The Rooster Call: Outlook for the Euro

Hit the Mark Trading’s Brief Review of Overnight Market Action Setting the Tone for the Trading Day

Good Morning Traders!

Today is Friday.  You know what our standing orders are today…if you trade the Euro, we have a bias Euro will fall the last hour and a half of European trading hours.  Consider the bias a back drop of potential, but always take trades according to sound technical analysis signals. 

Last night in the client video newsletter, we discussed (lamented) the idea currencies needed some kind of push.  Well, we got that push big time thanks to what?  Central bank talk of course!  ECB and Bank of China to the rescue!

Let’s Start with ECB
These guys are on a mission and when the market does not cooperate, they hit the lecture halls talking down the currency.
From the Financial Times: In one of the strongest defences of bond buying yet, Mr Draghi said purchases of government debt would help increase prices for riskier assets, which in turn would “free up capital resources for additional lending”.  He also indicated the ECB could act as soon as early next year.

Last night’s client video provided specific entry ideas and if this educational trade implemented, you are in the trade short as a position trade.  Typically, only experienced traders will enter during the overnight session.  It’s also good to have a broker with a “night desk,” just in case something goes awry. If not in the Euro trade, start as a day trade and if we see a further drop, consider leaving as a position trade.

Count von Draghi is on a mission to import inflation.  He knows that Eurozone manufacturing firms who source components from China or other foreign non-Euro currency markets will face paying more for their production imports inputs. Here are other consequences.

  • Draghi makes a big deal about providing increased money for lending.  With 11.5% unemployment rate…who is going to borrow? Not the individual.  
  • The bubble in stocks receives more funding. 
  • Firms who can borrow will embark on a merger and acquisition binge buying out competitors increasing market share.
  • Firms in the USA and China can use their currency to purchase Eurozone firms with more currency buying power against the weakened Euro.
  • Eurozone firms unable to raise price easily will seek even more out-sourcing from cheaper labor markets in efforts to drive costs lower. (Example: I am told some Italian furniture makers send their leather to Asia for production rather than make the product 100% in Europe).
  • Exports out of Eurozone including agricultural products become cheaper as the Euro drops stimulating the economy. 
  • The currency wars shall continue.

I think we will see much lower levels for the Euro and this has been a thesis we have traded. 1.17 is an eventual target idea.  Why not?

Noting goes straight up or down and markets consolidate before dropping, but fundamentally the die is cast for the Euro. We will not change our position until we see unemployment levels improve.  We also know the Euro shall likely kick higher hard if Russia pulls out of Ukraine.

China Enters the Save our Economy Battle Cutting Interest Rates This move is market fuel especially for the Australian dollar as initial knee-jerk reaction.  China lowering interest rates is market fuel for global equity index futures. The Bank of China cut interest rates for the first time in two years.  The message: Things are likely worse than thought in the Middle Kingdom.

As Business Insider puts it…”A Double-Dose of ‘Oomph’ Just Hit the Market.”

Today’s Reports and FED Activity
11:00 Kansas City Fed Mfg Survey

Overnight / Pre-Market
Big day in equity indexes already.  We had our eye on TF in last night’s video expecting a large move today.  We had no idea two powerful central banks would trigger the move.  Technical analysis told us to expect the up move.

Understand that with such a large move overnight in US equity index futures, we could easily see a flat trading day!  Keep your emotions in check!  Trade your signals…not your enthusiasm.

  • Last night we discussed crude range came back and day traders should monitor crude. Well, here again, the overnight action popped crude in knee-jerk fashion. 
  • Natural gas read the weather reports and decided to fall after an overnight pop higher. All overnight gains just about eliminated. Warmer weather next week in USA.
  • VIX drops.
  • Gold plays “steady Eddie” in consolidation as does Silver.
  • Last night you were alerted to grains based on technical analysis. We also know that a rising US dollar hurts grains so be careful of fickle action and let price confirm your moves here.
  • Coffee dropped on USDA report citing better than expected crop production in Brazil.  Hmmm, the experts are all over the place on Brazilian coffee. December field inspections likely tells the tale. Seasonal influence kicks end soon.
  • Sugar and Cocoa along with Cotton consolidates.
  • Bonds are flat trading in very tight range along with 10-year notes.
  • Currencies quiet except Euro, USD, Aussie, and Swiss Franc (married to Euro).

Think About This!
We are watching coffee much like a kid watches a cork in the water while cane fishing off the bank of a river or lake.  Sometimes the cork goes under and we think this is it and then the cork pops back up. We dare not use futures contracts at this point in time.

I should finish the uploading of this week’s Boot Camp today. We have 8 hours of total immersion discussion instead of 6 thanks to lots of excellent questions and tons of chart examples. 

If you attended my free webinar yesterday, thank you!

Have a great trading day and enjoy your weekend!

To learn more from Martin, visit HitTheMarkTrading.com to join his mailing list and receive blog updates.