It’s Draghi’s Turn
By John R. Taylor, Jr.
The world financial markets are looking a bit tippy this afternoon. Stock markets in Europe and the Americas joined commodities in their recent swoon shortly after the ADP projections of US non-farm payrolls were published in the New York morning. US two- year rates hit a new low and Swiss rates turned negative again. Not a pretty picture. Although we had been arguing that the markets were more likely to carry on higher for another week or so, this looks like a big deal to us. A sharp break like this can lead us to premature conclusions, but when the European economy is most assuredly suffering badly and the US economy might finally be succumbing to the January tax increases and fiscal lightening implied by the recent sequestration process, there could be fire behind the smoke. We can’t blame Ben Bernanke as his printing press is working fine or the Swiss National Bank which promised to print Swiss francs forever. The British and the Japanese are certainly on board; it is only Mario Draghi and the ECB that is lagging in the money printing race. It’s up to you Mario. Turn this thing around.
We don’t think he will. However, you should remember we are technicians and quants, so we really don’t know what Draghi is going to do. But, today’s prices give us a clear indication, allowing us to ‘know’ that he will disappoint us all – or at least those of us that like rising markets. Although the impact of the gradual end of the LTRO process was known, as the Eurozone money supply would shrink as it has been doing for several months, the ECB has not done anything to offset this tightening. Not only have the LTRO repayments shrunk the money supply, but the ECB’s precipitous action cutting Cyprus off from its ELA support by slamming the door shut is a very negative signal that the lack of liquidity in southern Europe will just get worse. As the ELA had been the escape hatch allowing local euro-central banks to create funds within their own countries to support both the government and local corporate financing needs, the Cyprus events and the comments surrounding it would certainly have poured cold water on this process. To complete the trifecta, the comments by Jeroen Dijsselbloem, that every bank has to watch its own risk and no one is coming to rescue their equity holders, bond holders or depositors, are chilling. What would you do if you were an Italian, a Spanish or a Slovenian banker? Would you make a loan and add to your risk? If you were a depositor and there was a Deutsche Bank branch in town, would you open an account there or add to your €100,000 balance at the local bank? Cutting the governments’ fiscal deficit and shrinking the banking sector’s balance sheet is not the road to economic growth. Mark Europe down for a major recession or worse, unless Mario loosens the reins.
We have already said the ECB won’t move this week, but will it act next month or wait as long as July? Because the economy itself almost always reacts too slowly to be an accurate guide for the future, the answer probably depends entirely on how the markets react to their passivity. Our view is the markets will be troubled into the end of June or early July, with Europe leading the rest of the world down. But then the ECB will join the money printers adding new ideas to the catalogue of unconventional monetary policies. This should be enough to drive global markets higher through the rest of the year.
Get Out of CAD Long Positions Here
By Jonathan Clark
The commodity currencies have been strengthening during the past month, with the Australian dollar leading the way. The Canadian dollar has been lagging behind the Kiwi as well and the lack of strength has been somewhat surprising. Canada is a major exporter of oil and natural gas and their rising prices are positive for export earnings. Crude oil climbed 9% during March before giving back some of its gains during the past few days. Even more impressive are natural gas prices, which languished during most of last year due to oversupply but from the low on January 2, they climbed 24% by late last month. Energy is Canada’s largest commodity export, but the Canadian dollar only climbed 2% in March despite these positive developments, and on Wednesday there were some potentially negative shocks. Wednesday was an ugly day for pro-risk assets and some of the worst performers were crude oil -2.8%, gasoline -4.2%, heating oil -2.7%, natural gas -1.6%, and S&P/Toronto 60 -2.2%. Our analysis concludes that the US economy will witness a slowdown in the second quarter due to tax increases and sequestration, which will drag commodity prices, and with them the Canadian dollar, lower. The longer-term cycles argue the Canadian dollar will form a significant peak by the middle of April and – with market action out there – this could be right now. We recommend squaring long Canadian dollar positions, and it will not take much weakness to confirm a downtrend has begun.
Although US dollar/Canada has yet to show any strength, the cycles argue it will turn up here and rally for a minimum of a week and this expected upmove can easily last much longer. If this strength causes the USD/CAD to close above the resistance between 1.0200 and 1.0215, it will confirm an uptrend is underway. It is then headed directly higher into the week of April 22 and will rally to the 1.0335 area.
Following this peak it should pull back for a week before resuming its uptrend into the middle of May. The longer-term cycles call for this overall strength to persist into late June before a significant peak is reached. Our tentative target for this upmove is the 1.0500 area. If USD/CAD fails to see much strength during the next week, or closes below the nearby support between 1.0100 and 1.0125, we are premature in calling a low. In this case USD/CAD is headed directly lower into the start of May and will fall to the 1.0040 area before bottoming. Dollar/Canada would then turn higher and rally for a minimum of two months, but this weaker US picture is less likely, and a quick reversal looks probable.
By John R. Taylor, Jr.
The world financial markets are looking a bit tippy this afternoon. Stock markets in Europe and the Americas joined commodities in their recent swoon shortly after the ADP projections of US non-farm payrolls were published in the New York morning. US two- year rates hit a new low and Swiss rates turned negative again. Not a pretty picture. Although we had been arguing that the markets were more likely to carry on higher for another week or so, this looks like a big deal to us. A sharp break like this can lead us to premature conclusions, but when the European economy is most assuredly suffering badly and the US economy might finally be succumbing to the January tax increases and fiscal lightening implied by the recent sequestration process, there could be fire behind the smoke. We can’t blame Ben Bernanke as his printing press is working fine or the Swiss National Bank which promised to print Swiss francs forever. The British and the Japanese are certainly on board; it is only Mario Draghi and the ECB that is lagging in the money printing race. It’s up to you Mario. Turn this thing around.
We don’t think he will. However, you should remember we are technicians and quants, so we really don’t know what Draghi is going to do. But, today’s prices give us a clear indication, allowing us to ‘know’ that he will disappoint us all – or at least those of us that like rising markets. Although the impact of the gradual end of the LTRO process was known, as the Eurozone money supply would shrink as it has been doing for several months, the ECB has not done anything to offset this tightening. Not only have the LTRO repayments shrunk the money supply, but the ECB’s precipitous action cutting Cyprus off from its ELA support by slamming the door shut is a very negative signal that the lack of liquidity in southern Europe will just get worse. As the ELA had been the escape hatch allowing local euro-central banks to create funds within their own countries to support both the government and local corporate financing needs, the Cyprus events and the comments surrounding it would certainly have poured cold water on this process. To complete the trifecta, the comments by Jeroen Dijsselbloem, that every bank has to watch its own risk and no one is coming to rescue their equity holders, bond holders or depositors, are chilling. What would you do if you were an Italian, a Spanish or a Slovenian banker? Would you make a loan and add to your risk? If you were a depositor and there was a Deutsche Bank branch in town, would you open an account there or add to your €100,000 balance at the local bank? Cutting the governments’ fiscal deficit and shrinking the banking sector’s balance sheet is not the road to economic growth. Mark Europe down for a major recession or worse, unless Mario loosens the reins.
We have already said the ECB won’t move this week, but will it act next month or wait as long as July? Because the economy itself almost always reacts too slowly to be an accurate guide for the future, the answer probably depends entirely on how the markets react to their passivity. Our view is the markets will be troubled into the end of June or early July, with Europe leading the rest of the world down. But then the ECB will join the money printers adding new ideas to the catalogue of unconventional monetary policies. This should be enough to drive global markets higher through the rest of the year.
Get Out of CAD Long Positions Here
By Jonathan Clark
The commodity currencies have been strengthening during the past month, with the Australian dollar leading the way. The Canadian dollar has been lagging behind the Kiwi as well and the lack of strength has been somewhat surprising. Canada is a major exporter of oil and natural gas and their rising prices are positive for export earnings. Crude oil climbed 9% during March before giving back some of its gains during the past few days. Even more impressive are natural gas prices, which languished during most of last year due to oversupply but from the low on January 2, they climbed 24% by late last month. Energy is Canada’s largest commodity export, but the Canadian dollar only climbed 2% in March despite these positive developments, and on Wednesday there were some potentially negative shocks. Wednesday was an ugly day for pro-risk assets and some of the worst performers were crude oil -2.8%, gasoline -4.2%, heating oil -2.7%, natural gas -1.6%, and S&P/Toronto 60 -2.2%. Our analysis concludes that the US economy will witness a slowdown in the second quarter due to tax increases and sequestration, which will drag commodity prices, and with them the Canadian dollar, lower. The longer-term cycles argue the Canadian dollar will form a significant peak by the middle of April and – with market action out there – this could be right now. We recommend squaring long Canadian dollar positions, and it will not take much weakness to confirm a downtrend has begun.
Although US dollar/Canada has yet to show any strength, the cycles argue it will turn up here and rally for a minimum of a week and this expected upmove can easily last much longer. If this strength causes the USD/CAD to close above the resistance between 1.0200 and 1.0215, it will confirm an uptrend is underway. It is then headed directly higher into the week of April 22 and will rally to the 1.0335 area.
Following this peak it should pull back for a week before resuming its uptrend into the middle of May. The longer-term cycles call for this overall strength to persist into late June before a significant peak is reached. Our tentative target for this upmove is the 1.0500 area. If USD/CAD fails to see much strength during the next week, or closes below the nearby support between 1.0100 and 1.0125, we are premature in calling a low. In this case USD/CAD is headed directly lower into the start of May and will fall to the 1.0040 area before bottoming. Dollar/Canada would then turn higher and rally for a minimum of two months, but this weaker US picture is less likely, and a quick reversal looks probable.
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