Fact is the market is on the edge and tip toeing due to uncertainty. We don’t know for sure what the ECB will feed the market with but one thing is for sure: There will be QE tapering between €20B -€40B with a possible extension of another 6 to 12 months.
We also know that the Euro has been on a majestic run gaining an impressive 12% against the USD and Euro bulls are really confident.
Here comes contrarian theory that might spoil the party now that Euro bulls are net long. While the USD and Euro are fairly strong this week, the opposite is happening to the Kiwi and Lonnie.
CAD is at the cross roads and one of the reasons has to do with BoC chair Poloz lacking support from PM Trudeau when zeros in to matters interest rate. We strongly believe Poloz was simply normalizing interest rates after those two quick slashes in 2015 following a plunge of oil prices.
Now if BoC don’t show any intention of raising rates in the near future, we expect the current CAD rally to effectively end. USD bulls might take over now that Trump is trying to find consensus. Tax reforms entirely lie on the republicans who are the majority.
Another event that might attract USD bulls is this week’s announcement of a new Fed chair set to replace Yellen in February 2018. The leading candidates are all hawks and definitely, an already hawkish Fed shored by a hawkish chair will mean stepping gas on interest rate normalization. It will be no surprise if these fed fund rate ranges are done away with and replaced with clear fund target rates next year.
As for the kiwi, the coalition government and their strings of policies will surely weigh down a peaking NZD. From immigration cuts and now the denial of foreigners to buy real estate in the island will be negative. It basically means cutting off of capital inflows. If they also amend the RBNZ acts and allow the central bank to track labor conditions in the country on top of inflation concerns, then expect interest rates to stay at the current level for an extended period of time.
In the chart, there is sustained bear pressure both in the daily and monthly chart with stochastic sell signal turning from over bought territory. In the daily chart after three days of sell pressure as shown by those long upper wicks, price action caved in and that bear engulfing candlestick was printed yesterday. Yen bulls are still in charge and as long as that stochastic sell signal is still in place and turning from the overbought position, I will be net short the Aussie. Advised from technical set up in the monthly chart, I will look to trade as follows:
Stop Loss: 89.30
Take Profit: below 87.00
Have a good trading day.