This text is from blog famous currency strategist Joel Kruger .
Proponomics is artificially supporting markets to stimulate economic recovery.
GETTING BACK INTO THE SWING – It is certainly no coincidence that markets are getting more interesting over the past few days as the summer comes to a close. Activity has picked up a good deal and we are already seeing some interesting moves across the FX and commodity space. The Euro has rallied above 1.2600 on the back of some renewed optimism in the Eurozone. The confidence amongst locals that the ECB just might be able to implement the necessary measures to inspire the much needed recovery, has fueled the single currency gains. Today’s ECB rate decision is therefore the critical event risk for the day and analysts are looking for a 25bp rate cut to 0.50% and formal announcement of a new bond buying scheme from Mr. Draghi. The Bank of England policy decision is also a headliner today but with no changes to policy expected (0.50% and 375B APT), this will likely take a serious backseat. Other event risk for Thursday has included the latest surprising Riksbank rate decision, in which the Swedish central bank unexpectedly slashed rates by 25bps to 1.25%, citing a failure of domestic growth to match the central bank’s expectations.
Joel Kruger forex technical analysis video :
SLEEPING GIANT WAKES – As far as interesting price action goes, the most compelling market out there right now is EUR/CHF. The cross which had been locked in a 20 point range between 1.2000 and 1.2020 for most of the past 12 months following the SNB peg, has finally broken out to the topside, with the price reaching the 200-Day SMA at 1.2060 before stalling out. While the upside break is only marginal on a percentage basis, the move is perhaps a good deal more symbolic, in that the central bank was able to successfully intervene on behalf of its currency and prevent a break back below 1.2000 as it had promised. At this point nothing is conclusive and the jury is still out, but the ability to close above 1.2020, combined with the move coming exactly on the one year anniversary of the peg announcement, is more than suspicious, and I wonder if the SNB is ready to take this cross rate a couple hundred points higher, now that bears have perhaps given up on the short trade.
CURRENCY INTERVENTION; CAN IT BE DONE? – For as long as I can remember, the consensus has been that no-one person or entity can manipulate the currency markets for any extended period of time given the sheer size of this market. This view has even applied to central banks who have in the past failed at attempts to counter any unnecessary moves in their local currencies. While it has been possible to curb some of the moves in a currency and slow the pace of the rate of change, the idea of successfully intervening to alter the course of the currency has ultimately proven to be an exercise in futility. But, things are a bit different in this new world economy, where we are no longer dealing with one entity acting on behalf of a local currency.
PROPONOMICS – With the global economy in turmoil, there has been a very active presence of coordination amongst all central banks and governments to apply a new type of economics which I call “Proponomics”, whereby this coordination serves to prop the global economy at all costs. Therefore, if the SNB says that they will not see EUR/CHF go below 1.2000, then you can also bet that the consequences of the rate actually dropping below the level would be catastrophic and significant enough that there is most probably a lot more behind the rate being supported at 1.2000 than just SNB bids.
THE BAZOOKA EFFECT – When the SNB first announced their defense of the level, I thought it was strange to see a central bank come out so aggressively by actually citing a specific level, making it so easy for markets to gun the barrier. Normally when markets know there is a level that needs to be broken, it inevitably gets broken. As such, I attribute the bold move by the SNB as a sign that there is most probably a lot more behind this defense than many suspect.
OK..WE DEFENDED 1.2000…NOW WHAT – With that in mind, this latest break above 1.2020 on the anniversary of the peg announcement could be a sign that the SNB is now ready to take this cross rate a good deal higher, perhaps announcing a new floor around 1.2200. After all, the fact that the SNB does not want to see the market below 1.2000 probably also means that they would be very happy to see the cross much higher than where it currently resides. Technically, on a medium and longer-term basis, there is plenty of room for this market to head higher.
SILVER AND CAD COUNTERTREND SET-UPS – Moving on, the push in the commodities markets over the past several days has been something to watch, and the star of this move has been Silver. The metal has been on fire with technical studies skyrocketing into severe overbought territory. Now that the daily RSI is above 80, I am issuing a recommendation to look to sell, with an ideal entry at 33.20, which represents the 61.8% fibonacci retracement off of the 2012 high-low move. Any gains beyond 33.20 should be well capped in favor of a healthy correction at a minimum back towards the 30.00 area. Finally, keep a close eye on USD/CAD. I see room for a major reversal ahead, and would recommend looking to buy on any dips towards 0.9800 for a push back over parity and towards the yearly highs just shy of 1.0500. Ultimately, only a daily close below 0.9700 would negate the constructive outlook from here.