This text is from blog famous currency strategist Joel Kruger .
WITH SO MANY OFF ON HOLIDAY.. – Trading markets in July and August can often be quite frustrating, with many participants off on holiday and the remainder struggling to figure out whether there are any benefits to pushing things in one direction or another. In the end, the price action is likened to a tale of Jekyll & Hyde, where on one day, conditions are calm as can be, and on the next day, the markets move at a furious and relentless pace. With this in mind, I always like to take a step back and find comfort in the longer-term time horizons.
FOREST THROUGH THE TREES – While I am always religiously focused on the the hourly and daily charts, during the months of July and August, I often find myself also paying a good deal of attention to the weekly charts. Focusing exclusively on the hourly and dailys during these times has a way of making you doubt your convictions, as markets do not react the way they would in the other months of the year (December and early January exceptions). However, taking a step back and looking outside your normal time frames, allows you to be able to see the forest through the trees, and more often than not, helps to restore confidence in your decision making. Take the current EUR/USD as an example…
DIFFERENT TIME FRAME = DIFFERENT PERSPECTIVE – Right now, the Euro appears like it has come back under pressure this week, with the market retreating well away from the weekly highs near 1.2450. But if one is to take a step back and look at the weekly chart, there is potentially, a very different story being told. On closer analysis, the weekly chart shows a market that put in a key bullish outside formation a couple of weeks back and has since managed to post consecutive weekly higher lows and higher highs. So even with all the downside pressure in the current week, the market has been able to hold well above the previous weekly low (1.2130), and post a fresh weekly higher high by 1.2440.
STILL LOOKING FOR EURO UPSIDE – With this in mind, I still retain bullish outlook for the Euro over the coming days and look for the market to put in a higher low ahead of a fresh upside extension beyond 1.2450 and towards the next objective at 1.2600 further up. While it would not be ideal to see setbacks extend below 1.2200 on Friday, if the market can hold above 1.2130 today, it has already achieved its objective (in the sense that it has posted a fresh weekly higher low and higher high). Ultimately therefore, only a break below the previous weekly low would negate the corrective outlook and give reason to consider underlying bear trend resumption.
CHI-NOT – Moving on to the fundamentals, the biggest story on Friday, in my opinion, is unquestionably the much softer China trade data released earlier in the day. I have written ad nauseam about the idea of a three act global recession. We have already seen acts one and two, starring the US and Eurozone respectively, and the final act is only now just beginning, with China to play the leading role. A few years back, many laughed at the idea of a Eurozone crisis, and when it finally did hit, it proved to be much more intense than in the US. Yet now, investors have a hard time considering the possibility of an intensified China slowdown.
OOPSY..MAYBE WE WERE WRONG – But China data has been on the decline, and with each passing day, the situation seems to be getting worse and worse. Friday’s trade data was horrendous, and this not only exposes China, but the many correlated and dependent economies, like the commodity bloc countries and emerging market countries that have not considered the possibility of an intensified cool down. Take the latest RBA quarterly statement as an example. The RBA released its quarterly statement an hour or so before the China trade data, and in the statement, it was clear that the Australian central bank did not hold the view that China would slow dramatically.
WOULD YOU GIVE YOUR MONEY TO THIS GUY (ABOVE)? – This view is reflective of many traditionally risk correlated economies, that have also managed to achieve safe haven status throughout the US and Eurozone crisis because of their ability to offer compelling yield differentials and at the same time sell the idea that they have decoupled and are immune from the global recession. The idea of being able to wear two hats is ridiculous, and sooner or later, the market will awaken to this fact (likely on the realization that China has some very tough years ahead), and aggressively liquidate their long China, and long correlated China positions. It won’t be pretty.