Two weeks ago, my last blog in fact, I wrote about the UK and EUROPE being at the precipice. In the past 14 days sentiment has shifted and moves in the currencies I talked about have started, however, I never had ITALY as front runner to possibly drive the single currency lower to new 52 weeks lows.
Back in the day…
It was during 2016, I think it was on CNBC when I heard some analyst talking about market uncertainties as he ran off a series of what if’s.
- The first one was a, what if – TRUMP is elected President; following that he gave an opinion, which, I have long forgotten.
- The second was, what happens if the UK votes for a BREXITand finally,
- The third rather surprising one, was based upon ITALIAN elections that came and went at that time, the result never played out as that commentator predicted then, but it did on the general election this past March.It was claimed that a victory for the FIVE STAR MOVEMENT and any government involving them would be tantamount to a “DOOMSDAY SCENARIO”
Well, I wonder if this commentator had an open ticket at Ladbrokes or Paddy Power because his treble has come home!
Politics is a funny thing, never say never. The FIVE STAR MOVEMENT was the largest party in the Italian March elections and it had stated that it would never be in coalition with any other party.
However, to move forward this was necessary, at one point, it looked like Berlusconi’s Forza Italia party was in line, but the FIVE STAR MOVEMENT selected the NORTHERN LEAGUE as partners to form a coalition.
Shame really not to have Berlusconi in power as a meeting with TRUMP would have been brilliant; you could just imagine the craic and the media headlines. For now toga parties at 1600 Pennsylvania Avenue, have been put on hold.
My question is: – Is this coalition still the “DOOMSDAY SCENARIO?”
Without doubt, populist parties are loved by the media for the headlines they can create. Are they populist or nationalist? Having read a bit over the past couple of days about these parties it would appear that have ditched a huge amount of the anti-EU rhetoric and I think I am correct in saying they have abandoned for now, the idea of dumping the single currency as well, although, I have also read stuff about wanting a parallel currency. I am not sure at all what this would involve and frankly I doubt anyone does at this stage.
Last Friday the coalition agreed on a series of political objectives and released a working document to the media. The leaders of these parties are “unknowns” and therefore the MP’s will be unknown and frankly there is a massive cloud and thick fog about what will actually happen.
Are they extreme?
The policy document released has called for: –
- Tax Reform: Corporate Taxes at 15% and Personal Taxes at 20% – both proposed taxation levels are a significant reduction from where they are now.
- Relaxing EU Bail-in Rules: No surprise here given the state of Italian Bank Debt and the current market uncertainties.
- Removing the EU Russian sanctions.
- Lowering the Retirement Age.
- Nothing about the rumoured request for an EU Debt write-off of over €250 Billion.
- Nothing about nationalizing some of the banks such as Banc Monte Paschi Di Siena.
Is the above extreme?
There is nothing about leaving the EUROZONE or bringing back the Lira. There is also nothing how a debt riddled country is going to pay for this either, but hey, this is politics and in ITALY in particular because of extreme levels of bureaucracy, very little ever gets done as it is so difficult to reform. It is also very difficult to undo what is already in place. All you have to do is look at what Berlusconi, Monti, Letta, Renzi and Gentiloni have actually achieved since 2008. Remember Italy has had more elections in the past 50 years than the number of years that have passed by.
In my opinion, for what it’s worth it doesn’t seem like a “DOOMSDAY SCENARIO” yet and given the bureaucracy that exists in the Italian political system, one could argue that ITALY is in a permanent state of a “DOOMSDAY SCENARIO”
For sure, Italian 10 YR debt costs are rising. That is no surprise. Italian Banks are under pressure. Believe me it would be worse if the Lira printing presses were running!
Yes, Italian Banks have been under pressure to boost bad debt provisions and sell-off non-performing loans. I think it has been quoted that it would take until the middle of the next decade if the ITALIAN BANKS started an aggressive program today to fix these well-known and documented issues and even then, the target is to be no better than the EU average!
Below is chart plucked from Wikipedia that shows the breakdown of seats by the Italian Major Political parties. There are 6 parties listed here, you can add another 60 to get a broader flavour of the number of parties looking for representation in ITALY. There lies part of Italy’s problem.
Therefore, there is a bit (to say the least) of concern over the uncertainty of exactly what an ITALIAN government out of this coalition with Luigi Di Maio (5SM) and Matteo Salvini (NL) would look like moving forward.
Enough of that what about the FX effect?
One would expect the EUR/USD and the crosses to be under some pressure given the current situation of uncertainty and the fact that ITALY is the third largest economy inside the EUROZONE.
Not too much of an issue in this regard as far as I can see, and, I must admit I find this strange. One would have thought that one loose sound-byte on a Referendum on EU membership, or, a Referendum on dumping the single currency would be enough to send the single currency to 1.1500 and below and I have no doubt some extreme comments will be made.
The coalition is an unknown, and, who knows what position the government will take when in power. We are talking politics here with unknowns, it’s a huge uncertainty and what alleged promises are made now, count for nothing moving forward.
It’s not that the single currency isn’t under enough pressure at the moment with, U.S. Tariffs, Russian Sanctions and a Central Bank (ECB) that looks like it will be entering the same policy stance as the BOJ, which is ultra-market accommodative financial measures and market support via QE until “Hell Freezes Over”.
For now, the single currency appears to have buyers support ahead of the 1.1715 level which was the December 2017 low from where the latest move higher to the February 2018 highs of c.1.2550 started. Beneath the 1.1715 lows we have the November 2017 lows of 1.1550, I see this as the pressured target for the EUR bears to aim for in the medium term. For now, Italian political uncertainty means little. Watch this space.
FOREX REVIEW:
- FX – FORWARDS, BACKWARDS & SIDEWAYS:
1.1. THIS WEEKS TRADE INFORMATION: ECONOMIC DATA:
NOTE: Only the items that interest me are listed here.
1.2. THIS WEEKS TRADE INFORMATION: GEOPOLITICAL EVENTS:
1.3. BIAS CHART – USD MAJORS SUPPORT and RESISTANCE:
1.4. USD INDEX (DXY) OVERVIEW – MY THOUGHTS:
Looking at the chart below: –
- The TRUMP inaugural trend line and the 200 DAY SMA are now well behind current pricing and will now come into play as support on any downside move.
- My eyes are fixed on the 94.14 PIVOT POINT as being the next target.
There is so much USD momentum at the moment and we have seen a sentiment shift. Obviously, a lot depends on the USD 10YR Treasury. It is now consolidated above 3% and, in my opinion, this will keep the USD March higher intact.
The bigger question is what happens at the PIVOT POINT?
We could get held up for a while but at the moment I am more in the camp of thinking we march onwards and upwards towards 95.20 rather than reverse the move and head lower in line with the trend. We could stop at 95.20 and downside trend would still be intact.
It is a tough call. We will have to wait and see, but I do think there is still some gas left in the tank to continue to push higher.
The EUR/USD which has a huge say in how the DXY moves looks like it has a move lower in it towards at the very least 1.1715 and maybe more, therefore this in itself could push the DXY higher.
1.5. USD MAJORS – TRADING CHARTS:
EUR/USD:
ITALY has the focus of the EUROZONE at the moment.
There is a lot of uncertainty around with the new government coalition.
On the chart below, I see resistance at 1.1820 and downside support resides initially at 1.1715 and then a full re-trace of the recent upside move at 1.1550.
At the moment I think you really need nerves of steel and big balls to get long the USD. The direction of least resistance is lower with this pair.
GBP/USD:
My DOUBLE TOP pattern is in play as you can see on the chart below. The 200 DAY SMA (Green line) should now act as resistance and the downside move should see an attack on 1.3300 and if the double top plays out the measured move is to 1.3030.
Now, on the other hand the GBP has been finding buyers leaping in ahead of 1.3450. It is questionable how long this will last. Should the EUR/USD drop dramatically it will drag cable with it.
We also have to consider BREXIT. The EU27 are sticking to its guns and not giving anything away. This story has a long way to run and I can still see a “NO DEAL” as an option. It looks like there is a political deadlock over the IRISH border. The UK government cannot break the Good Friday agreement and the EU knows this and will push the UK to give in on what the UK government wants. There will be blood in Westminster should Theresa May backdown, hence my thoughts of a “NO DEAL”.
AUD/USD:
I do not know what to do with this currency.
Are we channeling?
We are definitely in a down trend, but it is a difficult trade. 0.7400 to 0.7550 seems to be a trading range at the moment.
NZD/USD:
This is also a difficult pair to trade at the moment, it is neither one thing or another. Below 0.6850 opens up the move lower towards the 2017 lows at 0.6780.
Despite encouraging words from the new RBNZ governor, Adrian Orr who is happy to see the NZD weaken, after its initial move it has retraced a bit and is now consolidating. Back above 0.6940-50 and NZD bulls may take full control once again.
USD/CAD:
The NAFTA deadline came and went and I got caught on a 200 pip loss…argh!!
Where now for CAD?
Allegedly, a lot of pork pies have been spoken about how close a NAFTA deal is, it is some way away. This therefore, in my opinion puts BOC policy on hold.
The danger here for USD/CAD bears is that we could move closer to 1.3000 before we see sellers stepping in once again. I am not sure what to do with this pair. I took my shorts off the table, but that does NOT mean that I want to go long.
Patience and some credible news is required before I step back in again.
USD/CHF:
We have broken free of the triangle pattern and now appear to be consolidating.
Having missed this entire move, from my perspective, one would have to see a move back to 0.9850 (trend line break) as a gift area to enter long.
USD/JPY:
I am waiting for circa.112.00 before I think of shorting this pair. The three-year trend line comes in around 112.50 and this can be used to sell against.
- THE WEEKLY FX PREMIUM TRADING SUMMARY:
2.1. WEEKLY FX PREMIUM PERFORMANCE HIGHLIGHTS:
MAY 2018 (So far): 1,120 net profitable pips
2018 TOTAL (So far): 6,659 net profitable pips
2.2. WEEKLY FX PREMIUM PERFORMANCE SUMMARY:
(Incorporating the last 5 WEEKLY FX PREMIUM TRADES)
You can get on board and join my FX PREMIUM subscribers and subscribe to the “10,000 pips a year” group from as little as CAD$10 for the first 10 days and then CAD$150.00 per month, currency conversions for CAD$150 are roughly as follows: –
- GBP £90 per month
- EUR €100 per month
- USD $120 per month
- JPY 12,700 per month
- AUD $150 per month
Go to my website www.weeklyfxdrivethru.comfor more details under the TAB – “SUBSCRIBE”.
- TRADER EDUCATION:
No item this week.
- WEEKLY FX PREMIUM SUBSCRIBERS ONLY:
4.1. TRADING REVIEW:
4.2. OPEN TRADES… HOW WILL I TRADE THIS WEEK:
4.3. SENTIMENT,FUNDAMENTAL & MACRO THOUGHTS:
4.3.1. OVERVIEW OF MY MACRO THOUGHTS & IDEAS:
4.3.2. THE MARKET SENTIMENT CHART:
4.4. CURRENT LIVE TRADES & LIMIT ORDERS:
4.4.1. CURRENT LIVE TRADES:
4.4.2. CURRENT LIMIT ORDER TRADES:
4.5. FX BROKER NEWS:
- THE FINAL SHOT:
Nothing more to add here, I have said enough except,
As usual…
Always remember longevity in Forex trading can only be achieved through trading with good RISK and MONEY MANAGEMENT, and above all set your position sizes in accordance with the size of your account and allow for some flexibility.
Scott Pickering
The Pip Accumulator
Twitter: @pipaccumulator
https://weeklyfxdrivethru.com/disclaimer/
BLOG VERSION: #282 FREE NEWSLETTER
DATE: 19th May 2018