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Forex EUR/USD, GBP/USD Daily Analysis October 31, 2012

We often get emails asking why the market makes unexplained moves like what we saw yesterday on the EUR/USD and even more so with the Yen crosses. The BOJ increased its print fest substantially and in a normal world that would make the Yen weaken. That was not the case yesterday. It did eventually weaken back to the pre release levels but that is still not what we would expect with the substantial increase in QE from the BOJ. The only other consideration is that the market expected a much bigger increase. 

The other confusing move was the Euro. We were expecting the next push down and all news releases were Euro negative with a much worse print of German unemployment. Twice the expected increase of jobs lost. Mario Draghi didnt even do his Euro pump at his speech and the Spanish GDP was a tiny bit better than expected but still negative. The wild card was that Italian bond auction. As I said in the Oct. 30 forex commentary I didnt expect it to go off too badly but I also didnt expect a slam dunk like they got. The average interest paid was more than a half of a point better than the last auction. This is substantial. Its probably more of the manipulation game as they try to make things look better than they are but we have to play the hand they give us.

Now that we have a good Monday morning quarterbacking of just what the heck went on yesterday, I want to stress that knowing the news and how it effects the market is not a must. However if you want to understand what most likely causes moves that make no sense (other than them being pure manipulation) then we have to do the studying of just what the news means for the markets it effects and what the probable reaction of the smart money will be. 

Now lets get to the charts and where we stand right now. The EUR/USD has made an intraday push up from the lows for well over 90 pips. However it has gone back into the middle of the last false push up so we have no clear direction. With that intraday push in mind we should have a small bias for the next push up. However I will be keeping an open mind today as this has a good chance for being nothing more than manipulation. The levels I will be looking for the manipulation at will be yesterdays high of 1.2982 for the short. The best level for the long will be the highs from Monday at 1.2943 and if we dont see it there then the breakout level at the Asian session high yesterday at 1.2917 will be the next place I look for a potential long setup. As usual if we see an hourly candle close above yesterdays highs then my bias will be much stronger for the long.

 The hourly chart of EUR/USD the morning of Oct. 31, 2012

The GBP/USD has shown us a darn good example of why the bias for direction after a first push is lighter than when we have seen two pushes. It has made a deeper pullback and at this point is finding resistance at the break out level that for me determines that this first push down is a long term push rather than intraday so my bias is still to the downside on this pair today. What I would expect to happen is a test of the hourly and 4hr 200 emas before we see some manipulation to the upside. What would be the best confirmation would be to see a 1 hour stop run to yesterdays highs that we see the trapping formations on the 15 minute chart. If I see something relatively pretty this would be a trade I might double my position on. If we do see that one hour close above the highs I will have to reassess my plan and will consider the long position since we are still in the middle of the first push down and there is a possibility that they will test the recent highs again.

The one hour chart of GBP/USD from Oct. 31,2012

Forex News Today

There aren’t any high impact news events today. However there are a few medium impact events to watch. Starting with German Retail Sales expected at 0.4%. Considering that last months figures have been revised down and the Unemployment data yesterday was much worse than expected there is a good chance this will disappoint.

Next is the Euro group meetings. As usual I will expect the typical tape bombs from this and they will be higher impact. Whats on the table is the extension for Greece and possibly the write down of Greek debt that central banks around Europe are holding including the ECB. If this does happen and the ECB takes the hair cut this will make the Euro pop up and most likely test the recent highs. 

Lastly from the US there is Chicago PMI. This is expected to pop above the 50 expansion level and if it actually does then we could see some USD strength as thoughts that there may actually be some truth to this so called recovery.

Greece Is In The Hot Seat Today

The premise of the Euro Group meeting today is mostly to discuss what the Trioka is going to do with Greece. Will they give the next trance of aid? And will the European central Banks take the haircut? Including the ECB. To be honest I think the haircut wont happen. Mainly because from what I have seen the ECBs holdings of Greek debt are darn close to the actual cash on hand. Meaning taking that kind of loss will make the ECB its self insolvent. This may all be poppycock since the ECB can just join the rest of the world with the print fest but if they did that I would expect a German exit from the Euro faster than you could say Grexit 🙂

Meanwhile there has also been some disturbing news from Greece pertaining to the probability of them getting the next bump of cash from the Troika. Apparently part of the deal was for the Greek government to pass much needed labor reforms so they can actually have a chance of being competitive in the European labor markets. That only makes sense right? Well not to the Greeks because in the short term there will be more pain as the adjustments are implemented and it seems they dont want that. At least one party of the ruling coalition anyway.

This article below is from Zero Hedge and Reuters this morning

Greek Ruling Coalition Collapses Days Ahead Of Critical Vote

If one is curious why the EURUSD has been ramping as if no one will ever sell one more euro ever again, the reason is simple: the BIS is desperate to mask the fact that the fragile Greek coalition, whose creation sent Europe to the edge back in June during the Greek re-elections that just barely avoided a Grexit, has just crumbled. And with an illiquid market, the reflexive argument always is a simple one: if someone is buying, the news must be good, so dear momo-chasers – buy along. Only the news isn’t good, and in a centrally-planned world, the only buyer left are central banks, who are now solely political, and not market, forces. What the news really is, is that with Greece poised to vote on critical labor reforms (read more layoffs) next week, which must be passed in Parliament with a majority vote in order to get the next Troika bailout tranche, the Samaras-led coalition just lost one of its three members, after the Democratic Left announced it would take its 16 votes and vote against any further austerity. In doing so it has effectively joined Syriza and any other anti-bailout powers, and has made certain that yet another Greek election is imminent, one which will finally see the rise of the “anti-memorandum” forces on top, and finally launch the 3 year overdue departure of the Greek ferryboat from the monetary landmass, with even more dire consequences for the USS EURtanic.

From Reuters:

 A Greek coalition partner confirmed on Tuesday it would vote against labour reforms proposed by foreign lenders, ignoring the prime minister’s appeal for a united front to push through more unpopular austerity.

 The Democratic Left party’s refusal to back the reforms leaves the government facing an unpredictable vote when they are presented in parliament next week, making it the fragile coalition’s biggest test since taking power in June.

 “The Democratic Left has fought on the issue of labour relations, to protect workers’ rights which have been already weakened,” the party said in statement.

 “It does not agree with the result of the negotiations. The Democratic Left sticks to its position.”

 A party official, Dimitris Hatzisokratis, told Reuters the party would not vote in favour of the labour reforms.a

Meanwhile, the current (if not for much longer) PM Samaras, resorted to the usual trite and overused threats of global destruction if anyone dares to vote against the will of Europe:

 “What would happen if the deal isn’t passed and the country is led to chaos?” Samaras said in a statement. “Such dangers must be avoided. That is the responsibility of each party and every lawmaker individually

Sadly for him, nobody buys the MAD argument any more, and especially not Greece, where one can’t hit more rock bottom if one already is at rock bottom.

The only good news is that the Democratic Left can’t alone scuttle the majority needed for the vote to pass. It can, however, show that the coalition government has now collapsed, and get more defectors to join them across the aisle, in hopes of being on the right side during the next parliamentary elections which now appear to be imminent.

 The Democratic Left party has the support of 16 deputies in the 300-seat parliament. The government — which has a 176-seat majority – could pass the reforms without its support.

 But a vote against the package by the party would undermine the already fragile coalition and could encourage other lawmakers to defect and vote against unpopular measures, leaving the outcome uncertain till the end.

 Already some lawmakers from the other junior partner in the coalition, the Socialist PASOK, have threatened to vote against the measures, though the party’s leader has hinted the group will vote in their favour to ensure stability in Greece.

Expect all this and much more to be once again in the daily headline rotation, but not before the US presidential election: can’t rock the boat before that. Cause Tim Geithner said so. After that, pardon the phrase, the deluge (only this time in Europe).

I know I have said this before but things are about to get very interesting. Especially in just over a week after the US election.

Happy Trading


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