Recap: Europe, Australia, United Kingdom, Canada, and The United States.

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This week was full of financial news. I will be talking about some of them, which I consider too important to pass up. I will also give my views on them.

Europe:

Last Monday (March 2, 2015), a report showed that Consumer Price Index (CPI) Flash Estimate ticked up to -0.3% year-over-year from previous -0.6%. Markets were expecting -0.4. The data was little positive. However, It remained in negative territory for the third consecutive month. There are deflation in euro zone. The deflation might soon end later in the mid-year, as Quantitative Easing (QE) program starts this Monday (March 9, 2015).

Last Thursday (March 5, 2015), European Central Bank (ECB) kept the interest rates unchanged. During the press conference, the President of ECB, Draghi stated that the QE would start on March 9. ECB raised its projections for the euro area, “which foresee annual real GDP increasing by 1.5% in 2015, 1.9% in 2016 and 2.1% in 2017.” Remember that these are just projections and can change anytime. Plus, central banks are not right all the time. Mr. Draghi felt confident as he talked about the future of Euro zone. He believes Euro zone will greatly benefit from QE program and some areas already have since the announcement of QE last January.

This week, EUR/USD fell all the way to 1.0838, lowest level since September 2003, due to positive U.S jobs reports, Greece worries and QE program starting next week. I was already short on EUR/USD and I still believe it has a room to go further down.

EUR/USD Hourly
EUR/USD – Hourly

Australia: 

Last Monday (March 2, 2015), Reserve Bank of Australia (RBA) announced that they will leave the interest rate unchanged at 2.25%. In February meeting, RBA cut by 0.25%. This time, they did not. RBA is in “wait and see” mode, for now. I believe another rate cut is coming in the two meetings, depending on future economic reports. In the Monetary Policy Decision statement by RBA Governor, Glenn Stevens stated that the Australian dollar “remains above most estimates of its fundamental value…A lower exchange rate is likely to be needed to achieve balanced growth in the economy…Further easing of policy may be appropriate…”.  I believe RBA is open to further cuts and it will come in the next two meetings. However, positive economic reports might change that direction. As economics reports come out from Australia, we will have better sense of what RBA might do.

Last Monday (March 2, 2015), Building Approvals report came out and it was very positive. It was expected at -1.8%. It came out at whooping 7.9% up 10.7% from previous -2.8%. It shows that more buildings are being built. Thus, creating jobs. However, Building Approvals reports show that building approvals tend to jump around every month. If the report continues to be positive, it might convince RBA to keep the rate unchanged.

Last Tuesday (March 3, 2015), Gross Domestic Product (GDP) came at 0.5%, up only 0.1% from previous report (0.4%). It came out little bit weak from what was expected, 0.7%. It’s still very weak and it might have larger impact on RBA’s future actions. I believe RBA will cut because GDP is not improving much.

Last Wednesday (March 4, 2015), Retail Sales and Trade Balance reports came out from Australia. Retail sales came out at 0.4% as expected from previous 0.2%.  Trade balance on goods and services were a deficit of $980 million, an increase of $480 million from December 2014 ($500 million). All these numbers are in seasonally adjusted term. I believe the gap in Trade Balance from the last two reports might convince RBA little bit to cut the rate again.

I would be short on AUD. I believe it has the potential to go further down to 0.7500. The best pair would be to short AUD/USD (Positive U.S news and upcoming rate hike).

AUD/USD Hourly
AUD/USD – Hourly

United Kingdom: 

Last Thursday, Bank of England (BoE) kept the interest rate unchanged at 0.50% and Quantitative Easing (QE) programme at £375bn. In March 2009, the BoE’s Monetary Policy Committee (MPC) unanimously voted to cut the interest rate to 0.50% from 1.00% (-.50%). The interest rate still stays unchanged and QE stays steady, for now. If future economic reports such as wages, and inflation declines or comes out negative, rate cut might come. If it does not, rate hike might come sooner than expected. I believe it will get better and MPC will decide to raise the rate, sending Pound (GBP) higher.

This week, Pound (GBP) fell after rising last week, due to little negative news from UK and that BoE rejected higher rate for some time being because of concerns in oil prices and inflation. I would not trade GBP at this time. If I’m going to trade GBP, I would analyze its chart first. Did you notice that last week GBP/USD had-daily bearish engulfing pattern and this week there is-weekly bearish engulfing pattern?

GBP/USD - Daily
GBP/USD – Daily
GBP/USD - Weekly
GBP/USD – Weekly

Canada:

Last Tuesday (March 3, 2015), Canadian Gross Domestic Product (GDP) came out little positive at 0.3% from previous -0.2% on monthly basis. It was expected at 0.2%. On quarterly basis, it came out at 0.6% following 0.8% in third quarter.

Last Wednesday (March 4, 2015), Bank of Canada (BoC) left the interest rate unchanged at 0.75% following 0.25% cut last month. Ever since BoC cut the rate last month due to falling oil prices; oil prices has risen and been in $50 range. If oil price continue to fall, I believe they will cut the rate again. There is strong relationship between Canada and oil. As oil gets weaker, Loonie (CAD) gets weaker. Why? Canada is ranked 3rd globally in proved oil reserves. When making a trade decision on CAD, I would look at the oil prices. Of course, I would also look at news and technical. For example, if I want to trade USD/CAD, I would look at both U.S and Canada economic news (rate hike/cut, employment, etc) and technical on chart. If U.S economic news are strong, Canada economic news are weak and USD/CAD is just above strong support line, I would definitely go long on it. However, let’s say if USD/CAD is just below strong resistance line, I would wait for confirmation of a breakout and if the news are in my favor, I would go long.

Last Friday (March 6, 2015), Building Permits and Trade Balance reports were strongly negative. Building Permits came out at -12.9%, following 6.1% the previous month, expected of -4.2%. Trade balance on goods and services were a deficit of -2.5 billion, following -1.2 billion the previous month, expected of -0.9 billion. Both reports were negative, which sent CAD lower. At the same time, U.S non-farm payrolls came out strong, which sent USD higher. As a result, USD/CAD skyrocketed. The reports will definitely be on BoC committee’s mind. As of right now, I would be short on USD/CAD.

This week, USD/CAD was mixed as BoC kept the interest rate unchanged, after cutting it last month (negative for USD/CAD) and strong U.S jobs report (positive for USD/CAD). I would be short on it as I said in the last paragraph.

USD/CAD - Hourly
USD/CAD – Hourly

United States:

Last Friday (March 6, 2015), U.S jobs report came out very strong except the wages. Employment increased by 295,000 (Expected: 240k) and unemployment rate went down 0.2% to 5.5% (Expected: 5.6%). However, average hourly earning fell 0.1%, following 0.5% the previous month (Expected: 0.2%). But, that hourly wages part of the report did not stop U.S Dollar from rising. It was very positive for the U.S dollar because there is little higher chance of rate hike coming in the mid-year.

Since U.S economic news tends to have impact on global markets, here’s what happened; U.S Dollar rose, U.S stock fell, European stock rose, Euro dived, Gold prices fell and Treasury Yield jumped. EUR/USD fell to 1.0838, lowest level since September 2003. USD/JPY rose to 121.28, a two-month high.

So why did U.S stocks sold off? It sold off because of upcoming rate hike, which can be negative for equities, specifically for dividend stocks. As economy is getting better, it should help boost corporate profits. At the same time, strong dollar can hurt them. Rate hike can only make dollar even stronger.

In two weeks, the Fed will be meeting and I believe they might drop the “patient” in its March policy statement.

I would be long USD. The best pairs would be to short EUR/USD (Euro zone delfation, Greece crisis and QE program) and short NZD/USD (RBNZ keeps saying that NZD is too high and they will meeting next week, rate cut?) as I’m already short NZD/USD, and long USD/JPY (Upcoming U.S rate hike and extra stimulus BoJ might announce).

Dow Jones Industrial (DJI) - Hourly
Dow Jones Industrial (DJI) – Hourly
Nasdaq - Hourly
Nasdaq – Hourly
Standard & Poor 500 (S&P 500) - Hourly
Standard & Poor 500 (S&P 500) – Hourly
USD/JPY - Hourly
USD/JPY – Hourly
NZD/USD - Daily
NZD/USD – Daily

Follow my twitter account @Khojinur30 or just click twitter icon on the top right to be directed to my twitter account, for my views that are posted any time. Thank you.

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Central Bank Meeting Minutes: BoE, FOMC and ECB (Update on Greece)

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During the week of February 16, 2015, BoE (Bank of England), FOMC (Federal Open Market Committee) and ECB (European Central Bank) released its meeting minutes for the latest monetary decisions. Let’s go in depth of these meeting minutes and how we can apply them to our trading decisions.

 

Bank of England (BoE) – (February 18, 2015)

The Bank of England meeting minutes showed that the Monetary Policy Committee (MPC) voted unanimously (9 members) to keep the benchmark interest rate unchanged at a record-low of 0.5%. There were hints it could be lowered in the next few months (yes, decrease, not increase). Two committee members, Martin Weale and Ian McCafferty who voted in favor of rate hike previously, were in favor in holding rates this time. Regarding its inflation in which Consumer Prices Index (CPI) fell to 0.3% (lowest since decades ago) last month changed the views of MPC. Some worry that it might slip below zero in the next few months. It has caused some to suggest rate cut over the next few months. The rate cut hinted in the minutes is totally different than what the Bank of England governor, Mark Carney said last week.

Mark Carney spoke to the press at Inflation Report press conference. He signaled that BoE remains on course to raise interest rates in the U.K. next year, despite decline in inflation. He also mentioned that BoE might cut the interest rate if inflation transforms into deflation (below 0). I believe if the inflation falls below 0, the BoE will cut the interest rate by 0.25, but only for short period of time. However, he pointed out that BoE still expects its next move will be raising rates, not cut them.

There are confusions going on with BoE on interest rate. I look at this way; inflation goes below 0, rate cut will come, inflation starts to increase, rate increase will come, and watch out for future statements by BoE for more clues. I would not trade Pound (GBP) based on these interest rate talks, for now. There is no clear road for interest rate for now. But, I would trade based on other news/events and charts’ technical.

 

Federal Reserve – (February 18, 2015)

The Federal Reserve meeting minutes showed that the Federal Open Market Committee (FOMC) expressed concerns over raising interest rates too soon, which could could halt or slow the U.S economic “recovery”. They are also worried over the impact of dropping “patient” from central bank’s rate guidance. They thought that removing “patient” from the FOMC statements in the future would put too much weight on its meaning. As a result, it would cause financial markets to overreact (Unlike Swiss National Bank, Federal Reserve cares about financial markets movements). If “patient” is dropped, I would think that interest rate hike is coming in the next two meetings. They also worried about falling inflation expectations in the U.S. If the inflation drops, I believe it’s going to halt (not cut) FOMC from raising the interest rate, but not decrease the rates.

In the minutes, it’s mentioned that there are worries about international events such as Greece (Greece got 4 month bailout) and Ukraine (There’s no “truce”). But, it’s not going to keep them from raising the interest rate, backed by strong jobs reports. However, the federal reserve signaled its willingness to keep interest rates low for longer because of strong U.S dollar and “flat” housing market. Raising interest rates will only send U.S higher, making it much stronger than ever.

On February 24 and 25, Fed Chair Janet Yellen will be speaking in congressional testimony and we should look for further clues to the timing of the interest rate hike.

Any clues of earlier rate hike will send U.S. dollar to rise in which I would go short USD/JPY, USD/CAD, and/or long GBP/USD. Remember, don’t hold your trade positions for more time if you trigger market order just based on what Yellen said, unless there are other news and technical to support your trade.

 

European Central Bank (ECB) – (February 19, 2015)

The European Central Bank first ever meeting minutes showed fears of continued deflation the euro zone, which led to launch of Quantitative Easing (QE) program which starts in March. The main goal of QE is to drag the euro zone out of deflation and near to 2% inflation target. This first minutes doesn’t reveal much of anything. Since there weren’t any new details or “surprising” details, the markets, especially Euro did not move much.

Europe has agreed to extend its financial lifeline to Greece only for 4 months. The deal was stuck last Friday (February 20, 2015). This is another bailout for Greece. How long does Euro has to keep bailing out Greece from the mess Greece made? The deal is not final if Greece does not come up with its plan by Monday (February 23, 2015). Then, it will be voted by institutions involved in the bailout by April. If the institutions do not back the plan, the “deal” becomes “no deal”.

I would still keep an eye on Greece. If you trade Euro, be careful with news coming out of Greece. It will be violent and may cause you to have losing positions or touch stop loss (or make money). When picking Euro to trade, I would pick pairs other than EUR/USD.

If you have any questions, feel free to leave comments or contact. Thank you.

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Microsoft Earnings and its game changer product, Hololens

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On January 26, 2015, Microsoft reported their quarterly financial results for FY15 Q2 (FisicalYear 2015, Quarter 2 – ending on December 31) and it was below what analysts expected. Thomas Reuters had consensus estimates of $0.71 in earnings per share on $26.33 billion in revenue. Microsoft reported a revenue of $26.470 billion from $24.519 billion in the previous year, 8% increase. Microsoft reported earnings of $0.71 per share from $0.78 in the previous year, 9% decrease (Diluted EPS).

Microsoft stock (MSFT) dropped almost 4% after-hours or from around $47 (4 P.M) to about $45.50 (5 P.M). It continued to drop. The next day, the stock opened at $42.96 and finished the day at $42.6 7. From the announcement of financial results to the next day, the stock dropped about 10%. As of right now, it’s around $43.50. I view this as buying opportunity even it rose after almost $3 in almost 2 weeks. I will explain why MSFT is great stock down below.

MSFT - Hourly
MSFT – Hourly

Microsoft’s numbers looked weak because of currency and a restructuring charge. U.S dollar has been getting strengthening for some time now. It’s having a bad effect on international companies. Microsoft’s (International Company) international sales are being converted into fewer dollar, for now. Plus, Microsoft cannot control what happens to Forex market. In the last quarter, Microsoft had $243 million in restructuring charges, $0.02 per share negative impact. It comes from the integration of the Nokia Devices and Services business. Phone hardware revenue came at $2.3 billion, with 10.5 million Lumia units sold. It was successful. $0.04 per share loss came from IRS audit adjustment. Restructuring charges (-$0.02) and IRS audit adjustment (-$0.04) are temporary or one-time events. Succesful revenue from hardware and one-time losses are the two reasons to buy Microsoft stock (MSFT).

Last week, Microsoft showed off a product that I believe is a game-changer, HoloLens. It’s a headset with transparent lenses. What you see in reality is transformed into different world with 3-D objects floating, virtual screens, virtual characters and more. I believe it’s way better than Oculus Rift. Oculus Rift is designed for gaming only, targeting gamers only. HoloLens can be used for learning and experiencing new era of technology in a new way. Not only it targets gamers, but also non-gamers and people with dreams (creating/inventing products, etc). The price of HoloLens is unknown at this time. It should be affordable and fair if they want to get into mass-market. This is just the beginning and it has the potential to be huge. Hololens is another reason to buy Microsoft stock (MSFT). >>> Microsoft HoloLens YouTube <<<

Another reason is Microsoft’s acquisitions of small companies that has potential to grow a lot. Recently, Microsoft announced an acquisition of Revolution Analytics, Equivio and Sunrise. Revolution Analytics is a statistical software company. Equivio is startup producing test analysis software. Sunrise is a developer of calendar apps. So why is Microsoft acquiring small companies? They know that these companies will be very useful and helpful for their products. Therefore, driving up the sales. When they drive the sales (revenue) up, they will make us, the shareholders (or potential shareholders) happy.

Last reason to invest in Microsoft is its dividends. MSFT gives annual dividend of $1.24 at the yield of 2.83%. I would reinvest the dividends, known as DRIP (Dividend Reinvestment Plan). Why? There will no fees or commissions to reinvest, buying additional shares or fraction of a share. Over the long-run, it will benefit you as reinvestment adds up.

If you have any opinions, etc, feel free to leave comments or contact by email (khojinur_us@yahoo.com). Write “FMITBOOK” on subject line. Thank you.

 

UPDATE 1: I’m still watching MSFT (Microsoft stock ticker) for a good entry. I will go long on it in the future at a good entry price. Microsoft stock and other blue chip stock fell after Intel slashed revenue outlook due to weak PC demand. The decrease in the price of MSFT is still a good buying opportunity. (http://www.outofwacc.com/update-on-microsoft-rbnz-and-upcoming-events-to-watch-out/).

UPDATE 2: Microsoft FY15 Q3 earnings (http://www.outofwacc.com/microsofts-earnings/).

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US Jobs Report for January 2015

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Last Friday (February 6, 2015), US jobs report came out better than expected for prior month. Non-farm payrolls increased to 257,000 and the unemployment rose to 5.7% by 0.1% in January. Plus, data for November and December was “lifted”. November was revised from 353,00 to 423,000 (+70,000) and December was revised from 252,000 to 329,000 (+77,000). Over the past 3 months, U.S has created just over 1 million jobs, strongest since 1997. Only a negative side was the unemployment number. Unemployment number increased because labor force increased. The labor force participation rate rose by 0.2% to 62.9%, showing little more confidence in the jobs market. Average hourly earnings increased by 12 cents to $24.75, which took year-on-year gain to 2.2%, largest since August 2014.

Markets reactions to the report. See for yourself. If you have any questions, feel free to leave comments below.

S&P 500 - Hourly
S&P 500 – Hourly
US Dollar - Hourly
US Dollar – Hourly

 

USD/JPY - Hourly
USD/JPY – Hourly

 

Job gains took place in construction, financial activities, health care and manufacturing. It tells me that the economy is growing and businesses are hiring people for new projects. Businesses probably have positive cash flows to start new projects and hire people. Let’s hope that they are not taking debt that cannot be payed back.

When the rise in hourly wages are combined with lower oil prices, what do you get? People tend to have more money in their pockets. They can spend their money in anything such as retail, vacations, etc, which will increase the profits/revenues of the businesses. They can also pay down the debt that they may have such as student loans, mortgages, etc. Financial crisis in 2008 taught a lot of people lesson, to save money for unexpected emergencies. Young people are more likely to spend the money in areas like retail, entertainment and technology. New technologies tend to excite young people, such as drones.

Strong jobs reports increases the chance of interest-rate hike in June or earlier. Federal Reserve might wait for two more reports to get better sense of where economy is going. If FOMC (Federal Open Market Committee) drops “patient” in its next meeting, there will be higher chance of rate hike in June. The US Dollar is already strong. If FOMC drops “patient”, it will be even more stronger, hurting exports.

I believe FOMC should try to weaken US Dollar before raising interest rate. Even more stronger dollar has the power to hurt exports. Sales of international companies in the U.S can decrease due to stronger dollar. If the US Dollar continues to strength, it can effect US economy is negative way. It will slowly spread.

Feel free to leave comments. Thank you.

 

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Reserve Bank Australia (RBA) cuts cash rate

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Last Monday (February 2, 2015), Reserve Bank Australia (RBA) cut rates to 2.25% from 2.50%, record low. On my post “Now, Bank of Canada (Boc) Shocks by rate cut. Who’s next?”, I predicted RBA was going to be the next central bank who will cut the rates. If you have not read it, feel free to go to the post. Immediately after the announcement, Aussie fell about 100 pips. In the statement by the Governor of RBA, Glenn Stevens, “The Australian dollar has declined noticeably against a rising US dollar over recent months…remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices. A lower exchange rate is likely to be needed to achieve balanced growth in the economy.” They are basically saying that Aussie is little stronger and needs weaker currency to help their economy grow.

In the same hour RBA announces rate cut, AUD/USD dropped all the way to 0.7651, lowest since May 2009. After dropping almost 200 pips, the next day was total opposite. In the next day, Aussie absorbed all of the loses, due to short squeeze in non-dollar currencies and rise in oil prices. The rebound in Aussie is a perfect sell opportunity. I believe, in the six months, AUD/USD will drop over 300 pips, under 0.7500.

/CL (Crude Oil) - Hourly Chart
/CL – Hourly Chart
AUD/USD - Hourly
AUD/USD – Hourly

Last Thursday (February 5,2 2015), RBA released its quarterly Monetary Policy Statement, signaling another rate cut coming in the way. RBA lowered its 2015 growth and inflation forecasts. In November, they expected expansion between 2% and 3%. Now, they are expecting 1.75% and 2.75% (lowering by 0.25%). They also predicted that unemployment will rise. I believe another rate cut is coming this year. But, the question is “When?”. Again, rebound in AUD/USD is selling opportunity not to be missed.

 

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Reserve Bank of New Zealand (RBNZ) “unjustified” and “unsustainable”

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Last Wednesday (January 28, 2015), Reserve Bank of New Zealand (RBNZ) left interest rate or Official Cash Rate (OCR) unchanged at 3.5%. In a statement, two key words “unjustified” and “unsustainable” left Kiwi tumbling. In the statement, “While the New Zealand dollar has eased recently, we believe the exchange rate remains unjustified in terms of current economic conditions, particularly export prices, and unsustainable in terms of New Zealand’s long-term economic fundamentals. We expect to see a further significant depreciation.” They said that NZD or Kiwi exchange rate is too high and they expect it to decline further.”We expect to see a further significant depreciation” signals to me that RBNZ is planning to interfere in their currency, Kiwi. (or they just said that to make their currency to decline). Kiwi fell to the lowest March 2011.

30M (30 Minute) Chart
NZD/USD – 30M (30 Minute) Chart

 

In 2014, RBNZ raised Official Cash Rate (OCR) from 2.50% to 3.50%, increase of 1%. They raised OCR by 0.25% in four consecutive months in 2014; March, April, June and July. That was around the time oil plunge began, which is June. From September to today, they did not raise OCR. Since oil declined more than everybody expected, RBNZ stopped raising OCR. RBNZ’s tone on the interest rate shifted to a neutral stance, “In the current circumstances, we expect to keep the OCR on hold for some time. Future interest rate adjustments, either up or down, will depend on the emerging flow of economic data.”

NZD-USD 4
NZD/USD – Daily Chart

I would be short on kiwi. If you want to go short on kiwi, I would suggest waiting until it rebounds little bit. I’m already short on it and have been since the beginning of January. If you want to know, where and when I went short, the chart below will tell you. These small lines you see are fit for 1H (Hourly) chart. What you see below is daily chart.

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Federal Reserve – January, 2015

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Last Wednesday (January 28, 2015), the Federal Reserve released its meeting statement for January 2015. They kept interest rates unchanged, for now. They maintained the key word “patient” on interest rate hike. “Patient” says that FOMC is not in a rush to raise the interest rates. Federal Open Market Committee (FOMC) in the statement said “…economic activity has been expanding at a solid pace.  Labor market conditions have improved further, with strong job gains and a lower unemployment rate.” They viewed the economy in a good shape overall. Regarding inflation, they said ” Inflation has declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices.” They are blaming declining oil prices for the decreasing inflation. They also said “Inflation is anticipated to decline further in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate.” They expect inflation to decline as oil continues to decline in the near term. “Near term” can be about 6 months. They’re also saying that they expect oil prices to increase in “medium term”, which also can lift inflation. “Medium term” can be around 2 years.

In the statement, they are giving us some clues of future rate hike. “…readings on financial and international developments.” can account for rates. If the future financial reports are positive and international situations cools down, they might go for rate hike. Therefore, “…the Committee judges that it can be patient in beginning to normalize the stance of monetary policy.” What they said in 3rd paragraph of the last 2 sentences can be very helpful in predicting timing of rate hike, “Based on its current assessment,   However, if incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated.  Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated. If the future financial reports come out very positive and way better than expectations, we can conclude that rate hike is nearing. If, it’s worse than expectations, then we can conclude that rate hike is too far, but reachable.

All 10 FOMC members agreed with the statement (unanimous) since June 2014. If a certain situation slightly changes. Some, but not all might change their views. If a certain situation changes dramatically, all of FOMC members might be unanimous in the future statements.

Financial markets’ reactions to FOMC statement.

Hourly Chart
Hourly Chart
USD-JPY reaction to FOMC Jan 2015
Hourly Chart

I will be watching future financial reports such as ISM Manufacturing PMI and jobs reports, which are coming out next week. Using these types of reports and more, I will try to time the rate hike. As of right now, I believe it’s coming in the summer.

 

 

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European Central Bank (ECB) Announces Quantitative Easing (QE)

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On Thursday (January 22, 2015), European Central Bank (ECB) announced Quantitative Easing (QE) program. They left interest rates unchanged. During the press conference, ECB governor, Mario Draghi announced quantitative easing to the tune of €60 billion ($67.5 trillion) per month from March 2015 to September 2016 (19 months). The total amount sums to €1.1 trillion ($1.25 trillion). The day before, there was reports that ECB was going to announces €50 billion per month until year end. On Thursday, we found out the truth, €60B a month until 2016. During the press conference, Draghi said “…conducted until we see a sustained adjustment in the path of inflation which is consistent with our aim of achieving inflation rates below, but close to, 2% over the medium term.” He’s saying that QE program won’t end until they achieve their goal, inflation close to 2% but below.

The interest rates were left unchanged and it was not much market mover. But, during the press conference, when QE was announced, global markets were violent or should I say choppy?. European markets spiked, then dropped. By Friday (the day after QE was announced), European stocks hit 7-year highs. US markets rallied on Thursday. U.S markets rallied because more money are being pumped into U.S. However on Friday, U.S markets were mostly down because of worries that strong dollar will hurt U.S corporate earnings. Announcement of QE also knocked down euro to its knees. During the first 30 minutes of press conference (where QE was announced), EUR/USD was choppy. In the next 23 hours, EUR/USD fell all the way to 1.1113 (Friday 8 A.M EST) from around 1.1600 (post ECB conference), which is almost 500 pips in a day, actually 23 hours (from 9 A.M EST to 8. A.M EST).

EUR/USD - Hourly
EUR/USD – Hourly

Tomorrow, we will find out the results of Greek Elections. I believe Greece is going to stay in Euro-zone, which is going to give EUR some relief. Then, it will be a good place to sell EUR/USD because QE (Bearish) weights more than Greek staying in Euro-zone (Bullish). If Greece leaves Euro-zone, it’s another reason to be bearish on Euro currency.

Why did ECB announce QE?

ECB announced QE to fight back low euro-zone inflation. Many Euro-zone countries are close to deflation while some of them are already there. To boost the economy, ECB will print more money and increase the amount of money available to financial institutions.

There’s also a hope that QE will boost equity markets. When Bank of Japan (BoJ) announced expansion of a large monetary-stimulus program in October 31, 2014 Japan time, Japan stocks skyrocketed and Yen tumbled.

What’s great about a weaker euro? It benefits manufacturers and exporting nations. But, it can hurt international companies such as Cisco Systems, IMB,  Pepsi, etc.

Unlike Swiss National Bank (SNB), announcement of QE by ECB was much anticipated. We all knew it was coming. Although I thought it was going to be limited for some time before full-blown QE kicks in. I thought ECB would hold off until February or March because of Greek elections. Anyway, QE is starting in a month or March.

 

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Now, Bank of Canada (BoC) Shocks by rate cut. Who’s next?

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On Wednesday (January 21, 2015), Bank of Canada (BOC) announced that it is cutting the overnight rate to 0.75% from 1.00%. Bank rate and deposit rates stay the same, bank rate at 1.00% and deposit rate at 0.5%. Their reason for cutting overnight rate by a quarter?

Oil is the reason. For the past six months, crude oil (WTI) has been declining about 60%. BOC says that drop in oil prices are “negative for growth and underlying inflation…”. Fall in oil prices hurts Canadian economy because they are 3rd largest oil-exporting country. Oil-importing countries, such as China and the United States are benefiting from low oil prices.

Crude Oil
Crude Oil – Daily

Immediately after the announcement, loonie (CAD) fell over 200 pips, pushing USD/CAD to 1.2273 from 1.2063 (210 pips) in first 15 minutes (From 10:00 AM to 10:15 AM). USD/CAD kept hitting new highs since early 2009 (still is, for now). BOC expects oil prices to be around $60 in medium term (next two years). During the opening statement, BOC governor, Stephen S. Poloz said something that gave little more power for loonie to decline.

USD/CAD
USD/CAD – Hourly

During the opening statement, Governer Poloz said “The Bank has room to maneuver should its forecast prove to be either too pessimistic or too optimistic.” If conditions gets worse than what BOC expects, they might cut the overnight rate further. The statement caused USD/CAD to jump little higher. At the end, one thing that was said surprised me. Governor said “…we discussed the risk that by moving today we would surprise financial markets. We generally prefer that markets not be surprised by what we do…” Two opposite things are being said here. But, there were some rumors to rate cut days before. Since oil price decline increases the downside to Canadian economy. Rate cuts are” intended to provide insurance against these risks.”

If oil continues to decline until March, BOC might cut the overnight rate. I believe that because they warned us of further cuts from both on a press release and press conference. As of right now, I believe crude oil will fall to an area of $40.50. Then, stay there for several weeks. I’m saying this because technical analysis. I’m not an expert on crude oil, yet.

Who’s next to cut the rates? I believe it’s Reserve Bank of Australia  (RBA). Since August 2013, Cash Rate Target has been staying at 2.50%. In the beginning, most of their monetary policy decisions statements included sentences “The exchange rate remains high by historical standards, particularly given the declines in key commodity prices, and hence is offering less assistance than it might in achieving balanced growth in the economy.” Now, they say “The exchange rate has traded at lower levels recently, in large part reflecting the strengthening US dollar. But the Australian dollar remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices in recent months. A lower exchange rate is likely to be needed to achieve balanced growth in the economy”. They were saying that to weaken Aussie. They know how much their “words” has the power to cause large changes in the exchange rate. In the long-term, AUD/USD was (still is) in a downtrend. They might cut rates in February (February 2, 2015) or March (March 2, 2015), to further weaken Aussie. Further information about RBA monetary policy can be found here. (Note: times/dates are in EST).

 

AUD/USD - Daily
AUD/USD – Daily

 

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SNB Shocks Global Markets

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Last Thursday (January 15) around 4:30 a.m, SNB (Swiss National Bank) surprised everybody and woke the markets up by ending the minimum exchange rate of CHF 1.20 per euro and lowering interest rate to -0.75% from -0.25%. The announcement was unscheduled. It was shocking to everybody and there’s more come to the story.

After seconds of the announcement, CHF rode in fastest  bull mode in the modern history. EUR/CHF went on free fall with no ground stop. SNB’s floor rate of 1.2000 for EUR/CHF was broken. A lot of people were long EUR/CHF with stops just below 1.2000. Not only the CHF pairs were effected, but also other pairs. Stops were triggered in seconds (or minutes) and panic spread like wildfire. Imagine a highway with all the automobiles driving more than 200mph and large truck in the middle suddenly stops in a second.

In September 2011, Swiss National Bank (SNB) called its currency (Swiss Franc) “Massive Overvaluation”. They wanted to weaken the Swiss Franc to improve their economy. Therefore, they set a floor rate of 1.2000 of EUR/CHF exchange rate. In a statement, they stated “The SNB will enforce this minimum rate with the utmost determination”. They were saying that they will do everything in their power not to allow the exchange rate break the floor rate. Their tone was still same in the late 2014. Ever since, they have been buying the foreign exchange in unlimited quantities, until last thursday (January 15, 2015).

After abandoning its currency, SNB stated that “Swiss franc is still high”. Well, it is even more higher now. Immediately after the announcement, CHF pairs sky-rocketed. EUR/CHF dropped from above 1.2000 to about 0.9705, over 2000 pips drop in one day. USD/CHF dropped from around 1.0200 to 0.8350, almost 2000 pips drop in one day. The reason for SNB’s action “divergences between the monetary policies of the major currency areas have in increased significantly”. They are referring to Euro, which has depreciated a lot against USD, which has caused Swiss franc to weaken. That’s why they say that defending floor rate “no longer justified”. At the end of their statement, they said “remain active in the foreign exchange market to influence monetary conditions”. That’s what scares me. After what they did, we need to be cautious and not trade CHF pairs at this time.

 

EUR-CHF
EUR/CHF – Weekly

 

USD-CHF
USD/CHF – Weekly

 

SNB’s action looks suspicion for two reasons. First, SNB announces this sudden change of plans just a week before ECB meeting. Second, it looks like that IMF (International Monetary Fund) was not kept in loop.  I believe SNB is trying to buy time. The question is “For what?”. If they are trying to buy time, the move by SNB is only temporary (less 4 months).

 

2015-01-16-PROPHET
Comparison Chart – EUR/USD and USD/CHF

 

As to ECB, they have been decreasing the interest rates, which has caused Euro to decline a lot.. This week on Thursday (January 22, 2015), ECB will be releasing the results of their meeting. There has been a chatter (still is) that ECB will be announcing a full-blown Quantitative Easing (QE). At this time, I believe the interest rates will stay the same. Regarding to QE, I think QE will be announced, but limited. They might wait for Greek election results, which takes place on Sunday (January 25, 2015). Greece may exit Euro union and have their own currency. If they do, the currency will go down in value. I think full-blown QE will be announced in March 5.

Not only traders were effected, but also brokers such as FXCM. FXCM experienced significant losses ($225 million) and they may be in a breach of some regulatory capital requirements. When the news came out, their stock “FXCM” fell from around $12.50 to just below $1 (about 90% decline). In the morning of Friday, its stock was halt due to news pending. At 3:55, Dow Jones reported that Leucaidia National Corporation would be proving $300 million in cash to FXCM to continue normal operations. The agreement is in the form $300 million senior secured term loan with two-year maturity and an initial coupon of 10%. Immediately after the news, FXCM surged from around $1.50 to $4.50 (about 350% increase).

FXCM Ticker - SNB Effect
“FXCM” stock

 

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