'EUR/USD bearish run may no longer be avoided in the next few months' - Cyril Tabet, JFD Brokers

   Cyril
   Tabet

PROFILE:
• Current Job: Partner & CEO at JFD Brokers
• Career: Business degree at York University (Toronto). Succesfully spearheaded international launches of Alpari and Interbank FX. 15+ years expertise with Global Go-To-Markets initiatives.

 View profile at FXStreet

Cyril Tabet, Partner & CEO at JFD Brokers, brings a strategic vision and in-depth knowledge of the brokerage industry combined with 15+ years of hands-on expertise with Global Go-To-Market initiatives.

Since 2008, Cyril has established a strong reputation as an articulate presenter addressing various financial services related topics and attracting large crowds of investors to international conferences, seminars and expos across EMEA and Asia.

An agreement between Greece and its lenders still hasn't been reached and the country is reportedly running out of cash. For how long do you think the EUR/USD will be able to ignore these Greek news and keep avoiding some bearish runs?

Greece is struggling from deadline to deadline and seems to be in worse shape than most economists had expected, as it is deals with near zero growth, the highest unemployment in Europe (25.4%) and a debt to GDP ratio of 180%. The recent debt repayment of USD 880 million to the IMF is only a small fraction of Greece’s total debt of USD 360 billion. The nightmare sequence of payments to its creditors continues throughout June with four additional deadlines on the calendar and at the end of July there is an even bigger payment of USD 3.9 billion. As time is running out, Greece is desperately calling for more help to pay its bills and in turn it is forced to adopt more severe austerity measures including new taxes, higher VAT rate, pension reforms and job cuts. Even if it manages to receive some temporary help to pay its bills, it will only buy a little more time perhaps until the end of the year. Greece has already received two substantial bailouts (USD 123.4 billion in 2010 and USD 145.9 billion in 2012) and in order to carry on it will most likely have to receive a third one by the end of 2015.

The warnings that Greece will run out of money have been stated many times in the past, but a solution was always found at the last minute. Every time a crisis occurred as a result of Greece running out of money, the Euro plunged against the US Dollar, and as soon as a “temporary fix” was in place, there was a EUR/USD relief rally triggered slightly below the psychological 1.05 level. The history has repeated itself many times throughout the Greek crisis, with the EUR/USD pair following a downward spiral, however avoiding so far to flirt with the parity level. Therefore, a EUR/USD bearish run may no longer be avoided in the next few months, bearing in mind, however, that other factors may also affect such a move, including a Federal Reserve rate hike decision.

Do you think a Grexit is possible in the next months?

Even if a deal is reached between Greece and its creditors, the problem will not be completely resolved. History will again repeat itself with more payments down the road and the spiral will continue. The numbers above suggest that all previous temporary attempts have only so far been prolonging the inevitable event of Grexit.   

The big dilemma is whether Greece should continue to receive bailout packages from its lenders, which will eventually drive the country to a partial or total default if the government does not concede to more severe austerity measures, or ultimately choose the last resort of leaving the Eurozone and going back to the Drachma. Although a Grexit event will be extremely painful for Greece and the rest of Europe, it is indeed a possibility in the next months.

The cable has experienced a strong reversal in the last month and reached year highs last week over 1.58. Do you think it will continue its uptrend to 1.60 or the dovish BoE QIR will calm the sterling bulls for now?

Over the last 5 weeks the GBP/USD rebounded from a low of 1.4565 to a high of 1.5814 (more than an 8.5% upside correction). In the meantime, the DXY Index dropped from a high of 99.98 to a low of 93.46 (less than a -6.9% downside correction). Thus, the cable’s last shift can be mainly explained by a broader correction of the US Dollar, as market participants start to postpone their expectations concerning the date of the Federal Reserve’s first rate hike after worse than expected US data. 

On Wednesday 13th May 2015, the BOE released its QIR report in which it lowered both its growth and Inflation forecasts; a clear bearish signal for the GBP/USD. However on Tuesday 20th May 2015, the UK released its MPC Minutes, which revealed a slightly more hawkish than expected outcome, signalling a potential shift from a 9-0 rate hike vote to an 8-1 vote.

Market participants are still expecting the Federal Reserve to be the first bank to hike interest rates among developed central banks. As long as the consensus maintains this view, the GBP/USD trend should remain bearish over the medium/long term and we should therefore not expect the GBP/USD to rise far above the 1.6000. However, the US economy in particular, will need to deliver an improved data output in order to uphold this trend in the future.

Which direction is the USDJPY more likely to have a breakout of its current 118.5-120.5 range to?

From March 13th 2015 to May 14th 2015, the DXY Index dropped from 100.39 to 93.46 (less than a -7.1% downside correction) whilst throughout the same period, the USD/JPY declined to around -2.4%, demonstrating a good indication of market resilience towards the JPY strength.

Since the beginning of the year, the Nikkei 225 is up +16.65% and the market consensus is strongly bullish in regards to both Japanese and European Equities. Traditionally, the Nikkei and USD/JPY are positively correlated to each other and that should provide support for the USD/JPY until the end of 2015. 

Technically speaking, the weekly chart prices are forming an ascending triangle which could determine a more bullish outcome ahead.

As both the ECB and the BOJ remain extremely dovish in their statements over their Monetary Policy this could in turn see an expansion of their QE in coming months. Thus, a divergence theme between the Federal Reserve and the BOJ is still in place and if the US economy manages to publish more positive data in the coming months a bullish trend should soon resume.

Overall, the possibility of a 120.50 breakout is more likely than a 118.5 breakout.

A little bit under the radar, AUDNZD has experienced quite a big rally in the last weeks after months of steady downtrend. Will the bulls continue to add strength to the pair with the RBNZ possibly cutting rates later in the year?

The RBNZ announced that it has moved ahead with macro prudential measures in order to slow down the banks from lending to investors. The new measures will be implemented in October 2015. This indicates that the central bank has started to become more prudent in raising probabilities for a rate cut in coming months. 

New Zealand’s inflation rate gradually decreased in the last three months, very close to a deflation rate of 0.1% in April. The soft Labour Market data that followed sent the NZD even lower. The unemployment rate for the first quarter of the year increased unexpectedly to 5.8% while the market forecast was at 5.5%. 

However, the RBNZ survey for Inflation Expectations was a pleasant surprise for the market, easing the RBNZ's rate cut expectations. In a recent report the RBNZ stated “Businesses said they expect the CPI to rise 1.85% annually over the next two years. Expectations of inflation were 1.8% when the survey was conducted back in the December quarter last year.” The country recorded a record growth on the volume of Retail Sales in the first quarter of the year, the highest since February 2008, mainly driven by the falling domestic prices. Investors will closely watch this week’s Inflation Expectation’s data as another low figure could firm up the rate cut expectations and drive the NZD in further depreciation against the AUD. 

In mid-2014 the AUD/NZD tumbled more than 15%, following three unsuccessful attempts to break above the psychological level of 1.1300. However, following the strong rebound when the AUD/NZD nearly reached the parity level of 1.0000, the pair recovered more than 60 percent (61.8% Fibonacci Retracement level) of the move from October 2014 highs to April 2015 lows. This is quite impressive as a month ago the pair looked certain to hit parity, but instead of falling further, as highly expected, the pair managed to recover more than 10% in a month’s time. 

This rebound, slightly above the parity level, did not come as a surprise, following the aggressive sell-off in the pair, which saw it break through some important obstacles, including the 1.0920, 1.0350 and 1.0270 levels, as well as both the 50-period SMA and the 200-period SMA on the daily chart. 

My technical assessment of AUD/NZD is that the pair has rallied nicely these past weeks, with the price currently testing a key level slightly above 1.0800, which includes the 61.8 Fibonacci Retracement level, as well as the 100-period SMA on the weekly chart, with the latter one being a very significant obstacle for the bulls. 

Considering the aforementioned, the medium term bias in the market certainly appears to be more bullish, following the end of a multi-year bear market on its recent 1.0020 low, with a medium term target around the key resistance level of 1.0900 and then the psychological level of 1.1000. However, in order to reach these levels, the bulls would have to break through the above-mentioned obstacles, including the key resistance level of 1.0850 as well as the 100-period SMA on the weekly chart. In the long-term however, I anticipate the Australian dollar to extend its recovery toward the 1.1300 level. 

Conversely, the 1.0650 barrier will be a key level for the bulls, as a break below here should make way for a new retracement towards the psychological level of 1.0500, which coincides with the 38.2% Fibonacci level as well as the 200-period SMA on the daily chart.

What about oil? WTI has regained the 60$ level, do you think crude prices can avoid another downtrend with the current oversupply on the market?

The WTI Crude Oil plunged more than 60%, falling from a peak slightly below the psychological level of $107.00. Following the break below the $90.00 barrier, the move was further aggressive as it was expected for the price to penetrate the key level of $50.00, and for the commodity to reach an all-time low of $42.00 per barrel. Following a weaker dollar the last couple of months, the oil prices managed to recover more than 20%, reaching a fresh 2015 high slightly above the psychological level of $60.00. Around there the 200-period SMA on the daily chart is ready to provide a significant resistance to the bulls, preventing them to push the oil prices higher. 

Turning to a lower timeframe, the oil prices have been fluctuating between the $58.00 and the $62.00 levels for the past 3 weeks, where a clear battle is taking place between both market forces, the bulls and the bears. Technically, with both of our technical indicators (RSI and Stochastic) being overbought, which means that the massive oversupply on the market should add further pressure on the oil and could drive the oil prices lower.

At this point, it is worth noting that the aggressive rally following the strong rebound slightly above $40.00 came at the back of the massive imports from China, Russia and India. A possible increase in demand from these countries could support the crude oil prices and should drive the price above $70.00. In contrast, massive production from Saudi Arabia and Iran could lead oil prices lower. The important support level for WTI oil is seen at $58 per barrel, as a break below here, should add further pressure on the key support level of $56.00 and then at $55.00, with the latter being a significant level for the bulls, as it includes the 50-period SMA, as well as the 100-period SMA on the daily chart.