EUR to see 1.0950 if the Fed chickens out

Outlook:

Today we get housing starts and building permits, along with Redbook retail sales. Tension and jitters can only grow today and tomorrow ahead of the Fed statement. The majority of analyst believe the committee will remove the word “patient” and the First Rate Hike will come at the June 17 meeting. Deutsche Bank, for one, is sticking to June.

Some analysts perceive the US economy is not actually very strong and can easily fall back into recession. Yesterday’s industrial production is questioned as a sign of persistent weakness, disregarding truly exceptional weather. Critics point to the too-strong dollar as a serious headwind, along with other factors.

The too-strong dollar is not actually a strong factor. Rebuttals are starting to appear saying just this, thank goodness. According to Market News, TD Securities, for one, says the dollar will not push the US out of its growth corridor of 2.5-3%. The Fed doesn’t much care, either. Others note that the US still runs a vast trade deficit but trade is only about 15% of GDP. The strong dollar impediment to exports may be offset by technological superiority and other factors like quality. Quality has certainly kept German exports humming along whatever the level of the euro. And as for multinationals who failed to hedge and are taking earnings hits, bah. Some of the “hits” are only on paper, depending on accounting conventions, and many other “hits” are a convenient excuse for a slew of other shortcomings and nothing to do with the dollar. Somehow we suspect the investing public knows this, even if analysts profess to fall for it.

An appeal to fundamentals probably reveals that analysts don’t have a clue. Even if they had all the data the Fed has in front of it, they wouldn’t know how to interpret it. Is a sub-par reading just a glitch and an aberration, like Feb’s industrial production, or a sign of something bigger and more sinister? We always have some uncertainty, but this time it does seem as though it contains a big dash of wishful thinking. If the economy is not doing all that well after all, the Fed won’t signal a pending rate hike and traders and investors can continue to drink from the free punch-bowl. Oh, dear. This implies that we are in for a repeat of the taper tantrum, after all.

Another item of note—we increasingly see press references to overbought and oversold. It started at Bloomberg and moved on to the WSJ and FT over the past year or two. Today the key FT “Global Markets Overview” column states that the DAX is down because the relative strength index (RSI) showed it was overbought. RSI is not the only indicator (or even the best one) for such a judgment, but never mind. The point is that technical analysis is now mainstream and indicators can be quoted alongside fundamental data with equal or sometimes greater weight.

We have been trying to blend technical and fundamentals for over thirty years and trust us, it ain’t that easy. We shall have to be more cautious than ever, reinforcing our Rule No. 1—“Be careful what you read.” Reporters and analysts have a tendency to quote one another willy-nilly without checking the data. Case in point: the dollar/yen is famous for staying in overbought or oversold territory for months on end. When traders finally weary of the position and start a reversal, they can name overbought/oversold as the “reason” for the change, but this is an outright lie. They could just as easily have used the same excuse months before. Sometimes we never find out what the true catalyst was for a trend reversal. We can go back and try to figure out what traders were saying at the time, but in reality, much of the time the traders themselves do not know. They know only that the safe and profitable thing to do is to follow the crowd and never mind the reasons.

Technical analysis entails using the preponderance of evidence from multiple indicators, and multiple indicators hardly ever all agree. In fact, when they do all agree is when it’s time to square up and get out of Dodge. The purpose of indicators is to form a framework for reading the collective mind of the market. Today we have a weak pullback ahead of the Fed. Traders are poised to make it strong pullback in the euro if the Fed chickens out, perhaps to a 50% retracement (1.0950), or to abandon the pullback if the Fed behaves as expected and announces (or hints) the hike is coming in June. In that instance we go back to the Big Picture forecast of parity and worse. We are betting on the Fed, but we don’t have any actual cash on the line. Either way, the longer the market is wobbly, the bigger the spike when the news comes out.

So that’s the forecast—a spike. Strategize accordingly.