EURGBP & Gold vs Aussie Signals

by Ashraf Laidi
Nov 15, 2010 4:25 | 46 Comments

The escalating negative dynamics surrounding the euro must be assessed carefully when drawing conclusions over EURUSD. A decline below $1.3550 remains unlikely for now. Rather, I continue to favour shorts in EURCAD, EURCHF (see details below), with particular focus on EURGBP in this piece.

There are clear fundamental and technical arguments for why EURGBP will continue its decline. Last week, the pair posted its weekly drop in since January.

The fundamental case is two fold; the euro and sterling sides. On the euro-negative side; EURGBP is weighed by uncertainty as to whether Ireland will need IMF bail-out, Irish political dissent on the budget and LCH Exchange decision to raise the margin on Irish bonds. Irish PM Cowen is urging opposition parties to pass the planned EUR 6 bln adjustment to the budget in order to set aside funds for crucial spending ahead. Failure to do so would prevent the State from undertaking its EUR 50 bln in annual spending. Before we get to the details of EU financing, it is important to note the diminishing chances of any Budget resolution by the Irish parliament on Dec 7.

On the GBP-positive side, the Bank of England's less than hawkish take on inflation boosted the currency across the board. Although the BoE continues to see inflation below the 2% target at the end of its 2-year forecast period, it admitted that more upside risks to the inflation surprising on the upside that would serve to delay any QE2 for now. While GBP fundamentals could face renewed disappointments from the upcoming housing data ahead, GBP remains a relative play with respect to EUR and AUD.

The technicals arguments for a lower EURGBP are the following;

EURGBP & Gold vs Aussie Signals - Eurgbpnov14 (Chart 1)

1. 2-year Trendline Resistance Held up. The trendine (blue) extending from the all-time high of 0.9799 (Dec 2008) through the 2009 and 2010 highs was nearly broken last month but without success

2. Death Cross on the Weekly Moving Average. The 55-WEEK MA (blue line) breaks below the 100-WEEK MA for the first time since December 2007. When a moving average falls below a shorter period moving average, it is referred to as a "death cross". A notable death cross occurs when the 55-MA (daily or weekly or month) falls below the 100-MA or the 200-MA. These patterns usually foretell sharp moves in key instruments such as EURGBP.

3. Major Negative Stochastic Turnover. Note the slow stochastic in the lower box has turned lower—a pattern highly consistent with previous selloffs, as shown in the prior 4 circled turnarounds. Stochastics are a measure of momentum or pace of change in price formations.

EURGBP & Gold vs Aussie Signals - EURGBPMONTHLYNOV2010 (Chart 2)

4. Monthly Technicals (chart below). Key monthly reversal after the October candle showed an inverted hammer, which is a typically bearish price formation appearing at the peak of the trend. Such is a text-book reversal signal of a November flow that is already underway.

The aforementioned dynamics suggest further losses towards the prelim 0.8370 target (just below the June low), followed by 0.8150. Any new signal justifying the case of the hawks at the BoE (VAT, weak sterling, rising oil prices), EURGBP would risk a break below 0.8030 and onto 0.78. Only a close above 0.8870 merits re-consideration of this important downcycle. The daily chart may appear to stage short-term bullishness near 0.8550, but only a daily close above 0.86 merits reconsideration of broadening bear move.

What's Gold/Aussie Telling us?

EURGBP & Gold vs Aussie Signals - GOLDAUD Nov12 (Chart 3)

Friday's $47 decline in gold resulted from the run-up in US 10-year yields and the resulting rally in the US dollar. The inverse relationship between USD and gold has not always held up this year. We saw in Q1-Q2 how the inverse relation was reduced to insignificance, partly due to Eurozone credit concerns boosting gold's safe haven flows at the expense of a falling euro and to the benefit of US dollar.

Although I maintain my medium-long term bullishness for gold--seeing $1,550 by Q1 2011, my call for a medium term downleg (below $1,320) is highlighted by gold's movements in terms of the Aussie (Gold/AUD). Note in the weekly Gold/AUD chart below, each of the first three circled peaks coincided with a pullback in Gold/USD (centre chart). Attempting to pick temporary tops in Gold/USD via solely looking at Gold/USD can be difficult these days with Fed's QE2 and Eurozone sovereign issues playing in favour of gold. But if we obtain a clearer downsignal in the value of gold in terms of the stronger Aussie, then it could follow that the precious metal is due for a deeper pullback against all currencies.

The fundamental case for a temporary drop in gold can materialize from surging expectations of further Chinese tightening (rate hikes not just hiking reserve ratios). Continued upside surprise in US data—following the 151K increase in October payrolls—could also weigh on gold on the notion that the planned $650 bln in QE would be curtailed before Q2. Regardless of whether the announced QE2 program will be completed to the end, the more important fact is that there will always be bond, equity and FX traders who would draw such a conclusion at each and every round of positive US data. Such are the fundamental reasons for having a 2-way market in gold and other instruments—irrespective of the validity of the fundamental rationale.

For the technically-oriented trader, note how each of those three peaks in Gold/AUD are illustrated by a typically bearish formation, including bearish engulfing pattern and inverted hammers.

As Gold/AUD risks closing below AUD 1,370, watch the $USD1,350 trendline prevailing since the Jul 28 low. A break below $1,350 would extend losses towards the $1,320 foundation-38% retracement of the rise from the said low.

More details on the use of multi-currency gold analysis in Chapter 1 of my book More detailed Intra-day and Intra-week FX calls are found by following me on Twitter at Twitter.com/alaidi EURCAD HotChart still in progress

Comments (Showing latest 10 of 46) View All Comments
Lawrence
Tennessee, United States
Posts: 14
9 years ago
Mar 4, 2011 1:44
Thanks for the insight, Ashraf. And good luck with your future plans.
chloethebull
Canada
Posted Anonymously
9 years ago
Mar 3, 2011 23:53
so dave if ur saying the uk is going to be painful for next 2yr & we know the eurzone still has major debt issues that need to be resolved..which arn;t and due to irish elections we know kenny is going to try and renegotiate the interest on the bailout but merkel said that very unlikely to happen that should add more doubt&uncertanty to the eur..then we have usa posting pretty good data..fed now expressing high oil could be inflationary might have to get more hawkish like the ecb..mayb im just a $$ bull and need to let it go but i think usd could go on a run lol..any ways gl:)
DaveO
UK
Posted Anonymously
9 years ago
Mar 3, 2011 23:36
Good thinking Kam ! (I would not be short eurgbp just recently) Trading weekly timeframe a different matter, your stop will be 8750, youch)

Uk economy very different to eur, cannot be compared. Much of our inflation is external plus the effects of radical deficit cuts not even started to work through yet. Next 2 years will be painful.
Kam
london, UK
Posts: 31
9 years ago
Mar 3, 2011 19:47
Ashraf,

I am short eurgbp from 85.50 based on technicals (the weekly wedge!) but am concerned that perhaps the techincals don't reconcile with the fundamental position. In you analysis back in November 2010 the pound was fundamentally better placed with Euro debt crises etc but now with the rate hike speculation, ECB rhetoric today, Dismal UK q4 growth and full impact of UK cuts ahead, are you still in favour of gbp V euro.

On another note why does 2.4% inflation in Euro zone lead to ECB being so hawkish on rate hike whilst 5% inflation in UK is not a cause of concern (relatively to Euro zone) Is this to do with relative growth prospects.

Kamran
Ashraf Laidi
UK
Posted Anonymously
9 years ago
Mar 3, 2011 18:41
Tennessee, the correlation broke not only between AUD and Gold but also between AUD and equities. This is more in reflection of the Aussie's dubious fundamentals (no more rate hikes in med term & questions about sustainainability for consumers and home buyers) and impact of upcoming rate hikes.


Ashraf
Lawrence
Tennessee, United States
Posts: 14
9 years ago
Mar 3, 2011 2:04
Ashraf,

Has Gold and AUD correlation broken down? Do you still see gold at $1550 in the near future?
said
mulhouse, France
Posts: 2822
9 years ago
Feb 14, 2011 17:23
eh the scottish portuguese, are you on my roof?
said
mulhouse, France
Posts: 2822
9 years ago
Feb 14, 2011 17:16
yes turner
retrait des options sur dow jones.
camilla
said
France
Posted Anonymously
9 years ago
Feb 2, 2011 14:52
absolutely madeleine de montmorency.
in the reports of the BIS, and that's why white has put this report on GOLD few years ago.
replace ur fleet dealers.
montmorency
Abingdon, UK
Posts: 610
9 years ago
Feb 2, 2011 14:47
It seems to me that because trading volume* in EUR/USD and GBP/USD is so much higher than that in EUR/GBP, the price of the latter pair is highly dependent on what happens in the former two pairs. It's a bit like a straw blowing in a gusting wind - fairly hard to predict, unless there are strong fundamentals that only affect EUR vs GBP strength and not the relationship of the other two pairs.

This is why I no longer, or almost never, trade EUR/GBP.

I suppose that purely technical short-term moves may be an exception to this.


*[These numbers are in the annual reports for the International Bank of Settlements]