The chorus of market crash predictions grows ever louder. The Fed pauses its funds rate hike and Bitcoin emulates gold’s rally just as gold hits an interim high. Oil price lows may force Saudi Arabia to devalue the Saudi Riyal.
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Sun 14 February
Prelim GDP q/q (actual: -0.4% expected: -0.3% previous: 0.3%)
Mon 15 February
China Trade Balance (actual:406B expected:389B previous:382B)
Tue 16 February
Germany ZEW Economic Sentiment (expected:0.1 previous:10.2)
Canada Manufacturing Sales m/m (expected:0.9% previous:1.0%)
Wed 17 February
US FOMC Meeting Minutes
Thu 18 February
US Unemployment Claims (expected:275K previous:269K)
Fri 19 February
US CPI m/m (expected:-0.1% previous:-0.1%)
Amidst growing fears of a return to recession, world markets are reflecting the shift in sentiment, and interesting price chart pictures appear. GEO has maintained, since mid-2015, that the shift to recession and deflation was already underway. Now we see the telltale signs in the charts.
The free money that had levitated US stock markets since 2009 has been withdrawn by the Fed that, by raising interest rates, now seeks to contract credit. The symptoms can be seen in the chart of the Dow Jones Industrial Index.
The Dow has broken below a trendline that has supported advance since 2012. An attempt to advance back above it failed and the technical expectation is now that the chart should begin decline to significant levels of support. The initial breach of the 200MA (red) should see price find support at the 14,500 points level and a subsequent sell-off to at least the 12,000 level at the overlap of previous support and the 2.618 Fibonacci extension can be expected.
Uncertainty and fear about economic prospects usually has investors fleeing to safety, and (ambiguously, at first) gold became the safe haven of choice during December of 2015. Since then an accelerating gold rally has developed and it looks set to continue much higher during the coming months.
Any large interim correction should seek support at the support channel (pale blue) and/or the red 200-period moving average. These represent potential entry points into the next wave of advance.
While gold was embarking on its surreptitious rally, in December, bitcoin price was declining after rallying to an end-year high. Recently, as gold’s advance strengthened, the market began buying bitcoin – potentially in emulation of gold, but perhaps also in an interim speculative rally prior to lower lows.
The matter of a contentious hardfork remains on the cards for Bitcoin, and the cargo cult responsible for promoting the dangerous consensus breach, threaten the fundamental security and value of the block chain flagship. Once the threat is proven hare-brained and impotent, bitcoin price will be unburdened and could rally through the mid-year block reward halving event.
The Bank of Japan’s unprecedented quantitative easing program had ensured a steadily devaluing Yen since 2012. Despite a strengthening US dollar and increased currency inflation by the BoJ during recent months, the Yen is strengthening.
Both the yen and euro strengthening at the start of this year has delayed the inevitable dollar rally.
Some commentators blame the law of diminishing returns, while analyst Marc Chandler suggests: “Instead, we suggest that [the Yen] has been overwhelmed by the unwinding of funding and hedge positions. By nearly any metric, the more than 10 yen decline in the dollar since the start of the month is excessive.”
Whichever way one explains it, central banking’s pretzel logic of trying to fight credit deflation with the creation of more credit, remains a tragi-comedy.
Suadi Arabia has not been faring well during the global commodities rout. The country’s principal source of revenue had declined from $120/barrel in 2014 to $60/barrel at the start of 2015. As if a halving of revenue wasn’t bad enough, by the start of 2016, oil (at $30/barrel) is worth a quarter of its 2014 value.
Meanwhile, Saudi Arabia’s central bank has been dutifully maintaining a peg of its currency, the Saudi Riyal, to the US dollar. Central banks achieve a peg price by strategically selling the pairing currency (the dollar, in this case) from its supply of national reserves. Yet, at some point, the charade of credibility can become too expensive and may threaten to exhaust the central bank’s supply of national reserves.
Recent and historic developments threaten Saudi Arabia with bankruptcy if they do not un-peg the Riyal:
1) The lead-up to the Fed’s recent rate hike had sent the US dollar soaring, thus putting downward pressure on all paired currencies, including the Saudi Riyal. The cost of maintaining a peg to the strengthening dollar has increased.
2) Oil revenue has whittled down to a quarter of what it was two years ago, and with oil being Saudi Arabia’s primary export, the national budget must be funded from reserves. The viability of spending US dollar reserves on maintaining a peg, as opposed to funding government, has to be questioned.
3) Saudi Arabia’s historical and political context is leading it into regional conflicts. The predominantly Sunni Islam country is encircled by Shiite Islamic states that attack its territory and interests in the Middle East. Saudi Arabia must fund military defense and potentially the costs of war.
The un-pegging of the Riyal will see its value drop, with repercussions through the Saudi economy. Foreign investors can be expected to withdraw to safety, and local investors may seek to disinvest from a faltering domestic stock market.
The date of the event is unknown, but it does represent an opportunity for short-selling the SAR/USD forex pair, as well as buying a put option on the Saudi stock index. The opportunity, highlighted and discussed by Jim Rickards, fits GEOs suggested long-term strategy of holding bitcoin and buying the US dollar.
This analysis is provided by xbt.social.
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The writer trades Bitcoin. Trade and Investment is risky and subject to probability and market changes. CCN.LA accepts no liability for losses incurred as a result of anything written in this report.
Charts from TradingView, financial data & cartoon from Investing.com, image from Shutterstock.