October 19 Market Overview
The Reserve Bank of Australia (RBA) has noted that there are distortions in the market prices. For example, the DXY is trading above its 50-year monthly average at around 99.00, and GBP/JPY is trading between 179.50 to 181.07, which is between its 36 and 37-year monthly averages. Last year, WTI traded at the 24-year monthly average when it was in the 70's. USD/JPY and EUR/USD need to align with DXY's 50-year monthly averages.
The SPX 500 is trading normally between its 1 and 10-year monthly averages. The speculation for XAU/USD and Gold, priced in all currencies, also trades between their 1 and 10-year monthly averages. However, these will not adjust to distorted locations and prices until the currency price trades normally again.
Central banks need to lower interest rates to normalize markets and currency prices. This is because the Federal Reserve's (Fed) increase of 500 points has caused distortions in market prices, especially since these increases did not reduce inflation.
The Fed's strategy to follow Volker was a complete failure. If the Fed had not increased rates, markets would be trading normally today and inflation would also be at normal levels and decrease faster than expected.
In terms of monetary policy, central banks consider inflation, interest rates, and exchange rates as import lines. The exchange rate should ideally be in the middle of import and export lines. Export lines include GDP, money supplies, and producer prices.
The position of the exchange rate is currently incorrect due to central bank increases which have distorted import/export prices and consequently, market prices.
Market normalization only occurs two weeks of every month when most vital GDP and inflation are released as import and export lines. GDP and inflation are running per month at differences of 0.10 to 0.20. At this rate, central banks may take until 2050 to normalize inflation at 2% while markets remain distorted and GDP remains low.
A major issue is the daily trade of interest rates at 2, 3, and 5 points. Central Banks raise by 500 points but offer daily trades at only 5 points. This problem won't see normalization anytime soon.
In terms of exports exceeding imports, the Swiss National Bank (SNB) is doing well compared to the Fed, Bank of Japan (BOJ), Bank of England (BOE), Reserve Bank of Australia (RBA), and Reserve Bank of New Zealand (RBNZ) where imports exceed exports.
Last week, EUR/USD and other EUR currencies were oversold but have since risen. This week, EUR/USD, EUR/JPY, and EUR/CHF are deeply oversold while EUR/AUD and EUR/NZD are overbought. GBP is trading similarly to EUR with GBP/USD, GBP/CHF, and GBP/JPY being deeply oversold.
There are issues as overbought EUR/AUD trades oversold to GBP/AUD, overbought EUR/NZD trades oversold to GBP/NZD, and oversold GBP/CAD trades oversold to EUR/CAD.
Next week we're watching for GBP/AUD at 1.9196 while GBP/NZD and EUR/NZD correct lower but fail to break any significant averages.
EUR/USD, GBP/USD, AUD/USD, NZD/USD are all not only massively oversold but close to extreme oversold. There's no concept of shorts for next week.
EUR/USD must trade at least to 1.0652 then trade above 1.0685 to easily target 1.0819 or higher.
GBP/USD has a minimum target at 1.2332; AUDUSD at 0.6539; NZDUSD has a minimum target between 0.6047 and 0.6214.
The anchor pairs must bring us back to normal trading again which means wider ranges, more profitable trades, and more currencies to trade.
The USD/JPY pair has a target of 148.07 for next week. The long-term targets are 144.27, 136.53, 131.99, and 128.60. It’s important to note that the 128.60 level in January was at 122.00, and this line has increased by about 60 pips each month for the past nine months.
The USD/JPY pair has the potential to move by 1000 pips in a day, but this isn’t seen as a significant move. Currently, USD/JPY is trading with daily movements of only around 50 to 70 pips, indicating significant distortions.
For the EUR/JPY pair, there’s a significant drop to 156.21, and for GBP/JPY it’s 180.62. GBP/JPY is expected to lead the way for all JPY cross pairs. Keep an eye on AUD/JPY next week for potential long and short positions at 94.32 and NZD/JPY at 87.61.
USD/CAD is trading in an overbought condition as usual and continues to aim for the long-term target in the 1.3100 range. The best strategy is to only trade short in order to follow the trend.