Is The Risk Rally Over? John Taylor Puts Out New EURCHF Target Of 1.20 By May
Is the Risk Rally Over?
By John R Taylor/Jonathan Clark, FX Concepts
Ireland’s request for aid rumored to be €80-90 billion was not well received by the financial markets. Credit spreads initially narrowed, only to widen again. Equities initially traded higher and the DAX reached its highest level in 18 months, but then reversed direction and closed lower on the day. It is a bad sign for an uptrend in risk assets when they fail to rally on what should be positive news. However, even with a bailout package, many problems remain for the Irish. The main problem for Ireland is that it looks a bit like Iceland. The size of the potential losses for their banks is estimated at €85bn, which is half the size of the GDP. Politics are a looming disaster. The Green coalition partner stunned Brian Cowen’s Fianna Fáil party by calling for an election within two months, and the 2 critical Independents are in revolt. Since the long-term cycles are calling for a peak in risk assets between now and the middle of December – and are well within one standard deviation – we are especially vigilant of signs that a high may have already been seen.
There are other problems in the European periphery other than Ireland. If a bailout of Ireland leads to contagion in Portugal and Spain and they see their funding costs rise further this will increase the odds the major decline has begun. Equities are also a good barometer of risk appetites and the Spanish IBEX has already broken below the uptrend support from the low in June. If the Portuguese PSI 20 closes below 7,665 joining the IBEX this would be enough to push us out of long positions in European equities. In the currency markets one of the best indicators of stress is EUR/CHF as the crossrate reflects money from the Eurozone flowing in and out of Switzerland. The cycles argued the crossrate would strengthen into next week before peaking and that it could trade as high as 1.3725, but the upmove reversed on Monday. Although the short cycles call for weakness, if the upmove remains intact, it will hold above the support at 1.3380 and will make a final upmove into the middle of next week. It now appears the resistance at 1.3650 will hold and if risk does survive here, this level should be a good place to sell as the crossrate should then turn lower and begin a downtrend lasting into May. A close below 1.3380 signals it is headed lower into the middle of December and our initial target will become 1.3100 and the 1.2000 area could be seen by May.