Sive Morten
Special Consultant to the FPA
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Fundamentals
(Reuters) - The dollar rose against the euro and yen in choppy trading on Friday after a report showed the U.S. economy created more jobs than expected last month, but gains were capped by wages data that analysts said were disappointing.
That could weigh on the pace of interest rate rises next year as the Federal Reserve grapples with sluggish wages that reflect persistently low inflation, analysts said.
The dollar came off three-week highs after the report, while the euro, although still down on the day, recouped some of those losses.
U.S. non-farm payrolls rose by 228,000 jobs in November amid broad gains in hiring as distortions from recent hurricanes faded. Economists polled by Reuters had forecast payrolls rising by 200,000 jobs last month.
But analysts said average hourly earnings were lower than expected. Average hourly earnings rose five cents or 0.2 percent in November, but economists expected a 0.3 percent rise. The annual increase in wages was also weaker than forecast: the November figure came in at 2.5 percent versus a 2.7 percent expectation.
“The lack of wage pressure will not alter the Fed’s rate hike aspiration in the coming meeting, but will certainly be a major discussion point for the new Fed chairman in 2018,” said Marvin Loh, senior global market strategist at BNY Mellon in Boston.
Following the data, the dollar pared gains against the yen but was still higher on the day at 113.52 yen, up 0.4 percent. The euro reduced losses versus the dollar and was last flat on the day at $1.1767.
The dollar index was up 0.1 percent at 93.899.
The Fed is widely expected to raise interest rates at next week’s monetary policy meeting and for now is seen tightening two to three times next year.
With a rate hike priced in, investors are more focused on what the Fed may signal about its monetary policy outlook next year. In the Fed’s last quarterly projection from September, the U.S. central bank indicated three more hikes in 2018.
Michael Feroli, an economist at JP Morgan in New York, believes there could be as many as four rate hikes next year and the Fed’s newest forecasts could show a lower unemployment rate than the September projections and a generally firmer outlook for gross domestic product growth.
“Both revisions should be directionally supportive of a somewhat faster rate normalization path,” Feroli said.
Interesting article on changing situation in Italy:
News in Charts: Italy and the itcoin
by Fathom Consulting
On the surface it appears that Italy is finally beginning to enjoy a cyclical upswing similar to the rest of the euro area, with growth having accelerated in 2017. Fathom, however, predicts that this upturn will be short-lived. In the long term, structural problems (including excessive levels of debt, the prevalence of non-performing loans, a declining population and anaemic productivity growth) will continue to hamper the Italian economy. In the near term, uncertainty surrounding the upcoming election, and the possible introduction of a parallel currency, may weigh on confidence heading into 2018.
The latest opinion polls suggest that the election is unlikely to produce a decisive outcome, with none of Italy’s three major political blocs likely to win a majority. It therefore seems inevitable that Italy’s next government will be a coalition. While a grand coalition formed between the centre-left and centre-right blocs would probably lead to a near-continuation of current policy, an alliance between the centre-right bloc and the populist Five Star Movement could generate a period of heightened economic and financial market uncertainty, especially given that both blocs have previously indicated support for a parallel currency scheme.
Regardless, of the electoral outcome, the outlook for Italian public finances remains grim. Years of structural reforms and anaemic economic growth have led to little appetite for further austerity. Indeed, with all major political parties currently proposing some form of fiscal expansion, Italian sovereign debt is unlikely to decline significantly from its current level.
As Fathom highlighted in a recent note to clients, Italy’s public finances remain precarious, with the country’s debt at risk of spiralling out of control. According to Fathom’s proprietary debt calculator, Italian debt stability remains conditional on a commitment to fiscal restraint and continued access to cheap funding. The current spending plans of Italian politicians do not appear to reflect this reality. At present, Fathom calculates the market-implied probability of Italian default over the next five years to be less than ten per cent. Financial markets, therefore, have either not priced in Italy’s post-election fiscal plans or simply do not trust the politicians to implement what they have proposed.
Another headline-grabbing proposal is for the Italian government to introduce a parallel currency that would circulate alongside the euro. Similar proposals currently have the support of the three of the four largest political parties and cannot, therefore, be completely ruled out.
According to the proposals, the government would pay its own suppliers, public sector employees and state pensions using a combination of euros and the new currency (hereafter dubbed the ‘itcoin’). Those receiving itcoins could in turn use them to make direct payments to the government (e.g. for tax purposes). Crucially, the government would commit to accepting these payments. As a result, it is possible that itcoins could also be used to make payments to the private sector. Proponents argue that firms would accept the parallel currency as means of payment since they could in turn use it to pay their own tax liabilities.
Advocates claim that the itcoin would boost the economy since it would enable the government to pursue a fiscal expansion that would boost growth through multiplier and liquidity effects. The feasibility of the itcoin, however, is subject to debate. Under current proposals the itcoin would not formally be given the status of legal tender (i.e. private sector vendors would not be forced to accept it as means of payment). Arguably, therefore, possessing itcoins would be viewed as a less attractive prospect than holding euros. Consequently, there would be little reason for shopkeepers to accept itcoins as a means of payments and the parallel currency might plausibly be expected to fall out of circulation. Indeed, this is the predication of Thiers’ Law.
Aside from debates over the itcoin’s feasibility, there are also questions over its legality. European laws currently state that the euro must be the only currency given the status of legal tender within the single currency bloc. Despite protestations by itcoin advocates, the EU would probably view the itcoin as incompatible with this law and consider debate over a parallel currency as indistinguishable from a debate over euro membership. From their point of view, the introduction of the itcoin could be the start of a slippery slope which might lead towards a euro exit.
However, Italexit is not Fathom’s central forecast, even if a eurosceptic coalition is formed. Given that support for the euro remains solid, proposals for the itcoin’s introduction may instead be used as a bargaining tool in negotiations with the EU over future budgetary plans. Arguably, financial markets take a similar view — according to Fathom’s calculations the market-implied probability of Italexit is currently 3.4%.
Ultimately, for the itcoin to be introduced, the Five Star Movement would have to show willingness to enter coalition negotiations with the centre-right, and public support for the euro would have to decline significantly. While neither of these events appear likely for now, they cannot be ruled out altogether.
In any case, the election is unlikely to result in the formation of a strong and stable coalition government. As highlighted above, the Italian economy faces deep-rooted problems, many of which can only be resolved through further structural reforms. However, years of reform fatigue have left little appetite for more and the Italian economy is forecast to continue to bump along the bottom, with the country’s structural problems unlikely to be resolved any time soon.
COT Report
Today guys, in technical part we again will take a look at Dollar Index. I've checked charts that we've prepared last weekend - and I put them without any changes so, that you could see how our setup has worked and what we expect next.
But, in COT report we will take a look at EUR. Because the major target of our analysis is EUR still.
Here we have mostly bullish sentiment. Although total speculative position is coiling around all time high and makes upside potential limited for EUR - it doesn't prevent possible return back to 1.21 area.
Open interest position has increased which means that some new flows have come to EUR market, as well as net long position. It means that overall sentiment is moderately bullish on EUR and nobody hurry to close it.
Technicals
Dollar Index should help us again with understanding situation on EUR. As we've talked on Friday - our major setup has not been triggered as EUR has dropped below strong support area and now too many scenarios exist there. While on dollar index situation stands more clear and it could help us better understand perspectives of EUR market as well.
Sentiment analysis currently doesn't point on reversal yet. Not only on EUR but on GBP as well. It means that despite deep retracement that we have EUR still has chance on upside continuation.
In today's technical part of research - I'll keep all charts the same as they stand last week. Because the scenario that we've anticipated has been completed. But mostly it has relation to lower time frames. On monthly-weekly charts everything mostly stands the same...
Our particular subject in two recent weeks - last two monthly candles. In fact, guys, we've got bearish engulfing here. And it seems, before final upside reversal will happen, we should get minor downside action back to previous lows around 90.65-91.0 area. Some deep retracement after first bounce up from K-support and trend line.
This week Dollar index has shown minor retracement back inside the body of engulfing. This is typical action while pattern has been formed. Pattern will be valid until price stands below its top.
Weekly
On weekly chart this leads us the same major pattern as on EUR - DRPO "Buy". To be honest, guys, on EUR potential DRPO pattern looks purely. Here, we have more DRPO LAL (Look-alike) rather than pure DRPO.
This is because we use absolute high as starting point of the thrust, while real thrust has started slightly lower, around 100.30 area. If we will use this point - then DXY already has tested 3/8 resistance that should not happen when you're dealing with DRPO. That's why we call this scenario as LAL.
EUR, in turn, shows a bit different action, although shape is the same. There price keeps pure DRPO setup.
As on DXY as on EUR DRPO has not been confirmed yet. We need just two details to be completed still - some deeper downside action first and upside reversal and close above 3x3 DMA second. This is here, on DXY. On EUR there should be mirror action, as we have DRPO "Sell" there.
As and if DRPO "Buy" will be confirmed and start to work - action somewhere to 98-100 should happen to keep harmony of potential H&S pattern here.
Last week market has not penetrated 3x3 DMA and this is good sign as DXY keeps chance for DRPO.
Daily
Remember this chart, guys? Last weekend we've suggested action back to 93.80 area. Here I just have added major pattern - "222" Buy that we should get together with DRPO "Buy" on weekly.
Here you could understand why we use DXY instead of EUR, as it shows current situation better. DXY already has completed downside AB-CD action that we were watching on EUR and that is yet should be completed.
But this makes overall situation more harmonic and logical. As on EUR current deep retracement looks a bit irrational - here is quite another story. As DXY has completed AB=CD - deep retracement is normal action.
But this not all yet. Here we also have morning star candlestick pattern right around neckline. it also was a reason for upside action. So, our scenario was realized on 100% here.
Now we've got clear H&S pattern and price stands at point where downside action should be re-established - top of right shoulder and near OB level.
This, in turn, shed light on EUR situation. It also could turn up. But EUR itself doesn't show situation as clear as DXY:
4-hour
Jewell in our analysis crown guys, 4-hour chart - no comments. Everything stands from last week. Upside Morning star ab-cd is completed. Large AB=CD downside H&S target coincides with minor 1.618 AB-CD pattern.
Hourly
And here is common thing to EUR, guys - channel. So, it could be used differently. Depending on your trading style you could wait for breakout and then try to take position on retracement. You could use stop entry orders, placed on breakout. Or, finally, you could try to get some patterns inside the channel - something like I've drawn here. One thing we could say definitely - DXY stands at culmination point and it seems that EUR does as well. Either our downside action here will start or long-term picture will change drastically.
Because what daily H&S failure will mean? It will mean that DXY will go above 95 area, which erase DRPO and lead, in turn, to collapse on EUR.
Conclusion:
So, Dollar Index again brings clearer picture and lets us better understand what is going on EUR either.
Now market stands at "culmination" point as I call it. Here either our setup will work or situation will change drastically.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
(Reuters) - The dollar rose against the euro and yen in choppy trading on Friday after a report showed the U.S. economy created more jobs than expected last month, but gains were capped by wages data that analysts said were disappointing.
That could weigh on the pace of interest rate rises next year as the Federal Reserve grapples with sluggish wages that reflect persistently low inflation, analysts said.
The dollar came off three-week highs after the report, while the euro, although still down on the day, recouped some of those losses.
U.S. non-farm payrolls rose by 228,000 jobs in November amid broad gains in hiring as distortions from recent hurricanes faded. Economists polled by Reuters had forecast payrolls rising by 200,000 jobs last month.
But analysts said average hourly earnings were lower than expected. Average hourly earnings rose five cents or 0.2 percent in November, but economists expected a 0.3 percent rise. The annual increase in wages was also weaker than forecast: the November figure came in at 2.5 percent versus a 2.7 percent expectation.
“The lack of wage pressure will not alter the Fed’s rate hike aspiration in the coming meeting, but will certainly be a major discussion point for the new Fed chairman in 2018,” said Marvin Loh, senior global market strategist at BNY Mellon in Boston.
Following the data, the dollar pared gains against the yen but was still higher on the day at 113.52 yen, up 0.4 percent. The euro reduced losses versus the dollar and was last flat on the day at $1.1767.
The dollar index was up 0.1 percent at 93.899.
The Fed is widely expected to raise interest rates at next week’s monetary policy meeting and for now is seen tightening two to three times next year.
With a rate hike priced in, investors are more focused on what the Fed may signal about its monetary policy outlook next year. In the Fed’s last quarterly projection from September, the U.S. central bank indicated three more hikes in 2018.
Michael Feroli, an economist at JP Morgan in New York, believes there could be as many as four rate hikes next year and the Fed’s newest forecasts could show a lower unemployment rate than the September projections and a generally firmer outlook for gross domestic product growth.
“Both revisions should be directionally supportive of a somewhat faster rate normalization path,” Feroli said.
Interesting article on changing situation in Italy:
News in Charts: Italy and the itcoin
by Fathom Consulting
On the surface it appears that Italy is finally beginning to enjoy a cyclical upswing similar to the rest of the euro area, with growth having accelerated in 2017. Fathom, however, predicts that this upturn will be short-lived. In the long term, structural problems (including excessive levels of debt, the prevalence of non-performing loans, a declining population and anaemic productivity growth) will continue to hamper the Italian economy. In the near term, uncertainty surrounding the upcoming election, and the possible introduction of a parallel currency, may weigh on confidence heading into 2018.
The latest opinion polls suggest that the election is unlikely to produce a decisive outcome, with none of Italy’s three major political blocs likely to win a majority. It therefore seems inevitable that Italy’s next government will be a coalition. While a grand coalition formed between the centre-left and centre-right blocs would probably lead to a near-continuation of current policy, an alliance between the centre-right bloc and the populist Five Star Movement could generate a period of heightened economic and financial market uncertainty, especially given that both blocs have previously indicated support for a parallel currency scheme.
Regardless, of the electoral outcome, the outlook for Italian public finances remains grim. Years of structural reforms and anaemic economic growth have led to little appetite for further austerity. Indeed, with all major political parties currently proposing some form of fiscal expansion, Italian sovereign debt is unlikely to decline significantly from its current level.
As Fathom highlighted in a recent note to clients, Italy’s public finances remain precarious, with the country’s debt at risk of spiralling out of control. According to Fathom’s proprietary debt calculator, Italian debt stability remains conditional on a commitment to fiscal restraint and continued access to cheap funding. The current spending plans of Italian politicians do not appear to reflect this reality. At present, Fathom calculates the market-implied probability of Italian default over the next five years to be less than ten per cent. Financial markets, therefore, have either not priced in Italy’s post-election fiscal plans or simply do not trust the politicians to implement what they have proposed.
Another headline-grabbing proposal is for the Italian government to introduce a parallel currency that would circulate alongside the euro. Similar proposals currently have the support of the three of the four largest political parties and cannot, therefore, be completely ruled out.
According to the proposals, the government would pay its own suppliers, public sector employees and state pensions using a combination of euros and the new currency (hereafter dubbed the ‘itcoin’). Those receiving itcoins could in turn use them to make direct payments to the government (e.g. for tax purposes). Crucially, the government would commit to accepting these payments. As a result, it is possible that itcoins could also be used to make payments to the private sector. Proponents argue that firms would accept the parallel currency as means of payment since they could in turn use it to pay their own tax liabilities.
Advocates claim that the itcoin would boost the economy since it would enable the government to pursue a fiscal expansion that would boost growth through multiplier and liquidity effects. The feasibility of the itcoin, however, is subject to debate. Under current proposals the itcoin would not formally be given the status of legal tender (i.e. private sector vendors would not be forced to accept it as means of payment). Arguably, therefore, possessing itcoins would be viewed as a less attractive prospect than holding euros. Consequently, there would be little reason for shopkeepers to accept itcoins as a means of payments and the parallel currency might plausibly be expected to fall out of circulation. Indeed, this is the predication of Thiers’ Law.
Aside from debates over the itcoin’s feasibility, there are also questions over its legality. European laws currently state that the euro must be the only currency given the status of legal tender within the single currency bloc. Despite protestations by itcoin advocates, the EU would probably view the itcoin as incompatible with this law and consider debate over a parallel currency as indistinguishable from a debate over euro membership. From their point of view, the introduction of the itcoin could be the start of a slippery slope which might lead towards a euro exit.
However, Italexit is not Fathom’s central forecast, even if a eurosceptic coalition is formed. Given that support for the euro remains solid, proposals for the itcoin’s introduction may instead be used as a bargaining tool in negotiations with the EU over future budgetary plans. Arguably, financial markets take a similar view — according to Fathom’s calculations the market-implied probability of Italexit is currently 3.4%.
Ultimately, for the itcoin to be introduced, the Five Star Movement would have to show willingness to enter coalition negotiations with the centre-right, and public support for the euro would have to decline significantly. While neither of these events appear likely for now, they cannot be ruled out altogether.
In any case, the election is unlikely to result in the formation of a strong and stable coalition government. As highlighted above, the Italian economy faces deep-rooted problems, many of which can only be resolved through further structural reforms. However, years of reform fatigue have left little appetite for more and the Italian economy is forecast to continue to bump along the bottom, with the country’s structural problems unlikely to be resolved any time soon.
COT Report
Today guys, in technical part we again will take a look at Dollar Index. I've checked charts that we've prepared last weekend - and I put them without any changes so, that you could see how our setup has worked and what we expect next.
But, in COT report we will take a look at EUR. Because the major target of our analysis is EUR still.
Here we have mostly bullish sentiment. Although total speculative position is coiling around all time high and makes upside potential limited for EUR - it doesn't prevent possible return back to 1.21 area.
Open interest position has increased which means that some new flows have come to EUR market, as well as net long position. It means that overall sentiment is moderately bullish on EUR and nobody hurry to close it.
Technicals
Dollar Index should help us again with understanding situation on EUR. As we've talked on Friday - our major setup has not been triggered as EUR has dropped below strong support area and now too many scenarios exist there. While on dollar index situation stands more clear and it could help us better understand perspectives of EUR market as well.
Sentiment analysis currently doesn't point on reversal yet. Not only on EUR but on GBP as well. It means that despite deep retracement that we have EUR still has chance on upside continuation.
In today's technical part of research - I'll keep all charts the same as they stand last week. Because the scenario that we've anticipated has been completed. But mostly it has relation to lower time frames. On monthly-weekly charts everything mostly stands the same...
Our particular subject in two recent weeks - last two monthly candles. In fact, guys, we've got bearish engulfing here. And it seems, before final upside reversal will happen, we should get minor downside action back to previous lows around 90.65-91.0 area. Some deep retracement after first bounce up from K-support and trend line.
This week Dollar index has shown minor retracement back inside the body of engulfing. This is typical action while pattern has been formed. Pattern will be valid until price stands below its top.
Weekly
On weekly chart this leads us the same major pattern as on EUR - DRPO "Buy". To be honest, guys, on EUR potential DRPO pattern looks purely. Here, we have more DRPO LAL (Look-alike) rather than pure DRPO.
This is because we use absolute high as starting point of the thrust, while real thrust has started slightly lower, around 100.30 area. If we will use this point - then DXY already has tested 3/8 resistance that should not happen when you're dealing with DRPO. That's why we call this scenario as LAL.
EUR, in turn, shows a bit different action, although shape is the same. There price keeps pure DRPO setup.
As on DXY as on EUR DRPO has not been confirmed yet. We need just two details to be completed still - some deeper downside action first and upside reversal and close above 3x3 DMA second. This is here, on DXY. On EUR there should be mirror action, as we have DRPO "Sell" there.
As and if DRPO "Buy" will be confirmed and start to work - action somewhere to 98-100 should happen to keep harmony of potential H&S pattern here.
Last week market has not penetrated 3x3 DMA and this is good sign as DXY keeps chance for DRPO.
Daily
Remember this chart, guys? Last weekend we've suggested action back to 93.80 area. Here I just have added major pattern - "222" Buy that we should get together with DRPO "Buy" on weekly.
Here you could understand why we use DXY instead of EUR, as it shows current situation better. DXY already has completed downside AB-CD action that we were watching on EUR and that is yet should be completed.
But this makes overall situation more harmonic and logical. As on EUR current deep retracement looks a bit irrational - here is quite another story. As DXY has completed AB=CD - deep retracement is normal action.
But this not all yet. Here we also have morning star candlestick pattern right around neckline. it also was a reason for upside action. So, our scenario was realized on 100% here.
Now we've got clear H&S pattern and price stands at point where downside action should be re-established - top of right shoulder and near OB level.
This, in turn, shed light on EUR situation. It also could turn up. But EUR itself doesn't show situation as clear as DXY:
4-hour
Jewell in our analysis crown guys, 4-hour chart - no comments. Everything stands from last week. Upside Morning star ab-cd is completed. Large AB=CD downside H&S target coincides with minor 1.618 AB-CD pattern.
Hourly
And here is common thing to EUR, guys - channel. So, it could be used differently. Depending on your trading style you could wait for breakout and then try to take position on retracement. You could use stop entry orders, placed on breakout. Or, finally, you could try to get some patterns inside the channel - something like I've drawn here. One thing we could say definitely - DXY stands at culmination point and it seems that EUR does as well. Either our downside action here will start or long-term picture will change drastically.
Because what daily H&S failure will mean? It will mean that DXY will go above 95 area, which erase DRPO and lead, in turn, to collapse on EUR.
Conclusion:
So, Dollar Index again brings clearer picture and lets us better understand what is going on EUR either.
Now market stands at "culmination" point as I call it. Here either our setup will work or situation will change drastically.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
