Sive Morten
Special Consultant to the FPA
- Messages
- 18,648
Reuters) - The yen rose against major currencies on Friday as concerns about the upcoming French elections and the lack of movement in fiscal changes in the United States kindled safe-haven demand for the Japanese currency.
The dollar improved versus most peers with the exception of the yen, chalking up a second week of gains following a mildly hawkish view from Federal Reserve Chair Janet Yellen and surprising strong U.S. data on retail sales and consumer prices.
"We are trading in this political policy vacuum," Mazen Issa, senior FX strategist at TD Securities in New York, said of the dollar. "We are going to see things whipsaw around."
Weaker stock prices around the globe, together with a three-day U.S. holiday weekend, further fed appetite for the yen, bonds and other less risky assets.
News the French left could unite behind one candidate in presidential elections, possibly knocking centrist and right-leaning nominees out of the race in the first round, raised a new scenario for a second-round runoff. This possible alliance could increase the chances of anti-EU, anti-immigrant Marine Le Pen winning the presidency.
In the wake of this political development, the euro fell 0.6 percent against the dollar at $1.0612, holding above a five-week low of $1.0520 struck on Wednesday.
The euro's weakness helped stabilize the dollar as traders had pared bullish bets on the greenback earlier this week on reduced expectations the Federal Reserve will raise interest rates in March.
They concluded Yellen did not offer enough conviction of a March rate increase at her two-day testimony before Congress where she raised the possibility the central bank may raise rates more than twice in 2017.
A combative presidential news conference on Thursday following the resignation of National Security Adviser Michael Flynn this week raised doubts how effective the Trump administration will be in pushing through its economic agenda, with a goal to pump up the U.S. economy.
"For dollar bulls, this week has been frustrating," said Paresh Upadhyaya, director of currency strategy at Pioneer Investments in Boston. "We will likely remain rangebound next week."
The dollar index was up 0.44 percent at 100.89, reversing Thursday's 0.7 percent drop that was its steepest one-day loss in over two weeks. It eked out a weekly gain of 0.1 percent.
UK MPC to look through a period of above target inflation
by Fathom Consulting
On Tuesday, we presented part of our latest quarterly forecast at an event hosted by Thomson Reuters in London. We were joined by former Bank of England policymakers Charlie Bean, Charles Goodhart and Andrew Sentance. The focus of the event was the outlook for the UK economy, but it also touched on the possible ramifications of Mr Trump’s presidency, in particular his gamble with China and import tariffs.
Interestingly, at 41%, the majority of Tuesday’s audience felt that Mr Trump’s strategy would pay off and that he would succeed in stimulating US economic growth, enabling Janet Yellen and her team to continue the process of interest rate normalisation. Two of our panellists, Charlie Bean and Andrew Sentance, noted that this would provide a welcome shift in the policy mix, away from monetary policy. We concur. Indeed, we have argued since early last year that low interest rates have held back growth in productive potential by preventing the gales of creative destruction.
With regards to the UK, our audience were much less optimistic about Prime Minister Theresa May’s ability to negotiate a favourable outturn. When asked what kind of deal she was likely to secure with the rest of the European Union (EU), 90% felt that a ‘hard’ Brexit was inevitable. Within that, opinions were mixed as to whether Mrs May would secure anything better than WTO access to EU markets.
That uncertainty is in spite of Mrs May setting out her stall. She intends that the UK will leave both the single market, and the common currency, yet with a deal that allows UK firms to trade with the rest of the EU on terms similar to those in place today.
In our view, such an outcome is extremely unlikely, and the UK may end up with something much closer to WTO minima. On our central view, this becomes clear as negotiations proceed, putting downward pressure on both investment and consumption, with only a modest boost to net trade.
Notably, all of Tuesday’s panellists were relatively pessimistic about the near-term performance of the UK economy. Reflecting on the long-term implications, Charlie Bean said that it remains impossible to predict as there are “many moving parts”.
Little more than 1 in 4 of Tuesday’s audience expected to see an increase in Bank Rate before the end of this year. The consensus was that policymakers would continue to sit on their hands, even against the backdrop of a prolonged inflation overshoot.
In our central scenario, we see headline inflation of 3% or more significantly outpacing wage inflation this year. Nevertheless, like the vast majority of Tuesday’s audience, we assume that the MPC will refrain from raising rates, fearing that tighter policy will tip the UK into recession.
CFTC Report
Feb 17 Speculators reduced bullish bets on the U.S. dollar to their lowest in four months, cutting net longs for a sixth straight week, according to Commodity Futures Trading Commission data released on Friday and
calculations by Reuters.
The value of the dollar's net long position totaled $14.99 billion in the week ended Feb. 14, down from $17.07 billion the previous week. The latest dollar positioning was the lowest since the week ended Oct. 11.
The dollar has underperformed so far this year, falling 1.2 percent against a basket of currencies, after gains of 3.6 percent in 2016.
The dollar has been hurt by a combination of comments from the Trump administration about preference for a weaker dollar as well as mixed U.S. economic data suggesting growth in the world's largest economy may not be as strong as many initially thought.
The greenback's soft trend so far in 2017, however, is not expected to last long with a Federal Reserve in the midst of an interest rate hiking cycle. Fed Chair Janet Yellen earlier this week affirmed the U.S. central bank's commitment to raising interest rates multiple times this year, noting that "every FOMC (Federal Open Market Committee) meeting is a live meeting." "It is only a matter of time before the dollar resumes its rise," said Kathy Lien, managing director of FX strategy at BK Asset Management in New York.
"The (dollar) bulls could be hanging back until President Trump announces his 'phenomenal' tax plan," she added.
(The Reuters calculation for the aggregate U.S. dollar position is derived from net positions of International Monetary Market speculators in the yen, euro, British pound, Swiss franc and Canadian and Australian dollars.)
COT Report on EUR brings no valuable information. Last week net short position slightly increased while open interest dropped. It seems that short-term speculators have closed some longs when EUR has failed to break up 1.0830 area. Still changes were very small.
Technical
Monthly
January and February action still stands mostly inside December candle and makes no impact on overall long-term picture. We know that fundamental background mostly looks bearish for EUR - potentially more hawkish Fed policy, ECB QE prolongation, coming elections in many EU countries, bringing more uncertainty. After GB, separatistic sentiment start to appear in other countries of EU, as Italy, France, Netherlands, Spain that are not satisfied with Brussels domination in governing EU.
Speaking on big picture, On a way down, guys, EUR has passed through all major Fib levels. Last one was at 1.12 area and now we do not have any other below current market. Also price has dropped below 1.27 extension of this big butterfly. Thus, on monthly chart the only logical destination point stands at parity - 1.618 butterfly extension, chanell trend line support and YPS1.
Besides, right now EUR is testing YPP, but unsuccessfully yet.
Concerning bullish perspectives... they look really blur by far. The only issue that we could drag in here is a hint on possible stop grabber in February, if price will close above MACDP.
But this is definitely insufficient for real new bullish tendency. Especially if we will take in consideration previous strong drop in 2014, CFTC data. So it seems maximum that we could expect here is some deeper upside retracement, but no more. Anyway this is just tactical issue. Besides, we have not got it yet and need to wait for Feb close.
Also take a look at different behavior near low border of channel. Previously when market has touched it - it shows immediate upside pullback, it was V-shape reversal. Right now behavior is absolutely different, price just hangs on the border and shows no upside action. Any tight consolidation near trendline could become a sign of coming breakout.
Thus, based on monthly chart we could make two major conclusions. First is - real bullish trend could be re-established only if EUR will erase reversal candle and overcome its top above 1.16. Our next target on Monthly chart is parity - 1.618 Butterfly extension, YPS1 and trendline support.
In general guys, we think that steps that already have been announced by ECB and Fed should be enough to push EUR right to parity during "price-in" process, when market will "anticipate" them. But further dynamic will depend on real action from Fed, Trump administration and ECB. How they will fulfill their promises and obligations. Any surprising hawkish measures could push EUR even below parity, while step out from pormises could lead to appearing of reverse H&S pattern on monthly/weekly charts.
In shorter-term perspectives, we will keep watching over grabber, whether market will form it or not. On coming week we mostly will deal with shorter-term time frames.
Weekly
As weekly as monthly chart most are not impacted by last week action.
Since we have here two major patterns - butterfly and inner AB-CD, current upside action mostly reminds reaction on reaching of 1.0 extension AB-CD target. On a way up EUR has reached 1.0830 - 3/8 major resistance, and now we're watching whether price will form AB-CD upside action. But, honestly speaking, here, even reaching of 5/8 resistance is acceptable. It means that if our daily H&S pattern will work and EUR will reach 1.10-1.11 area - this will not erase yet long-term bearish picture.
Returning back to long-term perspective, on a way down final destination 1.618 point coincides with 1.618 butterfly target. Although we have multiple targets inside 1.0-1.05 area, ther are all minor ones. Recall, that we have daily 1.0230 extension. Also, if you will take a careful look, you could recognize another smaller butterfly inside right wing here. It also has target at 1.02 and 1.013.
But, guys, if EUR will be on a road to parity, all these intermediate targets will be hit very fast one by one.
Also, it is not very probable that market will stuck around 1.27 butterfly and will not go to parity. By two reasons - first is, pshychological pressure, second - when price will hit 1.27, it will be between 1.0 and 1.618 extensions of AB-CD pattern and this position is very unstable, market gravitates to some target... That's why parity probably should be hit.
And after that most interesting thing will come. Take a look that butterfly could become part of large reverse H&S pattern. But whether it will be formed or not will depend on fundamental factors, D. Trump ficsal policy, US economy data and Fed reaction. Thus, we have more or less single road to parity, but later, around it we will get a crossroads...If there will be something bearish that wasn't priced in yet - EUR could drop even further. If not - H&S will start to form...
Daily
As on last week as on coming week daily and intraday charts will remain our major time frames, until we mostly have a deal with retracement action. Last week we very carefully have followed to EUR and mostly have discussed all details here. Thus, right now there are few moments that we could add.
Downward retracement on Friday is absolutely logical action and we've warned about it. This is reaction on existed short-term bearish momentum that was formed on a way down from 1.0830 area. The more instersting things are yet to come. Because major concern here is validity of H&S pattern. Right now action looks good, no hints on possible failure yet. Still we have to remain cautious and keep an eye on intraday retracement. On a way down EUR should not break 1.05 lows to keep H&S pattern valid. Thus, major level to watch for on daily chart is MPS1+5/8 Fib support @ 1.0520.
This is the bottom of right shoulder - if EUR will not hold above it, this automatically will lead price right down to the bottom of the head around 1.03 lows. Which, in turn will mean continuation of long-term bear trend...
Hourly
So, guys, finally we come to time frame that probably will become our major one on coming week. Our Friday suggestion on deep retracement was correct, but still EUR keeps a lot of uncertainty what particular pattern could be formed here. That's why we need to develop detailed trading plan, how we will act and what we will be watching for...
Right now as most probable patterns we could suggest large "222" Buy, where current move down will be AB leg or, even Double Bottom. Deep retracement that we've discussed could be different, even right to 1.0520 bottom. Even DB pattern will be acceptable here, as it will keep valid daily pattern right?
Appearing of big butterfly "buy" is possible but has less probability. We will not discuss this scenario right now but keep it in mind...
Now, what we need to do first on Monday. Take a look that price will open around strong support area - EUR favorite 50% level, WPP and 1.618 AB-CD downside target that creates an Agreement. We can't exclude chances that upside action will continue right from here, or at least upside reaction will follow. That's why - this is the first area where we could think about taking long position.
As soon as reaction up will start - it will be neccesary to stops to breakeven.
Second step. Watch for large "222" Buy pattern. This will happen if current drop is AB leg. In this case our first position will close at b/e since EUR will show deeper retracement, to 5/8 FIb level or even lower...
So, let's start from this points. This should be enough for Monday action, besides, on Monday there will be holiday in US and activity probably will be a bit less than usual...
THen, depending on how situation will develop we will continue our discussion in regular daily videos...
Conclusion:
On coming week we will continue our journey with daily reverse H&S pattern. Long-term situation has got no impact yet as market mostly stands in tight range.
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.
The dollar improved versus most peers with the exception of the yen, chalking up a second week of gains following a mildly hawkish view from Federal Reserve Chair Janet Yellen and surprising strong U.S. data on retail sales and consumer prices.
"We are trading in this political policy vacuum," Mazen Issa, senior FX strategist at TD Securities in New York, said of the dollar. "We are going to see things whipsaw around."
Weaker stock prices around the globe, together with a three-day U.S. holiday weekend, further fed appetite for the yen, bonds and other less risky assets.
News the French left could unite behind one candidate in presidential elections, possibly knocking centrist and right-leaning nominees out of the race in the first round, raised a new scenario for a second-round runoff. This possible alliance could increase the chances of anti-EU, anti-immigrant Marine Le Pen winning the presidency.
In the wake of this political development, the euro fell 0.6 percent against the dollar at $1.0612, holding above a five-week low of $1.0520 struck on Wednesday.
The euro's weakness helped stabilize the dollar as traders had pared bullish bets on the greenback earlier this week on reduced expectations the Federal Reserve will raise interest rates in March.
They concluded Yellen did not offer enough conviction of a March rate increase at her two-day testimony before Congress where she raised the possibility the central bank may raise rates more than twice in 2017.
A combative presidential news conference on Thursday following the resignation of National Security Adviser Michael Flynn this week raised doubts how effective the Trump administration will be in pushing through its economic agenda, with a goal to pump up the U.S. economy.
"For dollar bulls, this week has been frustrating," said Paresh Upadhyaya, director of currency strategy at Pioneer Investments in Boston. "We will likely remain rangebound next week."
The dollar index was up 0.44 percent at 100.89, reversing Thursday's 0.7 percent drop that was its steepest one-day loss in over two weeks. It eked out a weekly gain of 0.1 percent.
UK MPC to look through a period of above target inflation
by Fathom Consulting
On Tuesday, we presented part of our latest quarterly forecast at an event hosted by Thomson Reuters in London. We were joined by former Bank of England policymakers Charlie Bean, Charles Goodhart and Andrew Sentance. The focus of the event was the outlook for the UK economy, but it also touched on the possible ramifications of Mr Trump’s presidency, in particular his gamble with China and import tariffs.
Interestingly, at 41%, the majority of Tuesday’s audience felt that Mr Trump’s strategy would pay off and that he would succeed in stimulating US economic growth, enabling Janet Yellen and her team to continue the process of interest rate normalisation. Two of our panellists, Charlie Bean and Andrew Sentance, noted that this would provide a welcome shift in the policy mix, away from monetary policy. We concur. Indeed, we have argued since early last year that low interest rates have held back growth in productive potential by preventing the gales of creative destruction.
With regards to the UK, our audience were much less optimistic about Prime Minister Theresa May’s ability to negotiate a favourable outturn. When asked what kind of deal she was likely to secure with the rest of the European Union (EU), 90% felt that a ‘hard’ Brexit was inevitable. Within that, opinions were mixed as to whether Mrs May would secure anything better than WTO access to EU markets.
That uncertainty is in spite of Mrs May setting out her stall. She intends that the UK will leave both the single market, and the common currency, yet with a deal that allows UK firms to trade with the rest of the EU on terms similar to those in place today.
In our view, such an outcome is extremely unlikely, and the UK may end up with something much closer to WTO minima. On our central view, this becomes clear as negotiations proceed, putting downward pressure on both investment and consumption, with only a modest boost to net trade.
Notably, all of Tuesday’s panellists were relatively pessimistic about the near-term performance of the UK economy. Reflecting on the long-term implications, Charlie Bean said that it remains impossible to predict as there are “many moving parts”.
Little more than 1 in 4 of Tuesday’s audience expected to see an increase in Bank Rate before the end of this year. The consensus was that policymakers would continue to sit on their hands, even against the backdrop of a prolonged inflation overshoot.
In our central scenario, we see headline inflation of 3% or more significantly outpacing wage inflation this year. Nevertheless, like the vast majority of Tuesday’s audience, we assume that the MPC will refrain from raising rates, fearing that tighter policy will tip the UK into recession.
CFTC Report
Feb 17 Speculators reduced bullish bets on the U.S. dollar to their lowest in four months, cutting net longs for a sixth straight week, according to Commodity Futures Trading Commission data released on Friday and
calculations by Reuters.
The value of the dollar's net long position totaled $14.99 billion in the week ended Feb. 14, down from $17.07 billion the previous week. The latest dollar positioning was the lowest since the week ended Oct. 11.
The dollar has underperformed so far this year, falling 1.2 percent against a basket of currencies, after gains of 3.6 percent in 2016.
The dollar has been hurt by a combination of comments from the Trump administration about preference for a weaker dollar as well as mixed U.S. economic data suggesting growth in the world's largest economy may not be as strong as many initially thought.
The greenback's soft trend so far in 2017, however, is not expected to last long with a Federal Reserve in the midst of an interest rate hiking cycle. Fed Chair Janet Yellen earlier this week affirmed the U.S. central bank's commitment to raising interest rates multiple times this year, noting that "every FOMC (Federal Open Market Committee) meeting is a live meeting." "It is only a matter of time before the dollar resumes its rise," said Kathy Lien, managing director of FX strategy at BK Asset Management in New York.
"The (dollar) bulls could be hanging back until President Trump announces his 'phenomenal' tax plan," she added.
(The Reuters calculation for the aggregate U.S. dollar position is derived from net positions of International Monetary Market speculators in the yen, euro, British pound, Swiss franc and Canadian and Australian dollars.)
COT Report on EUR brings no valuable information. Last week net short position slightly increased while open interest dropped. It seems that short-term speculators have closed some longs when EUR has failed to break up 1.0830 area. Still changes were very small.
Technical
Monthly
January and February action still stands mostly inside December candle and makes no impact on overall long-term picture. We know that fundamental background mostly looks bearish for EUR - potentially more hawkish Fed policy, ECB QE prolongation, coming elections in many EU countries, bringing more uncertainty. After GB, separatistic sentiment start to appear in other countries of EU, as Italy, France, Netherlands, Spain that are not satisfied with Brussels domination in governing EU.
Speaking on big picture, On a way down, guys, EUR has passed through all major Fib levels. Last one was at 1.12 area and now we do not have any other below current market. Also price has dropped below 1.27 extension of this big butterfly. Thus, on monthly chart the only logical destination point stands at parity - 1.618 butterfly extension, chanell trend line support and YPS1.
Besides, right now EUR is testing YPP, but unsuccessfully yet.
Concerning bullish perspectives... they look really blur by far. The only issue that we could drag in here is a hint on possible stop grabber in February, if price will close above MACDP.
But this is definitely insufficient for real new bullish tendency. Especially if we will take in consideration previous strong drop in 2014, CFTC data. So it seems maximum that we could expect here is some deeper upside retracement, but no more. Anyway this is just tactical issue. Besides, we have not got it yet and need to wait for Feb close.
Also take a look at different behavior near low border of channel. Previously when market has touched it - it shows immediate upside pullback, it was V-shape reversal. Right now behavior is absolutely different, price just hangs on the border and shows no upside action. Any tight consolidation near trendline could become a sign of coming breakout.
Thus, based on monthly chart we could make two major conclusions. First is - real bullish trend could be re-established only if EUR will erase reversal candle and overcome its top above 1.16. Our next target on Monthly chart is parity - 1.618 Butterfly extension, YPS1 and trendline support.
In general guys, we think that steps that already have been announced by ECB and Fed should be enough to push EUR right to parity during "price-in" process, when market will "anticipate" them. But further dynamic will depend on real action from Fed, Trump administration and ECB. How they will fulfill their promises and obligations. Any surprising hawkish measures could push EUR even below parity, while step out from pormises could lead to appearing of reverse H&S pattern on monthly/weekly charts.
In shorter-term perspectives, we will keep watching over grabber, whether market will form it or not. On coming week we mostly will deal with shorter-term time frames.
Weekly
As weekly as monthly chart most are not impacted by last week action.
Since we have here two major patterns - butterfly and inner AB-CD, current upside action mostly reminds reaction on reaching of 1.0 extension AB-CD target. On a way up EUR has reached 1.0830 - 3/8 major resistance, and now we're watching whether price will form AB-CD upside action. But, honestly speaking, here, even reaching of 5/8 resistance is acceptable. It means that if our daily H&S pattern will work and EUR will reach 1.10-1.11 area - this will not erase yet long-term bearish picture.
Returning back to long-term perspective, on a way down final destination 1.618 point coincides with 1.618 butterfly target. Although we have multiple targets inside 1.0-1.05 area, ther are all minor ones. Recall, that we have daily 1.0230 extension. Also, if you will take a careful look, you could recognize another smaller butterfly inside right wing here. It also has target at 1.02 and 1.013.
But, guys, if EUR will be on a road to parity, all these intermediate targets will be hit very fast one by one.
Also, it is not very probable that market will stuck around 1.27 butterfly and will not go to parity. By two reasons - first is, pshychological pressure, second - when price will hit 1.27, it will be between 1.0 and 1.618 extensions of AB-CD pattern and this position is very unstable, market gravitates to some target... That's why parity probably should be hit.
And after that most interesting thing will come. Take a look that butterfly could become part of large reverse H&S pattern. But whether it will be formed or not will depend on fundamental factors, D. Trump ficsal policy, US economy data and Fed reaction. Thus, we have more or less single road to parity, but later, around it we will get a crossroads...If there will be something bearish that wasn't priced in yet - EUR could drop even further. If not - H&S will start to form...
Daily
As on last week as on coming week daily and intraday charts will remain our major time frames, until we mostly have a deal with retracement action. Last week we very carefully have followed to EUR and mostly have discussed all details here. Thus, right now there are few moments that we could add.
Downward retracement on Friday is absolutely logical action and we've warned about it. This is reaction on existed short-term bearish momentum that was formed on a way down from 1.0830 area. The more instersting things are yet to come. Because major concern here is validity of H&S pattern. Right now action looks good, no hints on possible failure yet. Still we have to remain cautious and keep an eye on intraday retracement. On a way down EUR should not break 1.05 lows to keep H&S pattern valid. Thus, major level to watch for on daily chart is MPS1+5/8 Fib support @ 1.0520.
This is the bottom of right shoulder - if EUR will not hold above it, this automatically will lead price right down to the bottom of the head around 1.03 lows. Which, in turn will mean continuation of long-term bear trend...
Hourly
So, guys, finally we come to time frame that probably will become our major one on coming week. Our Friday suggestion on deep retracement was correct, but still EUR keeps a lot of uncertainty what particular pattern could be formed here. That's why we need to develop detailed trading plan, how we will act and what we will be watching for...
Right now as most probable patterns we could suggest large "222" Buy, where current move down will be AB leg or, even Double Bottom. Deep retracement that we've discussed could be different, even right to 1.0520 bottom. Even DB pattern will be acceptable here, as it will keep valid daily pattern right?
Appearing of big butterfly "buy" is possible but has less probability. We will not discuss this scenario right now but keep it in mind...
Now, what we need to do first on Monday. Take a look that price will open around strong support area - EUR favorite 50% level, WPP and 1.618 AB-CD downside target that creates an Agreement. We can't exclude chances that upside action will continue right from here, or at least upside reaction will follow. That's why - this is the first area where we could think about taking long position.
As soon as reaction up will start - it will be neccesary to stops to breakeven.
Second step. Watch for large "222" Buy pattern. This will happen if current drop is AB leg. In this case our first position will close at b/e since EUR will show deeper retracement, to 5/8 FIb level or even lower...
So, let's start from this points. This should be enough for Monday action, besides, on Monday there will be holiday in US and activity probably will be a bit less than usual...
THen, depending on how situation will develop we will continue our discussion in regular daily videos...
Conclusion:
On coming week we will continue our journey with daily reverse H&S pattern. Long-term situation has got no impact yet as market mostly stands in tight range.
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.
