Sive Morten
Special Consultant to the FPA
- Messages
- 18,699
Fundamentals
Here I would like to offer your attention new research from "Phantom Consulting" on Alpha now research, that is dedicated mismatching between current situation in US economy and public opinion on its perspective. Shortly speaking, current fears that widely are announced in mass media are not as scaring as they look like. And screaming on too high USD rate, too low inflation, dropping of ISM index is just the half of the story:
As our regular readers will be aware, we have argued since last summer that the US economy was robust enough for higher interest rates. That view has been vociferously contested by the likes of Larry Summers and Martin Wolf, who — among others — believe that the Fed has made a huge policy mistake by raising the federal funds rate. They point to a strengthening US dollar and embattled manufacturing sector as evidence. This Newsletter dismisses that notion.
Citing the Institute for Supply Management’s Manufacturing Index, which has fallen to a post-crisis low, some commentators are even warning of an impending US recession. Heeding their concerns, we have conducted our own analysis and find that a flailing manufacturing sector need not spell disaster for the overall performance of the US economy.
Indeed, manufacturing accounts for a relatively small proportion of the country’s gross domestic product and although often considered a bellwether for the wider economy, an ISM reading below 50 (indicative of diminishing activity) is rarely accompanied by outright economic recession.
While our analysis reveals that a negative shock to the manufacturing sector’s ISM can presage a reduction in the non-manufacturing index, that is not always the case — with the source of the manufacturing sector’s hardship decisive.
Indeed, as the following chart illustrates, when the shock is a real appreciation of the US dollar, the manufacturing sector takes a hit but the non-manufacturing ISM benefits. This is because a stronger dollar reduces the relative cost of imports, boosting households’ disposable income and supporting the service sector. With this in mind, the 15% real appreciation of the US dollar since the summer of 2014 need not herald wider economic malaise.
Another critique launched at the Federal Reserve is that inflation is too weak to justify raising rates. However, as our chart reveals, measures of inflation that strip out the most volatile components are close to pre-crisis norms.
While policy tightening with headline inflation below 1% was previously unprecedented in the US, other central banks have raised rates when inflation has been far lower. For example, in late 1999, the Reserve Bank of New Zealand tightened when inflation was below zero. And in 2004, the Bank of England raised rates even though CPI inflation was below its 2% target.
Minutes of the FOMC’s December meeting confirmed that it expects to raise rates by around 100 basis points per annum. Even so, the market-implied path remains around one half of that pace. In our forthcoming Global Economic and Markets Outlook, due to be presented to our clients later this month, we address how that gap is likely to close.
________________________________________________________________________________________
(Reuters) - The dollar tumbled to a near five-month low against the yen and a 2-1/2-week trough versus the euro on Friday, hammered by a combination of poor risk appetite arising from a renewed drop in oil prices and weak U.S. economic data.
The downbeat economic numbers along with the meltdown in oil and stocks could further slow the pace of the Federal Reserve's already gradual tightening policy, a negative scenario for the dollar.
The dollar index, which measures the greenback against a basket of six other major currencies, was down 0.2 percent at 98.933 .
"I think the Fed is going to be reluctant to raise interest rates any time soon," said Joe O'Leary, senior FX trader at Silicon Valley Bank in Santa Clara, California.
"There's just too much uncertainty going on. We also have weak U.S. data, and equity markets getting clobbered. This will all affect U.S. growth."
Data showed on Friday that U.S. retail sales fell in December as unseasonably warm weather curbed purchases of winter apparel and cheaper gasoline weighed on receipts at service stations. U.S. producer prices were also lower last month due to weak energy costs, while the country's industrial output declined for a third straight month.
Following the poor U.S. economic data, the interest rate futures market has now priced in just one additional rate move by the Federal Reserve this year, compared with expectations of three hikes.
Commodity-based currencies such as the Australian, New Zealand and Canadian dollars also took a nosedive on the back of another slide in Chinese stock markets following an almost 5 percent tumble in oil prices to less than $30 per barrel.
In late trading, the dollar fell to 116.51 yen , the lowest since Aug. 24. It was last at 117.02 yen, down 0.9 percent.
The euro rose to $1.0984 , its highest since Dec. 29, and was last at $1.0913, up 0.5 percent.
The Aussie sank to US$0.6824 versus the greenback, the lowest since April 2009, while the New Zealand dollar fell to a 3-1/2-month trough of US$0.6382 .
The Canadian dollar, meanwhile, dropped to a fresh 12-year low against the U.S. dollar. The greenback was last up 1.2 percent at C$1.4534
Richard Benson, co-head of portfolio management at currency fund Millennium Global, said the Canadian dollar, down by a third in value against its U.S. counterpart since 2012, was suffering from bets on more easing of monetary policy next week.
CFTC data shows contraction of short position while open interest stands almost the same. It means that some shorts have been replaced by long positions... But to be honest, difference is not significant to last week.
Technicals
Monthly
As we have mentioned previously appearing of YPP around 1.11 area has negative sign for bears. Last week many patterns were pointed on further drop. Today situation is changing or, at least, chances on upward action have increased. And well-known feature that markets gravitates to pivots, especially to yearly ones, could take a special meaning in nearest future. This brings some contradictions and additional worryings in analysis.
Most bad thing is that we do not know when market will test YPP. It could do it in January, or it could first drop to YPS1 and then, on a back wave up will test YPP...
Still, right now we will follow direct technical analysis, but will keep in mind 1.1150 level as YPP.
Actually monthly chart of EUR is not very informative and it would be better to look at EUR through the prism of Dollar Index (DXY) futures. It shows brighter and more transparent picture.
Fed program suggests 0.25% rate hike in every quarter of 2016. It means that by the end of 2016 Fed rate will be 1.25-1.375 as it is suggested by analysts and Fed Fund futures rate. Of cause this hiking procedure will be data depended, I mean NFP, GDP etc. but anyway, Fed has announced not just isolated rate hike but tendency. This is major point. Analysis that we put above relatively confirms the same thing.
This lets us to make major conclusion that such sort of statement on background of EU QE program, will probably slowly but stubbornly press EUR/USD pair. And this lets us to confirm our expectation of parity and even 0.8 targets.
Now, if you remember our most important riddle was on possible upward retracement. Other words speaking this is not a question on "what trend we have" but mostly "when this trend will continue - right now, or will be slightly postponed".
Last month we have tried to understand will we get any upside retracement on EUR due forming 2-bottom consolidation. And major riddle is what could happen inside this circle on monthly chart.
Our first scenario was - market just could continue move down. Especially if recent rally was mostly technical. As you can see our bearish grabber and dynamic pressure pattern have not quite reached target - former 1.0460 low was not reached. Butterfly pattern is still valid and market was falling like a stone to its 1.27 target, though only oversold was able to stop it for some time. Thus, moving to 1.618 target which is a parity is still possible.
Second scenario mostly relies on potential DRPO "Buy" pattern and 2-candle bullish grabber.
Last week we've made a parallel analysis with Dollar Index and come to conclusion that hardly EUR will be able to stay with long-term upside retracement to 1.21 area. Dollar index has DRPO "Failure" pattern in progress and untouched 1.618 target. Taking in consideration Fed financial policy, EUR drop is just a question of time. That's why we still keep our long term target.
Still, on shorter term charts we see signs of possible minor scale upside retracement.
Weekly
First sign comes on weekly chart. This time frame is the one where we have to dig market mechanics if we want to get the answer. Because here we do not have clear patterns and "easy-to-read" combinations. So, what does mechanics tell us?
Initially we've got bearish grabber that was very welcome at that moment and EUR has given us the signal of downward continuation. But 2-3 weeks later balance was broken. Take a look that after bearish grabber market has formed overlapping candles and each next candle has become inside one for previous candle. So EUR was not hurry to start action down. Finally 2 week ago EUR has dropped significantly below MPP but take a look - returned right back up and even formed bullish grabber at this time.
This action put under question perspectives of soon drop by two reasons. First is, and most simple - we have bullish grabber in place with invalidation point around 1.07. That's why following strict rules of grabber's trading we should not take any shorts until market will not erase this grabber by dropping below it's lows...
Second and most important is overall price behavior, this flat "stagnation" after bearish grabber indicates unwillingness of EUR to move down. And fast return after MPP challenge just proves it. That's why currently we can't follow initial bearish context.
At the same time, monthly chart tells that too strong upside action is also hardly possible. It means that EUR could move down, but this action will be limited.
Daily
So, at first glance, by following to simple logic, EUR should have to calm down after multiple bearish grabbers were formed and just continue move down. But this has not happened. EUR again and again is challenged 1.10 area and put under question the same grabbers.
As a result, as you can see trend has turned bullish here and EUR has vanished bearish grabbers, although we do not see obvious upward breakout yet. Market right now is not at OB/OS level so it has quite sufficient room to move in any direction. But this stubborn in upside direction despite any bearish patterns increases chances on some upside continuation.
On next week we will be watching for first our target here. This is minor 0.618 extension based on daily upside rally and it stands at 1.1060 level.
Speaking on invalidation of bullish setup - here is all quite simple and stands the same on all time frames. This is 1.07 level. This is a crossing of invalidation point of different patterns - weekly bullish grabber, daily AB-CD, butterfly on 4-hour chart and others. Breaking below it will mean that market returns to bearish context and this will mean re-establishing of bearish trend that we've discussed on monthly chart.
Meantime, market stands in "minor" upside retracement with 1.1060 as first destination point.
4-hour
In short-term perspective situation looks as follows. Upside breakout has happened and market now stands in technical downward retracement. EUR here has the same target as on daily chart - 1.1060 top. But here it is based on butterfly 1.27 extension and inner AB=CD pattern. As you can see - 1.07 lows is the same invalidation point.
Right now market turns to re-test broken trend line and this will be most important moment. EUR needs to hold above it and do not return right back in channel to keep chances on further upward continuation:
Hourly
This chart better shows the range where EUR should stop its downward retracement. As you can see it has completed minor AB=CD and trend line that market will re-test, is coincide with WPP and K-support area. That's being said, EUR will keep chances on upside continuation if it will hold above 1.0870.
Conclusion
Fed statement mostly was supportive for long term bear trend on EUR/USD. Right now our trading plan suggests move down to 1.05 area. Long term analysis currently excludes too far upside retracement, say to 1.21-1.25 area. But it does not exclude minor bounce to 1.12-1.13 area.
In short-term charts we also see some signs that this bounce still could happen.
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.
Here I would like to offer your attention new research from "Phantom Consulting" on Alpha now research, that is dedicated mismatching between current situation in US economy and public opinion on its perspective. Shortly speaking, current fears that widely are announced in mass media are not as scaring as they look like. And screaming on too high USD rate, too low inflation, dropping of ISM index is just the half of the story:
As our regular readers will be aware, we have argued since last summer that the US economy was robust enough for higher interest rates. That view has been vociferously contested by the likes of Larry Summers and Martin Wolf, who — among others — believe that the Fed has made a huge policy mistake by raising the federal funds rate. They point to a strengthening US dollar and embattled manufacturing sector as evidence. This Newsletter dismisses that notion.
Citing the Institute for Supply Management’s Manufacturing Index, which has fallen to a post-crisis low, some commentators are even warning of an impending US recession. Heeding their concerns, we have conducted our own analysis and find that a flailing manufacturing sector need not spell disaster for the overall performance of the US economy.
Indeed, manufacturing accounts for a relatively small proportion of the country’s gross domestic product and although often considered a bellwether for the wider economy, an ISM reading below 50 (indicative of diminishing activity) is rarely accompanied by outright economic recession.
While our analysis reveals that a negative shock to the manufacturing sector’s ISM can presage a reduction in the non-manufacturing index, that is not always the case — with the source of the manufacturing sector’s hardship decisive.
Indeed, as the following chart illustrates, when the shock is a real appreciation of the US dollar, the manufacturing sector takes a hit but the non-manufacturing ISM benefits. This is because a stronger dollar reduces the relative cost of imports, boosting households’ disposable income and supporting the service sector. With this in mind, the 15% real appreciation of the US dollar since the summer of 2014 need not herald wider economic malaise.
Another critique launched at the Federal Reserve is that inflation is too weak to justify raising rates. However, as our chart reveals, measures of inflation that strip out the most volatile components are close to pre-crisis norms.
While policy tightening with headline inflation below 1% was previously unprecedented in the US, other central banks have raised rates when inflation has been far lower. For example, in late 1999, the Reserve Bank of New Zealand tightened when inflation was below zero. And in 2004, the Bank of England raised rates even though CPI inflation was below its 2% target.
Minutes of the FOMC’s December meeting confirmed that it expects to raise rates by around 100 basis points per annum. Even so, the market-implied path remains around one half of that pace. In our forthcoming Global Economic and Markets Outlook, due to be presented to our clients later this month, we address how that gap is likely to close.
________________________________________________________________________________________
(Reuters) - The dollar tumbled to a near five-month low against the yen and a 2-1/2-week trough versus the euro on Friday, hammered by a combination of poor risk appetite arising from a renewed drop in oil prices and weak U.S. economic data.
The downbeat economic numbers along with the meltdown in oil and stocks could further slow the pace of the Federal Reserve's already gradual tightening policy, a negative scenario for the dollar.
The dollar index, which measures the greenback against a basket of six other major currencies, was down 0.2 percent at 98.933 .
"I think the Fed is going to be reluctant to raise interest rates any time soon," said Joe O'Leary, senior FX trader at Silicon Valley Bank in Santa Clara, California.
"There's just too much uncertainty going on. We also have weak U.S. data, and equity markets getting clobbered. This will all affect U.S. growth."
Data showed on Friday that U.S. retail sales fell in December as unseasonably warm weather curbed purchases of winter apparel and cheaper gasoline weighed on receipts at service stations. U.S. producer prices were also lower last month due to weak energy costs, while the country's industrial output declined for a third straight month.
Following the poor U.S. economic data, the interest rate futures market has now priced in just one additional rate move by the Federal Reserve this year, compared with expectations of three hikes.
Commodity-based currencies such as the Australian, New Zealand and Canadian dollars also took a nosedive on the back of another slide in Chinese stock markets following an almost 5 percent tumble in oil prices to less than $30 per barrel.
In late trading, the dollar fell to 116.51 yen , the lowest since Aug. 24. It was last at 117.02 yen, down 0.9 percent.
The euro rose to $1.0984 , its highest since Dec. 29, and was last at $1.0913, up 0.5 percent.
The Aussie sank to US$0.6824 versus the greenback, the lowest since April 2009, while the New Zealand dollar fell to a 3-1/2-month trough of US$0.6382 .
The Canadian dollar, meanwhile, dropped to a fresh 12-year low against the U.S. dollar. The greenback was last up 1.2 percent at C$1.4534
Richard Benson, co-head of portfolio management at currency fund Millennium Global, said the Canadian dollar, down by a third in value against its U.S. counterpart since 2012, was suffering from bets on more easing of monetary policy next week.
CFTC data shows contraction of short position while open interest stands almost the same. It means that some shorts have been replaced by long positions... But to be honest, difference is not significant to last week.
Technicals
Monthly
As we have mentioned previously appearing of YPP around 1.11 area has negative sign for bears. Last week many patterns were pointed on further drop. Today situation is changing or, at least, chances on upward action have increased. And well-known feature that markets gravitates to pivots, especially to yearly ones, could take a special meaning in nearest future. This brings some contradictions and additional worryings in analysis.
Most bad thing is that we do not know when market will test YPP. It could do it in January, or it could first drop to YPS1 and then, on a back wave up will test YPP...
Still, right now we will follow direct technical analysis, but will keep in mind 1.1150 level as YPP.
Actually monthly chart of EUR is not very informative and it would be better to look at EUR through the prism of Dollar Index (DXY) futures. It shows brighter and more transparent picture.
Fed program suggests 0.25% rate hike in every quarter of 2016. It means that by the end of 2016 Fed rate will be 1.25-1.375 as it is suggested by analysts and Fed Fund futures rate. Of cause this hiking procedure will be data depended, I mean NFP, GDP etc. but anyway, Fed has announced not just isolated rate hike but tendency. This is major point. Analysis that we put above relatively confirms the same thing.
This lets us to make major conclusion that such sort of statement on background of EU QE program, will probably slowly but stubbornly press EUR/USD pair. And this lets us to confirm our expectation of parity and even 0.8 targets.
Now, if you remember our most important riddle was on possible upward retracement. Other words speaking this is not a question on "what trend we have" but mostly "when this trend will continue - right now, or will be slightly postponed".
Last month we have tried to understand will we get any upside retracement on EUR due forming 2-bottom consolidation. And major riddle is what could happen inside this circle on monthly chart.
Our first scenario was - market just could continue move down. Especially if recent rally was mostly technical. As you can see our bearish grabber and dynamic pressure pattern have not quite reached target - former 1.0460 low was not reached. Butterfly pattern is still valid and market was falling like a stone to its 1.27 target, though only oversold was able to stop it for some time. Thus, moving to 1.618 target which is a parity is still possible.
Second scenario mostly relies on potential DRPO "Buy" pattern and 2-candle bullish grabber.
Last week we've made a parallel analysis with Dollar Index and come to conclusion that hardly EUR will be able to stay with long-term upside retracement to 1.21 area. Dollar index has DRPO "Failure" pattern in progress and untouched 1.618 target. Taking in consideration Fed financial policy, EUR drop is just a question of time. That's why we still keep our long term target.
Still, on shorter term charts we see signs of possible minor scale upside retracement.
Weekly
First sign comes on weekly chart. This time frame is the one where we have to dig market mechanics if we want to get the answer. Because here we do not have clear patterns and "easy-to-read" combinations. So, what does mechanics tell us?
Initially we've got bearish grabber that was very welcome at that moment and EUR has given us the signal of downward continuation. But 2-3 weeks later balance was broken. Take a look that after bearish grabber market has formed overlapping candles and each next candle has become inside one for previous candle. So EUR was not hurry to start action down. Finally 2 week ago EUR has dropped significantly below MPP but take a look - returned right back up and even formed bullish grabber at this time.
This action put under question perspectives of soon drop by two reasons. First is, and most simple - we have bullish grabber in place with invalidation point around 1.07. That's why following strict rules of grabber's trading we should not take any shorts until market will not erase this grabber by dropping below it's lows...
Second and most important is overall price behavior, this flat "stagnation" after bearish grabber indicates unwillingness of EUR to move down. And fast return after MPP challenge just proves it. That's why currently we can't follow initial bearish context.
At the same time, monthly chart tells that too strong upside action is also hardly possible. It means that EUR could move down, but this action will be limited.
Daily
So, at first glance, by following to simple logic, EUR should have to calm down after multiple bearish grabbers were formed and just continue move down. But this has not happened. EUR again and again is challenged 1.10 area and put under question the same grabbers.
As a result, as you can see trend has turned bullish here and EUR has vanished bearish grabbers, although we do not see obvious upward breakout yet. Market right now is not at OB/OS level so it has quite sufficient room to move in any direction. But this stubborn in upside direction despite any bearish patterns increases chances on some upside continuation.
On next week we will be watching for first our target here. This is minor 0.618 extension based on daily upside rally and it stands at 1.1060 level.
Speaking on invalidation of bullish setup - here is all quite simple and stands the same on all time frames. This is 1.07 level. This is a crossing of invalidation point of different patterns - weekly bullish grabber, daily AB-CD, butterfly on 4-hour chart and others. Breaking below it will mean that market returns to bearish context and this will mean re-establishing of bearish trend that we've discussed on monthly chart.
Meantime, market stands in "minor" upside retracement with 1.1060 as first destination point.
4-hour
In short-term perspective situation looks as follows. Upside breakout has happened and market now stands in technical downward retracement. EUR here has the same target as on daily chart - 1.1060 top. But here it is based on butterfly 1.27 extension and inner AB=CD pattern. As you can see - 1.07 lows is the same invalidation point.
Right now market turns to re-test broken trend line and this will be most important moment. EUR needs to hold above it and do not return right back in channel to keep chances on further upward continuation:
Hourly
This chart better shows the range where EUR should stop its downward retracement. As you can see it has completed minor AB=CD and trend line that market will re-test, is coincide with WPP and K-support area. That's being said, EUR will keep chances on upside continuation if it will hold above 1.0870.
Conclusion
Fed statement mostly was supportive for long term bear trend on EUR/USD. Right now our trading plan suggests move down to 1.05 area. Long term analysis currently excludes too far upside retracement, say to 1.21-1.25 area. But it does not exclude minor bounce to 1.12-1.13 area.
In short-term charts we also see some signs that this bounce still could happen.
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.