Sive Morten
Special Consultant to the FPA
- Messages
- 18,664
Fundamentals
(Reuters) - The dollar gained on Friday after a report showed the U.S. economy created far more jobs than expected in June and previous months, keeping the Federal Reserve on track to raise interest rates at least one more time this year.
Following the report, the dollar rose to two-month highs against the yen, in its largest weekly percentage gain since late April. The greenback also climbed to a more than one-week peak against sterling.
Friday's data showed U.S. non-farm payrolls rose 222,000 last month, beating economists' expectations of a 179,000 gain. Data for April and May was revised to show 47,000 more jobs created than previously reported.
"The above-consensus payroll figure ... will augment the Fed's decision to begin balance sheet reduction sooner than later," said Charlie Ripley, investment strategist at Allianz Investment Management in Minneapolis.
"On balance, the labour market continues to be solid and despite the softer inflation data as of late, the solid employment data should keep the Fed on course for policy normalization," he said.
While the employment headline number was strong, inflation pressure remained tame. Average hourly earnings, which currency traders monitor closely, increased 0.2 percent in June, short of the 0.3 percent expected.
Marvin Loh, senior global markets strategist at BNY Mellon in Boston, pointed out that hourly earnings' 2.5 percent gain from a year earlier were "disappointing," with growth slower than at the start of the year and mostly stagnant over the past several months.
But Allianz's Ripley said tighter labour markets with the economy headed toward full employment should drive further wage increases.
The dollar was last at 113.95 yen, up 0.7 percent, after earlier reaching a two-month high of 114.17 yen.
The yen also slid earlier on Friday after the Bank of Japan said it would buy an unlimited amount of bonds, as it sought to put a lid on domestic rates pushed higher by the broad sell-off in developed market bonds.
The euro was last at $1.1403, down 0.2 percent. That pushed the dollar index up 0.2 percent to 96.0132
Sterling fell to a more than one-week low of $1.2871 and was last down 0.7 percent at $1.2883.
After release of the jobs data, U.S. short-term interest rate futures showed continued bets the Fed would raise interest rates in December.
Tail risk, or tailwind?
by Fathom Consulting
At the turn of the year, money managers were fretting about the future of the euro area. They worried about an imperfect currency union with high levels of youth unemployment and increasing political polarisation.
It was hard not to be pessimistic. Italian bank balance sheets had high levels of NPLs. Meanwhile, a Marine Le Pen presidency, and with it Frexit, could not be ruled out. According to a Bank of America Merrill Lynch poll of global fund managers, EU disintegration was the biggest risk facing the global economy. However, in the first quarter, while some investors had been predicting its demise, the euro area economy was quietly expanding at a faster pace than either the UK or the US. And an avowedly pro-EU candidate won the French presidential election.
With the possibility of a new Franco-German partnership on the horizon, long-Europe has returned to fashion. In the first half of the year, the Euro Stoxx 600 rose by 13.5% in US dollars, outperforming other major developed markets. Meanwhile, the euro appreciated by 7% against the US dollar in the second quarter alone – its strongest three-month performance since 2010. The euro area went from being a tail risk to being a tailwind to the global economy. Whether this can be maintained remains to be seen.
Also guys, Fathom is diminished possitive effect of D. Trump's presidency. Here is an extraction from their article:
Trump’s troubles: can the US economy still reach escape velocity? (Extractions)
by Fathom Consulting
Until now we have taken a favourable view of Donald Trump’s ability to reflate the US economy, putting it on a higher growth path, somewhere close to the ‘old normal’. But, in light of the President’s failure to make any tangible progress in implementing the pro-business aspects of his agenda five months into his presidency, along with a series of ongoing controversies which are eroding his political capital and hindering his ability to get things done, we are reassessing the US economic outlook and trimming our US GDP growth and inflation forecasts...We are likely to trim GDP growth to around 2½% and 3% in 2017 and 2018. We will also lower our CPI inflation forecasts.
We still think that Donald Trump will deliver some fiscal loosening, with corporate tax cuts likely to be enacted early next year. And our revised forecasts for the next two years will still have US economic growth and inflation exceeding the levels predicted by most other economic forecasters. We also think that the US economy is better placed to grow faster than most of the other major economies over this time horizon. Accordingly, we expect the US dollar and Treasury yields to rise from their current levels. But, in the absence of a jolt to the economy in the form of a fiscal spurge, escaping the status quo of low productivity, low growth, low inflation and low interest rates for a sustained period, becomes a lot less likely.
....There are differences between Japan’s economy 15 years ago and other advanced economies today: cultural differences; different economic models; and a failure of asset prices in Japan to return to pre-crisis levels. But will these differences alone be enough to ensure that the West doesn’t suffer the same fate as Japan? Fathom Consulting fears that they will not. In fact, there are a number of similarities between Japan 15 years ago and the West today: high debt; low inflation; ultra-loose monetary policy; ageing populations; weak productivity growth; and sluggish economies.
.... the size of the tax cuts is likely to be smaller than we had previously anticipated. And the chances of them being temporary, not permanent, have increased too, meaning that they are likely to have less bang for their buck. What is more, a large increase in infrastructure spending now seems less likely than it did. On balance then, the amount of stimulus we now expect to be enacted is about half as much as we had previously expected.
In our judgement, this will probably be insufficient to generate the impetus necessary to get the economy out of its current low productivity, low rates and low inflation environment. Animal spirits and investment will not accelerate as much as we thought. The uncertainty caused by the ongoing scandals surrounding the US President will also weigh on business sentiment. That wage growth and inflation have continued to undershoot expectations, despite the unemployment rate dipping to 4.3%, below most estimates of the natural rate of unemployment, reaffirms our belief that a bold fiscal stimulus package is needed to move decisively away from the current economic environment.
COT Report
Righ now, guys, we're interested not in most recent sentiment changes, but also on historical picture. Within last three weeks we see good bullish sentiment on EUR. Market shows increase as in speculative net position as in open interest. It means that new longs are coming on market.
At the same time, historically EUR was bearish most of the time and there were just few moments within almost a decade when speculative position was bullish. Another important moment here is historical maximum. It stands approximately around 72-75K contracts. The only spike to 100K was in 2011. Now overall speculative position stands around average maximum of 77K. It means that market is overextended.
Of course maximum breakout is possible, but we should treat it as outstanding event on sentiment chart. More probable is a normal behavior. Last time EUR has dropped for 100 pips when position has reached 79K contracts and OI was stand around 474K+ contracts. Today EUR net speculative long position is 77K, and OI stands around 422K. It means that chances on short-term retracement down looks significant, although it should not be too extended.
Also on compressed chart we clear see the divergence between price and speculative net position. Following this logic - price doesn't match to contraction of shorts and I wonder whether it will lead to faster upside action or not...
Techical
Monthly
So, technically monthly chart looks bullish for EUR. Upside action has started from tweezers at the bottom of consolidation, that was also W&R of previous lows and fake breakout. Trend now stands bullish here and we have strong bullish divergence with MACD.
Now EUR is breaking Yearly Pivot Resistance 1 around 1.13 area. At the same time, market already has no real resistance levels ahead. All of them have been broken. The first barrier that market has stands at 1.1735 - this is 3/8 major Fib resistance and upper border of consolidation.
Previos three month we also see tail closing, i.e. price has closed near the top of candles. This is also bullish sign here:
Weekly
Weekly trend also stands bullish, EUR is not at overbought. Here we also have enough bullish signs - unfilled gap, acceleration weeks that are two times greater than normal range and tight retracements.
The most tricky moment here is deep retracement. Sooner or later but it should happen and the problem is, we do not know when this will happen. On a way up EUR already has increased 1.618 extension of major AB-CD pattern. We've talked about it in previous research. It means that whole upside action from 1.04 to 1.14 -should become some kind of "AB" leg, i.e. overall scale of upside action should increase and step up on next level of scale. Thus, after AB leg some BC leg should start to form and it also will be bigger. If we would suggest that it starts right now - it probably should reach the gap.
Still this retracement should start by massive sell-off on intraday charts, but we do not see yet anything of this kind.
Overextension up by sentiment analysis also doesn't bring clarity. Thus, market was overextended 2-3 weeks ago as well, but take a look - only minor 177 pips retracement has followed.
So, putting its all together, it seems that we could count at least on the same ~170 pips retracement, approximately to 1.1270-1.1300 area, as EUR again is overextended by COT report.
Daily
Daily picture brings a lot of nuances and clarity in our analysis. First of all, we have relatively simple task as Oversold stands around 1.13 area. Thus, we're not interested right now in any other levels below it. Oversold itself creates nice support in agreement with 1.13-1.1320 area and harmonic retracement swing also points on the same level.
Second - we have MACDP line in the same region. It means that we also have to keep an eye on possible bullish grabber here, because once it will be formed, it will give us more confidence with upside continuation.
And the last, but not least - EUR has failed to continue upside action immediately, after first touch of 1.1320 area. It means that "V-shape" retracement has failed and we should get compounded 4-leg retracement pattern on intraday chart:
4-hour
Strong bullish signs on long-term charts suggest that retracement should not be deep here. At the same time, it has to be compound, as EUR was not able to show upside continuation after testing of 1.1320 and fizzled around, probably due better NFP data.
All this stuff creates good background for Gartley "222" Buy pattern here. Its entry point stands very close to Fib level, YPR1 and daily OS.
Of course we do not want to see here any miserable plunge and black nasty candles right down to 1.13 area. It would be perfect if AB-CD action will be gradual and harmonic. Invalidation point of this pattern stands below 1.1290 lows.
Also keep an eye on alternative scenario. If AB-CD retracement will be shorter and price will not reach 1.1305 level - it will mean that triangle/pennant is forming. In this case CD leg will end somewhere around 1.1333 area. The idea will be the same but triangle will demand some adjustment in trading plan.
Conclusion:
EUR right now looks bullish as technically as fundamentally. Next target stands around 1.1735 area. Due bullish signs that we see on higher time frames, we probably could search chances to go long. One of them could be formed on 4-hour chart.
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 gained on Friday after a report showed the U.S. economy created far more jobs than expected in June and previous months, keeping the Federal Reserve on track to raise interest rates at least one more time this year.
Following the report, the dollar rose to two-month highs against the yen, in its largest weekly percentage gain since late April. The greenback also climbed to a more than one-week peak against sterling.
Friday's data showed U.S. non-farm payrolls rose 222,000 last month, beating economists' expectations of a 179,000 gain. Data for April and May was revised to show 47,000 more jobs created than previously reported.
"The above-consensus payroll figure ... will augment the Fed's decision to begin balance sheet reduction sooner than later," said Charlie Ripley, investment strategist at Allianz Investment Management in Minneapolis.
"On balance, the labour market continues to be solid and despite the softer inflation data as of late, the solid employment data should keep the Fed on course for policy normalization," he said.
While the employment headline number was strong, inflation pressure remained tame. Average hourly earnings, which currency traders monitor closely, increased 0.2 percent in June, short of the 0.3 percent expected.
Marvin Loh, senior global markets strategist at BNY Mellon in Boston, pointed out that hourly earnings' 2.5 percent gain from a year earlier were "disappointing," with growth slower than at the start of the year and mostly stagnant over the past several months.
But Allianz's Ripley said tighter labour markets with the economy headed toward full employment should drive further wage increases.
The dollar was last at 113.95 yen, up 0.7 percent, after earlier reaching a two-month high of 114.17 yen.
The yen also slid earlier on Friday after the Bank of Japan said it would buy an unlimited amount of bonds, as it sought to put a lid on domestic rates pushed higher by the broad sell-off in developed market bonds.
The euro was last at $1.1403, down 0.2 percent. That pushed the dollar index up 0.2 percent to 96.0132
Sterling fell to a more than one-week low of $1.2871 and was last down 0.7 percent at $1.2883.
After release of the jobs data, U.S. short-term interest rate futures showed continued bets the Fed would raise interest rates in December.
Tail risk, or tailwind?
by Fathom Consulting
At the turn of the year, money managers were fretting about the future of the euro area. They worried about an imperfect currency union with high levels of youth unemployment and increasing political polarisation.
It was hard not to be pessimistic. Italian bank balance sheets had high levels of NPLs. Meanwhile, a Marine Le Pen presidency, and with it Frexit, could not be ruled out. According to a Bank of America Merrill Lynch poll of global fund managers, EU disintegration was the biggest risk facing the global economy. However, in the first quarter, while some investors had been predicting its demise, the euro area economy was quietly expanding at a faster pace than either the UK or the US. And an avowedly pro-EU candidate won the French presidential election.
With the possibility of a new Franco-German partnership on the horizon, long-Europe has returned to fashion. In the first half of the year, the Euro Stoxx 600 rose by 13.5% in US dollars, outperforming other major developed markets. Meanwhile, the euro appreciated by 7% against the US dollar in the second quarter alone – its strongest three-month performance since 2010. The euro area went from being a tail risk to being a tailwind to the global economy. Whether this can be maintained remains to be seen.
Also guys, Fathom is diminished possitive effect of D. Trump's presidency. Here is an extraction from their article:
Trump’s troubles: can the US economy still reach escape velocity? (Extractions)
by Fathom Consulting
Until now we have taken a favourable view of Donald Trump’s ability to reflate the US economy, putting it on a higher growth path, somewhere close to the ‘old normal’. But, in light of the President’s failure to make any tangible progress in implementing the pro-business aspects of his agenda five months into his presidency, along with a series of ongoing controversies which are eroding his political capital and hindering his ability to get things done, we are reassessing the US economic outlook and trimming our US GDP growth and inflation forecasts...We are likely to trim GDP growth to around 2½% and 3% in 2017 and 2018. We will also lower our CPI inflation forecasts.
We still think that Donald Trump will deliver some fiscal loosening, with corporate tax cuts likely to be enacted early next year. And our revised forecasts for the next two years will still have US economic growth and inflation exceeding the levels predicted by most other economic forecasters. We also think that the US economy is better placed to grow faster than most of the other major economies over this time horizon. Accordingly, we expect the US dollar and Treasury yields to rise from their current levels. But, in the absence of a jolt to the economy in the form of a fiscal spurge, escaping the status quo of low productivity, low growth, low inflation and low interest rates for a sustained period, becomes a lot less likely.
....There are differences between Japan’s economy 15 years ago and other advanced economies today: cultural differences; different economic models; and a failure of asset prices in Japan to return to pre-crisis levels. But will these differences alone be enough to ensure that the West doesn’t suffer the same fate as Japan? Fathom Consulting fears that they will not. In fact, there are a number of similarities between Japan 15 years ago and the West today: high debt; low inflation; ultra-loose monetary policy; ageing populations; weak productivity growth; and sluggish economies.
.... the size of the tax cuts is likely to be smaller than we had previously anticipated. And the chances of them being temporary, not permanent, have increased too, meaning that they are likely to have less bang for their buck. What is more, a large increase in infrastructure spending now seems less likely than it did. On balance then, the amount of stimulus we now expect to be enacted is about half as much as we had previously expected.
In our judgement, this will probably be insufficient to generate the impetus necessary to get the economy out of its current low productivity, low rates and low inflation environment. Animal spirits and investment will not accelerate as much as we thought. The uncertainty caused by the ongoing scandals surrounding the US President will also weigh on business sentiment. That wage growth and inflation have continued to undershoot expectations, despite the unemployment rate dipping to 4.3%, below most estimates of the natural rate of unemployment, reaffirms our belief that a bold fiscal stimulus package is needed to move decisively away from the current economic environment.
COT Report
Righ now, guys, we're interested not in most recent sentiment changes, but also on historical picture. Within last three weeks we see good bullish sentiment on EUR. Market shows increase as in speculative net position as in open interest. It means that new longs are coming on market.
At the same time, historically EUR was bearish most of the time and there were just few moments within almost a decade when speculative position was bullish. Another important moment here is historical maximum. It stands approximately around 72-75K contracts. The only spike to 100K was in 2011. Now overall speculative position stands around average maximum of 77K. It means that market is overextended.
Of course maximum breakout is possible, but we should treat it as outstanding event on sentiment chart. More probable is a normal behavior. Last time EUR has dropped for 100 pips when position has reached 79K contracts and OI was stand around 474K+ contracts. Today EUR net speculative long position is 77K, and OI stands around 422K. It means that chances on short-term retracement down looks significant, although it should not be too extended.
Also on compressed chart we clear see the divergence between price and speculative net position. Following this logic - price doesn't match to contraction of shorts and I wonder whether it will lead to faster upside action or not...
Techical
Monthly
So, technically monthly chart looks bullish for EUR. Upside action has started from tweezers at the bottom of consolidation, that was also W&R of previous lows and fake breakout. Trend now stands bullish here and we have strong bullish divergence with MACD.
Now EUR is breaking Yearly Pivot Resistance 1 around 1.13 area. At the same time, market already has no real resistance levels ahead. All of them have been broken. The first barrier that market has stands at 1.1735 - this is 3/8 major Fib resistance and upper border of consolidation.
Previos three month we also see tail closing, i.e. price has closed near the top of candles. This is also bullish sign here:
Weekly
Weekly trend also stands bullish, EUR is not at overbought. Here we also have enough bullish signs - unfilled gap, acceleration weeks that are two times greater than normal range and tight retracements.
The most tricky moment here is deep retracement. Sooner or later but it should happen and the problem is, we do not know when this will happen. On a way up EUR already has increased 1.618 extension of major AB-CD pattern. We've talked about it in previous research. It means that whole upside action from 1.04 to 1.14 -should become some kind of "AB" leg, i.e. overall scale of upside action should increase and step up on next level of scale. Thus, after AB leg some BC leg should start to form and it also will be bigger. If we would suggest that it starts right now - it probably should reach the gap.
Still this retracement should start by massive sell-off on intraday charts, but we do not see yet anything of this kind.
Overextension up by sentiment analysis also doesn't bring clarity. Thus, market was overextended 2-3 weeks ago as well, but take a look - only minor 177 pips retracement has followed.
So, putting its all together, it seems that we could count at least on the same ~170 pips retracement, approximately to 1.1270-1.1300 area, as EUR again is overextended by COT report.
Daily
Daily picture brings a lot of nuances and clarity in our analysis. First of all, we have relatively simple task as Oversold stands around 1.13 area. Thus, we're not interested right now in any other levels below it. Oversold itself creates nice support in agreement with 1.13-1.1320 area and harmonic retracement swing also points on the same level.
Second - we have MACDP line in the same region. It means that we also have to keep an eye on possible bullish grabber here, because once it will be formed, it will give us more confidence with upside continuation.
And the last, but not least - EUR has failed to continue upside action immediately, after first touch of 1.1320 area. It means that "V-shape" retracement has failed and we should get compounded 4-leg retracement pattern on intraday chart:
4-hour
Strong bullish signs on long-term charts suggest that retracement should not be deep here. At the same time, it has to be compound, as EUR was not able to show upside continuation after testing of 1.1320 and fizzled around, probably due better NFP data.
All this stuff creates good background for Gartley "222" Buy pattern here. Its entry point stands very close to Fib level, YPR1 and daily OS.
Of course we do not want to see here any miserable plunge and black nasty candles right down to 1.13 area. It would be perfect if AB-CD action will be gradual and harmonic. Invalidation point of this pattern stands below 1.1290 lows.
Also keep an eye on alternative scenario. If AB-CD retracement will be shorter and price will not reach 1.1305 level - it will mean that triangle/pennant is forming. In this case CD leg will end somewhere around 1.1333 area. The idea will be the same but triangle will demand some adjustment in trading plan.
Conclusion:
EUR right now looks bullish as technically as fundamentally. Next target stands around 1.1735 area. Due bullish signs that we see on higher time frames, we probably could search chances to go long. One of them could be formed on 4-hour chart.
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.
