Sive Morten
Special Consultant to the FPA
- Messages
- 18,669
Hi there,
Today, guys, actually a difficult choice between GBP and NZD. Both currencies have interesting perspectives. Thus, today let's take a look at GBP, but tomorrow I'll think, may be I will replace Gold with NZD...
Fundamentals
(Reuters) - The dollar fell broadly on Friday after weaker-than-forecast data on housing and consumer sentiment cast a risk-off sentiment over U.S. assets.
The greenback gave back most of the previous day's gains, easing toward levels from earlier this week that were the lowest since November.
Disappointing economic readings and the lack of progress on fiscal stimulus from Washington have overshadowed the likelihood of more rate hikes from the Federal Reserve.
The government said U.S. home construction fell in May for a third straight month, to its lowest in eight months. The University of Michigan said its gauge on consumer sentiment deteriorated in early June.
"It raises some doubt on U.S. growth for the rest of the year," said Minh Trang, senior currency trader at Silicon Valley Bank in Santa Clara, California.
The dollar index was down 0.3 percent at 97.126, and on track for a 0.14 percent decline on the week.
The dour U.S. data boosted the yen, which had slid to a two-week low versus the dollar.
"The move in the yen very much coincided with a strengthening of bonds in the U.S., which also coincided with a selling off in (U.S.) equity markets," said Axel Merk, president and portfolio manager at Merk Hard Currency Fund in Palo Alto, California. "My guess would be that the risk-off environment prevailed."
Earlier, the yen had weakened after Bank of Japan Governor Haruhiko Kuroda said there was "some distance" to achieving the BoJ's inflation target of 2 percent, and it was "inappropriate" to say how the Bank would exit its massive stimulus program as domestic inflation has remained sluggish.
That ran contrary to market speculation in the past month that the BoJ could be considering its own plan for eventually withdrawing emergency stimulus for the world's third largest economy.
The euro rose 0.35 percent against the yen to 124.04 yen after touching a near two-week high earlier Friday.
The common currency was up 0.4 percent versus the dollar at $1.1191, but about a cent below a seven-month peak of $1.1296 hit before the Fed's widely expected rate hike on Wednesday.
Financial markets take UK general election result in their stride
by Fathom Consulting
The Conservative Party has never seen its poll lead collapse so far in such a small span of time ahead of an election, from a lead of 20 percentage points or more, to a lead of only 2 percentage points last Thursday, delivering a hung parliament. The cliché goes: oppositions do not win elections; governments lose them. This government did not lose, but it came extremely close, from an extremely comfortable starting position. That has to rank as a fail on the part of the Conservative campaign.
Despite the uncertainty generated by last Thursday’s result, both in terms of the UK’s Brexit strategy and the future of Theresa May as Prime Minister, financial markets have taken it in their stride. At the time of writing, sterling has fallen just a fraction of that seen last year — when the nation voted to leave the EU. But with the outlook for the UK economy unquestionably dire, and the election result merely adding to the UK’s woes, we believe that sterling is vulnerable to a further sell-off.
The defensive line from Conservative HQ is that their share of the vote increased relative to the last election, albeit by less than did Labour’s share, and that it is higher than in any election since 1983. Indeed, both parties benefited from the collapse in the vote for the single-issue party UKIP (who have had their way with the result of the EU referendum and are now redundant) and the big reduction in support for the SNP, which was so strong last time around that the only way for them was down.
UKIP and the SNP were expected to suffer, and they did. But the centrist party, the Liberal Democrats, were expected to benefit, and they did not – gaining only four seats, and seeing their share of the popular vote fall compared to their disastrous campaign of 2015. They campaigned hard on the issue of Brexit, calling for a second referendum, in the hope of enlisting the support of disappointed remainers. That support was not forthcoming. This election was a fail not just for the Tories but also for the Liberal Democrats, a party overloaded with bad feeling after their role in the Coalition.
As our regular readers will be aware, we were of the opinion that the outlook for the UK was dire even before last June’s decision to leave the European Union. The election result does not change that. The UK has accumulated a huge overload of public and private debt, which is undermining growth and driving rising inequality in terms of wealth. Whoever is in charge of managing the economy henceforth faces a long-term outlook that is unprecedentedly bleak.
That has not changed materially as a result of the election, nor has the likely shape of Brexit (only a big Liberal Democrat resurgence, with that party holding the balance of power, would have done that). It does not change the likely stance of macroeconomic policy materially either – only a Labour or Labour/SNP government would have done that. It has, however, weakened the Prime Minister’s hand in negotiations with the EU, and indeed in terms of achieving anything at all domestically. Another election is likely in due course, perhaps after a couple of by-elections.
The net effect of all this is increased uncertainty. At the time of writing, we expect a Conservative/Democratic Unionist Party-led government, which will secure a tiny majority — rendering both the period and magnitude of EU-related uncertainty even greater. All of this will weigh on an already troubled economy. And the clock is ticking. Brexit negotiations are due to begin in earnest, and the UK finds itself with a lame duck Prime Minister lacking a clear mandate of any sort.
The big question for economic policy in the longer term is how to deal with the overload of debt. Any attempt to answer that question has now been delayed even further. The UK economy will stumble on, weighed down by debt, saddled with uncertainty, until the next election at least.
COT Report
It seems that CFTC data confirms our suggestion on temporal relief of speculative positions. Recall that GBP was strongly oversold in March and April, where we said that upside bounce should happen. Indeed, Cable has reached YPP around 1.31 area.
Right now we see that as soon as short positions were offloaded a bit, new wave of short accumulation starts. Last three week we see gradual increase of shorts accompanied by growth of open interest. This tells that speculators increase short positions - new shorts are opened.
This fact lets us talk on existing of bearish sentiment on the market.
Technicals
Monthly
Overall sentiment in UK right now is difficult to call "positive", despite situation on FX markets. Indeed, three terrorist attacks in a row, political defeat of governing party, Brexit turmoil and coming negotiations with EU in most unsuitable moment, terrible fire in London. Blur perspectives of national economy. It seems that country is dropped in some black stripe.
Despite huge volatility due elections last week, monthly chart mostly stands intact. Trend holds bullish, but price mostly stands in flag consolidation after testing of Yearly Pivot and completed upside harmonic retracement.
Speaking on purely technical reasons, recent upside bounce mostly was due completion of all-time 0.618 AB-CD target and butterfly 1.27 extension. Current consolidation mostly remains bearish flag pattern.
In longer term perspective situation also stands unclear. GB has bought Brexit ticket, but currently it is difficult to suggest where it will lead it. Fathom consulting has negative fundamental view on perspective of UK economy. We place their articles here regularly. In two words speaking they think that UK has "deffered" effect of Brexit. It will come, but later, despite that many economists were fast to aknowledge that no negative effect will happen as we do not see it right now. Finally, taking in consideration possible 150 points US rate hike in 2 years also will be headwind to GBP. That's why we have doubts on perspective of GBP rising in long-term.
As 0.618 AB-CD target has been hit, next one stands at AB=CD completion around 1.06 area. Currently it might seem too brave suggestion, but previously we've mentioned HSBC bank forecast that it suggests to see pound around 1.10 area by the end of 2017. Thus, may be our view is not absolutely crackpot...
Besides, if you will take a look at all-time GBP chart, you'll see that market already has broken major 5/8 Fib support and on a way down, drop is really fast since first leg was on 2008 crisis. Overall fundamental situation is mostly supportive to this scenario, besides, 20 points is not really big distance to GBP that is more volatile than many other major currencies.
In shorter-term perspective we will focus on our next downside target, which is 1.1240 area. This is 1.618 butterfly extension and Yearly Pivot Support area. Taking in consideration existing pace of the price - it seems that GBP could reach this area closer to the end of 2017. Now investors expect that Fed may be will rise rate in December for 3rd time in 2017. Thus, this fact could play major role in reaching of 1.12 area.
Weekly
Last time we've made GBP analysis at the end of May and major conclusion that we got - price could drop to 1.2640 daily K-support area without any harm to long-term trends. So this part of our analysis is completed now. By this action GBP has completed minimum butterfly target as 3/8 retracement is done.
In long-term perspective, we believe that sooner or later but market should drop as we have uncompleted long-term 1.618 AB-CD target around 1.1650 area. Action since summer 2016 mostly looks like consolidation and shows signs of bearish dynamic pressure, as trend has turned bullish but market shows no thrusting action.
But in shorter-term perspective, the question about final reversal point down looks not trivial. Take a look, we've got bullish stop grabber. It suggests action above previous top. Existed butterfly tells that this is possible action as we have 1.618 extension target as well. But - how reliable this grabber is?
We know that daily 1.2640 is K-support area and oversold. THis is the reason why we used it as target two weeks ago. So, may be weekly grabber is just a technical result of support testing but not a driving pattern per se?
Currently it is difficult to say what factors could push cable above 1.31 area, or, from another side - weaken the dollar to let GBP move above 1.31. Price action in recent weeks is not strongly bearish. Despite volatility around elections, overall action looks rather gradual here. Possible leg to 1.3250 target will not make drastical impact on force balance, thus, here it mostly will be technical.
That's why conclusion here that we could make - if you're bearish and watch chances to go short, better to wait for drop below major daily trend line, 1.2640 support and destruction of this grabber.
Daily
So, as it is relatively clear about short position. Now let's try to understand how interesting to go long here. On daily chart price shows logical bounce out from our K-support and daily oversold. In fact, this action is given grabber pattern on weekly.
There are some moments that support idea of possible upward continuation. For example, incompleted 1.618 AB-CD target (that's actually H&S pattern), upward acceleration on trendline breakout. But price action that we see right now has no features of bullish thrust and has no corresponding background. It seems that cable could be pushed higher only by some external moment of big fundamental release. Something of that sort.
Breakout of 1.2550 area and trendline will be meaningful event for GBP as it will confirm bearish sentiment and open road to deeper targets.
4-hour
Take a look at intraday picture. Here we have some kind of wedge or flag consolidation. Theoretically it is a bearish continuation pattern. Overall action inside of flag doesn't look bullish. GBP looks heavy right now. That's why I have serious doubts on attractiveness of long position based on weekly grabber. Even despite of another bullish grabber inside the wedge.
Right now I see the only chance to get more or less acceptable background for long position. For example, if cable will form butterfly "Buy" pattern here and simultaneously will re-test daily trendline. In this case it will be relatively safe to try go long. At least, butterfly and trendline should provide 3/8 retracement up that will let you to protect your position by breakeven stop.
Taking long position right now looks too risky. Only if GBP will show explosive upside rally by some reason and erasing of election's day plunge - this could change situation and provide better bullish context...
That's being said, to take or not to take long position depends on additional action here, as we need better context. But now we do not have it.
Conclusion:
Our long-term view on GBP mostly stands intact and we expect downward continuation in 2017-2018. Our next long-term target stands around 1.12 area that could be reached by December.
In shorter-term perspective donwward breakout of 1.2550 area and neckline of former H&S pattern will confirm re-establishing of bearish trend. At the same time we will watch for some specific behavior that could postpone final bearish reversal and provide us context for short-term trade on long side. (May the force will be with you...
)
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.
Today, guys, actually a difficult choice between GBP and NZD. Both currencies have interesting perspectives. Thus, today let's take a look at GBP, but tomorrow I'll think, may be I will replace Gold with NZD...
Fundamentals
(Reuters) - The dollar fell broadly on Friday after weaker-than-forecast data on housing and consumer sentiment cast a risk-off sentiment over U.S. assets.
The greenback gave back most of the previous day's gains, easing toward levels from earlier this week that were the lowest since November.
Disappointing economic readings and the lack of progress on fiscal stimulus from Washington have overshadowed the likelihood of more rate hikes from the Federal Reserve.
The government said U.S. home construction fell in May for a third straight month, to its lowest in eight months. The University of Michigan said its gauge on consumer sentiment deteriorated in early June.
"It raises some doubt on U.S. growth for the rest of the year," said Minh Trang, senior currency trader at Silicon Valley Bank in Santa Clara, California.
The dollar index was down 0.3 percent at 97.126, and on track for a 0.14 percent decline on the week.
The dour U.S. data boosted the yen, which had slid to a two-week low versus the dollar.
"The move in the yen very much coincided with a strengthening of bonds in the U.S., which also coincided with a selling off in (U.S.) equity markets," said Axel Merk, president and portfolio manager at Merk Hard Currency Fund in Palo Alto, California. "My guess would be that the risk-off environment prevailed."
Earlier, the yen had weakened after Bank of Japan Governor Haruhiko Kuroda said there was "some distance" to achieving the BoJ's inflation target of 2 percent, and it was "inappropriate" to say how the Bank would exit its massive stimulus program as domestic inflation has remained sluggish.
That ran contrary to market speculation in the past month that the BoJ could be considering its own plan for eventually withdrawing emergency stimulus for the world's third largest economy.
The euro rose 0.35 percent against the yen to 124.04 yen after touching a near two-week high earlier Friday.
The common currency was up 0.4 percent versus the dollar at $1.1191, but about a cent below a seven-month peak of $1.1296 hit before the Fed's widely expected rate hike on Wednesday.
Financial markets take UK general election result in their stride
by Fathom Consulting
The Conservative Party has never seen its poll lead collapse so far in such a small span of time ahead of an election, from a lead of 20 percentage points or more, to a lead of only 2 percentage points last Thursday, delivering a hung parliament. The cliché goes: oppositions do not win elections; governments lose them. This government did not lose, but it came extremely close, from an extremely comfortable starting position. That has to rank as a fail on the part of the Conservative campaign.
Despite the uncertainty generated by last Thursday’s result, both in terms of the UK’s Brexit strategy and the future of Theresa May as Prime Minister, financial markets have taken it in their stride. At the time of writing, sterling has fallen just a fraction of that seen last year — when the nation voted to leave the EU. But with the outlook for the UK economy unquestionably dire, and the election result merely adding to the UK’s woes, we believe that sterling is vulnerable to a further sell-off.
The defensive line from Conservative HQ is that their share of the vote increased relative to the last election, albeit by less than did Labour’s share, and that it is higher than in any election since 1983. Indeed, both parties benefited from the collapse in the vote for the single-issue party UKIP (who have had their way with the result of the EU referendum and are now redundant) and the big reduction in support for the SNP, which was so strong last time around that the only way for them was down.
UKIP and the SNP were expected to suffer, and they did. But the centrist party, the Liberal Democrats, were expected to benefit, and they did not – gaining only four seats, and seeing their share of the popular vote fall compared to their disastrous campaign of 2015. They campaigned hard on the issue of Brexit, calling for a second referendum, in the hope of enlisting the support of disappointed remainers. That support was not forthcoming. This election was a fail not just for the Tories but also for the Liberal Democrats, a party overloaded with bad feeling after their role in the Coalition.
As our regular readers will be aware, we were of the opinion that the outlook for the UK was dire even before last June’s decision to leave the European Union. The election result does not change that. The UK has accumulated a huge overload of public and private debt, which is undermining growth and driving rising inequality in terms of wealth. Whoever is in charge of managing the economy henceforth faces a long-term outlook that is unprecedentedly bleak.
That has not changed materially as a result of the election, nor has the likely shape of Brexit (only a big Liberal Democrat resurgence, with that party holding the balance of power, would have done that). It does not change the likely stance of macroeconomic policy materially either – only a Labour or Labour/SNP government would have done that. It has, however, weakened the Prime Minister’s hand in negotiations with the EU, and indeed in terms of achieving anything at all domestically. Another election is likely in due course, perhaps after a couple of by-elections.
The net effect of all this is increased uncertainty. At the time of writing, we expect a Conservative/Democratic Unionist Party-led government, which will secure a tiny majority — rendering both the period and magnitude of EU-related uncertainty even greater. All of this will weigh on an already troubled economy. And the clock is ticking. Brexit negotiations are due to begin in earnest, and the UK finds itself with a lame duck Prime Minister lacking a clear mandate of any sort.
The big question for economic policy in the longer term is how to deal with the overload of debt. Any attempt to answer that question has now been delayed even further. The UK economy will stumble on, weighed down by debt, saddled with uncertainty, until the next election at least.
COT Report
It seems that CFTC data confirms our suggestion on temporal relief of speculative positions. Recall that GBP was strongly oversold in March and April, where we said that upside bounce should happen. Indeed, Cable has reached YPP around 1.31 area.
Right now we see that as soon as short positions were offloaded a bit, new wave of short accumulation starts. Last three week we see gradual increase of shorts accompanied by growth of open interest. This tells that speculators increase short positions - new shorts are opened.
This fact lets us talk on existing of bearish sentiment on the market.
Technicals
Monthly
Overall sentiment in UK right now is difficult to call "positive", despite situation on FX markets. Indeed, three terrorist attacks in a row, political defeat of governing party, Brexit turmoil and coming negotiations with EU in most unsuitable moment, terrible fire in London. Blur perspectives of national economy. It seems that country is dropped in some black stripe.
Despite huge volatility due elections last week, monthly chart mostly stands intact. Trend holds bullish, but price mostly stands in flag consolidation after testing of Yearly Pivot and completed upside harmonic retracement.
Speaking on purely technical reasons, recent upside bounce mostly was due completion of all-time 0.618 AB-CD target and butterfly 1.27 extension. Current consolidation mostly remains bearish flag pattern.
In longer term perspective situation also stands unclear. GB has bought Brexit ticket, but currently it is difficult to suggest where it will lead it. Fathom consulting has negative fundamental view on perspective of UK economy. We place their articles here regularly. In two words speaking they think that UK has "deffered" effect of Brexit. It will come, but later, despite that many economists were fast to aknowledge that no negative effect will happen as we do not see it right now. Finally, taking in consideration possible 150 points US rate hike in 2 years also will be headwind to GBP. That's why we have doubts on perspective of GBP rising in long-term.
As 0.618 AB-CD target has been hit, next one stands at AB=CD completion around 1.06 area. Currently it might seem too brave suggestion, but previously we've mentioned HSBC bank forecast that it suggests to see pound around 1.10 area by the end of 2017. Thus, may be our view is not absolutely crackpot...
Besides, if you will take a look at all-time GBP chart, you'll see that market already has broken major 5/8 Fib support and on a way down, drop is really fast since first leg was on 2008 crisis. Overall fundamental situation is mostly supportive to this scenario, besides, 20 points is not really big distance to GBP that is more volatile than many other major currencies.
In shorter-term perspective we will focus on our next downside target, which is 1.1240 area. This is 1.618 butterfly extension and Yearly Pivot Support area. Taking in consideration existing pace of the price - it seems that GBP could reach this area closer to the end of 2017. Now investors expect that Fed may be will rise rate in December for 3rd time in 2017. Thus, this fact could play major role in reaching of 1.12 area.
Weekly
Last time we've made GBP analysis at the end of May and major conclusion that we got - price could drop to 1.2640 daily K-support area without any harm to long-term trends. So this part of our analysis is completed now. By this action GBP has completed minimum butterfly target as 3/8 retracement is done.
In long-term perspective, we believe that sooner or later but market should drop as we have uncompleted long-term 1.618 AB-CD target around 1.1650 area. Action since summer 2016 mostly looks like consolidation and shows signs of bearish dynamic pressure, as trend has turned bullish but market shows no thrusting action.
But in shorter-term perspective, the question about final reversal point down looks not trivial. Take a look, we've got bullish stop grabber. It suggests action above previous top. Existed butterfly tells that this is possible action as we have 1.618 extension target as well. But - how reliable this grabber is?
We know that daily 1.2640 is K-support area and oversold. THis is the reason why we used it as target two weeks ago. So, may be weekly grabber is just a technical result of support testing but not a driving pattern per se?
Currently it is difficult to say what factors could push cable above 1.31 area, or, from another side - weaken the dollar to let GBP move above 1.31. Price action in recent weeks is not strongly bearish. Despite volatility around elections, overall action looks rather gradual here. Possible leg to 1.3250 target will not make drastical impact on force balance, thus, here it mostly will be technical.
That's why conclusion here that we could make - if you're bearish and watch chances to go short, better to wait for drop below major daily trend line, 1.2640 support and destruction of this grabber.
Daily
So, as it is relatively clear about short position. Now let's try to understand how interesting to go long here. On daily chart price shows logical bounce out from our K-support and daily oversold. In fact, this action is given grabber pattern on weekly.
There are some moments that support idea of possible upward continuation. For example, incompleted 1.618 AB-CD target (that's actually H&S pattern), upward acceleration on trendline breakout. But price action that we see right now has no features of bullish thrust and has no corresponding background. It seems that cable could be pushed higher only by some external moment of big fundamental release. Something of that sort.
Breakout of 1.2550 area and trendline will be meaningful event for GBP as it will confirm bearish sentiment and open road to deeper targets.
4-hour
Take a look at intraday picture. Here we have some kind of wedge or flag consolidation. Theoretically it is a bearish continuation pattern. Overall action inside of flag doesn't look bullish. GBP looks heavy right now. That's why I have serious doubts on attractiveness of long position based on weekly grabber. Even despite of another bullish grabber inside the wedge.
Right now I see the only chance to get more or less acceptable background for long position. For example, if cable will form butterfly "Buy" pattern here and simultaneously will re-test daily trendline. In this case it will be relatively safe to try go long. At least, butterfly and trendline should provide 3/8 retracement up that will let you to protect your position by breakeven stop.
Taking long position right now looks too risky. Only if GBP will show explosive upside rally by some reason and erasing of election's day plunge - this could change situation and provide better bullish context...
That's being said, to take or not to take long position depends on additional action here, as we need better context. But now we do not have it.
Conclusion:
Our long-term view on GBP mostly stands intact and we expect downward continuation in 2017-2018. Our next long-term target stands around 1.12 area that could be reached by December.
In shorter-term perspective donwward breakout of 1.2550 area and neckline of former H&S pattern will confirm re-establishing of bearish trend. At the same time we will watch for some specific behavior that could postpone final bearish reversal and provide us context for short-term trade on long side. (May the force will be with you...
)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.
