Sive Morten
Special Consultant to the FPA
- Messages
- 18,675
Fundamentals
(Reuters FX news) - The U.S. dollar fell on Friday, easing from a roughly two-month high against the yen touched in the prior session and slumping against the euro, after weaker-than-expected U.S. economic data raised doubts about whether the Federal Reserve would assume a hawkish bent through the end of the year.
The U.S. core consumer price index (CPI) increased 1.9 percent year-on-year in April, the smallest gain since October 2015. Economists polled by Reuters expected the inflation measure to remain at 2 percent.
In addition, the Commerce Department said retail sales rose 0.4 percent last month. While March saw an upwardly revised 0.1 percent gain, the April figure disappointed expectations of economists polled by Reuters for an increase of 0.6 percent.
Federal funds futures implied traders saw about a 49 percent chance the Fed would increase rates twice by the end of 2017 shortly after the data, compared with 54 percent just before the release of the latest readings on U.S. store sales and the consumer price index, CME Group's FedWatch programme showed.
"It’s building on a theme of the last several months which is the actual inflation prints on the core are very non-threatening,” said Richard Franulovich, senior currency strategist at Westpac Banking Corp in New York, in reference to the core CPI reading.
"The Fed is still going to be hiking probably two more times this year, but the urgency to act and deliver a hawkish thrust to their actions is not there."
The euro rose as much as 0.7 percent against the dollar to a session high of $1.0934 . The euro had fallen to a more than two-week low on Thursday of $1.0838.
The dollar fell as much as 0.6 percent against the yen to a session low of 113.21 yen after hitting a roughly two-month high of 114.36 yen on Thursday.
The dollar index, which measures the greenback against a basket of six major rivals, was last down 0.4 percent at 99.274 . It was still on track to gain about 0.6 percent for the week to notch its first gain in five weeks.
Friday's inflation data hurt the dollar partly because it was disappointing after strong U.S. April import and producer price readings released earlier this week, said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in New York.
"The CPI data didn't confirm what those other two data sets said about inflation," he said.
Have we passed peak protectionism? And if so, what’s next?
by Fathom Consulting
On Tuesday 9 May, we presented an overview of our Global Economic and Markets Outlook for 2017 Q2 at an event hosted by Thomson Reuters in London. We were joined by former Bank of England policymakers Paul Fisher, Ian Plenderleith and Sushil Wadhwani.
Fathom Director Erik Britton began by setting out what, in our judgment, is the most likely outcome for the global economy. Despite wobbles over his initial failure to replace Obamacare, our central scenario sees US President Donald Trump enact a substantial fiscal stimulus package. There is a material pick-up in growth, with the US economy expanding by 2.7% in 2017 and by 3.5% in 2018. With the labour market already close to full employment, inflation begins to rise. Recognising that it has the tools to deal with a period of above target inflation, while another period of below target inflation would be much harder to address, the Fed moves cautiously. There are two increases in the Fed funds rate this year, and four next year. But this is barely enough to keep pace with rising inflation. Our forecast for the real Fed funds rate – the nominal rate, minus core inflation – is set out in our first chart below. We see the real Fed funds rate essentially on hold for at least the next two years. Moving the nominal Fed funds rate only to keep pace with inflation may appear extreme, but it is precisely what the Fed has delivered to date during the present tightening cycle – it is now 17 months since the Fed funds rate was first raised in December 2015, so we are at M17 on the horizontal axis of our chart. In this environment, inflation moves above target, reaching 3.0% by the end of this year, and 3.5% by the end of next year.
With the world’s largest economy growing at its fastest pace in more than ten years, and with China continuing to double down, emerging economies do well in our central scenario. Elsewhere the outlook is mixed. With near record levels of consumer confidence, driven in part by falling unemployment, the euro area continues to enjoy a cyclical upturn. Nevertheless, unless and until members of the single currency bloc form a proper fiscal union, we remain long-term euro area bears. In the UK growth continues to slow as the reality of what is likely to be a messy departure from the EU starts to bite.
Our risk scenario has remained largely unchanged in nature over the past year. It sees a series of protectionist policies enacted by populist politicians around the world. Tariffs start to rise, and globalisation goes into reverse, diminishing the size of the global economic ‘pie’ – see chart below. We began the debate by asking Ian Plenderleith whether, with Emmanuel Macron safely installed in the Elysée Palace, we could declare that peak protectionism had passed. Could we at last turn our attention instead to some of the pressing macro-economic questions of the day, such as: ‘Why is the risk-free rate so low?’ and ‘How might we address record levels of debt around the developed world?’.
Can we stop worrying about the march of populist politics?
Ian Plenderleith felt that M. Macron’s victory in the French elections would do no more than afford the global economy a little breathing space. The fundamental factors that appeared to have underpinned growing support for populist politicians in Europe, such as significant net inward migration, remained in place. Sushil Wadhwani agreed. He described recent political near misses in Europe, including the Dutch legislative and French presidential elections as a “postponement of the inevitable”. Our audience too were far from convinced that the worst was behind us. Asked to consider whether we had passed peak protectionism, only 8% were confident that we had. 41% of our audience felt that we ‘probably’ had, while the remaining 52% felt that we had not.
Why is the risk-free rate so low?
Mathematician Frank Ramsey demonstrated as long ago as 1928 that, in a world where individuals maximise the present value of expected future happiness, and firms maximise the present value of expected future profits, individuals should save and firms should invest until the real rate of interest is just equal to the sum of economic growth and the rate of time preference, ρ. Frank Ramsey’s theory has, on average, worked well. The following chart compares the real rate of growth of the UK economy since 1870 with the real long-term rate of interest. For all their variability, the means of these two series are very close. GDP growth has averaged 2.11%, while the real long-term rate of interest has averaged 2.90%. That implies that the rate of time preference has averaged 79 basis points. Similar relationships hold in other countries. Looking across all 17 advanced economies in the Jordà-Schularick-Taylor macro-history database, we find that a country’s real long-term rate of interest has, on average, exceeded its real rate of growth since 1870 by 33 basis points.
The idea that a country’s real rate of interest should, in steady state, be close to its real rate of growth works well on average. But, for now at least, the relationship appears to have broken down. Many would consider that we are pessimistic when it comes to our assessment of the UK’s growth prospects. But even we would accept that trend growth in the UK is some way north of -2%, which is more or less what ten-year index-linked gilts are yielding today.
Fathom’s view is that much of the decline in index-linked yields across the developed world, from around 2%-3% at the turn of the century, to less than zero in many countries today, has been driven by the behaviour of the world’s largest emerging economy. Since joining the WTO in 2001, China has become increasingly integrated into global capital markets, which means that its own decisions with regard to saving and investment are able to influence interest rates around the world. Easily the world’s largest saver, China is not following the Ramsey rulebook in our view. It is behaving as if it prefers ‘jam tomorrow’ – its time discount rate, ρ , is effectively negative. It is China’s strong desire to save, rather than consume, that has driven down index-linked yields, in the UK and elsewhere. If our explanation is broadly correct, then the normal relationship between growth and real rates of interest across the developed world might reassert itself in one of two ways. Either China rebalances, and consumes more while saving less, or it is effectively shut out of global capital markets by a collapse in global trade. This, in short, is our risk scenario.
Our panellists were in broad agreement that the normal relationship between growth and the real rate of interest would reassert itself at some point. But there was little consensus regarding when, and it was unclear whether it would be achieved by an increase in the real rate of interest or a reduction in the rate of economic growth. Sushil Wadhwani drew attention to the fact that, ever since 2010, the consensus each year had been that index-linked yields would rise. And yet in almost every year since 2010 they had fallen. But as he pointed out, that is the nature of mean reversion. Forecasts for mean reversion can be wrong for many years, until suddenly they are right.
Our audience too believed that index-linked gilt yields would normalise, but that it would take a long time. Most believed it would take between 10 and 20 years. However, almost one in five felt that long-term real rates of interest would remain below zero indefinitely.
Too much debt? A growing problem.
In many advanced economies, the total quantity of debt, relative to GDP, is close to levels last seen in the immediate aftermath of World War II. Having been broadly stable for more than 100 years, rising only in the immediate aftermath of a major global conflict before falling back again, debt began to increase as a share of GDP across the developed world around 1980. Financial innovation undoubtedly facilitated this move. But is the inexorable rise of debt, relative to GDP, a sign of market completion, or market failure? We tend to side with the latter interpretation. The burden of debt has reached such levels, in many advanced economies, but particularly in Japan, that it is scarcely possible to believe it can ever be repaid in full, on the terms envisaged by the lender. That is to say, some form of default whether soft, in the form of higher-than-expected inflation, or hard, through outright non-payment, seems almost inevitable. That is why we have advocated a policy of helicopter money for Japan.
A reduction in the rate of interest typically stimulates an economy through two channels. First, it lowers the repayments required on variable interest loans, boosting the post-interest income of debtors. Second, by reducing the opportunity cost of consuming today rather than tomorrow, it encourages people to bring forward expenditures that would otherwise have occurred in the future. But crucially, there are limits to this second channel. There must come a time when people have borrowed so much against their expected future incomes that they are either unwilling or unable to borrow any more. At that point, monetary policy becomes much less effective. Arguably, that is pretty much the position in which much of the developed world finds itself today. The boost to demand afforded by rising debt over the past 40 years has, in broad terms, come to an end. In support of this view, our own analysis suggests a doubling of a country’s debt-to-GDP ratio, from 100% to 200%, would reduce long-run economic growth by ½ a percentage point.
Among our panel, there was general agreement that debt levels had become problematic. But there was no clear consensus as to the appropriate solution. Ian Plenderleith felt that it could be repaid, more or less in full without the need for persistently high inflation, just as it had been in many countries following World War II. The difficulty with this approach, as Erik Britton pointed out, is that it would take a very long time. It took almost 30 years for the UK’s debt-to-GDP ratio to fall from an all-time high of 288% in 1946, to a more manageable 84% in 1975. Paul Fisher felt that, in an ideal world, the debt would be inflated away, at least in part. This led on to a discussion of whether, in the present circumstances, it would be advantageous for developed economy central banks to target a higher rate of inflation than 2%.
Paul Fisher was strongly of the view that inflation targets should not be raised merely in an attempt to deliver higher growth. He argued that inflation targeting was one of very few policies that had worked. Erik Britton countered that, while a higher inflation target would not boost inflation in and of itself, it is a policy that might benefit an economy, such as the US, that was already close to full employment, and where inflation was rising. Sushil Wadhwani believed that, for many countries, a higher inflation target would be beneficial. Recent experience had taught us that, with debt levels as high as they are, and with inflation intended to average around 2%, an economy can get itself into a position where the real rate of interest cannot be cut sufficiently to stimulate demand. This had caused a number of major central banks to engage in policies, such as quantitative easing and even negative rates on deposits that in his view were harmful to central bank independence.
COT Report
Recent COT data shows interesting picture. Actually net speculative position on EUR has become long. Last time it was in 2014. Open interest mostly stands unchanged, only shy increase is visible. It means that investors mostly have reversed their positions from bearish to bullish. This moment tells that sentiment, at least on 9th of May (when report was released) stands bullish on EUR. But, to be honest, It will be interesting to see what will happen next week. My suspicion is - this was just reaction on France elections and E. Macron victory. Thus, taking in consideration two moments - opposite Fed and ECB policy and Macron line (actually he is just a logical continuation of Sarkozi-Hollande chain) which supports mostly existent course in France policy, we think that current optimism could be temporal.
Technical
Monthly
As we've said in videos last week, our technical view could be harmed by elections result, but mostly in short-term. Whoever will become a president, existed financial background will stand the same, thus, major long-term trends should be the same. Right now we've got E. Macron and he brings least uncertainty in France policy as he actually just a continuation of previous two presidents - Sarkozi and Hollande. The only intrigue still stands around Parlament elections in June. It could become really tough combination if Macron will not get majority in Parlament... So, we will see.
From technical point of view we have untouched long-term targets around parity and some time it should be met, but somehow I think that it should happen on a background of surprising tightening policy from the Fed, which has more chances to happen only in 2018. So, in perspectives of 1-2 years EUR looks weaker than USD. In coming years EU will meet hard restructural political process that could change the structure of the Union, role of different members and financial relations. Also it is a question what will be with newbie members in Eastern Europe. Now we can see some old conflicts in Balkans countries (Serbia, Montenegro) are raised again.
Short-term technical picture doesn't exclude totally some upside continuation. Trend here stands bullish. Yes, we see signs of bearish dynamic pressure, as price mostly stands flat, but fluctuations inside of this "flat standing" are rather wide. A the same time, this fluctuations and even upside action to YPR1 will not change overall bearish setup. Price needs to create new top and exceed 1.16 high to change situation on monthly chart. While EUR will drift inside 1.03-1.16 range, it should be treated as consolidation or retracement action.
Right now we need to answer on question, in what direction market will follow on coming week.
Long term situation on monthly chart suggests that there are more chances on reaching parity but it is difficult to judge on timing of this process.
Weekly
Right now, guys, weekly chart is very interesting and we have a lot of important features here. Currently overall action match to existent bearish setup. As market has completed large AB=CD target, it has turned to upside retracement. This retracement, actually takes the shape of 3-Drive "Sell" pattern, that has been completed last week. May be it doesn't look absolutely perfect, as we see some space between drives' targets, but still they stand rather close to each other and this lets us treat it as 3-Drive.
Another important issue - by forming 3-Drive EUR has reached major 50% resistance level, and we know that 50% levels are favorite for this market. As you can see, such combination forbids any long entry, at least until appearing of new bullish issues.
The one flaw that we see here in this bearish idyll - it's a gap up, acceleration to 3rd drive point. This is negative sign for any bearish reversal pattern. We know that this is due France elections etc., but from technical point of view - there is no difference why particular this has happened. Existence of the gap is the only thing that important.
That's being said - overall picture will remain bearish and not suitable for long entry, until... right.. upside breakout will happen. The only thing that could drastically change overall balance here is upside breakout, if market will move above 1.1050 area.
Daily
Trend is bearish here, we see solid reversal action on Monday, when EUR drops, but overall situation mostly stands unclear still. Most interesting thing here is H&S pattern, but we will talk on it below, on intraday charts.
Coming action will depend on breakout. If H&S will work properly, as it should, we will get downward continuaiton, while H&S failure will lead to upside continuation.
As EUR stands here below MPR1 by far, this let's us to treat overall upside action as retracement. Situation here comes to boiling point and on coming week we should get the solution. That's why H&S pattern here is a culmination moment.
4-hour
So, guys, upside action that we've discussed in beginning of the last week, finally has happened, but only on Friday. Actually we've got DPRO "Buy" on the slope of the head, but this is not matter any more...
Situation here stands very tricky. H&S could failed differently - either in classical manner, when price will just move above the top of right shoulder or... by DiNapoli method. This is combination that he calls as "Ooops!".
And we have it. Take a look that EUR has K-support area right below the neckline. DiNapoli pattern, suggests that K-support should hold downward action and push price above neckline again. This, in turn, should trigger stops and push price even higher. This is the hazard that we have.
That's why, if you intend to take short position right around 1.0950, where the top of shoulder should appear - do not relax after it. Tight stops and take profit partially around K-support.
Finally, classical failure also could happen - Friday upside action on poor statistics was rather fast and, take a look - we have nice hidden bullish divergence with MACD.
That's being said, for daily traders task is simplier - they just need to wait for breakout. Upward will mean upside continuation, downside - yes, downwar action.
But for those, who usually starts trades on intraday patterns it will be more difficult. Thus, bulls could wait for either upside breakout of right shoulder, or reaching of K-support around 1.0815 area, while bears could try go short around 1.0950 (by using bearish reversal patterns on 5-min chart, for example), with target around 1.0815 area.
Conclusion:
Upside action on France elections has not broken yet long-term tendency. Currently we limit our trading space by 1.03-1.16 area on monthly chart.
On coming week a lot will depend from H&S pattern. Trading process could become really difficult as it is not simple H&S and has some traps around.
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 FX news) - The U.S. dollar fell on Friday, easing from a roughly two-month high against the yen touched in the prior session and slumping against the euro, after weaker-than-expected U.S. economic data raised doubts about whether the Federal Reserve would assume a hawkish bent through the end of the year.
The U.S. core consumer price index (CPI) increased 1.9 percent year-on-year in April, the smallest gain since October 2015. Economists polled by Reuters expected the inflation measure to remain at 2 percent.
In addition, the Commerce Department said retail sales rose 0.4 percent last month. While March saw an upwardly revised 0.1 percent gain, the April figure disappointed expectations of economists polled by Reuters for an increase of 0.6 percent.
Federal funds futures implied traders saw about a 49 percent chance the Fed would increase rates twice by the end of 2017 shortly after the data, compared with 54 percent just before the release of the latest readings on U.S. store sales and the consumer price index, CME Group's FedWatch programme showed.
"It’s building on a theme of the last several months which is the actual inflation prints on the core are very non-threatening,” said Richard Franulovich, senior currency strategist at Westpac Banking Corp in New York, in reference to the core CPI reading.
"The Fed is still going to be hiking probably two more times this year, but the urgency to act and deliver a hawkish thrust to their actions is not there."
The euro rose as much as 0.7 percent against the dollar to a session high of $1.0934 . The euro had fallen to a more than two-week low on Thursday of $1.0838.
The dollar fell as much as 0.6 percent against the yen to a session low of 113.21 yen after hitting a roughly two-month high of 114.36 yen on Thursday.
The dollar index, which measures the greenback against a basket of six major rivals, was last down 0.4 percent at 99.274 . It was still on track to gain about 0.6 percent for the week to notch its first gain in five weeks.
Friday's inflation data hurt the dollar partly because it was disappointing after strong U.S. April import and producer price readings released earlier this week, said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in New York.
"The CPI data didn't confirm what those other two data sets said about inflation," he said.
Have we passed peak protectionism? And if so, what’s next?
by Fathom Consulting
On Tuesday 9 May, we presented an overview of our Global Economic and Markets Outlook for 2017 Q2 at an event hosted by Thomson Reuters in London. We were joined by former Bank of England policymakers Paul Fisher, Ian Plenderleith and Sushil Wadhwani.
Fathom Director Erik Britton began by setting out what, in our judgment, is the most likely outcome for the global economy. Despite wobbles over his initial failure to replace Obamacare, our central scenario sees US President Donald Trump enact a substantial fiscal stimulus package. There is a material pick-up in growth, with the US economy expanding by 2.7% in 2017 and by 3.5% in 2018. With the labour market already close to full employment, inflation begins to rise. Recognising that it has the tools to deal with a period of above target inflation, while another period of below target inflation would be much harder to address, the Fed moves cautiously. There are two increases in the Fed funds rate this year, and four next year. But this is barely enough to keep pace with rising inflation. Our forecast for the real Fed funds rate – the nominal rate, minus core inflation – is set out in our first chart below. We see the real Fed funds rate essentially on hold for at least the next two years. Moving the nominal Fed funds rate only to keep pace with inflation may appear extreme, but it is precisely what the Fed has delivered to date during the present tightening cycle – it is now 17 months since the Fed funds rate was first raised in December 2015, so we are at M17 on the horizontal axis of our chart. In this environment, inflation moves above target, reaching 3.0% by the end of this year, and 3.5% by the end of next year.
With the world’s largest economy growing at its fastest pace in more than ten years, and with China continuing to double down, emerging economies do well in our central scenario. Elsewhere the outlook is mixed. With near record levels of consumer confidence, driven in part by falling unemployment, the euro area continues to enjoy a cyclical upturn. Nevertheless, unless and until members of the single currency bloc form a proper fiscal union, we remain long-term euro area bears. In the UK growth continues to slow as the reality of what is likely to be a messy departure from the EU starts to bite.
Our risk scenario has remained largely unchanged in nature over the past year. It sees a series of protectionist policies enacted by populist politicians around the world. Tariffs start to rise, and globalisation goes into reverse, diminishing the size of the global economic ‘pie’ – see chart below. We began the debate by asking Ian Plenderleith whether, with Emmanuel Macron safely installed in the Elysée Palace, we could declare that peak protectionism had passed. Could we at last turn our attention instead to some of the pressing macro-economic questions of the day, such as: ‘Why is the risk-free rate so low?’ and ‘How might we address record levels of debt around the developed world?’.
Can we stop worrying about the march of populist politics?
Ian Plenderleith felt that M. Macron’s victory in the French elections would do no more than afford the global economy a little breathing space. The fundamental factors that appeared to have underpinned growing support for populist politicians in Europe, such as significant net inward migration, remained in place. Sushil Wadhwani agreed. He described recent political near misses in Europe, including the Dutch legislative and French presidential elections as a “postponement of the inevitable”. Our audience too were far from convinced that the worst was behind us. Asked to consider whether we had passed peak protectionism, only 8% were confident that we had. 41% of our audience felt that we ‘probably’ had, while the remaining 52% felt that we had not.
Why is the risk-free rate so low?
Mathematician Frank Ramsey demonstrated as long ago as 1928 that, in a world where individuals maximise the present value of expected future happiness, and firms maximise the present value of expected future profits, individuals should save and firms should invest until the real rate of interest is just equal to the sum of economic growth and the rate of time preference, ρ. Frank Ramsey’s theory has, on average, worked well. The following chart compares the real rate of growth of the UK economy since 1870 with the real long-term rate of interest. For all their variability, the means of these two series are very close. GDP growth has averaged 2.11%, while the real long-term rate of interest has averaged 2.90%. That implies that the rate of time preference has averaged 79 basis points. Similar relationships hold in other countries. Looking across all 17 advanced economies in the Jordà-Schularick-Taylor macro-history database, we find that a country’s real long-term rate of interest has, on average, exceeded its real rate of growth since 1870 by 33 basis points.
The idea that a country’s real rate of interest should, in steady state, be close to its real rate of growth works well on average. But, for now at least, the relationship appears to have broken down. Many would consider that we are pessimistic when it comes to our assessment of the UK’s growth prospects. But even we would accept that trend growth in the UK is some way north of -2%, which is more or less what ten-year index-linked gilts are yielding today.
Fathom’s view is that much of the decline in index-linked yields across the developed world, from around 2%-3% at the turn of the century, to less than zero in many countries today, has been driven by the behaviour of the world’s largest emerging economy. Since joining the WTO in 2001, China has become increasingly integrated into global capital markets, which means that its own decisions with regard to saving and investment are able to influence interest rates around the world. Easily the world’s largest saver, China is not following the Ramsey rulebook in our view. It is behaving as if it prefers ‘jam tomorrow’ – its time discount rate, ρ , is effectively negative. It is China’s strong desire to save, rather than consume, that has driven down index-linked yields, in the UK and elsewhere. If our explanation is broadly correct, then the normal relationship between growth and real rates of interest across the developed world might reassert itself in one of two ways. Either China rebalances, and consumes more while saving less, or it is effectively shut out of global capital markets by a collapse in global trade. This, in short, is our risk scenario.
Our panellists were in broad agreement that the normal relationship between growth and the real rate of interest would reassert itself at some point. But there was little consensus regarding when, and it was unclear whether it would be achieved by an increase in the real rate of interest or a reduction in the rate of economic growth. Sushil Wadhwani drew attention to the fact that, ever since 2010, the consensus each year had been that index-linked yields would rise. And yet in almost every year since 2010 they had fallen. But as he pointed out, that is the nature of mean reversion. Forecasts for mean reversion can be wrong for many years, until suddenly they are right.
Our audience too believed that index-linked gilt yields would normalise, but that it would take a long time. Most believed it would take between 10 and 20 years. However, almost one in five felt that long-term real rates of interest would remain below zero indefinitely.
Too much debt? A growing problem.
In many advanced economies, the total quantity of debt, relative to GDP, is close to levels last seen in the immediate aftermath of World War II. Having been broadly stable for more than 100 years, rising only in the immediate aftermath of a major global conflict before falling back again, debt began to increase as a share of GDP across the developed world around 1980. Financial innovation undoubtedly facilitated this move. But is the inexorable rise of debt, relative to GDP, a sign of market completion, or market failure? We tend to side with the latter interpretation. The burden of debt has reached such levels, in many advanced economies, but particularly in Japan, that it is scarcely possible to believe it can ever be repaid in full, on the terms envisaged by the lender. That is to say, some form of default whether soft, in the form of higher-than-expected inflation, or hard, through outright non-payment, seems almost inevitable. That is why we have advocated a policy of helicopter money for Japan.
A reduction in the rate of interest typically stimulates an economy through two channels. First, it lowers the repayments required on variable interest loans, boosting the post-interest income of debtors. Second, by reducing the opportunity cost of consuming today rather than tomorrow, it encourages people to bring forward expenditures that would otherwise have occurred in the future. But crucially, there are limits to this second channel. There must come a time when people have borrowed so much against their expected future incomes that they are either unwilling or unable to borrow any more. At that point, monetary policy becomes much less effective. Arguably, that is pretty much the position in which much of the developed world finds itself today. The boost to demand afforded by rising debt over the past 40 years has, in broad terms, come to an end. In support of this view, our own analysis suggests a doubling of a country’s debt-to-GDP ratio, from 100% to 200%, would reduce long-run economic growth by ½ a percentage point.
Among our panel, there was general agreement that debt levels had become problematic. But there was no clear consensus as to the appropriate solution. Ian Plenderleith felt that it could be repaid, more or less in full without the need for persistently high inflation, just as it had been in many countries following World War II. The difficulty with this approach, as Erik Britton pointed out, is that it would take a very long time. It took almost 30 years for the UK’s debt-to-GDP ratio to fall from an all-time high of 288% in 1946, to a more manageable 84% in 1975. Paul Fisher felt that, in an ideal world, the debt would be inflated away, at least in part. This led on to a discussion of whether, in the present circumstances, it would be advantageous for developed economy central banks to target a higher rate of inflation than 2%.
Paul Fisher was strongly of the view that inflation targets should not be raised merely in an attempt to deliver higher growth. He argued that inflation targeting was one of very few policies that had worked. Erik Britton countered that, while a higher inflation target would not boost inflation in and of itself, it is a policy that might benefit an economy, such as the US, that was already close to full employment, and where inflation was rising. Sushil Wadhwani believed that, for many countries, a higher inflation target would be beneficial. Recent experience had taught us that, with debt levels as high as they are, and with inflation intended to average around 2%, an economy can get itself into a position where the real rate of interest cannot be cut sufficiently to stimulate demand. This had caused a number of major central banks to engage in policies, such as quantitative easing and even negative rates on deposits that in his view were harmful to central bank independence.
COT Report
Recent COT data shows interesting picture. Actually net speculative position on EUR has become long. Last time it was in 2014. Open interest mostly stands unchanged, only shy increase is visible. It means that investors mostly have reversed their positions from bearish to bullish. This moment tells that sentiment, at least on 9th of May (when report was released) stands bullish on EUR. But, to be honest, It will be interesting to see what will happen next week. My suspicion is - this was just reaction on France elections and E. Macron victory. Thus, taking in consideration two moments - opposite Fed and ECB policy and Macron line (actually he is just a logical continuation of Sarkozi-Hollande chain) which supports mostly existent course in France policy, we think that current optimism could be temporal.
Technical
Monthly
As we've said in videos last week, our technical view could be harmed by elections result, but mostly in short-term. Whoever will become a president, existed financial background will stand the same, thus, major long-term trends should be the same. Right now we've got E. Macron and he brings least uncertainty in France policy as he actually just a continuation of previous two presidents - Sarkozi and Hollande. The only intrigue still stands around Parlament elections in June. It could become really tough combination if Macron will not get majority in Parlament... So, we will see.
From technical point of view we have untouched long-term targets around parity and some time it should be met, but somehow I think that it should happen on a background of surprising tightening policy from the Fed, which has more chances to happen only in 2018. So, in perspectives of 1-2 years EUR looks weaker than USD. In coming years EU will meet hard restructural political process that could change the structure of the Union, role of different members and financial relations. Also it is a question what will be with newbie members in Eastern Europe. Now we can see some old conflicts in Balkans countries (Serbia, Montenegro) are raised again.
Short-term technical picture doesn't exclude totally some upside continuation. Trend here stands bullish. Yes, we see signs of bearish dynamic pressure, as price mostly stands flat, but fluctuations inside of this "flat standing" are rather wide. A the same time, this fluctuations and even upside action to YPR1 will not change overall bearish setup. Price needs to create new top and exceed 1.16 high to change situation on monthly chart. While EUR will drift inside 1.03-1.16 range, it should be treated as consolidation or retracement action.
Right now we need to answer on question, in what direction market will follow on coming week.
Long term situation on monthly chart suggests that there are more chances on reaching parity but it is difficult to judge on timing of this process.
Weekly
Right now, guys, weekly chart is very interesting and we have a lot of important features here. Currently overall action match to existent bearish setup. As market has completed large AB=CD target, it has turned to upside retracement. This retracement, actually takes the shape of 3-Drive "Sell" pattern, that has been completed last week. May be it doesn't look absolutely perfect, as we see some space between drives' targets, but still they stand rather close to each other and this lets us treat it as 3-Drive.
Another important issue - by forming 3-Drive EUR has reached major 50% resistance level, and we know that 50% levels are favorite for this market. As you can see, such combination forbids any long entry, at least until appearing of new bullish issues.
The one flaw that we see here in this bearish idyll - it's a gap up, acceleration to 3rd drive point. This is negative sign for any bearish reversal pattern. We know that this is due France elections etc., but from technical point of view - there is no difference why particular this has happened. Existence of the gap is the only thing that important.
That's being said - overall picture will remain bearish and not suitable for long entry, until... right.. upside breakout will happen. The only thing that could drastically change overall balance here is upside breakout, if market will move above 1.1050 area.
Daily
Trend is bearish here, we see solid reversal action on Monday, when EUR drops, but overall situation mostly stands unclear still. Most interesting thing here is H&S pattern, but we will talk on it below, on intraday charts.
Coming action will depend on breakout. If H&S will work properly, as it should, we will get downward continuaiton, while H&S failure will lead to upside continuation.
As EUR stands here below MPR1 by far, this let's us to treat overall upside action as retracement. Situation here comes to boiling point and on coming week we should get the solution. That's why H&S pattern here is a culmination moment.
4-hour
So, guys, upside action that we've discussed in beginning of the last week, finally has happened, but only on Friday. Actually we've got DPRO "Buy" on the slope of the head, but this is not matter any more...
Situation here stands very tricky. H&S could failed differently - either in classical manner, when price will just move above the top of right shoulder or... by DiNapoli method. This is combination that he calls as "Ooops!".
And we have it. Take a look that EUR has K-support area right below the neckline. DiNapoli pattern, suggests that K-support should hold downward action and push price above neckline again. This, in turn, should trigger stops and push price even higher. This is the hazard that we have.
That's why, if you intend to take short position right around 1.0950, where the top of shoulder should appear - do not relax after it. Tight stops and take profit partially around K-support.
Finally, classical failure also could happen - Friday upside action on poor statistics was rather fast and, take a look - we have nice hidden bullish divergence with MACD.
That's being said, for daily traders task is simplier - they just need to wait for breakout. Upward will mean upside continuation, downside - yes, downwar action.
But for those, who usually starts trades on intraday patterns it will be more difficult. Thus, bulls could wait for either upside breakout of right shoulder, or reaching of K-support around 1.0815 area, while bears could try go short around 1.0950 (by using bearish reversal patterns on 5-min chart, for example), with target around 1.0815 area.
Conclusion:
Upside action on France elections has not broken yet long-term tendency. Currently we limit our trading space by 1.03-1.16 area on monthly chart.
On coming week a lot will depend from H&S pattern. Trading process could become really difficult as it is not simple H&S and has some traps around.
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.