Sive Morten
Special Consultant to the FPA
- Messages
- 18,685
Fundamentals
(Reuters) - The U.S. dollar tumbled on Friday on a report that North Korea is preparing to test a long-range missile, overturning earlier gains after the government’s jobs report for September showed an unexpected rise in wages.
RIA news agency cited a Russian lawmaker’s making comments on the missile test, which North Korea believes can reach the U.S. West Coast.
“The market is getting more nervous about the prospect of some kind of a conflict,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York. “If they do something over the weekend, even if it’s a mild test, I’m sure we’re going to open up a with little bit of risk aversion on Monday.”
The dollar earlier rose to a more than two-month high against the yen and seven-week high against the euro as wage data from the September labour market report was seen as a sign of potentially improving inflation.
Average hourly earnings increased 12 cents, or 0.5 percent, in September after rising 0.2 percent in August. The gains came as nonfarm payrolls fell by 33,000 jobs last month after Hurricanes Harvey and Irma left displaced workers temporarily unemployed and delayed hiring.
“I think most people realized going in that the headline numbers would be distorted because of the storms, but the surprise was the average hourly earnings,” said Win Thin, head of emerging markets currency strategy at Brown Brothers Harriman in New York. “This is the missing piece in the Fed’s puzzle.”
The greenback jumped as high as 113.43 yen, the highest level since July 14, before dropping to 112.71. The euro fell to $1.1670, the lowest level since Aug. 17, before rising back to $1.1726.
Tepid inflation has been a bugbear for the Federal Reserve, which has puzzled over why price pressures remain low even as the job market improves.
The wage improvement boosted already high expectations that the U.S. central bank will raise rates at its December meeting, and that further hikes in 2018 are likely.
“The Fed signaled three rate hikes next year for the dot plots, and the market does not believe that,” said Thin. “I think if we start getting more numbers like that the market is going to have to believe it more and more.”
News in Charts: Upward Revisions to US Earnings Increase the Already-High Odds of a December Rate Hike
by Fathom Consulting
Today’s jobs report may have shown a 33,000 drop in nonfarm payroll employment in September, but the US dollar, Treasury yields and the probabilities that investors assign to a rate increase in December all rose. At first glance, these movements seem somewhat surprising, as it is widely known that the monthly change in payroll employment was affected by Hurricanes Harvey and Irma. Moreover, the payroll gains reported in the previous two months were revised lower, which would normally prompt the opposite market reaction, all else equal. Investors may have focused on the increase in average hourly earnings in September, but even these might have been distorted by the storms. Closer inspection of the data, however, reveals that earnings in earlier months were revised higher. This suggests that wage pressures may have been building a little faster than we and the Fed previously thought. The already-high probability of a rate increase in December seem to have risen following today’s release.
In a note to clients last week, we cautioned against reading too much into today’s job figures. After all, even the Bureau of Labor Statistics (BLS) acknowledged that they were unsure of how to quantify the impact of the hurricanes, and that since nearly 11 million workers were employed in FEMA-designated disaster counties, representing around 8 per cent of national employment, there would be a sizeable impact on the figures. The BLS indicated that they would need to make several assumptions on the weather-distorted data. The large decline in the growth of the nonfarm payrolls following Hurricane Katrina in 2005 led us to believe that a large drop this month was imminent. The recent initial jobless claims figures, which have risen sharply in Texas and Florida, also suggested that many people would be unable to work as a result of the storms.
Today’s release showed that employment in leisure and hospitality fell by 111,000, which compares with an average monthly increase of 26,000 over the last year for these sectors. These are industries in which the large majority of workers are not paid when they are absent from work. Significantly, they would not be counted as employed if they were unable to work during the payroll survey week (i.e. the week containing the 12th day of the month, which happened to be the same week that Hurricane Irma made landfall). This large deviation from the recent trend therefore appears to confirm that the headline figures were greatly distorted by the recent hurricanes.
The 0.5% month over month increase in average hourly earnings reported in September, which pushed up the annual change in average hourly earnings to 2.9%, a ten-month high, points to a tightening labour market. However, it is possible that September’s earnings figures may have also been affected by the storms, a point acknowledged by the BLS today. Nevertheless, there were upward revisions to earnings in the previous two months which resulted in the annual change in average hourly earnings in August being revised up from 2.5% to 2.7%, suggesting that wage pressures may have been building a little faster than we (and the Fed) previously thought. Other economic data released this week, including the ISM business surveys and vehicle sales, were also positive and increase the odds that the Fed will tighten policy again this year.
COT Report
Today guys, I think it makes sense to take a look at Dollar Index (DXY). Yesterday, in video we've taken a look mostly on intraday setups, as our preparation for NFP (and it works), but today, I take a look at wider picture, and "wow", setup that we have here is really thrilling.
In fact, all currency pairs on FX market, and EUR, AUD in particular carry reflection of DXY processes. The price action that we expect on index will be seen on currencies as well. On EUR and AUD we have even the same patterns as on DXY. We need to understand what's going on there and what to expect as in long-term as in short-term perspective.
First - let's take a look at CFTC report. Here is 2017 chart and we mostly are interested in blue bars - non-commercial (speculative component) red is commercial one (hedgers mostly):
Even if you do not understand anything in CFTC charts - you just can't miss significant narrowing of positions. It means that within 1 week open interest (the value of all positions) has dropped almost 2 times:
As hedgers as speculators have cancelled bets on further dollar appreciation - (short "red" and long "blue" bars have diminished). This were huge hedging positions against dollar acceleration and all of them were closed. Market has lost almost 50% of its value. Outstanding. But what the reasons for that? Why investors do not believe more in USD growth?
Based on reports that we have and overall statistics that we get from US, it should be made opposite conclusion. Within 2 years US Fund rate should be somewhere around 2.5%.
It means that investors either see some other factors that should hold dollar growth and become a headwind to its appreciation, or, situation should start to change, closer to December rate increase, and investors should start accumulate bullish positions again.
Actually, in June DXY net position has turned bearish, while it was bullish long time. Now it still stands bearish but situation is changing slowly. Last 3 weeks (take a look at blue bars again) speculators have increased longs a bit. This doesn't mean that we stand on the door of new bull trend here, but mostly confirms our idea of possible upside bounce here.
At the same time solution of huge drop of bullish positions stands under curtain and currently it is very difficult to explain it. This is an issue, that probably will become major driving factor of dollar in coming months.
Technicals
Monthly
Actually, guys, our analysis of DXY is not something new. First time, when we seriously were interested with it was in Nov 2011. Here I call you to re-read our very long-term analysis and targets of Dollar Index, because mostly it is completed. Just read fundamental part of the thread:
LONG TERM US DOLLAR INDEX VIEW
Now let's take a look at modern monthly chart. Our analysis of 2011 suggests - first is, dollar should take out 90 top as bullish grabber has been formed. It means that it should complete at least AB=CD @ 91.62. But, as price has accelerated without any respect through this level in 2014 - market has moved to next 1.618 extension 103.32. This level has been completed "pips-to-pips" at the end of 2016. Thus, scenario that has started in 2011 by perfect "222' Buy pattern has been completed in 2016:
Now, if you carefully will take a look at DXY chart and CFTC chart - you'll see that long positions were massively closed as market has reached monthly OS and K-support area. Although, it should be oppositely, right? At strong support traders should start accumulate longs and not distribute them. If you have any ideas on this sub - please share in comments, while personally I see only one reasonable explanation - people do not believe much in dollar's appreciation above previous top. Other words, CFTC data keeps room for upside retracement only.
On monthly chart we have two other technical issues that also suggest reasonable bounce up within few months. They are - DiNapoli bullish "Stretch" pattern, as price has reached K-support at monthly OS. Second one is bearish reversal swing. As upside momentum is still here, deep retracement could be triggered.
But this is only on first stage. Result of this bounce could lead to appearing of huge H&S pattern on monthly chart in 2018. And here is major tricky moment stands. From one side, we have rather hawkish Fed policy and good stats, that, theoretically should lead to bullish sentiment on the market and upside breakout of widening triangle here, on monthly chart.
But from the other side, we see traders reaction that have closed longs, which means that now they are more believe in H&S and bearish reversal here.
Thus, It seems that 101 level will be clue to solution - if DXY will start to break through it - H&S pattern will be vanished and market sentiment could start to change. This is most important level for long-term traders.
But for us, major conclusion is expectation of upside action in nearest few months here.
Weekly
We already has discussed some details on weekly chart previously. Speaking in two words - major task for weekly time frame is to create setup for upside reaction on monthly support area, to justify upside action, make a background for this. And we see two different scenarios.
First one we briefly have discussed in Friday's video. This is B&B "Sell" trade who leads to appearing bullish reversal pattern on daily chart. To get this setup we use short part of the thrust, and market has started well.
Now is the question where downside retracement will stop.
Currently price action is kept well by monthly pivot levels. But if price will drop below MPP - this will open door to second scenario.
Here, as you can see we have another alternative starting point for thrust down that makes thrust longer. But in this case we do not have B&B trade. If market will drop below MPP - this could lead to forming of DRPO "Buy" pattern here. These are two patterns that we will be watching for. But we stand in optimal situation as we already have short positions with breakeven stops (due our Friday video):
Daily
As DRPO on weekly is just a potential scenario and time is not come yet, daily chart mostly shows first scenario with B&B "Sell" trade.
This trade, in turn, could lead to appearing of reverse H&S pattern here - now recall setups that we have on daily AUD and EUR. Same H&S patterns... Existence of bullish divergence around H&S pattern and major monthly K-support brings more confidence for perspecitve of upside reaction here.
Upside action was stopped by MPR1. Also price shows puny W&R of previous tops, which also minor bearish sign. The one think that I do not like is price has not reached 94.20 weekly Fib resistance. Top was around 94.09. This could mean that somehow price could make an attempt to do it. But... may be not...
Anyway, right now the major question is how deep price will drop. If it will hold above 92, then we will get H&S and upside action will start. If not, and drop will be stronger, then we will have to turn to our weekly DRPO "Buy" Scenario as price could return back to previous lows around 91 area:
Intraday
This setup we mostly have discussed on Friday's video. Just few comments on it. First is - you can see my entry point, based on our analysis.
If you're scalp trader and just want to grab profit from 3-Drive pattern, think about exit around 0.93 area. This is K-support and WPS1. DXY could show some bounce out from it. As 94.20 weekly level has not been tested, who knows, may be some larger bearish reversal pattern could be formed. Currently it is difficult to say definitely. At least some risk of this exists.
As potential downside target it would be better to watch for 93.20 Fib level, as it more corresponds to the bottom of left shoulder on daily chart.
As you can see, in general, downside action has started pretty nice and was justified by our 3-Drive "Sell" pattern and 1.618 AB-CD target. Dollar has formed strong bearish reversal candle there:
Conclusion:
Dollar now brings a riddle about long term perspective, as some contradiction exists between massive longs closing and positive perspective of Fed fund rate. As Dollar index is a core for many other currencies and assets this riddle will spread across the board. And this is the riddle that we have to resolve. Right now we provide just one possible explanation, but it doesn't mean that its unique.
In shorter term perspective, we mostly will focus on downside action on coming week and following upside action that could take few weeks as well.
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 U.S. dollar tumbled on Friday on a report that North Korea is preparing to test a long-range missile, overturning earlier gains after the government’s jobs report for September showed an unexpected rise in wages.
RIA news agency cited a Russian lawmaker’s making comments on the missile test, which North Korea believes can reach the U.S. West Coast.
“The market is getting more nervous about the prospect of some kind of a conflict,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York. “If they do something over the weekend, even if it’s a mild test, I’m sure we’re going to open up a with little bit of risk aversion on Monday.”
The dollar earlier rose to a more than two-month high against the yen and seven-week high against the euro as wage data from the September labour market report was seen as a sign of potentially improving inflation.
Average hourly earnings increased 12 cents, or 0.5 percent, in September after rising 0.2 percent in August. The gains came as nonfarm payrolls fell by 33,000 jobs last month after Hurricanes Harvey and Irma left displaced workers temporarily unemployed and delayed hiring.
“I think most people realized going in that the headline numbers would be distorted because of the storms, but the surprise was the average hourly earnings,” said Win Thin, head of emerging markets currency strategy at Brown Brothers Harriman in New York. “This is the missing piece in the Fed’s puzzle.”
The greenback jumped as high as 113.43 yen, the highest level since July 14, before dropping to 112.71. The euro fell to $1.1670, the lowest level since Aug. 17, before rising back to $1.1726.
Tepid inflation has been a bugbear for the Federal Reserve, which has puzzled over why price pressures remain low even as the job market improves.
The wage improvement boosted already high expectations that the U.S. central bank will raise rates at its December meeting, and that further hikes in 2018 are likely.
“The Fed signaled three rate hikes next year for the dot plots, and the market does not believe that,” said Thin. “I think if we start getting more numbers like that the market is going to have to believe it more and more.”
News in Charts: Upward Revisions to US Earnings Increase the Already-High Odds of a December Rate Hike
by Fathom Consulting
Today’s jobs report may have shown a 33,000 drop in nonfarm payroll employment in September, but the US dollar, Treasury yields and the probabilities that investors assign to a rate increase in December all rose. At first glance, these movements seem somewhat surprising, as it is widely known that the monthly change in payroll employment was affected by Hurricanes Harvey and Irma. Moreover, the payroll gains reported in the previous two months were revised lower, which would normally prompt the opposite market reaction, all else equal. Investors may have focused on the increase in average hourly earnings in September, but even these might have been distorted by the storms. Closer inspection of the data, however, reveals that earnings in earlier months were revised higher. This suggests that wage pressures may have been building a little faster than we and the Fed previously thought. The already-high probability of a rate increase in December seem to have risen following today’s release.
In a note to clients last week, we cautioned against reading too much into today’s job figures. After all, even the Bureau of Labor Statistics (BLS) acknowledged that they were unsure of how to quantify the impact of the hurricanes, and that since nearly 11 million workers were employed in FEMA-designated disaster counties, representing around 8 per cent of national employment, there would be a sizeable impact on the figures. The BLS indicated that they would need to make several assumptions on the weather-distorted data. The large decline in the growth of the nonfarm payrolls following Hurricane Katrina in 2005 led us to believe that a large drop this month was imminent. The recent initial jobless claims figures, which have risen sharply in Texas and Florida, also suggested that many people would be unable to work as a result of the storms.
Today’s release showed that employment in leisure and hospitality fell by 111,000, which compares with an average monthly increase of 26,000 over the last year for these sectors. These are industries in which the large majority of workers are not paid when they are absent from work. Significantly, they would not be counted as employed if they were unable to work during the payroll survey week (i.e. the week containing the 12th day of the month, which happened to be the same week that Hurricane Irma made landfall). This large deviation from the recent trend therefore appears to confirm that the headline figures were greatly distorted by the recent hurricanes.
The 0.5% month over month increase in average hourly earnings reported in September, which pushed up the annual change in average hourly earnings to 2.9%, a ten-month high, points to a tightening labour market. However, it is possible that September’s earnings figures may have also been affected by the storms, a point acknowledged by the BLS today. Nevertheless, there were upward revisions to earnings in the previous two months which resulted in the annual change in average hourly earnings in August being revised up from 2.5% to 2.7%, suggesting that wage pressures may have been building a little faster than we (and the Fed) previously thought. Other economic data released this week, including the ISM business surveys and vehicle sales, were also positive and increase the odds that the Fed will tighten policy again this year.
COT Report
Today guys, I think it makes sense to take a look at Dollar Index (DXY). Yesterday, in video we've taken a look mostly on intraday setups, as our preparation for NFP (and it works), but today, I take a look at wider picture, and "wow", setup that we have here is really thrilling.
In fact, all currency pairs on FX market, and EUR, AUD in particular carry reflection of DXY processes. The price action that we expect on index will be seen on currencies as well. On EUR and AUD we have even the same patterns as on DXY. We need to understand what's going on there and what to expect as in long-term as in short-term perspective.
First - let's take a look at CFTC report. Here is 2017 chart and we mostly are interested in blue bars - non-commercial (speculative component) red is commercial one (hedgers mostly):
Even if you do not understand anything in CFTC charts - you just can't miss significant narrowing of positions. It means that within 1 week open interest (the value of all positions) has dropped almost 2 times:
As hedgers as speculators have cancelled bets on further dollar appreciation - (short "red" and long "blue" bars have diminished). This were huge hedging positions against dollar acceleration and all of them were closed. Market has lost almost 50% of its value. Outstanding. But what the reasons for that? Why investors do not believe more in USD growth?
Based on reports that we have and overall statistics that we get from US, it should be made opposite conclusion. Within 2 years US Fund rate should be somewhere around 2.5%.
It means that investors either see some other factors that should hold dollar growth and become a headwind to its appreciation, or, situation should start to change, closer to December rate increase, and investors should start accumulate bullish positions again.
Actually, in June DXY net position has turned bearish, while it was bullish long time. Now it still stands bearish but situation is changing slowly. Last 3 weeks (take a look at blue bars again) speculators have increased longs a bit. This doesn't mean that we stand on the door of new bull trend here, but mostly confirms our idea of possible upside bounce here.
At the same time solution of huge drop of bullish positions stands under curtain and currently it is very difficult to explain it. This is an issue, that probably will become major driving factor of dollar in coming months.
Technicals
Monthly
Actually, guys, our analysis of DXY is not something new. First time, when we seriously were interested with it was in Nov 2011. Here I call you to re-read our very long-term analysis and targets of Dollar Index, because mostly it is completed. Just read fundamental part of the thread:
LONG TERM US DOLLAR INDEX VIEW
Now let's take a look at modern monthly chart. Our analysis of 2011 suggests - first is, dollar should take out 90 top as bullish grabber has been formed. It means that it should complete at least AB=CD @ 91.62. But, as price has accelerated without any respect through this level in 2014 - market has moved to next 1.618 extension 103.32. This level has been completed "pips-to-pips" at the end of 2016. Thus, scenario that has started in 2011 by perfect "222' Buy pattern has been completed in 2016:
Now, if you carefully will take a look at DXY chart and CFTC chart - you'll see that long positions were massively closed as market has reached monthly OS and K-support area. Although, it should be oppositely, right? At strong support traders should start accumulate longs and not distribute them. If you have any ideas on this sub - please share in comments, while personally I see only one reasonable explanation - people do not believe much in dollar's appreciation above previous top. Other words, CFTC data keeps room for upside retracement only.
On monthly chart we have two other technical issues that also suggest reasonable bounce up within few months. They are - DiNapoli bullish "Stretch" pattern, as price has reached K-support at monthly OS. Second one is bearish reversal swing. As upside momentum is still here, deep retracement could be triggered.
But this is only on first stage. Result of this bounce could lead to appearing of huge H&S pattern on monthly chart in 2018. And here is major tricky moment stands. From one side, we have rather hawkish Fed policy and good stats, that, theoretically should lead to bullish sentiment on the market and upside breakout of widening triangle here, on monthly chart.
But from the other side, we see traders reaction that have closed longs, which means that now they are more believe in H&S and bearish reversal here.
Thus, It seems that 101 level will be clue to solution - if DXY will start to break through it - H&S pattern will be vanished and market sentiment could start to change. This is most important level for long-term traders.
But for us, major conclusion is expectation of upside action in nearest few months here.
Weekly
We already has discussed some details on weekly chart previously. Speaking in two words - major task for weekly time frame is to create setup for upside reaction on monthly support area, to justify upside action, make a background for this. And we see two different scenarios.
First one we briefly have discussed in Friday's video. This is B&B "Sell" trade who leads to appearing bullish reversal pattern on daily chart. To get this setup we use short part of the thrust, and market has started well.
Now is the question where downside retracement will stop.
Currently price action is kept well by monthly pivot levels. But if price will drop below MPP - this will open door to second scenario.
Here, as you can see we have another alternative starting point for thrust down that makes thrust longer. But in this case we do not have B&B trade. If market will drop below MPP - this could lead to forming of DRPO "Buy" pattern here. These are two patterns that we will be watching for. But we stand in optimal situation as we already have short positions with breakeven stops (due our Friday video):
Daily
As DRPO on weekly is just a potential scenario and time is not come yet, daily chart mostly shows first scenario with B&B "Sell" trade.
This trade, in turn, could lead to appearing of reverse H&S pattern here - now recall setups that we have on daily AUD and EUR. Same H&S patterns... Existence of bullish divergence around H&S pattern and major monthly K-support brings more confidence for perspecitve of upside reaction here.
Upside action was stopped by MPR1. Also price shows puny W&R of previous tops, which also minor bearish sign. The one think that I do not like is price has not reached 94.20 weekly Fib resistance. Top was around 94.09. This could mean that somehow price could make an attempt to do it. But... may be not...
Anyway, right now the major question is how deep price will drop. If it will hold above 92, then we will get H&S and upside action will start. If not, and drop will be stronger, then we will have to turn to our weekly DRPO "Buy" Scenario as price could return back to previous lows around 91 area:
Intraday
This setup we mostly have discussed on Friday's video. Just few comments on it. First is - you can see my entry point, based on our analysis.
If you're scalp trader and just want to grab profit from 3-Drive pattern, think about exit around 0.93 area. This is K-support and WPS1. DXY could show some bounce out from it. As 94.20 weekly level has not been tested, who knows, may be some larger bearish reversal pattern could be formed. Currently it is difficult to say definitely. At least some risk of this exists.
As potential downside target it would be better to watch for 93.20 Fib level, as it more corresponds to the bottom of left shoulder on daily chart.
As you can see, in general, downside action has started pretty nice and was justified by our 3-Drive "Sell" pattern and 1.618 AB-CD target. Dollar has formed strong bearish reversal candle there:
Conclusion:
Dollar now brings a riddle about long term perspective, as some contradiction exists between massive longs closing and positive perspective of Fed fund rate. As Dollar index is a core for many other currencies and assets this riddle will spread across the board. And this is the riddle that we have to resolve. Right now we provide just one possible explanation, but it doesn't mean that its unique.
In shorter term perspective, we mostly will focus on downside action on coming week and following upside action that could take few weeks as well.
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.
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