Forex FOREX PRO WEEKLY, October 30 - 03, 2023

[Sive Morten]

Fundamentals

This week market society mostly was watching for the bulk of US data. Although we also had ECB in the schedule, but no surprises were expected, and there weren't. With the GDP and PCE numbers - result has exceeded all, even most brave expectations. But there is a nuance - once again the methodology of GDP and deflator calculation has been revised, and not just for recent 2-3 years, but for the whole history of observations since 1947. The price level also have changed. It was 2012 prices, now it is 2017. So, the US statistics are turning to circus that hardly could be used for making any suggestions. But there are alternative ways exists that could help us to understand what's really going on.

Market overview

The dollar edged down against a basket of currencies on Friday, pulled down by portfolio rebalancing, but was on track to end the week higher as fresh data reinforced the view the U.S. economy remains on a firm footing. U.S. consumer spending increased more than expected in September, signaling a strong fourth quarter, while monthly inflation was elevated, data on Friday showed.

Gross domestic product increased at a 4.9% annualized rate last quarter, the fastest since the fourth quarter of 2021, the Commerce Department's Bureau of Economic Analysis said in its advance estimate of third-quarter GDP growth. Economists polled by Reuters had forecast GDP rising at a 4.3% rate. While U.S. business output ticked higher in October as the manufacturing sector pulled out of a five-month contraction on a pickup in new orders, and services activity accelerated modestly amid signs of easing inflationary pressures, S&P Global said on Tuesday.

"It is reinforcing the message that the U.S. is sort of hanging in there on the economic side and inflation is also remaining somewhat stubborn," said Brad Bechtel, global head of FX at Jefferies in New York. At the margin, that helps the dollar," Bechtel said.

The GDP numbers follow business activity data earlier this week that highlighted the strength of the U.S. economy relative to the United Kingdom and the European Union. "While all three PMI readings for the U.S. (manufacturing, services, and composite) were positive, both the UK and the euro zone showed contractions, re-emphasizing the continuing resilience of the larger U.S. economy in comparison to its peers around the world," said Helen Given, FX trader at Monex USA.

"The strong Q3 GDP result reinforces the market tension between good data on the one hand and the prospect of higher rates and a more restrictive Fed on the other," Brian Rose, senior U.S. economist at UBS, said in a note. That's likely to continue generating market choppiness until investors are confident that the economy is cooling but not collapsing and the rate shock is over," Rose said.

"This time of the month there are month-end flows that tend to predominate at certain points," Bipan Rai, North America head of FX strategy at CIBC Capital Markets, said. "I would expect some of that is reflected in the price action that we are seeing for the dollar today.Following big gains for the July-September period the dollar has struggled to make further advances despite relatively upbeat U.S. economic data, Rai noted. We have seen some signals, at least in the near term, that the dollar is a bit overbought," said Rai, who still expects the dollar to remain strong. Additional positioning doesn't really make sense until those two key risk events are out of the way," Rai said.

Cooling inflation will likely keep the Fed on pause in coming months, traders bet on Friday, even as persistent underlying price pressures amid strong consumer spending kept some chance of a rate hike later this year in play. The U.S. economy grew at its fastest pace in nearly two years in the third quarter, data on Thursday showed, as higher wages from a tight labour market helped power consumer spending.

Quincy Krosby, chief global strategist at LPL Financial in Charlotte, said U.S. economic growth has prompted market concerns that the Fed may need to increase interest rates again before the end of the year to quell inflation.

"The Fed's job isn't done and it does not appear that higher interest rates are doing the job for them," Krosby said in an email.

The European Central Bank on Thursday left interest rates unchanged as expected, ending an unprecedented streak of 10 consecutive rate hikes. The decision to keep rates on hold is likely to reinforce expectations that the world's biggest central banks, including the U.S. Federal Reserve, are essentially done tightening policy after an unprecedented series of synchronized hikes.

"PMIs and money supply data suggest that the inevitable recession started in the summer," AFS Group Senior Analyst Arne Petimezas said. "But the ECB, which should have known better with its tower full of economists, continued to tighten. The outlook for the economy appears to be increasingly precarious, putting a so-called "soft landing" in jeopardy.

Industry is in recession, sentiment indicators are pointing south, consumption is muted and even the labour market has started to soften, all suggesting a second-half contraction. In a mild surprise for markets, she said policymakers did not discuss at all an early end to reinvestments in the ECB's 1.7 trillion euro ($1.8 trillion) Pandemic Emergency Purchase Programme. Markets now see a high chance the ECB will start cutting interest rates in April and fully price in a move by June, followed by two other cuts before the end of the year.

German data was particularly glum. The purchasing managers' index survey showed the service sector joined the manufacturing sector in contractionary territory.
Bank lending across the euro zone came to a near standstill last month, European Central Bank data showed on Wednesday, providing further evidence that the 20-nation bloc was skirting a recession. Growth indicators from industrial output data to PMI and sentiment readings in recent weeks are all suggesting that euro zone's economy is now either stagnating or even shrinking as weak external demand, consumer caution and high interest rates are exerting their toll.

The ECB's own survey of the bloc's biggest banks show they plan to further curb businesses' access to credit in the fourth quarter and also see waning demand for loans. The M3 measure of growth money supply, seen in the past as a good indicator of future economic expansion, meanwhile contracted by 1.2%

The steepest jump in interest rates in decades will spark a domino effect on corporate defaults in the years ahead, asset manager Janus Henderson Investors said in a report on Friday. The cost of insuring exposure to European junk debt also hit on Oct. 20 its highest level since late March at 473 basis points (bps), according to S&P Global Market Intelligence. As firms will have to refinance debt at a higher cost of funding, this will hurt their ability to pay interest, eventually leading to more defaults, the report said.

Defaults have already been rising this year, with the number globally up to September reaching 118, nearly double the 2022 total and well above the year-to-date five-year average of 101, according to S&P.

CURIOUS GDP Data

It is a bit surprising to see so frank data from Reuters. In fact, data published from Fed surveys currently in the public domain shows banks have already tightened standards for all kinds of business and consumer loans, demand for most types of loans has weakened, and growth for all stripes of loans has slowed. And a kind of "Chinese" growth pace of the US economy keeps a lot of questions.

Businesses have become particularly uninterested in borrowing, banks reported in the Fed's July senior loan officers opinion survey.

Those trends have so far done little to weigh down strong GDP growth and consumer spending that along with large job gains seem to suggest ongoing upward pressure on prices.

"We don't have a lot of data to really hang our hat on at this point," said BMO's Scott Anderson. But the impact of tighter credit is coming, he said, and "we're pretty confident we'll see a slowdown."

Overall U.S. commercial bank credit shrank during the third quarter, the first year-over-year decline in more than a decade, weekly Fed data show. The decline was largely driven by a drop in the value of Treasury bonds as yields soared. Mortgage-backed securities held broadly by banks also fell in value, as mortgage rates have risen, most recently to a 23-year high of 7.9%.

And a yearlong decline in loan demand accelerated in the second half of September, according to a twice-quarterly Dallas Fed survey of Texas banking conditions that closely tracks the Fed's national survey. Banks have become more pessimistic about future business activity, that survey showed, leading them to forecast even weaker loan demand ahead.

Banks responding to the Dallas Fed survey reported increased delinquency for all kinds of borrowers, but particularly for consumer loans. That could be a particularly telling turn of events, because other Fed data shows that even as U.S. banks have tightened credit card standards, credit card borrowing did not slow in the second quarter.

Households have spent down much of the savings they built up during the pandemic, and employment gains don't look sustainable, said Nationwide's Kathy Bostjancic. "The key question is the degree growth cools in the coming quarters to further relieve inflation pressures in the services sector," Bostjancic said.

All that may add to a picture that sets the stage for a weaker fourth quarter, and further slowing next year, more reason for the Fed to keep rates where they are and let tighter credit and financial conditions do their work. A Commerce Department report on Friday showed consumer spending surged in September and inflation by the Fed's preferred gauge rose 3.4%, with underlying inflation pressures easing slightly to 3.7% from August's 3.8%.

"The spending, income and inflation largely came in line with our expectations, so we forecast that the Fed is done tightening for this cycle, but with growth remaining resilient and inflation elevated the Fed will be in no hurry to cut rates," Bostjancic wrote after the report. "We look for the Fed to keep rates on hold through mid-year 2024."

It is not surprising that rats are running out of the ship with this kind of performance of banking sector. It seems it stands on the edge. Thus, J. Dimon, JPM CEO aims to sell 1 Mln JPM shares, which actually in constant drop since the beginning of the year, despite S&P rally. Thus on Friday JPM shares collapsed for 3.5%

But, if private sector doesn't borrow and not investing, where GDP growth comes from? It is easy - government spending. In fact, we need to consider GDP dynamic together with budget deficit and US government spending and it is becoming more or less clear. Big spending and US government orders in private corporations, including defense sector transforms into GDP growth, replacing private sector

Excess government spending, which creates a deficit of 6-7% of GDP at the end of the year. This luxury is permissible as long as there are buyers for government debt at rates with a relatively small premium to the Fed rate using funds in reverse repo. There are not many of them left, only 1.15 trillion. dollars and they will run out in about six months. If at the same time BTFP also ceases to operate (03/31/24), then it is unclear who, in principle, will be able to buy new treasuries. Then, apparently, the recession will appear in all its glory.

But this is only the half of the story. Methodology. "Once again, a large-scale revision of American statistics has been made... since 1947!

The scale of the "sabotage" has yet to be assessed, but as for the main indicator (GDP), both nominal GDP and deflator have been revised. The discrepancy in nominal GDP was 0.85%, and the deflator was over 1% (overall inflation was underestimated). In addition, the statistics were given to the prices of 2017, and earlier the comparison was with 2012.

As a result, according to the new data, the accumulated growth of the American economy over 10 years turned out to be almost 2% higher than according to the old data. The most significant changes in the crisis period of 2020 are now a fall of only 2.2%, whereas previously it was believed that GDP fell by 3.4%.

This is not only a change in indicators (and, say, a decrease in inflation automatically overestimates GDP). The point is also that it is now becoming much more difficult to compare data and draw systematic conclusions. What is also very interesting - the big jump of deflator - in the third quarter (according to the same preliminary data) increased significantly, to 3.5%, compared to the previous value of 1.7%.

Speak it simple they say - "before we had fools working in the statistics bureau, but now we hired smart ones". So it turned out that inflation (GDP deflator) was lower, nominal GDP itself was higher, and in 2020 it actually fell by almost half as much. Since the beginning of the inflation crisis and the start of raising rates, this is the second such trick. At the beginning of the year, a large-scale reform of inflation measurement took place.

All this means only one thing: no one there hopes for any normalization of the budget. The numbers have been drawn, now they will update the training manuals for talking heads and begin to convince a new wave of hamsters that the US economy is strong and, in general, everyone is easy-peasy. In fact, we now also get consistently high inflation in the dollar....

INDIRECT "REAL" INDICATORS

Now let's take a look at cruel reality. By the way, try to explain then the GDP growth. I couldn't do this... First is -the recent three months were absolutely terrible almost for all sectors:

US companies are no longer in a hurry to actively borrow on the market amid high yields. 5% yield is causing people and businesses to put off decisions, warns BofA, while IMF chief says rates have risen too high, too fast.

That is, due to high rates, it is not possible to increase the volume of production of goods and services while maintaining demand with a significant budget deficit. What happens to prices when demand is high and supply is not growing? This, among other things, relates to the question of what will be more pro-inflationary - yield curve control (YCC) or QE. And here we go -

Second, inflation and its expectations - Here is Michigan 1-Year Inflation Expectations at 6 month high on a chart below. 5-year inflationary expectations are also raising. Berkshire Hathaway further increased its stake in Occidental Petroleum to 25.8%. It means that W. Buffet doesn't expect the drop of crude oil prices. Baltic Dry Index Shipping costs rise to highest level in a year. Another inflationary factor: USA, production. The number of enterprises that are preparing to raise selling prices is growing.

United States Continuing Jobless Claims hits new highs, that difficult to relate with superb GDP growth:

Now to the most interesting things. While we, mere mortals, have been saying for months that there is still no recession in the US because the budget deficit is 7-8%, the great ones have been silent. But now the great ones are talking too. Exactly the same thing, that the deficit exceeds nominal GDP growth, supports demand in the economy and without it everything would have already crumbled.

But what the great ones are silent about so far is that the increase in public debt, even without QE from the Fed and the growth of the money supply, accelerates or supports inflation so far. And that, of course, we may not see a recession, but we will get inflation instead. It is already showdown is started between the Fed and US Treasury concerning high deficit level. It's like the Fed is trying to do something with inflation but Treasury absolutely doesn't control spending, making the Fed efforts in vain.

The US debt market liquidity is deteriorating, together with exhausting of Reverse Repo mechanism. Liquidity is draining out form everywhere.

Investors are loosing faith in the US debt, stop treating it as "safe haven" and "benchmark" asset. CDS spreads are raising again, while EM yields already are lower than on US bonds. As Mohammed El-Erian said - "Treasuries lose their status as save heaven assets".

At the same time we hear from all sides that this is tremendous level for buying US debt - 5-7% depending on its term for a long time. This is a "dream". All big banks either talk about it or suggest that US debt market is oversold and expect mega rally in 2024. Wait a minute... let's go step by step. Why can there be a rally in state bonds? Because yields will fall. Why will yields fall? Because either the Fed will lower the rate, or everyone will suddenly break into treasuries.

If we assume that we will not see a victory over inflation soon or never at all (one could then assume that someone will be satisfied with the yield on long securities below the Fed rate, in theory, of course), then there is not much reason to break into the treasury. This means that the Fed will lower the rate. Why will the Fed cut the rate? To save the situation.

And why is it above 5% that the yield will be attractive? Because the inversion at such a rate will already disappear and bond prices will be at the bottom. Total - the inversion stops, the yield of long-term treasuries is higher than short-term ones, recession, crisis, rate cut and, in fact, profit on bonds.

But It makes no sense to buy relatively long-term treasuries at a rate without a premium to inflation. It is unlikely that they do not understand this. Then at the time of the recession there should be a relatively strong disinflationary moment, which will allow them to say "we win (won)! But the recession is in the yard, so run to the Treasuries. Now!" and push Treasures into their portfolios to the brim.

There are other more simple explanation could be done as well. For example, big whales just want to light their heavy portfolios of US Treasuries and need to increase demand to hold the rate. Or, to prevent total chaos on the market.

In fact, the signal to purchasing of the US debt could be only the big purchase by the Fed. As soon as it buys them for a serious amount - half a trillion or a trillion, then yes, there will be a rally, at least it could overtake inflation. In the meantime, it doesn't worthy of it. The world's most important sovereign debt market now rests on the shoulders of speculators. “Data from the Commodity Futures Trading Commission (CFTC) for the week ended October 17 shows that leveraged shorts (hedge funds and speculators) rose 250K to just 4.71 million contracts—significantly more than the peak aggregate net short position since 2019 at the level of 4 million contracts.”

 

[Sive Morten]

So what we have in dry residual:

• Approximate layout: US 10-year rate - 5%, 30-year mortgage loan - 8% (+3% premium);
• The banking sector is sitting on $600 billion in unrealized losses + there is a sluggish collapse of commercial real estate and a credit crisis;
• The Fed floods all this with separate liquidity lines (hidden QE). Powell to the markets - but we like everything, this is how we fight inflation;
• The Treasury market is out of business - $2+ trillion annual deficit needs to be financed + interest costs. Liquidity in the sovereign debt market is effectively supported by speculators' leveraged shorts;
• Foreigners have fled, the holders are turning their noses up, they have put their own people in long positions, and some have gained the courage to point to the US government on the problem of debt monetization;
• Peripheral markets are out of business - the devaluation of national currencies is forcing the sale of more and more dollar assets (hello to the Bank of Japan).

That's all that you need to know about the US GDP growth now. As it happened previously big war could resolve many problems, that we now see is coming on Middle East. With such a geopolitical environment EUR has no chances to become more attractive compares to USD and we do not see reasons yet to change our long term bearish view on EUR/USD.

Technicals
Monthly

October is a quiet month still, at least based on monthly chart, mostly indicating "indecision" condition, as price is flirting around YPP, forming doji. As it is just two sessions till the end of the month and 31st is a holiday, so, EUR probably will finish this month as it is. Next direction will depend on the breakout.

Now, with escalation of Middle East conflict, which will have multiplier negative effect on EU economy because of energy cost, downside direction seems more probable, but this is just a suggestion by far.

As we've said - EUR keeps nominal bullish trend by far. But overall environment is more bearish rather than bullish for EUR. Thus, we keep everything the same here for now, 0.9 target remains in place.

Weekly

Here picture remains bearish by few factors. Firs is, just nominally, as MACD is down. Second - market is forming the flag consolidation, which is traditionally bearish continuation pattern. Finally, market shows very small bounce from the area, where we could expect more significant response. After downside reversal swing been formed, after touching of wide K-support area, EUR shows almost no pullback. The only upsetting thing that we do not have any clear patterns here. Despite great thrust down - no DiNapoli patterns were formed yet.

Daily

Returning back to our Friday's discussion - daily chart is not clarified yet. Once again we have to take a look at Dollar index, and it has formed 2nd bearish grabber, keeping door open for EUR upside action as well.

While on EUR we have the same doji as on DXY but no grabbers. Still bearish engulfing here is not cancelled yet, and this is also "the pattern", so which one works and which one fails - we'll see.

Intraday

The pullback that we've discussed has happened, we've got B&B "Sell" here that mostly is done:

On 1H chart you could see that drop has started right from K-area and trend line resistance. Thus, if you have shorts - you probably could hold it with b/e stops. The question about taking a new position is not very simple. In general if we have grabbers - it would be better to not go against them. B&B has target that doesn't contradict with them.

Theoretically it is possible to consider long entry based on grabbers. Still, we have nominal upside trend on daily chart. But overall environment hints on dollar strength and on Monday we could get downside open due to Middle East escalation. Let's see. And I'm not satisfied 100% with this idea as well. Although from technical point of view - this trade seems correct. Thus, here you have to make personal decision.

 

[chalo]

Hi Sive, thank you for your analysis. I did spend a good time reading the links and watching Youtube links, very informative. Always grateful for all your time.

 

[Sive Morten]

Morning everybody,

So, EUR confirms our weekend thoughts - bullish context is technically correct, but is a bit tricky as you never know what next hot news from Middle East will be or, say, what JPow will tell in nearest two days... But, the one thing we do correct - haven't taking new shorts.

If you take a look at dollar index, you'll see that grabber start working. In relation to EUR, they suggest action above 1.07 top, at least. But, if we recall our weekly analysis, we could get B&B "Sell" on weekly chart which could start accurately from 1.0750-1.08 area, around daily XOP target:

On 4H chart price returns back in upside channel trend stands bullish. Downside action was able to stay above major 5/8 support area.

On 1H chart market hits OP and Agreement resistance area. Next tactical target is XOP around 1.0670:

As we've said in weekend - bullish trend is technically justified. If we wouldn't have geopolitical risk factor, it would be more comfortable to take long position. Thus, mostly it depends on your personal view on these factors. If you do not worry too much about it - it is possible to keep bullish trading here, because technically it is correct.

This is also the reason why we do not consider any shorts by far.

 

[Sive Morten]

Morning everybody,

So, a lot of events are going around now, and in a few days we should get a bulk of important data - Powell statement, Yellen borrowing plans, NFP etc.

Yesterday price action was rather drastic, although it was not a total surprise as reversal happened right from our 1.0670 XOP target that we've discussed yesterday. Now overall picture is not as simple. Overall background is dollar supportive and IMO EUR has more chances to proceed lower. But, technically, the bullish scenario has not been erased yet. For example, on this reverse action, DXY has formed another bearish grabber. Yes, it might be just because the market's close, but... who knows. What if J.Powell comments will go against markets expectations? Or NFP will be very bad?

In fact, now everything depends on lows in red circle, from technical point of view. While it holds - it is easy to imagine upside butterfly, right? But if it fails - bullish context will be destroyed - grabbers, potential butterfly etc.

Speaking about bearish position - it is the same story. Yes recent reversal was impressive, we have huge bearish engulfing on the chart above, but, formally, bullish context is not cancelled yet. And by taking short position right now you anticipate its destruction and take additional risk, betting on the Fed results:

So, now situation mostly depends on your risk aversion. The trick stands in contradiction between technical picture and overall environment. Daily context is bullish, while we see DXY raising, US yields, market anticipates hawkish tone from Powell and US Treasury also hardly limit its appetites for borrowing, which suggests higher yields again.

Thus, personally I would wait. If you're ready to anticipate and make a bet on all coming events - choose your poison depending on your expectations. Formally, from technical point of view, despite recent collapse long position for now seems correct, at least on daily/1H time frames combination. But this is formally and only for now.

 

[Sive Morten]

Morning everybody,

So, despite recent volatility our general view seems to be correct - technical context remains bullish on EUR. WE could do not like the price shape, that it is heavy and choppy and shows no bullish signs. But we do mistake if we take short position now. As trend as patterns are bullish by far. Thus, if you do not like to buy - just wait a bit and see what will happen. Do not hurry to take the short position by far.

If yesterday we've talked about grabbers on GBP and DXY, now we've got it on EUR directly:

On 4H chart lows were not broken, market just has tested them, forming "222" Buy:

That's why, if you do not worry about NFP and consider long entry - you could watch for local Fib support levels for entry. Since we had solid downside momentum, theoretically EUR should try to touch 1.0580 support, at least, or maybe some smaller retracements will be formed:

 

[Sive Morten]

Morning everybody,

So, EUR once again has shown that despite what you think about overall price action, whether you like it or not, but it is better to not go against technical context. Yesterday it was more or less significant upside action. Now, situation on the US bond market and DXY support dollar weakness and bring no barriers for upside action on EUR. Major risk factor today is NFP report. Meantime, grabber is not completed yet and context remains bullish. So, we do not consider any shorts positions by far. Next upside target stands around daily K-resistance of 1.0770 area

On 4H chart, potentially butterfly is possible, although it is a bit early to say for sure:

On 1H chart EUR stands in pullback. Minor grabber suggests that it might be a bit deeper. We could consider COP downside target around 1.06-1.0610 level. Maybe it will be reached. If you plan to buy EUR - avoid strong collapse. In this case do nothing, because in best scenario we get much better entry price at least, while worst one just destroy bullish context...