Sive Morten
Special Consultant to the FPA
- Messages
- 18,659
Fundamentals
(Reuters) The dollar rose on Friday as remarks by Federal Reserve policymakers helped boost investor expectations of a near-term increase in U.S. interest rates.
Boston Fed President Eric Rosengren said in a speech on Friday that gradual interest rate increases might be in order with the U.S. economy at full employment and that low interest rates were increasing the chance of an overheated economy.
Rosengren's comments followed the announcement Thursday that U.S. Fed Governor Lael Brainard would give a speech on Monday.
Brainard is considered one of the Fed's more dovish members, meaning she is more inclined to leave rates lower in order to strengthen employment. The announcement of her speech likely means she will deliver the message that the Fed is close to raising rates, analysts said, suggesting there may be consensus on the rate-setting Federal Open Market Committee (FOMC) to do so.
Brainard and Rosengren are both voting members on the FOMC, which sets the target for U.S. short-term rates.
"Despite the relatively weak economic (data) that we’ve had this month, the market decided that it appears central bank officials are no longer enamored with zero-interest-rate policy; they really want to normalize rate policy sooner rather than later," said Boris Schlossberg, managing director of FX strategy at BK Asset Management.
Fed funds futures prices showed traders had raised their bets on a rate increase this year. CME Group's FedWatch shows investors see a 30 percent chance of a rate increase at September's FOMC meeting and a 60 percent chance of a hike in December.
The increased bets on a rate increase raised U.S. Treasury debt yields, which was bullish for the dollar, analysts said. U.S. benchmark 10-year Treasury notes touched their highest level in more than two months on Friday.
Higher Treasury yields boost U.S. interest rates, which makes the dollar more attractive for investors to hold.
The dollar index, which tracks the U.S. currency against a basket of six currencies, rose 0.35 percent to 95.366.
The euro fell 0.3 percent against the dollar to $1.1224, pressured lower by a report on German exports that showed the steepest drop in nearly a year.
Commodity-linked currencies were battered by the dollar as traders unwound carry trade positions in higher-yielding currencies like the Australian and New Zealand dollars, BK's Schlossberg said.
Fathom’s German Economic Sentiment Indicator (GESI)
by Fathom Consulting
On the face of it, Germany’s strong economic performance so far this year poses a challenge to our forecast of sluggish GDP growth. However, that performance almost entirely pre-dates the UK’s EU referendum, held on 23 June, and our own indicator of underlying economic activity in the post referendum period points to stagnant German GDP in the third quarter. As a consequence, we maintain our forecast of 1.1% GDP growth in Germany this year.
Fathom’s German Economic Sentiment Indicator (GESI) uses principal component analysis (PCA) to condense the responses to 18 different questions, from 5 closely-watched surveys. This helps to distill the message from a wide range of survey data.
We find that the first principal component by itself is able to account for close to 65% of the variation in the underlying data. Moreover, each of the survey responses contributes positively to the first principal component. Because a more positive balance is seen as indicative of stronger economic activity in each case, this is a desirable property.
We have transformed the first principal component so that it has the same mean, and the same variance, as quarterly GDP growth. The resulting monthly series (our GESI) is shown alongside quarterly GDP growth in the chart above. The GESI has fallen by 0.5 percentage points since June, down from 0.2% to -0.3% in August. This is the weakest reading since October 2012. Interestingly, most of the fall in the GESI took place between July and August, rather than in the immediate aftermath of the Brexit vote.
How should we interpret the GESI’s August reading? The GESI is more persistent than GDP growth. By construction, it has the same mean and variance, but it displays less short-term volatility. That is because actual GDP growth captures ‘lumpy’ economic transactions that, because of their design, the surveys cannot hope to capture. For that reason, we might interpret the GESI as a measure of underlying economic activity, rather than a prediction of actual GDP growth. Nevertheless, our GESI appears consistent with stagnant German GDP in the third quarter. As a consequence, we maintain our forecast of 1.1% GDP growth in Germany for the whole of 2016.
COT Report
Today, guys, we turn back to EUR discussion again, but, actually, not because something really interesting stands there, but mostly because our short-term setups on CAD and JPY have been completed, and other major currencies do not bring something special as well. Thus, we mostly will take a look at progress of the same setup on EUR that we've started 2 weeks ago.
Recent CFTC data shows important information. WIthin last three weeks speculative net short position has increased, as well as open interest. This increase was not drammatic, but still, it suggests opening of new shorts on EUR. For us it means that any bullish scenario is fragile and stands under higher degree of failure. And, as you know, we mostly talked previously on possible action to 1.16 area...
Technicals
Monthly
Recent action doesn't have strong impact on monthly chart by far, September stands as inside to August action still. That's why our monthly analysis mostly stands the same.
Currently EUR stands at rather strong support area. This is lower border of downward channel and all-time 5/8 Fib support. Here EUR has formed Butterfly "buy" and it has reached first 1.27 extension here. Probably it needs some time to pass through this level and supportive fundamental background of US strength.
EUR is forming typical reversal candle in May. Price has moved above April top and closed below April's lows. It could not get extended continuation, but usually market shows downward continuation within next 1-3 candles.
Sometimes reversal candles lead to collapse, as it was on EUR around 1.40 area. Thrust down has started particularly by reversal candle in March 2014.
Speaking on big scale bearish signs, we have these ones:
EUR was not able to reach YPR1 and returned right back down to YPP, and now even stands slightly below it. This is bearish sign. Following this logic next destination could be YPS1 right around parity and 1.618 butterfly target. This is just another destination point that we have here.
Appearing of reversal candle brings nothing good to bulls. Currently we can't precisely forecast the consequences of its appearing, but even minor results will bring 1-2 months of downward action inside current 1.04 -1.15 consolidation... Although potential bearish impact could be even stronger.
Finally we have another bearish sign that looks like bearish dynamic pressure. Take a look that although trend holds bullish - market shows inablitity to move up, even from strong support area. Next strong support stands precisely at parity and will become a culmination of downward action, since this level includes support line, YPS1 and butterfly 1.618 target. Brexit results hardly will bring prosperity to EU and probably will become another bearish driving factor for EUR.
Although we also discuss short-term bullish scenarios on lower time frames, but monthly picture and recent COT data could make bullish scenarios just tactical without any extended perspective.
Weekly
Last week we've talked on possible breaking of normal bearish market mechanics by EUR. One example of this we have seen 2 weeks ago on daily chart, when we have put the start our upside trading on EUR. Here we have similar signs but of a bigger scale, since this is weekly time frame.
As you can see EUR has not dropped lower right to 1.05 lows as it should for normal bearish behavior, but stopped precisely at 5/8 Fib support. Previously we've mentioned that EUR keeps small downward swings equality very accurate, and if it breaks it - it should double it down, as it was on a way from 1.17 to 1.05 lows.
But this has not happened, instead of that EUR has formed "222" Buy pattern. It has not doubled downward swing, but formed AB-CD retracement instead. Thus, weekly chart suggests next target around 1.16 top. This is minor 0.618 AB-CD extension. Other targets stand above OB level, so they are not really interesting to us by far.
Second moment - is a trend line. On Brext voting EUR has broken it down, but take a look what is going on right now - it is returning right back to it. Trend has turned bullish on weekly chart. Currently it is still flirting with the line, but if it will show true return back - this will be strong bullish sign that will bring a lot of confidence with upside continuation.
But, as you can see unfortunately or may be fortunately (depending on your position, LOL), EUR has not returned back above trend line. Since weekly chart is rather big scale and real trend shifting here comes very slow - all patterns that we've discussed here are valid - "222" Buy and others.
Still, recent action mostly reminds re-testing of broken trend line, some kind of "Kiss goodbye". Currently weekly chart doesn't let us to say definitely what scenario we have, because to talk definitely on bearish trend - we need to get drop below 1.09 lows. But right now we have just one black candle near trend line. It absolutely doesn't excude yet potential breakout.
We just need to see how market treats Fed comments - either as long-term direction or just short-term reaction. Result will be different for weekly chart. That's why despite recent reaction on Yellen speech, technically bullish scenario has not been vanished yet totally, especially after poor NFP and ISM numbers.
Still, speaking in favor of bearish scenario - last three weeks give a hint on bearish sentiment among investors. It seems that market already is tuned on rate hike and values bad moments less than good moments for rate hike. As a result, within last 3 weeks trend has turned bullish but price action is not, market even shows shy decrease. This makes us think that may be indeed, bad data has short term impact on situation. Next important input will be on Fed September meeting, since their rethoric should be more clear on perspective of rate hike in December.
Thus, weekly picture mostly confirms that we've said above - bullish scenario has not vanished totally, but really feels some bearish pressure.
Daily
On Daily chart everything was fine in the beginning of the week. After poor ISM services EUR has started up on Tue with nice upside action and almost has reached our predefined target at MPR1. But this was only minimal target. Action that we saw on Thu and Fri is not very good for bullish perspective.
First of all, EUR wasn't able to break MPR1. And this suggests that current action up should be treated as retracement.
Second - if we suggest that EUR has touched neckline of reverse H&S pattern, we also can't call it as bullish sign, when market tests neckline and drop down, when it should break it. Grabber that has been formed on Fri is not very reliable, since it stands againts previous action. Personally, I do not like this kind of grabbers and very rare trade them.
Still, EUR still has chances to make upside breakout and reach our minimal target for this setup around 1.16 area. Our invalidation point stands the same - 1.11 lows. Only if EUR will break it down - this will be the end of the game for bulls. Right now EUR could, for example, form Butterfly "sell" pattern, as it it shown on 4-hour chart
4-hour
Recent drop mostly was triggered by agressive rethoric from Fed representatives. EUR has formed something like bearish engulfing or even H&S pattern and dropped down. Still, as we've said above it is nothing lost yet for bulls and EUR has chances to form, say, Butterfly:
Hourly
It could happen that market has made just 5/8 retracement and reached Agreement support around 1.12 area. Right now it has started bounce up out from there. It seems that EUR should bring clarity in this setup on next week. It will either destroy it totally, if it will drop right back down to 1.11 area, or re-establish move up. On Monday we should take a close look to 1.12 area. Downward breakout will not become a catastrophy yet, but brings nothing good to bulls. Normally, bullish market should hold on such strong support level.
Conclusion:
Last time we've said that support where market stands on monthly chart is very long-term and wide. Standing there could last for months or even years, and may be sometime upward action will happen there. And right now we see some hints on minor upward action. Still on a big scale EUR shows mostly bearish signs. Currently we can't talk on some very extended targets and better to treat current splash as tactical retracement yet.
In shorter -term perspective initial bullish pace has faded and market has turned to some choppy action. EUR still keeps theoretical chances on upside continuation, but we should keep an eye on major levels to not miss early signs of possible failure. Thus, on Monday we will monitor 1.12 level whether EUR will be able to hold above it.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
(Reuters) The dollar rose on Friday as remarks by Federal Reserve policymakers helped boost investor expectations of a near-term increase in U.S. interest rates.
Boston Fed President Eric Rosengren said in a speech on Friday that gradual interest rate increases might be in order with the U.S. economy at full employment and that low interest rates were increasing the chance of an overheated economy.
Rosengren's comments followed the announcement Thursday that U.S. Fed Governor Lael Brainard would give a speech on Monday.
Brainard is considered one of the Fed's more dovish members, meaning she is more inclined to leave rates lower in order to strengthen employment. The announcement of her speech likely means she will deliver the message that the Fed is close to raising rates, analysts said, suggesting there may be consensus on the rate-setting Federal Open Market Committee (FOMC) to do so.
Brainard and Rosengren are both voting members on the FOMC, which sets the target for U.S. short-term rates.
"Despite the relatively weak economic (data) that we’ve had this month, the market decided that it appears central bank officials are no longer enamored with zero-interest-rate policy; they really want to normalize rate policy sooner rather than later," said Boris Schlossberg, managing director of FX strategy at BK Asset Management.
Fed funds futures prices showed traders had raised their bets on a rate increase this year. CME Group's FedWatch shows investors see a 30 percent chance of a rate increase at September's FOMC meeting and a 60 percent chance of a hike in December.
The increased bets on a rate increase raised U.S. Treasury debt yields, which was bullish for the dollar, analysts said. U.S. benchmark 10-year Treasury notes touched their highest level in more than two months on Friday.
Higher Treasury yields boost U.S. interest rates, which makes the dollar more attractive for investors to hold.
The dollar index, which tracks the U.S. currency against a basket of six currencies, rose 0.35 percent to 95.366.
The euro fell 0.3 percent against the dollar to $1.1224, pressured lower by a report on German exports that showed the steepest drop in nearly a year.
Commodity-linked currencies were battered by the dollar as traders unwound carry trade positions in higher-yielding currencies like the Australian and New Zealand dollars, BK's Schlossberg said.
Fathom’s German Economic Sentiment Indicator (GESI)
by Fathom Consulting
On the face of it, Germany’s strong economic performance so far this year poses a challenge to our forecast of sluggish GDP growth. However, that performance almost entirely pre-dates the UK’s EU referendum, held on 23 June, and our own indicator of underlying economic activity in the post referendum period points to stagnant German GDP in the third quarter. As a consequence, we maintain our forecast of 1.1% GDP growth in Germany this year.
Fathom’s German Economic Sentiment Indicator (GESI) uses principal component analysis (PCA) to condense the responses to 18 different questions, from 5 closely-watched surveys. This helps to distill the message from a wide range of survey data.
We find that the first principal component by itself is able to account for close to 65% of the variation in the underlying data. Moreover, each of the survey responses contributes positively to the first principal component. Because a more positive balance is seen as indicative of stronger economic activity in each case, this is a desirable property.
We have transformed the first principal component so that it has the same mean, and the same variance, as quarterly GDP growth. The resulting monthly series (our GESI) is shown alongside quarterly GDP growth in the chart above. The GESI has fallen by 0.5 percentage points since June, down from 0.2% to -0.3% in August. This is the weakest reading since October 2012. Interestingly, most of the fall in the GESI took place between July and August, rather than in the immediate aftermath of the Brexit vote.
How should we interpret the GESI’s August reading? The GESI is more persistent than GDP growth. By construction, it has the same mean and variance, but it displays less short-term volatility. That is because actual GDP growth captures ‘lumpy’ economic transactions that, because of their design, the surveys cannot hope to capture. For that reason, we might interpret the GESI as a measure of underlying economic activity, rather than a prediction of actual GDP growth. Nevertheless, our GESI appears consistent with stagnant German GDP in the third quarter. As a consequence, we maintain our forecast of 1.1% GDP growth in Germany for the whole of 2016.
COT Report
Today, guys, we turn back to EUR discussion again, but, actually, not because something really interesting stands there, but mostly because our short-term setups on CAD and JPY have been completed, and other major currencies do not bring something special as well. Thus, we mostly will take a look at progress of the same setup on EUR that we've started 2 weeks ago.
Recent CFTC data shows important information. WIthin last three weeks speculative net short position has increased, as well as open interest. This increase was not drammatic, but still, it suggests opening of new shorts on EUR. For us it means that any bullish scenario is fragile and stands under higher degree of failure. And, as you know, we mostly talked previously on possible action to 1.16 area...
Technicals
Monthly
Recent action doesn't have strong impact on monthly chart by far, September stands as inside to August action still. That's why our monthly analysis mostly stands the same.
Currently EUR stands at rather strong support area. This is lower border of downward channel and all-time 5/8 Fib support. Here EUR has formed Butterfly "buy" and it has reached first 1.27 extension here. Probably it needs some time to pass through this level and supportive fundamental background of US strength.
EUR is forming typical reversal candle in May. Price has moved above April top and closed below April's lows. It could not get extended continuation, but usually market shows downward continuation within next 1-3 candles.
Sometimes reversal candles lead to collapse, as it was on EUR around 1.40 area. Thrust down has started particularly by reversal candle in March 2014.
Speaking on big scale bearish signs, we have these ones:
EUR was not able to reach YPR1 and returned right back down to YPP, and now even stands slightly below it. This is bearish sign. Following this logic next destination could be YPS1 right around parity and 1.618 butterfly target. This is just another destination point that we have here.
Appearing of reversal candle brings nothing good to bulls. Currently we can't precisely forecast the consequences of its appearing, but even minor results will bring 1-2 months of downward action inside current 1.04 -1.15 consolidation... Although potential bearish impact could be even stronger.
Finally we have another bearish sign that looks like bearish dynamic pressure. Take a look that although trend holds bullish - market shows inablitity to move up, even from strong support area. Next strong support stands precisely at parity and will become a culmination of downward action, since this level includes support line, YPS1 and butterfly 1.618 target. Brexit results hardly will bring prosperity to EU and probably will become another bearish driving factor for EUR.
Although we also discuss short-term bullish scenarios on lower time frames, but monthly picture and recent COT data could make bullish scenarios just tactical without any extended perspective.
Weekly
Last week we've talked on possible breaking of normal bearish market mechanics by EUR. One example of this we have seen 2 weeks ago on daily chart, when we have put the start our upside trading on EUR. Here we have similar signs but of a bigger scale, since this is weekly time frame.
As you can see EUR has not dropped lower right to 1.05 lows as it should for normal bearish behavior, but stopped precisely at 5/8 Fib support. Previously we've mentioned that EUR keeps small downward swings equality very accurate, and if it breaks it - it should double it down, as it was on a way from 1.17 to 1.05 lows.
But this has not happened, instead of that EUR has formed "222" Buy pattern. It has not doubled downward swing, but formed AB-CD retracement instead. Thus, weekly chart suggests next target around 1.16 top. This is minor 0.618 AB-CD extension. Other targets stand above OB level, so they are not really interesting to us by far.
Second moment - is a trend line. On Brext voting EUR has broken it down, but take a look what is going on right now - it is returning right back to it. Trend has turned bullish on weekly chart. Currently it is still flirting with the line, but if it will show true return back - this will be strong bullish sign that will bring a lot of confidence with upside continuation.
But, as you can see unfortunately or may be fortunately (depending on your position, LOL), EUR has not returned back above trend line. Since weekly chart is rather big scale and real trend shifting here comes very slow - all patterns that we've discussed here are valid - "222" Buy and others.
Still, recent action mostly reminds re-testing of broken trend line, some kind of "Kiss goodbye". Currently weekly chart doesn't let us to say definitely what scenario we have, because to talk definitely on bearish trend - we need to get drop below 1.09 lows. But right now we have just one black candle near trend line. It absolutely doesn't excude yet potential breakout.
We just need to see how market treats Fed comments - either as long-term direction or just short-term reaction. Result will be different for weekly chart. That's why despite recent reaction on Yellen speech, technically bullish scenario has not been vanished yet totally, especially after poor NFP and ISM numbers.
Still, speaking in favor of bearish scenario - last three weeks give a hint on bearish sentiment among investors. It seems that market already is tuned on rate hike and values bad moments less than good moments for rate hike. As a result, within last 3 weeks trend has turned bullish but price action is not, market even shows shy decrease. This makes us think that may be indeed, bad data has short term impact on situation. Next important input will be on Fed September meeting, since their rethoric should be more clear on perspective of rate hike in December.
Thus, weekly picture mostly confirms that we've said above - bullish scenario has not vanished totally, but really feels some bearish pressure.
Daily
On Daily chart everything was fine in the beginning of the week. After poor ISM services EUR has started up on Tue with nice upside action and almost has reached our predefined target at MPR1. But this was only minimal target. Action that we saw on Thu and Fri is not very good for bullish perspective.
First of all, EUR wasn't able to break MPR1. And this suggests that current action up should be treated as retracement.
Second - if we suggest that EUR has touched neckline of reverse H&S pattern, we also can't call it as bullish sign, when market tests neckline and drop down, when it should break it. Grabber that has been formed on Fri is not very reliable, since it stands againts previous action. Personally, I do not like this kind of grabbers and very rare trade them.
Still, EUR still has chances to make upside breakout and reach our minimal target for this setup around 1.16 area. Our invalidation point stands the same - 1.11 lows. Only if EUR will break it down - this will be the end of the game for bulls. Right now EUR could, for example, form Butterfly "sell" pattern, as it it shown on 4-hour chart
4-hour
Recent drop mostly was triggered by agressive rethoric from Fed representatives. EUR has formed something like bearish engulfing or even H&S pattern and dropped down. Still, as we've said above it is nothing lost yet for bulls and EUR has chances to form, say, Butterfly:
Hourly
It could happen that market has made just 5/8 retracement and reached Agreement support around 1.12 area. Right now it has started bounce up out from there. It seems that EUR should bring clarity in this setup on next week. It will either destroy it totally, if it will drop right back down to 1.11 area, or re-establish move up. On Monday we should take a close look to 1.12 area. Downward breakout will not become a catastrophy yet, but brings nothing good to bulls. Normally, bullish market should hold on such strong support level.
Conclusion:
Last time we've said that support where market stands on monthly chart is very long-term and wide. Standing there could last for months or even years, and may be sometime upward action will happen there. And right now we see some hints on minor upward action. Still on a big scale EUR shows mostly bearish signs. Currently we can't talk on some very extended targets and better to treat current splash as tactical retracement yet.
In shorter -term perspective initial bullish pace has faded and market has turned to some choppy action. EUR still keeps theoretical chances on upside continuation, but we should keep an eye on major levels to not miss early signs of possible failure. Thus, on Monday we will monitor 1.12 level whether EUR will be able to hold above it.
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.
