FOREX PRO WEEKLY, September 28-01, 2015

[Sive Morten]

Fundamentals

Reuters reports dollar hit its highest in over five weeks against a basket of major currencies on Friday, a day after Federal Reserve Chair Janet Yellen said she expected the central bank to hike rates in 2015, and after U.S. growth data appeared to support such a move.

In a speech late Thursday, a week after the Fed delayed a long-anticipated rate hike, Yellen said she and other U.S. central bank policymakers do not expect recent global economic and financial market developments to significantly affect policy.

The comments surprised analysts since the Fed kept interest rates unchanged partly in a bow to worries about the global economy.

"The Yellen remarks yesterday were indeed a fairly elaborate attempt to explain why rates will go up before the end of the year," said David Gilmore, partner at Foreign Exchange Analytics in Essex, Connecticut.

Commerce Department data on Friday showed U.S. gross domestic product rose at a 3.9 percent annual pace in the second quarter, up from 3.7 percent reported last month.

The data supported the case that the U.S. economy may be able to withstand a rate hike.

The dollar index, which measures the greenback against a basket of six major currencies, hit 96.700 after the GDP data, its highest since Aug. 19. The index was on track for a weekly gain of about 1.4 percent, its strongest since mid-July.

The dollar hit its highest in over two weeks against the Japanese yen of 121.240 yen.

The greenback hit a more than six-week high against the Swiss franc of 0.98420 franc earlier in the session. While the euro slipped against the dollar after two straight days of gains, it remained within recent ranges and did not break below a more than two-week low of $1.11050 touched on Sept. 23.

Lingering skepticism surrounding the view that the Fed would hike rates this year capped the dollar's gains, analysts said.

"The theme is indecision," said David Rodriguez, senior strategist at FXCM in New York.

Recent CFTC data shows interesting data. Total open interest has dropped, but the core stands not around speculative positions. Yes, we see drop in speculative longs and flat standing of short positions, but take a look at commercials short - they have dropped for 2 times last week, ~ for 100K contracts. Each contract, guys, 125K EUR... Somebody has closed a lot of shorts at the eve of Fed meeting. This could explain solid rally that we've seen at that moment. But this is only the half of the story. The major one stands with trend. As you know hedgers accumulate positions against the trend. As short positions has been closed significantly it means that hedgers expect starting of bearish trend on EUR. This is important.

Open Interest:

Longs:

Shorts:

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Commercial shorts:

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Technicals

Monthly
Today, guys, we will provide specific type of analysis and make an attempt to clarify what is going on on EUR and what to expect. We will turn to cross-market analysis, since EUR has a bit mixed signs and does not show clear direction. As a result of this cross market analysis we will get better understanding of situation. We have talked about this way of analysis in our Forex Military School, but somehow traders very rare use it and we think that this is mistake. Analysis of monthly time frame will be enough for us...
First, we will start with Dollar Index. Our journey here has started in far 2011, our mature members should remember this discussion, when we've anticipated long-term dollar appreciation. It was based on quarterly stop grabber right at the bottom of huge Gartley "222" Buy" pattern.
Right now we see that this rally comes to an end or at least to logical objective point. After it will be reached, dollar could turn to long-term consolidation or retracement. But what about EUR you may ask?

Take a look that market has completed DRPO "Sell" but right now it stands under the hazard of failure by 2 reasons. First one is monthly stop grabber that suggests upward continuation and DRPO Failure. As we know DRPO "Failure" is directional pattern either that cancels direct signal and calls us to take opposite position.
Second - AB-CD pattern. Market already has moved above 1.0 extension but has not reached yet 1.618. Odds suggest that before any solid action market should hit the target. As you can see Dollar Index points on further dollar appreciation. It means that EUR/USD action should be bearish. Let's go further...

Next chart is monthly chart of Gold but in EUR. By the end of September we could get bullish grabber that suggests solid appreciation of gold against the EUR:

This also tells about possible weakness on EUR. From this standpoint, recent CFTC data looks absolutely logical. Finally, let's go to EUR directly:

Last time we've discussed three moments - DRPO, flag and grabber.


So, DRPO... situation becomes clear It looks curious and 90% this is not DRPO. We have no recognizable second bottom as usually it should to, also we have this untypical spike up that confuses the idea and market mechanics of DRPO.

Overall shape mostly reminds bearish flag and logically it better agrees with all this stuff that now stands in EU.

Finally on monthly chart we have another issue - possible bearish grabber that could be formed in September. Now price is crossing MACDP line but the major question what will be close price. Thus, except suspicious DRPO we have no bullish patterns here.

It means that next possible target @1.22 currently stands under question. It should follow from DRPO, but due to the reasons that we've placed above, we can't rely on it.

Finally despite the depth of current upside retracement, we still will treat it as bounce, if even EUR will reach 1.20-1.22 area. Market too long stands in downward action, especially during recent year and market has solid bearish momentum. Also take a look at butterfly pattern. Here we see definite acceleration right to 1.27 target point. Usually it leads market to next 1.618 target after retracement.

That's being said monthly analysis mostly tells that even phantom bullish patterns, such as mentioned DRPO gradually disappears as a smoke and bearish context crystals better. Grabber has target at 1.04 lows but our opinion that this will be a road to parity...

Weekly

By letter guys, we have bullish trend here. But recent action, market mechanics tells that something has broken in this bullish mechanism. After market has completed upside AB=CD pattern and hit overbought - we've got logical retracement down.
But take a look what has happened next. EUR was not able to re-establish upside action. Market already was out from overbought burden, and couldn't continue move higher. Last week EUR has dropped below MPP.

That's being said may be overall setup theoretically is bullish. At the same time overall action, especially in recent time looks poor. Final confirmation of bearish breakout will happen when trend will shift to bearish and market will move below 1.08 lows around MPS1.

Daily

Mostly guys, we already have discussed all important issues on daily chart in our updates last week. Right now trend stands bearish, but the moment of truth probably will come around 1.10 area. This is a clue to next action. Bearish breakout will open the road to the sequence of targets - 1.08, 1.04 and parity. While if market will hold above it - it could move higher inside the flag for some time more. But to be honest guys, I do not believe too much in this scenario.
Also, do not expect that market will move through 1.10 as knife through butter. Probably not. This will be oversold, accompanied by Fib support and trend line. Breakout will be difficult and market be EUR will challenge this level not once or even twice.
Since we do not have bullish setup, because trend is bearish - we can't take long-term bullish position right now (and personally I do not want to do it). Taking short also looks a bit early - it will be safer to wait till the end of the month when we will get (or will not get) multiple grabbers, may be 1.10 breakout. And then with confidence we could focus on short entry here.
EUR right now could interesting only of intraday trading probably. On daily it is a time of big expectation.

4-hour

As EUR has not completed this setup in time on Friday, we will continue to watch for 1.10 area breakout. Recall what we've said in last update - market has not quite completed 0.618 AB-CD target, if you use absolute top as "A" point. That's being said, the way how market will touch it could tell us a lot. If this will be some kind of W&R action - market will grab the target and jump up immediately, this could lead to upside continuation. While touching the target and standing below it will increase chance on breakout of 1.10. Because market will be below 0.618 target and next one is 1.0 that stands below 1.10. This will become important moment on coming week.

Conclusion:
Despite multiple tactical scenarios on intraday charts, long-term picture turns to bearish for EUR. If we will get all these grabbers that we've mentioned in research - chances on reaching parity will increase significantly.

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.

 

[Sive Morten]

Good morning,

Reuters reports today - the yen firmed broadly on Tuesday as a sharp selloff in global equities sent investors into safer assets and took a heavy toll on commodity currencies.

Worries about the health of the Chinese economy grew after industrial firms suffered their biggest profit drop in four years.

Mixed messages from Federal Reserve officials about the likely timing of a hike in interest rates didn't help.

The MSCI's broadest gauge of world stocks fell to a two-year low on fear that many firms, especially those in the resource sector that had thrived on strong demand from China, might need a major downsizing to deal with lower growth.

"Everybody is looking at stock prices for trading clues. Those who usually love to look at interest rate gaps are also watching stocks," said Masatoshi Omata, senior client manager at Resona Bank.

Commodity currencies were particularly hard hit, further undermined by a tumble in base metals and oil prices.

The Australian dollar found itself below 70 U.S. cents again , falling to as low as $0.6946, within reach of 6 1/2-year low of $0.6892 hit three weeks ago. It last stood at $0.6950, down 0.5 percent on the day.

Its Canadian peer flirted with an 11-year trough of C$1.3417 hit last week, last trading at C$1.3407 .

The latest comments from Fed officials clouded the outlook for a 2015 rate lift-off.

William Dudley, head of the New York Fed, and John Williams, head of the San Francisco Fed, both signaled support for a hike this year but Charles Evans, head of the Chicago Fed, called for rates to stay near zero until mid-2016.

All in all, the Fed is seen as on course towards pulling the trigger and when it finally does deliver its first hike in nearly a decade, analysts said the focus will shift to how quickly it will normalise its monetary policy.

"If Fed lift-off is imminent, there is scope for short-term volatility, and this Friday's U.S. non-farm payroll data presents some event risk, especially if it is seen to rule out, or confirm, an October hike," analysts at ANZ wrote in a note to clients.

"While we wouldn't discount this, the reality for markets is that it is more the pace, than the specific timing of hikes, that matters, with a gradualist Fed expected to cap upward pressure on Treasury yields."

With market focus on commodities and fallout from slowdown in China, the euro took a back seat, moving little against the dollar, at $1.1253 .

So, today we will make just shy update on EUR. Market on higher time frames really looks heavy and it seems that bearish breakout is just a question of time, but anyway we need to get confirmation before will take any activity in south direction.
On weekend we've said that our major target is 1.10 area. As soon as market will break it down we will get freedom with planning bearish trades. That's why, trading EUR down right now stands a bit beyond of our strategy here, but it is not forbidden either.
On daily chart market still stands if minor upside retracement. Trend holds bearish here. Market has chance to create bearish grabber today-tomorrow, as MACDP line stands very close. IF we will get it - this will be valuable add-on to our bearish expectatisons

On 4-hour chart we've planned to see butterfly "Buy", but as market has shown fast candle up it could shift to "222" Sell pattern. Area around WPR1 will be solid resistance and includes also AB=CD target, 1.618 minor AB-CD and major Fib resistance:

May be upside action could take the shape of butterfly as well:

That's being said - we mostly wait for 1.10 breakout to get confidence and start thinking on going short. But if you would like to trade it down right now - think about this resistance level. Just don't forget about moving stop to breakeven as soon as market will show respect to this resistance by retracement down.
Also, if EUR will break bearish context, move through this resistance and shift daily trend to bullish - you will have to close your short position.

 

[Sive Morten]

Good morning,

Reuters reports today demand for the safe-haven yen eased early on Wednesday as global stocks steadied from a rout and some semblance of calm returned to markets, but traders said month-end and quarter-end flows meant that volatility is likely to remain a feature.

The dollar fetched 119.86 yen , having turned around from a low of 119.24. The euro stood at 134.82 yen , off Tuesday's trough of 134.24. The Australian dollar was back near 84.00 yen , up from a three-week low of 82.76.

The yen showed limited reaction to data showing Japan's industrial output fell unexpectedly in August.

But some market players think a weak reading in the Bank of Japan's tankan corporate sentiment survey due on Thursday could heighten expectations of BOJ stimulus and could weaken the yen further.

U.S. stocks managed to end higher in a choppy session on Tuesday and their futures extended those gains in Asia on Wednesday, helping to lift Asian shares after their hammering on Tuesday.

Financial markets have been unsettled by worries about slower Chinese economic growth, and in turn the health of the global economy, combined with uncertainty over the timing of a hike in U.S. interest rates.

A meltdown in Glencore stocks on Monday highlighted jittery nerves, although shares in the Swiss-based trader and miner managed a rebound on Tuesday.

Some traders also pointed to an encouraging improvement in U.S. consumer sentiment and euro zone economic sentiment as well as a bigger-than-expected interest rate cut in India as factors helping soothe markets.

Against the greenback, the common currency bought $1.1245 , off a high of $1.1282. As a result, the dollar index <.DXY> has drifted up to 95.886, from a low of 95.708.

Yet, it remained well off a one-month peak of 96.700 set on Friday after Federal Reserve Chair Janet Yellen left the door open to a U.S. rate hike later this year.

A string of Fed speakers since then have also made clear the Fed is closer to delivering its first hike in nearly a decade, though the timing of such a move remained unclear.

Traders said U.S. nonfarm payrolls due on Friday could help strengthen, or weaken, the case for a 2015 lift-off. In any case, the outcome of the report should set the tone for the dollar.

The market will also be keeping an eye on Yellen, who is due to give welcome remarks at a conference at 1900 GMT Wednesday, though no Q&A session is planned.

"If she wants to clarify anything, post this bout of risk aversion, then she may tweak the message from last Friday," said Emma Lawson, senior currency strategist at National Australia Bank.

So, while we're waiting retracement on Cable, let's talk on EUR again. Here we have minor changes but still they exist. On daily chart overall upward action starts to take the shape of some consolidation - flag or small wedge. Other words it mostly looks bearish. In currenc circumstance, personally, guys, I would take bet on bearish breakout rather than on bullish reversal.
Still, for traders on weekly/daily basis - wait, because weekly trend is bullish. For daily/intraday traders - context is bearish, but we still need to wait for some important moments.

On 4-hour chart we've discussed 2 scenarios - either completion of AB=CD and reaching resistance around WPR1 or immediate turn down. Today probably we wll get the answer. In nearest hours we will be watching for trend here in general and possible grabber in particular. Thus, if grabber will be formed, then our next step will be waiting for WPR1.

If not and trend will shift bearish then take a look at hourly chart:

If this will happen - market will destroy short-term bullish scenario - erase butterfly, break triangle shift 4-hou trend bearish, move below WPP and erase grabber. IF this will happen - we will be able to think about bearish position here.

That' being said, we wait either reaching of WPR1 then trend shifting or breaking through WPP and also trend shifting before taking bearish position.

 

[Sive Morten]

Good morning,

Recent comments from Reuters - dollar firmed on Thursday after China manufacturing surveys were just a smidgen better than some had expected, but gains were limited as caution prevailed ahead of key U.S. jobs data on Friday.

The euro remained under pressure after a downbeat eurozone inflation report, while the yen faced mixed signals after Bank of Japan's tankan corporate sentiment survey contained both positive and worrying signs.

But the China surveys were the session's main event. The final Caixin/Markit China Manufacturing Purchasing Managers' Index (PMI) edged down to 47.2 in September, slightly up from a preliminary reading of 47.0, but still marking its lowest reading since March 2009 and a deterioration from August's 47.3.

China's official PMI released separately inched up to 49.8 in September from the previous month's reading of 49.7, though it still showed contraction for the second straight month.

"The China readings were almost flat, not really an improvement, but a few people might have used the figures as an excuse to increase dollar-long positions with China closed today," said Masashi Murata, currency strategist for Brown Brothers Harriman in Tokyo.

China began its one-week string of National Day holidays on Thursday.

"The big picture is still that the outlook for the global economy remains very subdued, mainly due to weak Chinese growth," Murata said.

The dollar index which measures the greenback against a basket of six rival currencies, was up about 0.1 percent at 96.395.

The yen largely shrugged off mixed signals from the BOJ's closely watched tankan survey showing that confidence at big Japanese manufacturers worsened, leading some to bet that the central bank could take further stimulus steps. But service-sector sentiment improved for the fourth straight quarter to hit the highest level in more than two decades.

Market attention was locked on to the China surveys after the U.S. Federal Reserve opted to refrain from raising interest rates for the first time since 2006 at its meeting last month, citing worries about the global economy, particularly China.

But some investors believe that an improving U.S. employment situation could prompt the central bank to hike as early as this month.

Economists expect Friday's U.S. nonfarm payrolls report to show that employers added 203,000 jobs in September, according to a Reuters poll.

The latest ADP data released overnight supported these expectations, showing U.S. private-sector employers added 200,000 jobs.

Against the dollar, the euro shed about 0.2 percent to $1.1151 , and also slipped about 0.1 percent to 134.03 yen .

Eurozone prices fell by 0.1 percent on an annual basis in September, falling short of expectations and well below the European Central Bank's target of just under 2 percent. That raised expectations that the ECB might decided to take further easing measures.

If the European Central Bank decides to extend its asset-purchase programme in response to global growth risks and flatlining inflation, it could hit its self-imposed limits on bond ownership in several countries within a year.

Analysts say this would happen first in Portugal and Finland, followed closely by the most important euro zone member, Germany.

The limits on individual bond holdings, set by the ECB to avoid becoming mired in any future debt restructurings, were raised for most government bonds to 33 percent from 25 percent earlier this month.

Other factors defining how long the ECB could extend QE include a ban on holding more than a third of any country's government debt and the fact that bonds must be bought in proportion to each country's contribution to the ECB's capital.


If the ECB hits those limits in Germany, it could, in theory, buy other low-risk German assets such as corporate debt or government agency debt.

And if even more easing were necessary, analysts say the ECB would simply scrap the limits on the German assets it can buy.

But would the ECB take a similar decision in junk-rated Portugal, or would it simply leave a country it has publicly praised for its economic reforms out of a stimulus programme?

If Portugal, which had to be bailed out in 2011 needs to restructure its still onerous debt in the foreseeable future, the ECB would find it hard to avoid any losses if it held more than a third of its debt.

"The limits are important. The higher the share of the market you own the more problematic it becomes to engineer a restructuring if needed down the line," said Luca Cazzulani, rate strategist at UniCredit, who estimates the limit would be reached in Portugal as soon as the current trillion-euro QE programme ends in September 2016.

"This is the trade-off, but I don't know where they would put themselves in this trade-off."


CREDIBILITY

Working out how long extended QE might last is difficult. Analysts must make assumptions on the future price of the bonds and the pace of government debt issuance, among others. Bonds from Italy, Spain or Portugal that the ECB bought at the height of the crisis under a previous scheme called the Securities Markets Programme (SMP), which count toward the totals, further complicates the picture.

Cazzulani, who does not include future debt issuance in his estimates, says the ECB could buy German debt for seven more months at today's 60 billion euros per month pace after the current scheme ends.

Citi strategists, who assume no change in the pace of debt issuance but do not include SMP purchases, say extended QE would first run into ECB limit in Finland, then in Germany, at around the same time in October 2017.

That may seem as a long way off, but ratings agency Standard

& Poor's has said it expects QE to reach 2.4 trillion and be extended to mid-2018.

If the limit were reached in Finland or Portugal, "they would fudge it", says Harvinder Sian, global head of G10 rates strategy at Citi. "These countries are not systemically important."

In practice, they would probably slow down bond purchases in these countries before the limit was reached.

In the end, discussion of limits on QE, which risk leaving the ECB without ammunition, may be academic.

"If the ECB wants to do it, they will do it and ignore any of the previous limits they previously imposed on themselves," said Marius Daheim, senior fixed income strategist at SEB.

"If they feel it really is economically necessary to expand QE they will not back off just because it would violate 25 or 33 percent buying restrictions. That could be the maximum loss of credibility they could impose on themselves."

The Australian dollar was up 0.6 percent at $0.7058, well above this week's low of $0.6984, extending gains after the Chinese surveys. China is a key export market for Australia's resources, and is often a proxy for China plays.

So, guys, EUR has confirmed our suspicions on its weakness. Major breakout has not happened yet, but we already have got bearish monthly grabber on EUR and DRPO Failure on Dollar Index. Both these patterns suggest dollar streighten in long-term perspective. Besides, ADP report was really good and having 95% correlation, NFP also should not be dissapointed. Finally, today we will keep an eye on Draghi. If any hint will be given on possible QE expanding, this probably will be bearish for EUR.

On daily chart trend is bearish, market is coming back to 1.10 support area. It tells that recent upside action mostly was a retracement and reaction on reaching 0.618 AB-CD extension. Next logical target is AB=CD and 1.618 Butterfly - they are identical. EUR stands below as WPP as MPP (although today we have new October one, but I've drawn still September pivot).

On 4-hour chart trend has turned bearish. Market has erased our minor AB-CD and hardly will continue with large AB-CD. Recent acton takes the shape on some flag. Here we will watch for upside bounce with attempt to sell it and take short position:

Here are levels that we will use. Most attractive area is K-resistance around former low and pivot. Since volatility could rise, chances that EUR will reach it are not bad:

 

[Sive Morten]

Good morning,

Reuters reports today dollar trod water against the yen and euro on Friday as investors were wary ahead of the U.S. non-farm payrolls report, which could influence chances of the Federal Reserve raising interest rates before year-end.

Economists expect U.S. nonfarm payrolls data, due later in the global day, to show that employers added 203,000 jobs in September, according to a Reuters poll.

"Fed Chair Yellen has already mentioned that labour conditions are improving and hinted that developments overseas, notably in China, and prices were chief concerns," said Shinichiro Kadota, chief Japan FX strategist at Barclays in Tokyo.

"A very bullish report would of course have a big impact. But the Fed may not make its rates decision on employment data alone," he said.

Some analysts saw commodity currencies showing a potentially bigger response to the U.S. jobs data than the majors, which have been trapped in narrow range all week.

"Currencies like the Australian, New Zealand and Canadian dollars could see bigger swings against the dollar. 'China risk' has already put these currencies on the defensive, and they would look even more vulnerable if the employment data improve prospects of a U.S. rate hike," said Junichi Ishikawa, a market strategist at IG Securities in Tokyo.

The Canadian dollar hovered near two-week highs scaled overnight thanks to a surge in prices of crude, a major export commodity for Canada.

Ahead of the U.S. jobs data the Australian dollar dipped 0.1 percent to $0.7021 , nudged off a one-week high of $0.7085 scaled the previous day when a release of Chinese manufacturing activity was not as bad as feared.

The Aussie was on track to lose about 1.5 percent this week. The currency, often used as a proxy for China trades, hit a 6-year low of $0.6892 in September when a meltdown in the Chinese stock market fanned fears of a global economic slowdown.

On daily EUR we do not big shifts yet. Trend is still bearish. All that we've said yesterday on our expectations on daily chart is still valid.

Most important for us today are 4-hour and hourly charts. On 4-hour market has shown uspide retracement that we've discussed yesterday and it has to be used for short entry. But unfortunately it has happened in the night (at least in Europe) so, not everybody has used this chance probably. That's why we will try to apply Minesweeper "B" DiNapoli tactic for entry.
Market has failed to pass through WPP and formed multiple bearish grabbers as well:

Right now we need just most recent small swing down for entry on hourly chart:

Trend is bearish on all time frames, we also have bearish patterns on our back. All that we need is just catch minor retracement on hourly chart for short entry. But again - be aware of NFP data. Following ADP report it should be positive, but who knows... This will be major risk for us today...

 

[cosmos]

Sive, we still have that possible DRPO Buy on the Monthly chart to consider as well, yes?

 

[Sive Morten]

Sive, we still have that possible DRPO Buy on the Monthly chart to consider as well, yes?

Hi Cosmos,
We have neccesary closes around 3x3DMA but by market mechanics it is not Double Repo by many signs. We've mentioned this in our weekly researches.
BTW, what we really have is monthly bearish grabber. So, it seems that destination is parity. At least until grabber will be valid.
Taking in consideration that ECB takes decision on widening QE program, parity looks reasonable.