Sive Morten
Special Consultant to the FPA
- Messages
- 18,644
Fundamentals
So, guys, it was rather interesting but at the same time dramatic week. Right now central banks stand in difficult situation. They can't disguise clear signs of economy improvement, especially in EU, but at the same time they need to do something to protect growth and do not limit it by preliminary currency growth.
In a period of global upside economy cycle developed countries want to get as big piece of this pie as possible. So they would like to sell goods. Especially this is crucial for Japan. It is much simpler to do with cheap currency. But it is too tough rival situation and now central banks try to smooth any trends, make them gradual and keep currency value balanced to each other.
Most difficult situation stands in US. From one point of view, they want stimulate export, long-term Trump plan with taxation and returning back major production power from abroad needs weak currency. Tax has been dropped, production cost with weak currency is lower.
At the same time US is a hostage of awful national debt burden. For weak currency investors will demands more yield and it will start to rise. Dropping of currency in relation to commodities and other currencies is a sign of hidden inflation growth, that is not shown yet by official statistics as CPI and PPI. Here is, take a look at 10 year US Treasuries yields - they stand at peak and has potential to rise to 3.3%. In fact, here huge reverse H&S pattern is forming. As CPI and PPI are lagging indicators - we will see result of this somewhere in summer as inflation could jump:
Rising yields make debt serving more expensive. Also US needs to keep strong dollar to keep leadership in world's currency turnover where US dollar is treated as "Globe" currency #1. US needs to keep attractiveness to US Treasuries.
On loosing their political force and dropping of US dollar makes other countries think about diversification. Thus, France, Japan and China already have given hint on contraction of their operations with US bonds.
Taking in consideration big restructuring plan by D. Trump and situation with US domestic yields makes me think that inflation could be significantly stronger, but we will see it in late summer probably. This could lead to revision of Fed policy in favor of more hawkish steps closer to an end of 2018 year. My opinion is D. Trump wants to make US in a kind of Canada - leave sphere of global dominating, be focused in domestic inner processes, make America works for Americans. This is long-term process, I think it could take 6-10 years. D. Trump will be a president for 2 terms, I suppose. First stage of this plan will be most difficult and painful for US, because they still have too large external expenses (Defense, on keeping of all infrastructure across the globe, different political funds, financing of opposition across the world etc). In fact, this huge debt has appeared as result of speculation by exceptional US and USD role in the world and uncontrolled political ambitions and their financing.
As soon as Trump will start to contract expenses - he will reduce debt. America will be strong financial center in the world, reach, attractive and stable, with happy citizens, but it will be aside from major political process that could change the face of a planet. As I said - something like Canada, or, say, Switzerland.
That's why, dollar weakness degree within 1-2 years could be outstanding. It is difficult to forecast this.
According to Reuters news, USB has changed their forecast on EUR:
UBS Wealth Management upgraded its six-month forecasts for the euro on Friday to $1.28, from $1.22.
ECB also doesn't want to suffocate green upside momentum by early rate hike. They need to give economy to warm up a bit. The same is about Japan. But they have lack of tools to do it, mostly verbal interventions is major tool in arsenal right now.
Besides, Europe take political steps to abandon long-term "protection hand" of big overseas brother. Although it would be more correct to call it as "occupation" with creation of Brussels controlling mechanism over whole Europe. As a result, EU citizen were lost their voice, their ability to decide something in the country where they live. Most recent example is refugees wave across the Europe, where their rights were put even higher than rights of Germans who live in Germany and other domestic citizens in other countries of old Europe - France, Italy, etc.All these stuff were put as obligatory legal act from Brussels and nobody asked Germans whether they want this or not. The same stands for different US military operations across the world in 90s-00s.
Now EU starts to make first steps to its real independence. Thus, they launch EMF (Europe Monetary Fund).
In his first New Year’s address, Emmanuel Macron vowed to “reinvigorate European ambitions” while appealing to the French public not to be swayed by “nationalists” or “sceptics”. Since his election, President Macron has placed considerable focus on greater European integration. A key part of Mr Macron’s vision focuses on the capacity of the European Stability Mechanism (ESM), or a new alternative body acting as a European Monetary Fund (EMF) to enhance the euro area’s resilience to future shocks. Fathom expects the ESM’s responsibilities to be expanded to help manage cases of sovereign insolvency and to complete some of the missing elements of banking union. Achievement of these reforms would be likely to increase confidence in the long-term viability of the euro area’s framework.
That's being said, in nearest 1-2 years we could see more aggressive Fed policy than it is anticipated right now. This also makes us be careful with technical picture that we have. Fundamentals overrule technical, and it could happen that we will not get support/resistance there where it should be by technical picture.
COT Report
Recent CFTC report shows that some amount of new longs has been opened last week. Now all data on EUR stands at all-time highs - as open interest as net long speculative position. Statistically, this stands in favor of correction, while outstanding situation also could happen, in a case if some historical breakout happens. In relation to our story, this could be, for example, due rebalancing of global portfolios if favor of EUR assets, adjusting of limits etc. This change could increase capacity of EUR futures market, and, as a result - ultimate levels of positions and open interest.
This happens before as well.
Anyway, sentiment analysis tells about strong bullish trend, but warns that EUR is overextended up.
Source:
Technicals
Monthly
So, last week a lot of bullish factors coincide in one time point and pushed EUR to new highs. Despite strong rally, EUR is not overbought yet on monthly chart but it comes in rather sticky resistance area. Actually, guys we're at monthly K-resistance 1.2516-1.26, accompanied by YPR1 @ 1.2617 area.
Add here sentiment situation with highly saturated long positions and you will get perfect area for retracement. At least this is definitely not an area for long entry, if you're a long-term trader.
Dollar Index, in turn stands at oversold and monthly 5/8 Fib support. So, most conservative retracement target is 1.20-1.21 area. This correction will be painless for overall bullish picture.
Weekly
Still, the fact that EUR has hit resistance doesn't mean that drop should start immediately. As you can see, monthly level is rather wide and EUR could spend some time inside of it, challenge highs and fading existing upside momentum.
On weekly chart EUR stands at Overbought but other patterns are the same as last week. On dovish Mnuchin speech, EUR has completed as AB-CD XOP extension as Butterfly 1.618 target. Another point in favor of bounce down. Trend stands bullish, but MACD shows hint on potential bearish divergence.
Daily
Trend here is bullish as well, price is at overbought either. Here we do not have much new since our last discussion. In fact, Friday session was inside one. All that we have here is just candlestick shooting star pattern, which indicates inability of the market to hold above 1.25.
There are two levels that potentially might be interesting - 3/8 1.23 and K-area @ 1.2150. We do not care about lower levels right now as they stand below Oversold area. In fact, or trading range for the week will be 1.2150-1.25.
Intraday
So, on 4-hour chart market has formed pennant, that potentially is bullish pattern. At the same time we have MACD Divergence at strong resistance area:
Still, Friday action shows that despite some reversal patterns were forming, EUR, DXY do not hurry to turn. It means that there are multiple patterns could be formed. Triangle or pennant consolidations keep door open, for, say, upside butterfly, some other patterns.
Taking in consideration existence of OB as on daily as on weekly, personally I'll be watching for "222" Sell pattern. This is a kind of compromise between upside action and reversal. Although it suggests some upside continuation but at the same time this is bearish continuation pattern. Another advantage that entry point will be just in 2 pips difference with top. Currently "222" pattern is particular interesting - although it could fail and shift to butterfly as we saw many times, but in current situation this is less probable as market stands at overbought.
Conclusion:
Long term technical picture shows that as EUR as DXY stands around strong monthly levels. This fact significantly increases odds of pullback in 1-2 months perspective. Still, it doesn't mean that retracement should happen immediately as monthly areas are rather wide and long-term. Before drop will start - EUR not once and may be not twice will try to proceed higher.
In short-term perspective situation is ready for retracement as well, but we do not have any clear reversal pattern yet, except shooting star candlestick on daily chart. Our view suggests that watching for "222" pattern is not bad idea...
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.
So, guys, it was rather interesting but at the same time dramatic week. Right now central banks stand in difficult situation. They can't disguise clear signs of economy improvement, especially in EU, but at the same time they need to do something to protect growth and do not limit it by preliminary currency growth.
In a period of global upside economy cycle developed countries want to get as big piece of this pie as possible. So they would like to sell goods. Especially this is crucial for Japan. It is much simpler to do with cheap currency. But it is too tough rival situation and now central banks try to smooth any trends, make them gradual and keep currency value balanced to each other.
Most difficult situation stands in US. From one point of view, they want stimulate export, long-term Trump plan with taxation and returning back major production power from abroad needs weak currency. Tax has been dropped, production cost with weak currency is lower.
At the same time US is a hostage of awful national debt burden. For weak currency investors will demands more yield and it will start to rise. Dropping of currency in relation to commodities and other currencies is a sign of hidden inflation growth, that is not shown yet by official statistics as CPI and PPI. Here is, take a look at 10 year US Treasuries yields - they stand at peak and has potential to rise to 3.3%. In fact, here huge reverse H&S pattern is forming. As CPI and PPI are lagging indicators - we will see result of this somewhere in summer as inflation could jump:
Rising yields make debt serving more expensive. Also US needs to keep strong dollar to keep leadership in world's currency turnover where US dollar is treated as "Globe" currency #1. US needs to keep attractiveness to US Treasuries.
On loosing their political force and dropping of US dollar makes other countries think about diversification. Thus, France, Japan and China already have given hint on contraction of their operations with US bonds.
Taking in consideration big restructuring plan by D. Trump and situation with US domestic yields makes me think that inflation could be significantly stronger, but we will see it in late summer probably. This could lead to revision of Fed policy in favor of more hawkish steps closer to an end of 2018 year. My opinion is D. Trump wants to make US in a kind of Canada - leave sphere of global dominating, be focused in domestic inner processes, make America works for Americans. This is long-term process, I think it could take 6-10 years. D. Trump will be a president for 2 terms, I suppose. First stage of this plan will be most difficult and painful for US, because they still have too large external expenses (Defense, on keeping of all infrastructure across the globe, different political funds, financing of opposition across the world etc). In fact, this huge debt has appeared as result of speculation by exceptional US and USD role in the world and uncontrolled political ambitions and their financing.
As soon as Trump will start to contract expenses - he will reduce debt. America will be strong financial center in the world, reach, attractive and stable, with happy citizens, but it will be aside from major political process that could change the face of a planet. As I said - something like Canada, or, say, Switzerland.
That's why, dollar weakness degree within 1-2 years could be outstanding. It is difficult to forecast this.
According to Reuters news, USB has changed their forecast on EUR:
UBS Wealth Management upgraded its six-month forecasts for the euro on Friday to $1.28, from $1.22.
ECB also doesn't want to suffocate green upside momentum by early rate hike. They need to give economy to warm up a bit. The same is about Japan. But they have lack of tools to do it, mostly verbal interventions is major tool in arsenal right now.
Besides, Europe take political steps to abandon long-term "protection hand" of big overseas brother. Although it would be more correct to call it as "occupation" with creation of Brussels controlling mechanism over whole Europe. As a result, EU citizen were lost their voice, their ability to decide something in the country where they live. Most recent example is refugees wave across the Europe, where their rights were put even higher than rights of Germans who live in Germany and other domestic citizens in other countries of old Europe - France, Italy, etc.All these stuff were put as obligatory legal act from Brussels and nobody asked Germans whether they want this or not. The same stands for different US military operations across the world in 90s-00s.
Now EU starts to make first steps to its real independence. Thus, they launch EMF (Europe Monetary Fund).
In his first New Year’s address, Emmanuel Macron vowed to “reinvigorate European ambitions” while appealing to the French public not to be swayed by “nationalists” or “sceptics”. Since his election, President Macron has placed considerable focus on greater European integration. A key part of Mr Macron’s vision focuses on the capacity of the European Stability Mechanism (ESM), or a new alternative body acting as a European Monetary Fund (EMF) to enhance the euro area’s resilience to future shocks. Fathom expects the ESM’s responsibilities to be expanded to help manage cases of sovereign insolvency and to complete some of the missing elements of banking union. Achievement of these reforms would be likely to increase confidence in the long-term viability of the euro area’s framework.
That's being said, in nearest 1-2 years we could see more aggressive Fed policy than it is anticipated right now. This also makes us be careful with technical picture that we have. Fundamentals overrule technical, and it could happen that we will not get support/resistance there where it should be by technical picture.
COT Report
Recent CFTC report shows that some amount of new longs has been opened last week. Now all data on EUR stands at all-time highs - as open interest as net long speculative position. Statistically, this stands in favor of correction, while outstanding situation also could happen, in a case if some historical breakout happens. In relation to our story, this could be, for example, due rebalancing of global portfolios if favor of EUR assets, adjusting of limits etc. This change could increase capacity of EUR futures market, and, as a result - ultimate levels of positions and open interest.
This happens before as well.
Anyway, sentiment analysis tells about strong bullish trend, but warns that EUR is overextended up.
Source:
Technicals
Monthly
So, last week a lot of bullish factors coincide in one time point and pushed EUR to new highs. Despite strong rally, EUR is not overbought yet on monthly chart but it comes in rather sticky resistance area. Actually, guys we're at monthly K-resistance 1.2516-1.26, accompanied by YPR1 @ 1.2617 area.
Add here sentiment situation with highly saturated long positions and you will get perfect area for retracement. At least this is definitely not an area for long entry, if you're a long-term trader.
Dollar Index, in turn stands at oversold and monthly 5/8 Fib support. So, most conservative retracement target is 1.20-1.21 area. This correction will be painless for overall bullish picture.
Weekly
Still, the fact that EUR has hit resistance doesn't mean that drop should start immediately. As you can see, monthly level is rather wide and EUR could spend some time inside of it, challenge highs and fading existing upside momentum.
On weekly chart EUR stands at Overbought but other patterns are the same as last week. On dovish Mnuchin speech, EUR has completed as AB-CD XOP extension as Butterfly 1.618 target. Another point in favor of bounce down. Trend stands bullish, but MACD shows hint on potential bearish divergence.
Daily
Trend here is bullish as well, price is at overbought either. Here we do not have much new since our last discussion. In fact, Friday session was inside one. All that we have here is just candlestick shooting star pattern, which indicates inability of the market to hold above 1.25.
There are two levels that potentially might be interesting - 3/8 1.23 and K-area @ 1.2150. We do not care about lower levels right now as they stand below Oversold area. In fact, or trading range for the week will be 1.2150-1.25.
Intraday
So, on 4-hour chart market has formed pennant, that potentially is bullish pattern. At the same time we have MACD Divergence at strong resistance area:
Still, Friday action shows that despite some reversal patterns were forming, EUR, DXY do not hurry to turn. It means that there are multiple patterns could be formed. Triangle or pennant consolidations keep door open, for, say, upside butterfly, some other patterns.
Taking in consideration existence of OB as on daily as on weekly, personally I'll be watching for "222" Sell pattern. This is a kind of compromise between upside action and reversal. Although it suggests some upside continuation but at the same time this is bearish continuation pattern. Another advantage that entry point will be just in 2 pips difference with top. Currently "222" pattern is particular interesting - although it could fail and shift to butterfly as we saw many times, but in current situation this is less probable as market stands at overbought.
Conclusion:
Long term technical picture shows that as EUR as DXY stands around strong monthly levels. This fact significantly increases odds of pullback in 1-2 months perspective. Still, it doesn't mean that retracement should happen immediately as monthly areas are rather wide and long-term. Before drop will start - EUR not once and may be not twice will try to proceed higher.
In short-term perspective situation is ready for retracement as well, but we do not have any clear reversal pattern yet, except shooting star candlestick on daily chart. Our view suggests that watching for "222" pattern is not bad idea...
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.
