Sive Morten
Special Consultant to the FPA
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- 18,702
Fundamentals
This was short week, guys, due Thanksgiving celebration and number of events also was small. Next week process should be more interesting. So, today we mostly discuss some common thoughts around FX market and EUR in particular.
Despite holiday sentiment, we still have got some statistics and continues talks around US/China agreement.
As Reuters reports - The dollar rose against a basket of currencies on Wednesday on upbeat U.S. data in subdued trading as uncertainty about a possible U.S.-China trade deal lingered during a U.S.-holiday shortened week.
U.S. economic growth picked up slightly in the third quarter, rather than slowing as initially reported, on a stronger pace of inventory accumulation and a less steep decline in business investment. Separate data showed new orders for key U.S.-made capital goods increased by the most in nine months in October and shipments rebounded.
“The dollar is definitely supported by the data,” said Alfonso Esparza, senior currency analyst at OANDA in Toronto. “The Fed has signaled that is done for the year and good data validates that thinking,” he said. “The other thing is that this is basically the end of the week for U.S. markets and no one wants short dollar exposure going into the Thanksgiving weekend,” Esparza said.
The index pared gains after U.S. data, excluding volatile food and energy components, showed the personal consumption expenditures (PCE) price index edged up 0.1% last month after being unchanged in September.
“A 0.1% m/m rise in the core PCE deflator left the Fed’s preferred core inflation rate at a well below-target 1.6%. That underlines that interest rates are unlikely to be raised again for the foreseeable future,” said Andrew Hunter, senior U.S. economist at Capital Economics.
While recent reports that the United States and China are close to agreement on the first phase of a trade deal have helped support risk sentiment, much uncertainty remains about the outlook for the trade talks.
Lingering trade tensions have generally supported the greenback as investors view the United States as relatively well-positioned to weather a full-blown trade war.
Sterling was up 0.31% on Wednesday, recovering from early losses following the third poll in a row that showed a narrowing lead for the governing Conservative Party before Britain's Dec. 12 election. Investors awaited the release of the YouGov seat-by-seat predictions of the election outcome. Last time the multilevel regression and post-stratification model accurately predicted the 2017 hung parliament.
Sterling briefly touched near seven-month highs against the euro on Thursday on a poll predicting a comfortable election victory for the ruling Conservatives, then slipped to end the day marginally lower. British Prime Minister Boris Johnson is on course to win a majority of 68 in parliament, according to a model from pollsters YouGov.
Sterling “will rally further if Wednesday’s poll from YouGov ... is confirmed on Dec. 12,” Stephen Gallo, currency strategist at BMO Capital Markets, said, referring to election day. Though he noted that an increase in the pound “from here is rather limited, with risks during the Brexit transition now being considerably underpriced by the FX market.”
The Conservatives could win 359 seats out of 650, up from 317 in the 2017 election and the best result for the party since Margaret Thatcher’s 1987 victory, according to YouGov’s model. Following the poll, the likelihood of a Conservative majority rose to 67.5% from 63%, according to odds from betting agencies, while the probability of a hung parliament - in which no party has a majority - fell to 28% from 32%.
Michael Hewson, chief market strategist at CMC Markets, said that he expects the pound to trade in the $1.27-$1.30 range until the election result is announced.
A Conservative majority could see the pound head towards $1.40, he said, as markets are not fully pricing in the Conservative lead shown by pre-election polls.
Commerzbank FX strategist Thu Lan Nguyen said that she would expect a rally in the pound if the Conservatives won a majority, because “there is still some scepticism about the polls”.
Once US was out from holiday on Friday - the euro hovered around its lowest levels for this month as the dollar held its poise on hopes that the United States and China would be able defuse their damaging tariff war with a preliminary trade deal.
The U.S. currency also gained from data showing the world’s biggest economy is on a firm footing, which prompted investors to scale back their rate-cut bets.
U.S. economic growth picked up slightly in the third quarter, data showed on Wednesday, in contrast to other indicators pointing to a slowdown in global activity.
The Federal Reserve also flagged an upbeat outlook amid signs of labour market strength and a possible turnaround in business investment.
That prompted a pullback on rate cut bets for this year and next, with the market now pricing in a 5% chance the Fed will hike rates next month and most expecting it to hold steady.
Still, “any euphoria related to this is likely to be limited,” said Thu Lan Nguyen, a currency analyst at Commerzbank, noting that the rise is due to the change in the calculation methodology.
Members of the European Central Bank are discussing the potential for a new definition of the inflation target, which now stands at below, but close to 2%.
Nerves persisted within markets as traders navigated a blizzard of trade war headlines that offered few clues as to when or how a truce might be agreed between Washington and Beijing.
China has vowed to impose “firm countermeasures” after U.S. President Donald Trump’s approval of a bill backing Hong Kong’s pro-democracy protesters on Wednesday, but is yet to indicate whether they would have any bearing on trade talks.
Negotiators between the world two biggest economies have been trying for weeks to hammer out a ‘phase 1” trade deal, with markets hoping an agreement could be signed before year-end.
“There seems to be pretty good optimism around the trade talks going on between U.S. and China,” said William O’Loughlin, a portfolio manager at Rivkin Securities in Sydney. “Though as we know that can change on a dime...the rally doesn’t feel like a euphoric, super-bullish rally, it does feel like climbing the wall of worry.”
Indeed reaction was short term as dollar gave up early gains to trade slightly lower on the day against a basket of currencies on Friday. This mostly confirms what we've said about US/Sino saga - as longer it lasts as smaller reaction of the market will be on any news until final signing or failure.
Another thing that we rare mention here is market volatility. As we do not trade options, this useful analysis tool plays limited role in our view, but now we have absolutely unique situation when volatility stand at long-term lows. It is important, because low volatility is a sign of coming strong action, although it doesn't tell when this action should happen. As a rule, volatility is rising on falling market or wide whipsaw market, while shows gradual decrease on upside rally after major collapse. This is because of greed and fear. Fear is stronger and acts faster. This is the reason why any collapse is few times faster than any rally, which is driven by greed and develops slowly.
Following this logic, who knows, may be we are at the eve of EUR/USD drop... Volatility is relative indicator, not direct and it should be viewed in overall context. Currently we do not have strong reasons to suggest EUR/USD collapse, but they could appear and we should be prepared to this.
Trading ranges in the euro/dollar pair this week were the narrowest in 20 years, falling to around 20 pips on Monday, analysts at Nordea pointed out.
And implied euro/dollar volatility, calculated using option prices on a three-month horizon, is trading at 4.27%, the lowest on record, having fallen from 7.16% in January.
One-year volatility — or vol in traders’ parlance, is also at a record low of 5.48%, down two percentage points this year . Market participants reported relentless demand to sell options which are often used to hedge against unexpected currency moves. The renewed euro-dollar vol slump has taken a forex volatility index near record lows hit in April at 5.48%
This week, guys, we do not have CFTC data as it will be released on Monday, but Fathom consulting prepared fresh report on China economy situation, which mostly confirms our view that China care greater hurt in this war and more depends on trade peace rather than US. Here is some extracts from report:
Fathom’s underlying measure of economic activity in China, the CMI 2.0, slowed to 4.1% in the twelve months to September, nearly a third less than the official measure of 6% growth in Q3.
China’s economy has slowed by more than can be attributed to the drag from trade tensions alone. This is a consequence of structural issues at home, such as the reliance on the old-growth engine powered by manufacturing and investment, combined with a struggling domestic environment. Evidence of this is highlighted in shadow measures of consumer expenditure, which we believe to more reliably predict consumption patterns within China. The measures suggest that the Chinese authorities’ aim of rebalancing towards a more consumer-led economy is not succeeding.
At the same time, private sector firms, which we assume to be an important component of ‘other’, the red line in the chart below, have slashed investment; this together with weaker consumer expenditure points to substantially weaker growth in activity across the economy as a whole.
The Chinese economy has been plagued by overcapacity, mainly as a consequence of its old model of growth, in which excessive investment was pumped into the economy. One tactic is to export some of the spare capacity to China’s trading partners. But even with this policy action, China still faces an environment of excess capacity, and thus falling investment could be viewed as a positive development, or at least an unsurprising one, with businesses responding to diminishing marginal returns. However, the simultaneous downturn in consumption is not desirable. A downgrade to growth is the result.
Technicals
Monthly
This week price action was in tight range and barely impacts on monthly picture. The only thing that is important here is the bottom of reversal month. While it stands valid - EUR keeps chances on upside continuation. As we said, we've got reversal month by October's close. November stands inside one by far, showing retracement back in October's body. In general this is not something uncommon and absolutely natural process. At the same time, taking broader view - forming of reversal bar doesn't make any impact on major tendency by far, as EUR still keeps LH-LL trend. Reversal bar will complete its mission if it will lead to breaking of this tendency.
In general recent changes here were in favor of EUR due US statistics and more dovish Fed policy, at least in short-term. But this week data has improved and new achievement of US/China negotiations stands on horizon. It stops for awhile EUR appreciation. Now we need to keep close eye on key technical levels that are vital for longer-term tendency. Market should not erase October rally as it was in June. Otherwise EUR continues to drift lower to 1.03 area.
Now we come closer to the end of the year and second issue that might be interesting on EUR is YPS1. If EUR, by the end of the year will be able to hold above YPS1 - 2019 action could be treated as retracement of 2016 - 2017 rally. And EUR will keep chances on extension in 2020.
That's being said the major intrigue stands around fundamental background now - it is changing. It is interesting whether its change will be strong enough to make impact on monthly chart and long lasting tendency here. As economy in EU hardly will improve soon - the major driving factor depends on US - how better/worse situation will be there.
Weekly
Our life could be easier, if we would get bullish grabber here, but we didn't. I'm not sure how representative this week action is, but EUR was able to hold above daily 5/8 Fib support area and we follow to our trading plan that is based on monthly bullish reversal setup. Besides, despite the retracement here - trend is still bullish.
Still bearish reversal week still stands in progress here. As it has triggered minor downside continuation within two weeks, now it is important what will happen around major daily support level. As we mentioned previously overall situation stands tricky. Downside reversal happens in the middle of the range and not at some resistance area, which looks bearish as well. Despite trend stands up, we still could recognize signs of bearish dynamic pressure - price is falling while MACD shows uptrend. And this fact increases importance of price action around daily support as it will be vital for short-term perspective.
Daily
So our former setup is done here. Hopefully we were smart enough to not focus on big targets and choose near standing COP. According to our trading plan - bears should be out there, booking result, while bulls could step-in. But this is only the half the work. Here we have more important task is to understand what this rally is - just minor pullback before further collapse or reversal according to monthly candle.
As we've got reversal day, it seems that at least some upside continuation should happen. MACD Histogram also shows bullish divergence around major support area. Thus, we have at least some bullish background.
Intraday
So our 3-Drive is done well, but it is already reached top between 2nd and 3rd Drives and completed its target. In the beginning of the week, I suggest that we could focus on this one:
On 4H chart we have upside reversal in a shape of bullish engulfing pattern, which suggests two things. First is - upside action probably will take the shape of AB=CD pattern. Second - before upside continuation some downside retracement should happen, i.e. BC leg should be formed. Besides, market has formed upside reversal swing which also suggests deep retracement.
Taking it all together lets us suggest a kind of reverse H&S pattern here with initial pullback out from the K-resistance to 1.10 area (or lower) and then upside continuation to OP target and Agreement with 1.1052 Fib level.
When & if this setup will be completed, then we will think what to do next. Coming week is promised to be interesting with NFP on board by the end of the week.
Conclusion:
Conclusion today the same as last week - currently fundamental background stands stable and lets market to be driven by its own factors. Major events should happen in December and this keeps long-term charts intact. Thus, we keep up with our trading plan and continue trading setups that we have on daily/intraday frames.
This was short week, guys, due Thanksgiving celebration and number of events also was small. Next week process should be more interesting. So, today we mostly discuss some common thoughts around FX market and EUR in particular.
Despite holiday sentiment, we still have got some statistics and continues talks around US/China agreement.
As Reuters reports - The dollar rose against a basket of currencies on Wednesday on upbeat U.S. data in subdued trading as uncertainty about a possible U.S.-China trade deal lingered during a U.S.-holiday shortened week.
U.S. economic growth picked up slightly in the third quarter, rather than slowing as initially reported, on a stronger pace of inventory accumulation and a less steep decline in business investment. Separate data showed new orders for key U.S.-made capital goods increased by the most in nine months in October and shipments rebounded.
“The dollar is definitely supported by the data,” said Alfonso Esparza, senior currency analyst at OANDA in Toronto. “The Fed has signaled that is done for the year and good data validates that thinking,” he said. “The other thing is that this is basically the end of the week for U.S. markets and no one wants short dollar exposure going into the Thanksgiving weekend,” Esparza said.
The index pared gains after U.S. data, excluding volatile food and energy components, showed the personal consumption expenditures (PCE) price index edged up 0.1% last month after being unchanged in September.
“A 0.1% m/m rise in the core PCE deflator left the Fed’s preferred core inflation rate at a well below-target 1.6%. That underlines that interest rates are unlikely to be raised again for the foreseeable future,” said Andrew Hunter, senior U.S. economist at Capital Economics.
While recent reports that the United States and China are close to agreement on the first phase of a trade deal have helped support risk sentiment, much uncertainty remains about the outlook for the trade talks.
Lingering trade tensions have generally supported the greenback as investors view the United States as relatively well-positioned to weather a full-blown trade war.
Sterling was up 0.31% on Wednesday, recovering from early losses following the third poll in a row that showed a narrowing lead for the governing Conservative Party before Britain's Dec. 12 election. Investors awaited the release of the YouGov seat-by-seat predictions of the election outcome. Last time the multilevel regression and post-stratification model accurately predicted the 2017 hung parliament.
Sterling briefly touched near seven-month highs against the euro on Thursday on a poll predicting a comfortable election victory for the ruling Conservatives, then slipped to end the day marginally lower. British Prime Minister Boris Johnson is on course to win a majority of 68 in parliament, according to a model from pollsters YouGov.
Sterling “will rally further if Wednesday’s poll from YouGov ... is confirmed on Dec. 12,” Stephen Gallo, currency strategist at BMO Capital Markets, said, referring to election day. Though he noted that an increase in the pound “from here is rather limited, with risks during the Brexit transition now being considerably underpriced by the FX market.”
The Conservatives could win 359 seats out of 650, up from 317 in the 2017 election and the best result for the party since Margaret Thatcher’s 1987 victory, according to YouGov’s model. Following the poll, the likelihood of a Conservative majority rose to 67.5% from 63%, according to odds from betting agencies, while the probability of a hung parliament - in which no party has a majority - fell to 28% from 32%.
Michael Hewson, chief market strategist at CMC Markets, said that he expects the pound to trade in the $1.27-$1.30 range until the election result is announced.
A Conservative majority could see the pound head towards $1.40, he said, as markets are not fully pricing in the Conservative lead shown by pre-election polls.
Commerzbank FX strategist Thu Lan Nguyen said that she would expect a rally in the pound if the Conservatives won a majority, because “there is still some scepticism about the polls”.
Once US was out from holiday on Friday - the euro hovered around its lowest levels for this month as the dollar held its poise on hopes that the United States and China would be able defuse their damaging tariff war with a preliminary trade deal.
The U.S. currency also gained from data showing the world’s biggest economy is on a firm footing, which prompted investors to scale back their rate-cut bets.
U.S. economic growth picked up slightly in the third quarter, data showed on Wednesday, in contrast to other indicators pointing to a slowdown in global activity.
The Federal Reserve also flagged an upbeat outlook amid signs of labour market strength and a possible turnaround in business investment.
That prompted a pullback on rate cut bets for this year and next, with the market now pricing in a 5% chance the Fed will hike rates next month and most expecting it to hold steady.
Still, “any euphoria related to this is likely to be limited,” said Thu Lan Nguyen, a currency analyst at Commerzbank, noting that the rise is due to the change in the calculation methodology.
Members of the European Central Bank are discussing the potential for a new definition of the inflation target, which now stands at below, but close to 2%.
Nerves persisted within markets as traders navigated a blizzard of trade war headlines that offered few clues as to when or how a truce might be agreed between Washington and Beijing.
China has vowed to impose “firm countermeasures” after U.S. President Donald Trump’s approval of a bill backing Hong Kong’s pro-democracy protesters on Wednesday, but is yet to indicate whether they would have any bearing on trade talks.
Negotiators between the world two biggest economies have been trying for weeks to hammer out a ‘phase 1” trade deal, with markets hoping an agreement could be signed before year-end.
“There seems to be pretty good optimism around the trade talks going on between U.S. and China,” said William O’Loughlin, a portfolio manager at Rivkin Securities in Sydney. “Though as we know that can change on a dime...the rally doesn’t feel like a euphoric, super-bullish rally, it does feel like climbing the wall of worry.”
Indeed reaction was short term as dollar gave up early gains to trade slightly lower on the day against a basket of currencies on Friday. This mostly confirms what we've said about US/Sino saga - as longer it lasts as smaller reaction of the market will be on any news until final signing or failure.
Another thing that we rare mention here is market volatility. As we do not trade options, this useful analysis tool plays limited role in our view, but now we have absolutely unique situation when volatility stand at long-term lows. It is important, because low volatility is a sign of coming strong action, although it doesn't tell when this action should happen. As a rule, volatility is rising on falling market or wide whipsaw market, while shows gradual decrease on upside rally after major collapse. This is because of greed and fear. Fear is stronger and acts faster. This is the reason why any collapse is few times faster than any rally, which is driven by greed and develops slowly.
Following this logic, who knows, may be we are at the eve of EUR/USD drop... Volatility is relative indicator, not direct and it should be viewed in overall context. Currently we do not have strong reasons to suggest EUR/USD collapse, but they could appear and we should be prepared to this.
Trading ranges in the euro/dollar pair this week were the narrowest in 20 years, falling to around 20 pips on Monday, analysts at Nordea pointed out.
And implied euro/dollar volatility, calculated using option prices on a three-month horizon, is trading at 4.27%, the lowest on record, having fallen from 7.16% in January.
One-year volatility — or vol in traders’ parlance, is also at a record low of 5.48%, down two percentage points this year . Market participants reported relentless demand to sell options which are often used to hedge against unexpected currency moves. The renewed euro-dollar vol slump has taken a forex volatility index near record lows hit in April at 5.48%
This week, guys, we do not have CFTC data as it will be released on Monday, but Fathom consulting prepared fresh report on China economy situation, which mostly confirms our view that China care greater hurt in this war and more depends on trade peace rather than US. Here is some extracts from report:
Fathom’s underlying measure of economic activity in China, the CMI 2.0, slowed to 4.1% in the twelve months to September, nearly a third less than the official measure of 6% growth in Q3.
China’s economy has slowed by more than can be attributed to the drag from trade tensions alone. This is a consequence of structural issues at home, such as the reliance on the old-growth engine powered by manufacturing and investment, combined with a struggling domestic environment. Evidence of this is highlighted in shadow measures of consumer expenditure, which we believe to more reliably predict consumption patterns within China. The measures suggest that the Chinese authorities’ aim of rebalancing towards a more consumer-led economy is not succeeding.
At the same time, private sector firms, which we assume to be an important component of ‘other’, the red line in the chart below, have slashed investment; this together with weaker consumer expenditure points to substantially weaker growth in activity across the economy as a whole.
The Chinese economy has been plagued by overcapacity, mainly as a consequence of its old model of growth, in which excessive investment was pumped into the economy. One tactic is to export some of the spare capacity to China’s trading partners. But even with this policy action, China still faces an environment of excess capacity, and thus falling investment could be viewed as a positive development, or at least an unsurprising one, with businesses responding to diminishing marginal returns. However, the simultaneous downturn in consumption is not desirable. A downgrade to growth is the result.
Technicals
Monthly
This week price action was in tight range and barely impacts on monthly picture. The only thing that is important here is the bottom of reversal month. While it stands valid - EUR keeps chances on upside continuation. As we said, we've got reversal month by October's close. November stands inside one by far, showing retracement back in October's body. In general this is not something uncommon and absolutely natural process. At the same time, taking broader view - forming of reversal bar doesn't make any impact on major tendency by far, as EUR still keeps LH-LL trend. Reversal bar will complete its mission if it will lead to breaking of this tendency.
In general recent changes here were in favor of EUR due US statistics and more dovish Fed policy, at least in short-term. But this week data has improved and new achievement of US/China negotiations stands on horizon. It stops for awhile EUR appreciation. Now we need to keep close eye on key technical levels that are vital for longer-term tendency. Market should not erase October rally as it was in June. Otherwise EUR continues to drift lower to 1.03 area.
Now we come closer to the end of the year and second issue that might be interesting on EUR is YPS1. If EUR, by the end of the year will be able to hold above YPS1 - 2019 action could be treated as retracement of 2016 - 2017 rally. And EUR will keep chances on extension in 2020.
That's being said the major intrigue stands around fundamental background now - it is changing. It is interesting whether its change will be strong enough to make impact on monthly chart and long lasting tendency here. As economy in EU hardly will improve soon - the major driving factor depends on US - how better/worse situation will be there.
Weekly
Our life could be easier, if we would get bullish grabber here, but we didn't. I'm not sure how representative this week action is, but EUR was able to hold above daily 5/8 Fib support area and we follow to our trading plan that is based on monthly bullish reversal setup. Besides, despite the retracement here - trend is still bullish.
Still bearish reversal week still stands in progress here. As it has triggered minor downside continuation within two weeks, now it is important what will happen around major daily support level. As we mentioned previously overall situation stands tricky. Downside reversal happens in the middle of the range and not at some resistance area, which looks bearish as well. Despite trend stands up, we still could recognize signs of bearish dynamic pressure - price is falling while MACD shows uptrend. And this fact increases importance of price action around daily support as it will be vital for short-term perspective.
Daily
So our former setup is done here. Hopefully we were smart enough to not focus on big targets and choose near standing COP. According to our trading plan - bears should be out there, booking result, while bulls could step-in. But this is only the half the work. Here we have more important task is to understand what this rally is - just minor pullback before further collapse or reversal according to monthly candle.
As we've got reversal day, it seems that at least some upside continuation should happen. MACD Histogram also shows bullish divergence around major support area. Thus, we have at least some bullish background.
Intraday
So our 3-Drive is done well, but it is already reached top between 2nd and 3rd Drives and completed its target. In the beginning of the week, I suggest that we could focus on this one:
On 4H chart we have upside reversal in a shape of bullish engulfing pattern, which suggests two things. First is - upside action probably will take the shape of AB=CD pattern. Second - before upside continuation some downside retracement should happen, i.e. BC leg should be formed. Besides, market has formed upside reversal swing which also suggests deep retracement.
Taking it all together lets us suggest a kind of reverse H&S pattern here with initial pullback out from the K-resistance to 1.10 area (or lower) and then upside continuation to OP target and Agreement with 1.1052 Fib level.
When & if this setup will be completed, then we will think what to do next. Coming week is promised to be interesting with NFP on board by the end of the week.
Conclusion:
Conclusion today the same as last week - currently fundamental background stands stable and lets market to be driven by its own factors. Major events should happen in December and this keeps long-term charts intact. Thus, we keep up with our trading plan and continue trading setups that we have on daily/intraday frames.