Sive Morten
Special Consultant to the FPA
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- 18,648
Fundamentals
(Reuters FX news) - The dollar rose to three-week highs on Friday after an influential Federal Reserve official said the U.S. central bank's plan to shrink its bond portfolio this year would not significantly delay its interest rate-hiking cycle.
The greenback initially sold off on a softer-than-expected U.S. jobs report for March, but rebounded as analysts noted the apparent weakness was caused by snowstorms.
Safe-haven buying also supported the dollar as the market focused on geopolitical events after the United States launched cruise missiles at an airbase in Syria, an ally of Russia.
New York Fed President William Dudley, an advocate of low interest rates, said on Friday that shrinking the Fed's $4.5 trillion bond portfolio would prompt only a "little pause" in the Fed's rate hike plans, providing relief to dollar bulls banking on more than one rate increase this year.
He added that interest rates are still a primary tool for monetary policy, and not a "gradual" balance sheet reduction.
"Dudley's comments added a tailwind for the dollar," said Joe Manimbo, senior market analyst at Western Union Business in Washington. "He has softened any suggestion that any reduction in balance sheet would cause a pause in interest rate hikes in a meaningful way."
The New York Fed official had said in an interview last week that trimming the balance sheet was a substitute for rate hikes, which could prompt the Fed to "pause" raising rates at that time.
Investors still expect two more rate increases in 2017, analysts said, although the probability of a June hike has declined to 61 percent FFM7 after the jobs report from more than 70 percent late on Thursday.
The dollar index rose to three-week peaks of 101.26 and last traded a up 0.5 percent at 101.16.
The dollar touched session highs against the Japanese yen following Dudley's comments, and was last up 0.3 percent at 111.16
The greenback hit a four-week high versus the euro, which fell 0.5 percent to $1.0587
The dollar's early rebound was spurred by a report showed U.S. non-farm payrolls increased by 98,000 jobs last month, the fewest since last May and far short of the increase of 180,000 jobs expected by a Reuters poll of economists.
The unemployment rate declined to 4.5 percent from 4.7 percent in February.
US healthcare reform – how worried should we be?
by Fathom Consulting
Mr Trump’s failure to reform US healthcare has raised doubts about his ability to pass pro-business legislation, including tax cuts and infrastructure investment. But we think investors have over-reacted: we still expect the corporate tax rate to be slashed and other business-friendly measures to be implemented this year. Moreover, the US economy is already in decent shape: consumer and business confidence is high, inflation is rising and the labour market is tightening rapidly. With the fed funds rate set to rise faster than investors anticipate, we think now is a good time to take long US dollar positions and short US Treasury positions.
Donald Trump’s failure to reform healthcare has raised doubts about his ability to enact the rest of his legislative agenda. Investors are particularly concerned that he may not cut taxes or increase spending on infrastructure, as hoped. The so-called Trump trade has partially unwound. Compared to a few weeks ago, equities are down, the US dollar has weakened and Treasury yields have fallen. But have investors over-reacted? We believe so.
First, by walking away from negotiations on healthcare, Donald Trump may have strengthened his hand. Obamacare is the law of the land for the foreseeable future and Mr Trump can point the finger at the Freedom Caucus. Growing pressure from the Republican Party establishment and Donald Trump’s base make the Freedom Caucus (and other potential rebels within the Republican party) more likely to support other aspects of Mr Trump’s agenda. Indeed, one member of the Freedom Caucus has already resigned over the group’s opposition to the healthcare plan.
Second, we do not expect tax cuts to be matched by spending cuts. Uncle Sam will pick up the tab! History has shown, after all, that Republicans have often loosened fiscal policy and left the Democrats to tidy up the state finances. The Laffer Curve argument – which contends that if tax cuts are properly targeted tax revenues may even rise – will probably convince sceptical Republicans to vote for tax cuts without offsetting spending cuts.
Republicans bought into this argument during Ronald Reagan’s presidency even though the budget deficit rose after the first round of Reagan’s tax cuts. More recently, following the botched healthcare reform, the leader of the Freedom Caucus has said that he would support a tax plan that is not revenue neutral.
Third, the economy is already in decent shape and the outlook is not completely dependent on tax cuts. Consumer and business confidence is high, inflation is rising and the labour market is tightening rapidly – all of these suggest that the economy is gaining momentum and points to a quicker pace of interest rate hikes than that implied by fed funds futures, fiscal stimulus or no fiscal stimulus.
Moreover, House Speaker Paul Ryan’s tax proposal includes a number of measures that would increase incentives for businesses to invest, such as subsidising research and development expenditures and allowing firms to immediately expense investment (Current depreciation rules mean that firms recover the cost of investment over many years. Immediately writing-off (or “expensing”) investment would represent a zero percent marginal effective tax on new investment.). These measures should receive unanimous backing by Republicans (and possibly even some Democrats).
Admittedly, some aspects of Paul Ryan’s tax plan are complicated, controversial and unlikely to gain unanimous endorsement by the Republican Party. The most contentious issue is likely to be the so-called border adjustment tax that would subsidise US exporters and tax US imports. This measure would raise revenues as long as the US runs a current account deficit, but would probably fall foul of World Trade Organisation (WTO) laws and, if adopted, spark retaliation by US trading partners. This could tip the world into recession.
Finding a compromise on the complicated issue of tax reform is likely to take several months. In our view, the most likely outcome is that a watered-down version of Paul Ryan’s bill (which includes no border tax but large cuts to corporate tax and other incentives to boost investment) will be approved by Congress and passed into law in Q4 this year.
Admittedly, if tax reform is not passed until next year, business and investor confidence may suffer a setback, potentially knocking growth. But for now, we still expect US GDP growth to exceed 2.5% in 2017 and 3.0% in 2018. Uncertainty over fiscal policy could end the honeymoon period of Mr Trump’s presidency, but we do not envision a protracted downturn. In fact, the economic fundamentals warrant a faster pace of rate increases than investors currently anticipate. This, in our view, will put further upward pressure on the US dollar and US Treasury yields before long. As such, we think that now may be a good time to accumulate long positions in the US dollar and short positions in US Treasuries.
COT Report
Recent CFTC data shows that last week long positions partially were closed as net speculative short position has increased slightly while open interest contracted. At the same time on a way up, while EUR was rising and speculative net short position was contracting - we do not see feasible increase in open interest. We even could recognize opposite action - in the middle of March when EUR has turned to retracement down - open interest has increased, while when upside action continues - it has dropped. This dynamic suggests very important issue that current upward action mostly should be treated as upside retracement within long-term bear trend.
Technical
Monthly
Situation has changed significantly since our last discussion. Mostly it makes impact on additional USD demand rather than on EUR directly, but anyway this has pushed EUR/USD down. In comments above we've mentioned already all major factors - clarification on Fed balance off-loading, NFP report and recent geopolitcal tensions. Sentiment analysis also doesn't look supportive for EUR. Recent Fathom consulting report concerning debates in Congress on Obamacare shed more light on mess around Trump's trade, tax programme, Fed policy etc.
From technical point of view we have untouched long-term targets around parity and some time it should be met, but somehow I think that it should happen on a background of surprising tightening policy from the Fed, which has more chances to happen only in 2018. So, in perspectives of 1-2 years EUR looks weaker than USD. In coming years EU will meet hard restructural political process that could change the structure of the Union, role of different members and financial relations. Also it is a question what will be with newbie members in Eastern Europe.
In short-term perspective EUR mostly has completed AB-CD retracement on weekly chart when it has reached 1.0930 area two weeks ago. On monthly chart it looks like third unsuccessful challenge of YPP. In fact, the third failure to pass through YPP looks as sign fo weakness and could lead to downward action at least to previous lows around 1.03 or even lower. It is too difficult make any long-term forecasts with precise numbers, as there too much imputs that stand under control, mostly political ones...
Right now on monthly chart there are more chances on reaching parity but it is difficult to judge on timing of this process. As usual, dealing with step-by-step action on daily/weekly chart, based on some patterns should help us:
Bullish perspectives are also exist, but we could speak on them only when downward action to parity will end. Right now it seems that some bullish reversal pattern could be formed around it:
Picture shows classical action. Take a look that since 1999 - EUR was forming upside reversal swing that lasts till Dec 2007. Now market stands in deep retracement - this is typical action as new upside reversal swing has been formed. Based on this picture EUR is approaching to area where this retracement should over and it could get chance to starts extension leg of bull trend that could lead EUR as far as to 1.76-1.82 area. Also you could recognize here some signs of reverse H&S pattern. That's why on big weekly picture we also have made a suggestion on big H&S pattern with head around parity....
Weekly
Theoretically trend by MACD is still bullish, market is not at oversold. But overall situation has changed drastically. As we've briefly mentioned previously - last week EUR has formed bearish reversal candle. This is strong signal, that upside action is over, at least in short-term perspective. As we've seen above - this mostly has happened due changing in financial background and global politics shifts.
At the same time, weekly chart mostly has completed normal upside reaction on reaching 100% extension of our large bearish AB=CD pattern. This reaction has taken the shape of AB=CD pattern and stopped at weekly K-resistance and YPP.
This action could mean two things. First is upside retracement is over. Second - EUR is turning to extension mode of action with existed long-term bear trend. Next major target here is parity, but it is too extended and we will focus on closer ones - previous 1.03 lows first of all. We choose this target because it stands in logical relation with patterns that are failed on daily chart:
Daily
This time frame shows major background for our analysis and understading some details of situation that we get here.
We've announced correct doubts when EUR suddenly has turned to retracement after upside gap and breakout neckline of our H&S pattern. According to our view - small retracement "yes", deep retracement - "no", i.e. it will destroy all bullish context. And this has happened. As soon as EUR has broken K-support on 4-hour chart around 1.08 area - price action has turned to "irrational" that doesn't match to driving patterns, which is H&S.
Finally, speaking on last week action - EUR was not able even to show minor bounce from strong K-support area. This just shows how market week is. Also this fact significantly diminishes chances on survival of other support levels. If K-support was not able to hold price and even trigger minor upside reaction -what chances that weaker levels will.
This leads us to important conclusion in estimating short term targets. Major conclusion if failure of H&S pattern and inability of market to jump up thorugh neckline. If even we hesitate with H&S shape, but will treat it as triangle - anyway, EUR has failed to break it up for three times.
It means that opposite extreme points should be broken. And they are - right shoulder around 1.05 and next one is head around 1.03...
Right now EUR stands at trend line support. In fact this is lower border of triangle that I've mentioned above. Slightly below stands major 5/8 Fib support, but as we said - they have small chances to keep this drop.
Here we do not have clear patterns, except may be flag consolidaiton that has been formed at our K-support. Using classical approach to target estimation, we could use mast of flag here and count it down. This will lead us to MPS1 area:
That's being said - major conclusion here is downward action should continue not because we have drop here, but because this drop breaks bullish context and destroy bullish pattern that are failing right now. This is important difference.
4-hour
Here, guys, we do not have any clear pattern, but we know that market stands at support on daily chart. As market shows signs of weakness and it is not at oversold - our major idea suggests that downward action should continue.
But to control this process we need intraday chart. When market breaks K-area without any respect, it very often happens that market after breakout re-tests it from other side. It means that minor retracement here still is possible.
That's why on 4-hour chart we need keep an eye on upside bounce and watch how strong this retracement will be. To match perfectly to bearish scenario price should not exceed 1.0650-1.0665 area by two reasons. First is - WPR1, it should hold upside retracement during bearish trend. Second - breaking up 1.0670 will push price back in flag consolidation again, and this is not good for short-term bearish trend.
Conclusion:
Strong bearish reversal 2 weeks ago could mean that EUR steps back on a way of long-term bearish trend, as situation in global politics, domestic US finances has changed.
On daily chart we will watch for gradual breakout of 1.05 and 1.03 areas as EUR has put a background under final failure of daily bullish patterns.
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 FX news) - The dollar rose to three-week highs on Friday after an influential Federal Reserve official said the U.S. central bank's plan to shrink its bond portfolio this year would not significantly delay its interest rate-hiking cycle.
The greenback initially sold off on a softer-than-expected U.S. jobs report for March, but rebounded as analysts noted the apparent weakness was caused by snowstorms.
Safe-haven buying also supported the dollar as the market focused on geopolitical events after the United States launched cruise missiles at an airbase in Syria, an ally of Russia.
New York Fed President William Dudley, an advocate of low interest rates, said on Friday that shrinking the Fed's $4.5 trillion bond portfolio would prompt only a "little pause" in the Fed's rate hike plans, providing relief to dollar bulls banking on more than one rate increase this year.
He added that interest rates are still a primary tool for monetary policy, and not a "gradual" balance sheet reduction.
"Dudley's comments added a tailwind for the dollar," said Joe Manimbo, senior market analyst at Western Union Business in Washington. "He has softened any suggestion that any reduction in balance sheet would cause a pause in interest rate hikes in a meaningful way."
The New York Fed official had said in an interview last week that trimming the balance sheet was a substitute for rate hikes, which could prompt the Fed to "pause" raising rates at that time.
Investors still expect two more rate increases in 2017, analysts said, although the probability of a June hike has declined to 61 percent FFM7 after the jobs report from more than 70 percent late on Thursday.
The dollar index rose to three-week peaks of 101.26 and last traded a up 0.5 percent at 101.16.
The dollar touched session highs against the Japanese yen following Dudley's comments, and was last up 0.3 percent at 111.16
The greenback hit a four-week high versus the euro, which fell 0.5 percent to $1.0587
The dollar's early rebound was spurred by a report showed U.S. non-farm payrolls increased by 98,000 jobs last month, the fewest since last May and far short of the increase of 180,000 jobs expected by a Reuters poll of economists.
The unemployment rate declined to 4.5 percent from 4.7 percent in February.
US healthcare reform – how worried should we be?
by Fathom Consulting
Mr Trump’s failure to reform US healthcare has raised doubts about his ability to pass pro-business legislation, including tax cuts and infrastructure investment. But we think investors have over-reacted: we still expect the corporate tax rate to be slashed and other business-friendly measures to be implemented this year. Moreover, the US economy is already in decent shape: consumer and business confidence is high, inflation is rising and the labour market is tightening rapidly. With the fed funds rate set to rise faster than investors anticipate, we think now is a good time to take long US dollar positions and short US Treasury positions.
Donald Trump’s failure to reform healthcare has raised doubts about his ability to enact the rest of his legislative agenda. Investors are particularly concerned that he may not cut taxes or increase spending on infrastructure, as hoped. The so-called Trump trade has partially unwound. Compared to a few weeks ago, equities are down, the US dollar has weakened and Treasury yields have fallen. But have investors over-reacted? We believe so.
First, by walking away from negotiations on healthcare, Donald Trump may have strengthened his hand. Obamacare is the law of the land for the foreseeable future and Mr Trump can point the finger at the Freedom Caucus. Growing pressure from the Republican Party establishment and Donald Trump’s base make the Freedom Caucus (and other potential rebels within the Republican party) more likely to support other aspects of Mr Trump’s agenda. Indeed, one member of the Freedom Caucus has already resigned over the group’s opposition to the healthcare plan.
Second, we do not expect tax cuts to be matched by spending cuts. Uncle Sam will pick up the tab! History has shown, after all, that Republicans have often loosened fiscal policy and left the Democrats to tidy up the state finances. The Laffer Curve argument – which contends that if tax cuts are properly targeted tax revenues may even rise – will probably convince sceptical Republicans to vote for tax cuts without offsetting spending cuts.
Republicans bought into this argument during Ronald Reagan’s presidency even though the budget deficit rose after the first round of Reagan’s tax cuts. More recently, following the botched healthcare reform, the leader of the Freedom Caucus has said that he would support a tax plan that is not revenue neutral.
Third, the economy is already in decent shape and the outlook is not completely dependent on tax cuts. Consumer and business confidence is high, inflation is rising and the labour market is tightening rapidly – all of these suggest that the economy is gaining momentum and points to a quicker pace of interest rate hikes than that implied by fed funds futures, fiscal stimulus or no fiscal stimulus.
Moreover, House Speaker Paul Ryan’s tax proposal includes a number of measures that would increase incentives for businesses to invest, such as subsidising research and development expenditures and allowing firms to immediately expense investment (Current depreciation rules mean that firms recover the cost of investment over many years. Immediately writing-off (or “expensing”) investment would represent a zero percent marginal effective tax on new investment.). These measures should receive unanimous backing by Republicans (and possibly even some Democrats).
Admittedly, some aspects of Paul Ryan’s tax plan are complicated, controversial and unlikely to gain unanimous endorsement by the Republican Party. The most contentious issue is likely to be the so-called border adjustment tax that would subsidise US exporters and tax US imports. This measure would raise revenues as long as the US runs a current account deficit, but would probably fall foul of World Trade Organisation (WTO) laws and, if adopted, spark retaliation by US trading partners. This could tip the world into recession.
Finding a compromise on the complicated issue of tax reform is likely to take several months. In our view, the most likely outcome is that a watered-down version of Paul Ryan’s bill (which includes no border tax but large cuts to corporate tax and other incentives to boost investment) will be approved by Congress and passed into law in Q4 this year.
Admittedly, if tax reform is not passed until next year, business and investor confidence may suffer a setback, potentially knocking growth. But for now, we still expect US GDP growth to exceed 2.5% in 2017 and 3.0% in 2018. Uncertainty over fiscal policy could end the honeymoon period of Mr Trump’s presidency, but we do not envision a protracted downturn. In fact, the economic fundamentals warrant a faster pace of rate increases than investors currently anticipate. This, in our view, will put further upward pressure on the US dollar and US Treasury yields before long. As such, we think that now may be a good time to accumulate long positions in the US dollar and short positions in US Treasuries.
COT Report
Recent CFTC data shows that last week long positions partially were closed as net speculative short position has increased slightly while open interest contracted. At the same time on a way up, while EUR was rising and speculative net short position was contracting - we do not see feasible increase in open interest. We even could recognize opposite action - in the middle of March when EUR has turned to retracement down - open interest has increased, while when upside action continues - it has dropped. This dynamic suggests very important issue that current upward action mostly should be treated as upside retracement within long-term bear trend.
Technical
Monthly
Situation has changed significantly since our last discussion. Mostly it makes impact on additional USD demand rather than on EUR directly, but anyway this has pushed EUR/USD down. In comments above we've mentioned already all major factors - clarification on Fed balance off-loading, NFP report and recent geopolitcal tensions. Sentiment analysis also doesn't look supportive for EUR. Recent Fathom consulting report concerning debates in Congress on Obamacare shed more light on mess around Trump's trade, tax programme, Fed policy etc.
From technical point of view we have untouched long-term targets around parity and some time it should be met, but somehow I think that it should happen on a background of surprising tightening policy from the Fed, which has more chances to happen only in 2018. So, in perspectives of 1-2 years EUR looks weaker than USD. In coming years EU will meet hard restructural political process that could change the structure of the Union, role of different members and financial relations. Also it is a question what will be with newbie members in Eastern Europe.
In short-term perspective EUR mostly has completed AB-CD retracement on weekly chart when it has reached 1.0930 area two weeks ago. On monthly chart it looks like third unsuccessful challenge of YPP. In fact, the third failure to pass through YPP looks as sign fo weakness and could lead to downward action at least to previous lows around 1.03 or even lower. It is too difficult make any long-term forecasts with precise numbers, as there too much imputs that stand under control, mostly political ones...
Right now on monthly chart there are more chances on reaching parity but it is difficult to judge on timing of this process. As usual, dealing with step-by-step action on daily/weekly chart, based on some patterns should help us:
Bullish perspectives are also exist, but we could speak on them only when downward action to parity will end. Right now it seems that some bullish reversal pattern could be formed around it:
Picture shows classical action. Take a look that since 1999 - EUR was forming upside reversal swing that lasts till Dec 2007. Now market stands in deep retracement - this is typical action as new upside reversal swing has been formed. Based on this picture EUR is approaching to area where this retracement should over and it could get chance to starts extension leg of bull trend that could lead EUR as far as to 1.76-1.82 area. Also you could recognize here some signs of reverse H&S pattern. That's why on big weekly picture we also have made a suggestion on big H&S pattern with head around parity....
Weekly
Theoretically trend by MACD is still bullish, market is not at oversold. But overall situation has changed drastically. As we've briefly mentioned previously - last week EUR has formed bearish reversal candle. This is strong signal, that upside action is over, at least in short-term perspective. As we've seen above - this mostly has happened due changing in financial background and global politics shifts.
At the same time, weekly chart mostly has completed normal upside reaction on reaching 100% extension of our large bearish AB=CD pattern. This reaction has taken the shape of AB=CD pattern and stopped at weekly K-resistance and YPP.
This action could mean two things. First is upside retracement is over. Second - EUR is turning to extension mode of action with existed long-term bear trend. Next major target here is parity, but it is too extended and we will focus on closer ones - previous 1.03 lows first of all. We choose this target because it stands in logical relation with patterns that are failed on daily chart:
Daily
This time frame shows major background for our analysis and understading some details of situation that we get here.
We've announced correct doubts when EUR suddenly has turned to retracement after upside gap and breakout neckline of our H&S pattern. According to our view - small retracement "yes", deep retracement - "no", i.e. it will destroy all bullish context. And this has happened. As soon as EUR has broken K-support on 4-hour chart around 1.08 area - price action has turned to "irrational" that doesn't match to driving patterns, which is H&S.
Finally, speaking on last week action - EUR was not able even to show minor bounce from strong K-support area. This just shows how market week is. Also this fact significantly diminishes chances on survival of other support levels. If K-support was not able to hold price and even trigger minor upside reaction -what chances that weaker levels will.
This leads us to important conclusion in estimating short term targets. Major conclusion if failure of H&S pattern and inability of market to jump up thorugh neckline. If even we hesitate with H&S shape, but will treat it as triangle - anyway, EUR has failed to break it up for three times.
It means that opposite extreme points should be broken. And they are - right shoulder around 1.05 and next one is head around 1.03...
Right now EUR stands at trend line support. In fact this is lower border of triangle that I've mentioned above. Slightly below stands major 5/8 Fib support, but as we said - they have small chances to keep this drop.
Here we do not have clear patterns, except may be flag consolidaiton that has been formed at our K-support. Using classical approach to target estimation, we could use mast of flag here and count it down. This will lead us to MPS1 area:
That's being said - major conclusion here is downward action should continue not because we have drop here, but because this drop breaks bullish context and destroy bullish pattern that are failing right now. This is important difference.
4-hour
Here, guys, we do not have any clear pattern, but we know that market stands at support on daily chart. As market shows signs of weakness and it is not at oversold - our major idea suggests that downward action should continue.
But to control this process we need intraday chart. When market breaks K-area without any respect, it very often happens that market after breakout re-tests it from other side. It means that minor retracement here still is possible.
That's why on 4-hour chart we need keep an eye on upside bounce and watch how strong this retracement will be. To match perfectly to bearish scenario price should not exceed 1.0650-1.0665 area by two reasons. First is - WPR1, it should hold upside retracement during bearish trend. Second - breaking up 1.0670 will push price back in flag consolidation again, and this is not good for short-term bearish trend.
Conclusion:
Strong bearish reversal 2 weeks ago could mean that EUR steps back on a way of long-term bearish trend, as situation in global politics, domestic US finances has changed.
On daily chart we will watch for gradual breakout of 1.05 and 1.03 areas as EUR has put a background under final failure of daily bullish patterns.
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.
