Sive Morten
Special Consultant to the FPA
- Messages
- 18,654
Fundamentals
This week was relatively quiet, EUR/USD shows minor upward action and most news headlines were looking like ping-pong " virus fears easing" or "Virus fears growing" and that should have to explain recent FX motions by author's suggestion.
As a result, there was only one major thing - additional Fed 2.3 Trln measures to support small and medium business and provide guarantees to commercial banks on a loans of these companies. Second moment is consumer prices drop that point recession kind situation.
The dollar was on course for a weekly loss on Friday as the U.S. Federal Reserve’s massive new lending programme for small companies and signs of a slowdown in coronavirus infections reduced safe-haven demand.
Risk sentiment has steadily improved this week on tentative signs that the pandemic is slowing in U.S. and European hotspots, but some analysts remain cautious given so little is known about the virus and as many nations continue to grapple with the massive economic damage caused by the outbreak.
“The Fed has taken a lot of different measures, but the end result is a large increase in the supply of dollars,” said Junichi Ishikawa, senior FX strategist at IG Securities in Tokyo. “Positive news about the virus reduces the kind of panicked repatriation into dollars that we saw earlier this year. The end result is gradual dollar weakness.”
The Fed on Thursday announced a $2.3 trillion programme to offer loans to local governments and small and mid-sized businesses, the latest step to backstop the U.S. economy as the country battles the coronavirus crisis. The Fed has also slashed interest rates to zero, restated quantitative easing, and increased dollar liquidity to combat a shortage in money markets, leaving the dollar in the grip of bears in the spot market.
The central bank's announcement came as data showed that the number of Americans seeking unemployment benefits topped 6 million for the second straight week, with businesses closed across the country in an attempt to stem the spread of the virus.
“The Fed’s bold efforts helped to offset more horrific news on the job market. I would say that the Fed’s forceful action today underscores the unlimited firepower that the central bank wields and that’s going some way into sustaining the calm that’s descended on markets this week,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.
The Federal Reserve will continue to use all the tools at its disposal until the U.S. economy begins to rebound fully from the harm caused by the novel coronavirus outbreak, Fed Chair Jerome Powell said on Thursday, even as he acknowledged the limits of the central bank's powers.
The U.S. consumer prices fell by the most in more than five years in March and further decreases are likely as the novel coronavirus outbreak suppresses demand for some goods and services, offsetting price increases related to shortages resulting from disruptions to the supply chain.
“The big concern right now is deflation,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh. “Deflation is likely to take hold over the next few months as businesses slash prices in response to much lower demand from the coronavirus outbreak and associated restrictions on movement.”
The Labor Department said on Friday its consumer price index dropped 0.4% last month amid a tumble in the cost of gasoline, and record decreases in hotel accommodation, apparel and airline ticket prices. That was the biggest drop since January 2015 and followed a 0.1% gain in February. In the 12 months through March, the CPI increased 1.5%, the smallest advance since February 2019, after accelerating 2.3% in February. Economists polled by Reuters had forecast the CPI dropping 0.3% in March and climbing 1.6% year-on-year.
Deflation, a decline in the general price level, is harmful during an economic downturn as consumers and businesses can delay purchases in anticipation of lower prices. It can also distort monetary policy, the labor market and signals from stock and real estate prices, economists say.
Economists said it was unlikely these massive stimulus measures would spark inflation, noting that price pressures remained low during the Great Recession and after despite the U.S. central bank pumping money into the economy through extensive bond buying programs.
“The disinflationary impulse, along with the great disruption in economic and financial market activity, is a key reason why the Fed is unleashing vast new monetary policy stimulus,” said Gregory Daco, chief U.S. economist at Oxford Economics in New York.
CFTC Data
Speculators' net short U.S. dollar positioning in the latest week touched their largest level since May 2018, according to calculations by Reuters and
U.S. Commodity Futures Trading Commission data released on Friday. The value of the net short dollar position was $10.5 billion in the week ended on April 7, from net shorts of $9.9 billion the previous week. Speculators have been short on the U.S. dollar for four consecutive weeks.
The dollar has been pressured in the last few weeks by Federal Reserve measures which have flooded the financial system with dollars to address a liquidity crunch caused in part by demand for the U.S. currency.
Speaking on EUR - it also shows increasing of net long position. Speculators have increased longs for ~6K contracts and Open interest has increased for ~ 3K contracts, that has bullish sentiment as position is rising on the background of open interest increasing.
Source: cftc.gov
Charting by Investing.com
Now one of the major questions is second wave of pandemic. Although this subject is still uncertain but there are few relative factors that point on possibility of this scenario. First is VIX futures quotes, second - rising new cases in China again. They are few but they appear again. If second wave still will happen - it is expected in fall.
The Cboe Volatility Index, known as Wall Street’s fear gauge, recently traded at 43.36 on Wednesday from a record closing high of 82.69 on Mar. 16.
Prices for near-term VIX futures, which reflect expectations of volatility in coming months, have dropped as well in the past two weeks. Front-month VIX futures, which expire on Apr. 15, were last trading at 42.15 from 45.875 on Mar. 26.
Yet longer-dated VIX futures have risen since late March. VIX futures expiring in September, for instance, have risen to 30.85 on Wednesday from 28.65 on Mar. 26.
Their continued buoyancy reflects expectations that it will likely take months for investors to get a clear picture of the economic impact of the pandemic. Recent U.S. data have only begun to reflect the damage to employment and other areas.
“We don’t know the full economic impact, hence volatility has remained sticky,” said Stacey Gilbert, portfolio manager for derivatives at Glenmede Investment Management.
Some strategists also pointed to the possibility of a second wave of coronavirus infections, which could delay the resumption of normal business activity. Signs of a second wave have already emerged in China, and certain economic indicators, such as coal consumption by power plants and property sales in top cities, have pulled back, economists at Citi wrote on Tuesday.
“There’s a danger of getting lulled into complacency in the summer that we’ll get to ‘normal,’ and then get a repeat of this in the fall,” said Amy Wu Silverman, equity derivatives strategist at RBC Capital Markets.
It has taken VIX futures anywhere from five to 15 months to revert to typical levels after past market shocks, said Gilbert at Glenmede. Given the current slowdown was provoked by health rather than financial concerns, it could take longer for volatility markets to fully process its effects, she said.
If the U.S. economy were to remain partially closed into the fall, it could also influence November’s U.S. presidential election and thereby usher in market turbulence, said Michael Purves, chief executive of Tallbacken Capital Advisors. “These kind of events mean volatility in the political arena as well, and some of that has enduring impact in the market,” Purves said.
Also guys, if you take a look at recent S&P 500 CFTC data you will see sharp drop in net long position, despite 20% appreciation since March lows. This contradiction stands in favor of longer-term recovery hypothesis.
Source: cftc.gov
Charting by Investing.com
Fathom makes the bottom line, trying to take a look at US situation in general, showing their US Sentiment indicator
We have updated our US Economic Sentiment Indicator with a reading for March. The index is a single measure which incorporates readings from a range of business and consumer confidence surveys. The index dropped very fast in March, but it still remains in positive territory; much higher than it was at any point in 2008 or 2009, even though there is a widespread expectation that the short-term economic contraction due to the crisis is going to be a lot bigger than the contraction in late 2008/early 2009.
There are a few possible interpretations for this. First, that consumers and businesses are looking through the current shock and expect activity to rebound soon (supporting the case for a V-shaped recovery and giving the government a thumbs up for its support measures taken thus far). Second, that technical quirks with the business and consumer surveys mean that they do not fully reflect the magnitude of sharp swings in real economic activity. Third, that some of the surveys were conducted during the month of March and did not fully incorporate the effect of the lockdown. We will explore these issues in more detail in due course.
As we've said last week - there are still three conditions of V-shape recovery. They are:
Technicals
Monthly
In general market has spent the week in relatively tight range that makes no impact on monthly chart. So, as we've said - technically EUR direction depends on breakout. On monthly chart we have doji, that is also the bullish grabber.
Interestingly, that doji levels coincide with Pivots support and resistance levels as well. Downside breakout opens road to the parity, while upside break should open road for equal doji distance to upside - somewhere to 1.23 area. Still, taking in consideration fundamental background it seems that EU is paralyzed in making any decision as countries are not united on the face of common tragedy. Despite outstanding liquidity injection, the consequences of pandemic not necessary should be tragic. Demand for USD could hold for awhile.
Our major indicator here is the Dollar Index chart, or better to say historical resistance level that will provide the direction. This is all time K-level. As you understand, its breakout or reversal out from it will be major event for FX market. Thus, in nearest time, until breakout will happen we mostly will deal with shorter-term setups of a smaller scale.
Weekly
We keep weekly analysis without any changes. Trend stands bearish and recent week has become an inside one, compares to previous one. In general we talked about two possible scenarios - downside breakout and continuation to next long term target around par (which is our XOP), or appearing of reversal pattern. As we've said - "market reaction on daily chart should have to clarify this and by the result of this week".
Currently we see few moments that hurt idea of bullish reversal, although not cancelled it totally. As we said, we have two potential patterns - widening triangle or diamond shape, second - extended bullish engulfing pattern inside. So, currently it seems downside action is too strong for engulfing as EUR has broken all support levels on daily chart. Although lows of the pattern are still intact and supported by oversold level, downside action is too extended to treat it as just a pullback before upside continuation.
Second, for diamond - we should have seen continuation back to the top, while we've got sharp downside reversal instead. Trend again has turned bearish here. Combination of these two factors make not as attractive taking long position here, at least right now. Still, as EUR stands as depended variable - we do not cancel bullish scenario totally.
Daily
Here we take a look at Dollar Index, because on daily EUR chart we have nothing new - the same picture as on Friday. But on DXY we have one important detail that could help us a lot during next week.
Here we have bearish grabber that we do not on EUR. This pattern suggests drop below recent lows on DXY. This, in turn, means that EUR could climb above 1.1150 level as it takes 70% value in DXY. Currently we're watching just for near standing target on EUR - 1.10 resistance Agreement, but, taking in consideration DXY grabber we could consider upside XOP as well.
Intraday
Initially we watch for this scenario - reaching of 1.10 Agreement resistance that could give us "222" Sell pattern as well, where we intend to consider short entry. Right now situation still looks bearish because of slow CD leg right to 1.10 area. Usually it suggests reversal at "D" point rather than just a pullback. But something could change through Easter weekend, as DXY grabber suggests higher action on EUR.
Here is our picture for next week, guys. First is, we expect upside continuation to 1.10 area where we consider ability for scalp short trade out from Agreement resistance area. Then we will see how market will behave in relation to DXY grabber. That probably should be supported by news headlines or some speech, as usual, because pure technical signs, at least on EUR do not show currently strength and ability to break 1.10 level.
Conclusion:
After the "big splash" based on nervousness background within few weeks - we see calming markets across the board. Not only FX, but other markets as well. It seems that investors are living more by expectations rather than by current situation. As "expectations" and perspectives are rather blur by far - nobody makes sharp shifts on the markets as well.
By our view, the major event is Covid-19 autumn relapse. If world will be able to avoid it - then we expect acceleration of global recovery closer to the autumn. Other measures mostly have secondary meaning because they just determine the speed of recovery but not recovery per se. Thus, we also have no choice but wait and see what will happen, and focusing on minor daily/intraday setups.
This week was relatively quiet, EUR/USD shows minor upward action and most news headlines were looking like ping-pong " virus fears easing" or "Virus fears growing" and that should have to explain recent FX motions by author's suggestion.
As a result, there was only one major thing - additional Fed 2.3 Trln measures to support small and medium business and provide guarantees to commercial banks on a loans of these companies. Second moment is consumer prices drop that point recession kind situation.
The dollar was on course for a weekly loss on Friday as the U.S. Federal Reserve’s massive new lending programme for small companies and signs of a slowdown in coronavirus infections reduced safe-haven demand.
Risk sentiment has steadily improved this week on tentative signs that the pandemic is slowing in U.S. and European hotspots, but some analysts remain cautious given so little is known about the virus and as many nations continue to grapple with the massive economic damage caused by the outbreak.
“The Fed has taken a lot of different measures, but the end result is a large increase in the supply of dollars,” said Junichi Ishikawa, senior FX strategist at IG Securities in Tokyo. “Positive news about the virus reduces the kind of panicked repatriation into dollars that we saw earlier this year. The end result is gradual dollar weakness.”
The Fed on Thursday announced a $2.3 trillion programme to offer loans to local governments and small and mid-sized businesses, the latest step to backstop the U.S. economy as the country battles the coronavirus crisis. The Fed has also slashed interest rates to zero, restated quantitative easing, and increased dollar liquidity to combat a shortage in money markets, leaving the dollar in the grip of bears in the spot market.
The central bank's announcement came as data showed that the number of Americans seeking unemployment benefits topped 6 million for the second straight week, with businesses closed across the country in an attempt to stem the spread of the virus.
“The Fed’s bold efforts helped to offset more horrific news on the job market. I would say that the Fed’s forceful action today underscores the unlimited firepower that the central bank wields and that’s going some way into sustaining the calm that’s descended on markets this week,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.
The Federal Reserve will continue to use all the tools at its disposal until the U.S. economy begins to rebound fully from the harm caused by the novel coronavirus outbreak, Fed Chair Jerome Powell said on Thursday, even as he acknowledged the limits of the central bank's powers.
The U.S. consumer prices fell by the most in more than five years in March and further decreases are likely as the novel coronavirus outbreak suppresses demand for some goods and services, offsetting price increases related to shortages resulting from disruptions to the supply chain.
“The big concern right now is deflation,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh. “Deflation is likely to take hold over the next few months as businesses slash prices in response to much lower demand from the coronavirus outbreak and associated restrictions on movement.”
The Labor Department said on Friday its consumer price index dropped 0.4% last month amid a tumble in the cost of gasoline, and record decreases in hotel accommodation, apparel and airline ticket prices. That was the biggest drop since January 2015 and followed a 0.1% gain in February. In the 12 months through March, the CPI increased 1.5%, the smallest advance since February 2019, after accelerating 2.3% in February. Economists polled by Reuters had forecast the CPI dropping 0.3% in March and climbing 1.6% year-on-year.
Deflation, a decline in the general price level, is harmful during an economic downturn as consumers and businesses can delay purchases in anticipation of lower prices. It can also distort monetary policy, the labor market and signals from stock and real estate prices, economists say.
Economists said it was unlikely these massive stimulus measures would spark inflation, noting that price pressures remained low during the Great Recession and after despite the U.S. central bank pumping money into the economy through extensive bond buying programs.
“The disinflationary impulse, along with the great disruption in economic and financial market activity, is a key reason why the Fed is unleashing vast new monetary policy stimulus,” said Gregory Daco, chief U.S. economist at Oxford Economics in New York.
CFTC Data
Speculators' net short U.S. dollar positioning in the latest week touched their largest level since May 2018, according to calculations by Reuters and
U.S. Commodity Futures Trading Commission data released on Friday. The value of the net short dollar position was $10.5 billion in the week ended on April 7, from net shorts of $9.9 billion the previous week. Speculators have been short on the U.S. dollar for four consecutive weeks.
The dollar has been pressured in the last few weeks by Federal Reserve measures which have flooded the financial system with dollars to address a liquidity crunch caused in part by demand for the U.S. currency.
Speaking on EUR - it also shows increasing of net long position. Speculators have increased longs for ~6K contracts and Open interest has increased for ~ 3K contracts, that has bullish sentiment as position is rising on the background of open interest increasing.
Source: cftc.gov
Charting by Investing.com
Now one of the major questions is second wave of pandemic. Although this subject is still uncertain but there are few relative factors that point on possibility of this scenario. First is VIX futures quotes, second - rising new cases in China again. They are few but they appear again. If second wave still will happen - it is expected in fall.
The Cboe Volatility Index, known as Wall Street’s fear gauge, recently traded at 43.36 on Wednesday from a record closing high of 82.69 on Mar. 16.
Prices for near-term VIX futures, which reflect expectations of volatility in coming months, have dropped as well in the past two weeks. Front-month VIX futures, which expire on Apr. 15, were last trading at 42.15 from 45.875 on Mar. 26.
Yet longer-dated VIX futures have risen since late March. VIX futures expiring in September, for instance, have risen to 30.85 on Wednesday from 28.65 on Mar. 26.
Their continued buoyancy reflects expectations that it will likely take months for investors to get a clear picture of the economic impact of the pandemic. Recent U.S. data have only begun to reflect the damage to employment and other areas.
“We don’t know the full economic impact, hence volatility has remained sticky,” said Stacey Gilbert, portfolio manager for derivatives at Glenmede Investment Management.
Some strategists also pointed to the possibility of a second wave of coronavirus infections, which could delay the resumption of normal business activity. Signs of a second wave have already emerged in China, and certain economic indicators, such as coal consumption by power plants and property sales in top cities, have pulled back, economists at Citi wrote on Tuesday.
“There’s a danger of getting lulled into complacency in the summer that we’ll get to ‘normal,’ and then get a repeat of this in the fall,” said Amy Wu Silverman, equity derivatives strategist at RBC Capital Markets.
It has taken VIX futures anywhere from five to 15 months to revert to typical levels after past market shocks, said Gilbert at Glenmede. Given the current slowdown was provoked by health rather than financial concerns, it could take longer for volatility markets to fully process its effects, she said.
If the U.S. economy were to remain partially closed into the fall, it could also influence November’s U.S. presidential election and thereby usher in market turbulence, said Michael Purves, chief executive of Tallbacken Capital Advisors. “These kind of events mean volatility in the political arena as well, and some of that has enduring impact in the market,” Purves said.
Also guys, if you take a look at recent S&P 500 CFTC data you will see sharp drop in net long position, despite 20% appreciation since March lows. This contradiction stands in favor of longer-term recovery hypothesis.
Source: cftc.gov
Charting by Investing.com
Fathom makes the bottom line, trying to take a look at US situation in general, showing their US Sentiment indicator
We have updated our US Economic Sentiment Indicator with a reading for March. The index is a single measure which incorporates readings from a range of business and consumer confidence surveys. The index dropped very fast in March, but it still remains in positive territory; much higher than it was at any point in 2008 or 2009, even though there is a widespread expectation that the short-term economic contraction due to the crisis is going to be a lot bigger than the contraction in late 2008/early 2009.
There are a few possible interpretations for this. First, that consumers and businesses are looking through the current shock and expect activity to rebound soon (supporting the case for a V-shaped recovery and giving the government a thumbs up for its support measures taken thus far). Second, that technical quirks with the business and consumer surveys mean that they do not fully reflect the magnitude of sharp swings in real economic activity. Third, that some of the surveys were conducted during the month of March and did not fully incorporate the effect of the lockdown. We will explore these issues in more detail in due course.
As we've said last week - there are still three conditions of V-shape recovery. They are:
- widespread lockdowns are successful in bringing the pandemic under control within a few months. This is controlled by daily mortality statistics;
- governments around the world put in place packages of financial support that are sufficient to keep those firms that have been told to cease production solvent, and their staff able to pay the bills;
- No relapse of pandemic in Autumn.China’s National Health Commission (NHC) said there were 42 new confirmed cases as of April 9, of which 38 were attributed to travelers coming from overseas.
Technicals
Monthly
In general market has spent the week in relatively tight range that makes no impact on monthly chart. So, as we've said - technically EUR direction depends on breakout. On monthly chart we have doji, that is also the bullish grabber.
Interestingly, that doji levels coincide with Pivots support and resistance levels as well. Downside breakout opens road to the parity, while upside break should open road for equal doji distance to upside - somewhere to 1.23 area. Still, taking in consideration fundamental background it seems that EU is paralyzed in making any decision as countries are not united on the face of common tragedy. Despite outstanding liquidity injection, the consequences of pandemic not necessary should be tragic. Demand for USD could hold for awhile.
Our major indicator here is the Dollar Index chart, or better to say historical resistance level that will provide the direction. This is all time K-level. As you understand, its breakout or reversal out from it will be major event for FX market. Thus, in nearest time, until breakout will happen we mostly will deal with shorter-term setups of a smaller scale.
Weekly
We keep weekly analysis without any changes. Trend stands bearish and recent week has become an inside one, compares to previous one. In general we talked about two possible scenarios - downside breakout and continuation to next long term target around par (which is our XOP), or appearing of reversal pattern. As we've said - "market reaction on daily chart should have to clarify this and by the result of this week".
Currently we see few moments that hurt idea of bullish reversal, although not cancelled it totally. As we said, we have two potential patterns - widening triangle or diamond shape, second - extended bullish engulfing pattern inside. So, currently it seems downside action is too strong for engulfing as EUR has broken all support levels on daily chart. Although lows of the pattern are still intact and supported by oversold level, downside action is too extended to treat it as just a pullback before upside continuation.
Second, for diamond - we should have seen continuation back to the top, while we've got sharp downside reversal instead. Trend again has turned bearish here. Combination of these two factors make not as attractive taking long position here, at least right now. Still, as EUR stands as depended variable - we do not cancel bullish scenario totally.
Daily
Here we take a look at Dollar Index, because on daily EUR chart we have nothing new - the same picture as on Friday. But on DXY we have one important detail that could help us a lot during next week.
Here we have bearish grabber that we do not on EUR. This pattern suggests drop below recent lows on DXY. This, in turn, means that EUR could climb above 1.1150 level as it takes 70% value in DXY. Currently we're watching just for near standing target on EUR - 1.10 resistance Agreement, but, taking in consideration DXY grabber we could consider upside XOP as well.
Intraday
Initially we watch for this scenario - reaching of 1.10 Agreement resistance that could give us "222" Sell pattern as well, where we intend to consider short entry. Right now situation still looks bearish because of slow CD leg right to 1.10 area. Usually it suggests reversal at "D" point rather than just a pullback. But something could change through Easter weekend, as DXY grabber suggests higher action on EUR.
Here is our picture for next week, guys. First is, we expect upside continuation to 1.10 area where we consider ability for scalp short trade out from Agreement resistance area. Then we will see how market will behave in relation to DXY grabber. That probably should be supported by news headlines or some speech, as usual, because pure technical signs, at least on EUR do not show currently strength and ability to break 1.10 level.
Conclusion:
After the "big splash" based on nervousness background within few weeks - we see calming markets across the board. Not only FX, but other markets as well. It seems that investors are living more by expectations rather than by current situation. As "expectations" and perspectives are rather blur by far - nobody makes sharp shifts on the markets as well.
By our view, the major event is Covid-19 autumn relapse. If world will be able to avoid it - then we expect acceleration of global recovery closer to the autumn. Other measures mostly have secondary meaning because they just determine the speed of recovery but not recovery per se. Thus, we also have no choice but wait and see what will happen, and focusing on minor daily/intraday setups.
. Here is another one could be formed. This is the reason, by the way to book result by the end of the day. Its target coincides with 4H OP. For long position we do not see good context yet. 