Sive Morten
Special Consultant to the FPA
- Messages
- 18,527
Fundamentals
In general, this was good week for us. Although we didn't have any long-term setups, our tactical intraday scenarios have done well, mostly driven by external factors - ECB statement, US statistics and cross-border bank deal.
The major volatility has come on Wed by ECB statement. For us, this statement has not become an eye-opener and just confirm our view on EU/US economy balance, where EU stands as dependable variable.Recent stats from Germany confirms this as well.
European Central Bank President Mario Draghi underscored the risks facing the euro zone economy, reinforcing bets on possible further stimulus to prevent the region from slipping into recession.
"The essence of Draghi's message is 'We are willing to look at all options, but we are not there yet'," said Boris Schlossberg, managing director of BK Asset Management in New York. "Incoming data continue to be weak, especially for the manufacturing sector ...
The slower growth momentum is expected to extend into the current year," Draghi said at a press conference after a meeting where policy-makers left their easy policy unchanged.
He also cited the risks from trade disputes to regional business activity after U.S. President Donald Trump threatened to impose tariffs on $11 billion worth of European Union goods.
The dollar enjoyed a respite from recent selling as government data showed the biggest one-month jump in U.S. consumer prices in 14 months in March and it was also bolstered by the latest reading of the U.S. consumer price index.
The U.S. government's broadest inflation gauge rose 0.4% in March, the biggest monthly increase since January 2018, while the CPI core rate, which excludes volatile food and energy prices, edged up 0.1%, falling short of the 0.2% gain forecast by analysts polled by Reuters.
The somewhat mixed CPI report soothed worries about price growth fading, but did not dispel the view the Federal Reserve may lower key U.S. interest rates by early 2020, analysts said.
U.S. producer prices increased by the most in five months in March, the Labor Department reported, with its producer price index for final demand rising 0.6 percent in March, lifted by a surge in the cost of gasoline. Despite the top line increase, underlying wholesale inflation was tame.
Particular by these events our Wed H&S trade was completed. Next session we were going to go long on EUR and external factors again have made our day:
The dollar hovered near two-week lows on Thursday as Federal Reserve minutes reinforced its recent dovish policy tilt while the pound held steady after European leaders extended the deadline for Britain to leave the union.
U.S. central bankers also debated possible policy moves the Fed could make after it ends its balance sheet reduction programme by September, with some advocating purchases of U.S. Treasury securities at that point.
“Some people say the minutes contained few surprises but a close look suggests the Fed is likely to become more dovish as time goes by,” said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank.
Sterling showed no reaction after the EU delayed the deadline for Brexit for the second time in less than a month, in line with market expectations that Britain will not crash out of the bloc on Friday without a deal.
Still, the decision did little to boost clarity on exactly how, when, or even if at all, the UK will leave the EU, is keeping the pound in check.
“At least there won’t be a no-deal Brexit this month. But while I’m no expert on British politics, it seems difficult for the parliament to come to any agreement,” said Kazushige Kaida, head of forex at State Street Bank.
“They just kicked the can down the road. Once the dust settles, I would expect to see selling in sterling,” he added.
“Concern around Brexit and the ECB’s increasingly dovish stance is weighing on euro and sterling,” said Karl Schamotta, director of foreign exchange strategy and structured products at Cambridge Global Payments.
The implied volatilities on the pound’s options plunged, with three-month volatilities falling to 8.325/8.825 percent, a level last seen in late August. It has slipped below the actual volatilities over the past three months, which stood at 9.17 percent on Thursday.
Drop in volatility, guys, suggests rising inner tension and that big action stands right around the corner and hardly this action will be upward.
The advantages for sterling, as well as UK and European equities, include the removal of a near-term, no-deal Brexit. But that is offset by the prospects of UK Prime Minister Theresa May’s replacement, a general election and the threat to the UK economy of prolonged uncertainty.
On Friday our upside EUR target has been completed as the euro gained in a move dealers said may have be driven by anticipated currency demand arising from a Japanese bank’s plans to purchase a German multi-billion dollar aviation finance business.
Markets are often quiet in the hours before European trade opens and thin liquidity has in recent months caused sudden jolts or “flash crashes” in major currencies including the Swiss franc.
But the heavily-traded euro-dollar currency pair, with a daily turnover of over $1 trillion, has recently traded in a narrow range at a time when volatility in foreign exchange markets is at a multi-year low, said Elisabeth Andreae, an FX strategist at Commerzbank.
“It is remarkable that particularly in this market environment we see jumps even in EUR-USD typically during Asian trading times. This morning we saw a move from $1.1260 to $1.1290 in one fell swoop,” she said.
Dealers said speculators were buying the euro in response to reports on Mitsubishi UFJ Financial Group’s planned purchase of the aviation financing business of Germany’s DZ Bank. As of June last year, the portfolio of that business stood at 5.6 billion euros.
The transaction was announced on March 1 and MUFG said the transaction was expected to close after June.
Masafumi Yamamoto, chief forex strategist at Mizuho Securities in Tokyo expected the common currency to hold on to its gains.
“It is not really a surprise that the euro is capable of reacting quickly to potentially positive factors, given the fundamentals surrounding the euro zone economy are showing signs of improvement.”
“The euro was well-supported in the Asian session on Japanese demand on the crosses but the euro has also looked quite ‘cheap’ in broader terms in recent weeks and still looks – in our opinion – a relative bargain around the 1.12 area,” Shaun Osborne, chief FX strategist at Scotiabank in Toronto, said in a note.
Investors’ appetite for riskier currencies got a boost after Chinese data showed exports rebounded last month, helping offset weaker imports, and reports of another reduction in Germany’s growth forecasts, analysts said.
Data from Europe was encouraging. Euro zone industrial output declined by less than expected in February.
U.S. stocks climbed back to near record highs on Friday after the largest U.S. bank, JPMorgan Chase & Co, soothed worries that the first-quarter earnings season would pour cold water on Wall Street’s big rally back from last year’s slump.
“It’s a party-like atmosphere for markets. Good news from China and U.S. earnings off to an auspicious start,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.
“This has safe-havens on their back foot, that’s why the dollar is underperforming,” he said.
COT Report
Despite positive action that we saw on EUR by the end of the week, net speculation position on EUR remains bearish and was increased slightly this week. This mostly stands in agreement with our expectation - we're waiting for some upside continuation on EUR (Due DRPO "Sell" pattern on dollar index), but treat this action just as a retracement, which coming downward turn later:
source: CFTC.gov
Charting by Investing.com
As Brexit still stands on the table, here and there we start to hear some hints on possible other "exits" that could happen soon, such as Grexit, Frexit etc. Fathom analysis tells that chances are very small for that now.
Markets see low risk of euro default amid election uncertainty
by Fathom consulting
Fathom’s proprietary indicators gauge the market-implied likelihood of euro area sovereign defaults. There were broad-based declines in the indicators in March and, for most countries, they remain low by historical standards. This is despite a weaker growth environment and indications that some governments may seek to loosen fiscal policy. Political risk, a major driver of uncertainty during the heyday of the euro area debt crisis, also appears diminished in 2019 ― with little reaction in the default indicators to news concerning national parliamentary elections scheduled in Spain, Portugal, Greece, Finland and Belgium. Indeed, Fathom’s proprietary euro exit indicators are now below 10% for all countries, suggesting that investors do not expect these elections to seriously call into question membership of the euro.
That's being said guys, despite positive recent week for EUR and fast recovering after ECB statement, situation remains tricky. Major bearish long-term sentiment around EUR has not disappeared. This is the signal to us to not to be too fascinating with recent rally. The turn down scenario in perspective of 1-2 weeks still is on the table.
Technicals
Monthly
Price action this week mostly was going upward and EUR stands inside the range of recent drop. Thus, this action makes no impact on monthly and weekly time frames, where we keep our view with no changes.
As we said previously we're watching either downside breakout and start action to 1.08 and later to 1.03 or ability of the EUR to hold above 1.12 and turning up. It seems that market goes up with the latter by far.
Market stands at support area around major 5/8 Fib level. In case of upside action, YPP will be important target , because, as a rule, market tends to touch YPP through the year. But after recent events chances on rally stand phantom.
As Fathom consulting expects first rate change by Fed in June, but market is not ready for this step (as wee see from Fed watch tool by CME) - this is the first moment when EUR could show big action. By our view this could happen somewhere in the summer. Of course, recent news and market sentiment hardly agree with this now, but situation changes rapidly and this scenario is not erased totally yet. Brexit saga also could add some fuel to the fire and we could get strong action. UK probably will try to finish Brexit as soon as possible to not take part in EU elections.
As we said this many times previously - indirect technical factors point on market's weakness, at least in long-term perspectives, as EUR can't jump out from strong support within more than 5-6 months and just lays upon it. Trend stands bearish here.
Monthly situation shortly could be described as indecision with light gravitation to the downside. In fact, long standing around Yearly Pivot last year confirms things that we've discussed above. MACD trend stands bearish here.
Thus we keep valid our downside COP target around 1.03 by far.
Just by using of common sense, guys, in nowadays it is difficult to expect something positive as in global economy as in politics. Hence, any bad new triggers demand for safe haven assets and US dollar. Following simple logic odds stand in favor of downside trend rather than sharp upside reversal.
So, although on technical picture we see just light and indirect signs of EUR weakness, political background stands negative. This is the major reason why I do not believe in resurrection of bull trend on EUR in this year.
Weekly
Here is again - nothing to comment yet. As last week, this time frame is least informative among the others as nothing happens here. Market stands in the same consolidation, providing just minimal changes. Since price stands long-term here already, the exit probably should be strong and fast.
The only new issue that we've got is bearish grabber. But, market stands so choppy that it is difficult to use this pattern as context for the trade. Definitely it is not sufficient for position taking.
Even Dollar Index weekly chart is more informative for us. There, at least, we have uncompleted major COP target, which suggests upside continuation (on DXY) and downward turn on EUR again someday:
Daily
So, on Friday EUR perfectly hit our 1.1318 target and 50% Fib resistance level Agreement. Trend stands bullish here, market is not at overbought and EUR has no technical barriers to proceed higher.
Besides, we still have DRPO "Sell" pattern on DXY daily chart, which has not reached the minimal target yet:
Potentially it keeps door open for upside continuation on EUR. At the same time, we has to recall that net short position on EUR have been increased. It could mean that recent rally widely was used for short entry and longs covering by speculators.
Keeping all this stuff in mind, we suggest pullback in the beginning of the week. Technically major target is hit. Once it starts, we will see how it goes and get more information on direction.
Intraday
4H chart shows perfect bearish engulfing pattern right at major Agreement resistance. Black candle of engulfing pattern is also a reversal one. Thus, chances on AB-CD drop on 1H chart looks good.
But perspectives of the drop could differ. Thus, definitely market has to reach first support area of 1.1285 Fib level, combined with WPP and MPP in a way of AB=CD action. Next support stands around major trend line and K-levels of 1.1265-1.1270, but it is not the fact that EUR will reach it. Finally, downside breakout stands absolutely unclear yet.
In current circumstances we see only single trading plan that could be applied here. First step is to go short on minor upside retracement, which should be "BC" leg of AB-CD pattern. When market hits OP target, somewhere around 1.1285 support area - take 50% profit and move stops to breakeven on the rest. And just watch what will happen next... But this is only for intraday traders. Daily traders should wait for retracement as market stands at Agreement resistance and do nothing.
Conclusion:
Despite good performance last week and completion of our both setups, we should keep in mind overall bearish sentiment of the market. It puts the shadow on upside perspectives of the EUR. As we expect technical retracement right on Monday - later we need to monitor how it will go, and apply trading plan that provides safety priority over return.
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.
In general, this was good week for us. Although we didn't have any long-term setups, our tactical intraday scenarios have done well, mostly driven by external factors - ECB statement, US statistics and cross-border bank deal.
The major volatility has come on Wed by ECB statement. For us, this statement has not become an eye-opener and just confirm our view on EU/US economy balance, where EU stands as dependable variable.Recent stats from Germany confirms this as well.
European Central Bank President Mario Draghi underscored the risks facing the euro zone economy, reinforcing bets on possible further stimulus to prevent the region from slipping into recession.
"The essence of Draghi's message is 'We are willing to look at all options, but we are not there yet'," said Boris Schlossberg, managing director of BK Asset Management in New York. "Incoming data continue to be weak, especially for the manufacturing sector ...
The slower growth momentum is expected to extend into the current year," Draghi said at a press conference after a meeting where policy-makers left their easy policy unchanged.
He also cited the risks from trade disputes to regional business activity after U.S. President Donald Trump threatened to impose tariffs on $11 billion worth of European Union goods.
The dollar enjoyed a respite from recent selling as government data showed the biggest one-month jump in U.S. consumer prices in 14 months in March and it was also bolstered by the latest reading of the U.S. consumer price index.
The U.S. government's broadest inflation gauge rose 0.4% in March, the biggest monthly increase since January 2018, while the CPI core rate, which excludes volatile food and energy prices, edged up 0.1%, falling short of the 0.2% gain forecast by analysts polled by Reuters.
The somewhat mixed CPI report soothed worries about price growth fading, but did not dispel the view the Federal Reserve may lower key U.S. interest rates by early 2020, analysts said.
U.S. producer prices increased by the most in five months in March, the Labor Department reported, with its producer price index for final demand rising 0.6 percent in March, lifted by a surge in the cost of gasoline. Despite the top line increase, underlying wholesale inflation was tame.
Particular by these events our Wed H&S trade was completed. Next session we were going to go long on EUR and external factors again have made our day:
The dollar hovered near two-week lows on Thursday as Federal Reserve minutes reinforced its recent dovish policy tilt while the pound held steady after European leaders extended the deadline for Britain to leave the union.
U.S. central bankers also debated possible policy moves the Fed could make after it ends its balance sheet reduction programme by September, with some advocating purchases of U.S. Treasury securities at that point.
“Some people say the minutes contained few surprises but a close look suggests the Fed is likely to become more dovish as time goes by,” said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank.
Sterling showed no reaction after the EU delayed the deadline for Brexit for the second time in less than a month, in line with market expectations that Britain will not crash out of the bloc on Friday without a deal.
Still, the decision did little to boost clarity on exactly how, when, or even if at all, the UK will leave the EU, is keeping the pound in check.
“At least there won’t be a no-deal Brexit this month. But while I’m no expert on British politics, it seems difficult for the parliament to come to any agreement,” said Kazushige Kaida, head of forex at State Street Bank.
“They just kicked the can down the road. Once the dust settles, I would expect to see selling in sterling,” he added.
“Concern around Brexit and the ECB’s increasingly dovish stance is weighing on euro and sterling,” said Karl Schamotta, director of foreign exchange strategy and structured products at Cambridge Global Payments.
The implied volatilities on the pound’s options plunged, with three-month volatilities falling to 8.325/8.825 percent, a level last seen in late August. It has slipped below the actual volatilities over the past three months, which stood at 9.17 percent on Thursday.
Drop in volatility, guys, suggests rising inner tension and that big action stands right around the corner and hardly this action will be upward.
The advantages for sterling, as well as UK and European equities, include the removal of a near-term, no-deal Brexit. But that is offset by the prospects of UK Prime Minister Theresa May’s replacement, a general election and the threat to the UK economy of prolonged uncertainty.
On Friday our upside EUR target has been completed as the euro gained in a move dealers said may have be driven by anticipated currency demand arising from a Japanese bank’s plans to purchase a German multi-billion dollar aviation finance business.
Markets are often quiet in the hours before European trade opens and thin liquidity has in recent months caused sudden jolts or “flash crashes” in major currencies including the Swiss franc.
But the heavily-traded euro-dollar currency pair, with a daily turnover of over $1 trillion, has recently traded in a narrow range at a time when volatility in foreign exchange markets is at a multi-year low, said Elisabeth Andreae, an FX strategist at Commerzbank.
“It is remarkable that particularly in this market environment we see jumps even in EUR-USD typically during Asian trading times. This morning we saw a move from $1.1260 to $1.1290 in one fell swoop,” she said.
Dealers said speculators were buying the euro in response to reports on Mitsubishi UFJ Financial Group’s planned purchase of the aviation financing business of Germany’s DZ Bank. As of June last year, the portfolio of that business stood at 5.6 billion euros.
The transaction was announced on March 1 and MUFG said the transaction was expected to close after June.
Masafumi Yamamoto, chief forex strategist at Mizuho Securities in Tokyo expected the common currency to hold on to its gains.
“It is not really a surprise that the euro is capable of reacting quickly to potentially positive factors, given the fundamentals surrounding the euro zone economy are showing signs of improvement.”
“The euro was well-supported in the Asian session on Japanese demand on the crosses but the euro has also looked quite ‘cheap’ in broader terms in recent weeks and still looks – in our opinion – a relative bargain around the 1.12 area,” Shaun Osborne, chief FX strategist at Scotiabank in Toronto, said in a note.
Investors’ appetite for riskier currencies got a boost after Chinese data showed exports rebounded last month, helping offset weaker imports, and reports of another reduction in Germany’s growth forecasts, analysts said.
Data from Europe was encouraging. Euro zone industrial output declined by less than expected in February.
U.S. stocks climbed back to near record highs on Friday after the largest U.S. bank, JPMorgan Chase & Co, soothed worries that the first-quarter earnings season would pour cold water on Wall Street’s big rally back from last year’s slump.
“It’s a party-like atmosphere for markets. Good news from China and U.S. earnings off to an auspicious start,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.
“This has safe-havens on their back foot, that’s why the dollar is underperforming,” he said.
COT Report
Despite positive action that we saw on EUR by the end of the week, net speculation position on EUR remains bearish and was increased slightly this week. This mostly stands in agreement with our expectation - we're waiting for some upside continuation on EUR (Due DRPO "Sell" pattern on dollar index), but treat this action just as a retracement, which coming downward turn later:
source: CFTC.gov
Charting by Investing.com
As Brexit still stands on the table, here and there we start to hear some hints on possible other "exits" that could happen soon, such as Grexit, Frexit etc. Fathom analysis tells that chances are very small for that now.
Markets see low risk of euro default amid election uncertainty
by Fathom consulting
Fathom’s proprietary indicators gauge the market-implied likelihood of euro area sovereign defaults. There were broad-based declines in the indicators in March and, for most countries, they remain low by historical standards. This is despite a weaker growth environment and indications that some governments may seek to loosen fiscal policy. Political risk, a major driver of uncertainty during the heyday of the euro area debt crisis, also appears diminished in 2019 ― with little reaction in the default indicators to news concerning national parliamentary elections scheduled in Spain, Portugal, Greece, Finland and Belgium. Indeed, Fathom’s proprietary euro exit indicators are now below 10% for all countries, suggesting that investors do not expect these elections to seriously call into question membership of the euro.
That's being said guys, despite positive recent week for EUR and fast recovering after ECB statement, situation remains tricky. Major bearish long-term sentiment around EUR has not disappeared. This is the signal to us to not to be too fascinating with recent rally. The turn down scenario in perspective of 1-2 weeks still is on the table.
Technicals
Monthly
Price action this week mostly was going upward and EUR stands inside the range of recent drop. Thus, this action makes no impact on monthly and weekly time frames, where we keep our view with no changes.
As we said previously we're watching either downside breakout and start action to 1.08 and later to 1.03 or ability of the EUR to hold above 1.12 and turning up. It seems that market goes up with the latter by far.
Market stands at support area around major 5/8 Fib level. In case of upside action, YPP will be important target , because, as a rule, market tends to touch YPP through the year. But after recent events chances on rally stand phantom.
As Fathom consulting expects first rate change by Fed in June, but market is not ready for this step (as wee see from Fed watch tool by CME) - this is the first moment when EUR could show big action. By our view this could happen somewhere in the summer. Of course, recent news and market sentiment hardly agree with this now, but situation changes rapidly and this scenario is not erased totally yet. Brexit saga also could add some fuel to the fire and we could get strong action. UK probably will try to finish Brexit as soon as possible to not take part in EU elections.
As we said this many times previously - indirect technical factors point on market's weakness, at least in long-term perspectives, as EUR can't jump out from strong support within more than 5-6 months and just lays upon it. Trend stands bearish here.
Monthly situation shortly could be described as indecision with light gravitation to the downside. In fact, long standing around Yearly Pivot last year confirms things that we've discussed above. MACD trend stands bearish here.
Thus we keep valid our downside COP target around 1.03 by far.
Just by using of common sense, guys, in nowadays it is difficult to expect something positive as in global economy as in politics. Hence, any bad new triggers demand for safe haven assets and US dollar. Following simple logic odds stand in favor of downside trend rather than sharp upside reversal.
So, although on technical picture we see just light and indirect signs of EUR weakness, political background stands negative. This is the major reason why I do not believe in resurrection of bull trend on EUR in this year.
Weekly
Here is again - nothing to comment yet. As last week, this time frame is least informative among the others as nothing happens here. Market stands in the same consolidation, providing just minimal changes. Since price stands long-term here already, the exit probably should be strong and fast.
The only new issue that we've got is bearish grabber. But, market stands so choppy that it is difficult to use this pattern as context for the trade. Definitely it is not sufficient for position taking.
Even Dollar Index weekly chart is more informative for us. There, at least, we have uncompleted major COP target, which suggests upside continuation (on DXY) and downward turn on EUR again someday:
Daily
So, on Friday EUR perfectly hit our 1.1318 target and 50% Fib resistance level Agreement. Trend stands bullish here, market is not at overbought and EUR has no technical barriers to proceed higher.
Besides, we still have DRPO "Sell" pattern on DXY daily chart, which has not reached the minimal target yet:
Keeping all this stuff in mind, we suggest pullback in the beginning of the week. Technically major target is hit. Once it starts, we will see how it goes and get more information on direction.
Intraday
4H chart shows perfect bearish engulfing pattern right at major Agreement resistance. Black candle of engulfing pattern is also a reversal one. Thus, chances on AB-CD drop on 1H chart looks good.
But perspectives of the drop could differ. Thus, definitely market has to reach first support area of 1.1285 Fib level, combined with WPP and MPP in a way of AB=CD action. Next support stands around major trend line and K-levels of 1.1265-1.1270, but it is not the fact that EUR will reach it. Finally, downside breakout stands absolutely unclear yet.
In current circumstances we see only single trading plan that could be applied here. First step is to go short on minor upside retracement, which should be "BC" leg of AB-CD pattern. When market hits OP target, somewhere around 1.1285 support area - take 50% profit and move stops to breakeven on the rest. And just watch what will happen next... But this is only for intraday traders. Daily traders should wait for retracement as market stands at Agreement resistance and do nothing.
Conclusion:
Despite good performance last week and completion of our both setups, we should keep in mind overall bearish sentiment of the market. It puts the shadow on upside perspectives of the EUR. As we expect technical retracement right on Monday - later we need to monitor how it will go, and apply trading plan that provides safety priority over return.
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.