Forex FOREX PRO WEEKLY December 06 - 10, 2021

Sive Morten

Special Consultant to the FPA

Within just two weeks market sentiment and overall environment has changed drastically. The first bell was right after Thanksgiving when omicron has been detected. I already expressed my opinion that I see a lot of artificial things around it, and it it is too many coincidence around its appearing. But we should understand that people who support omicron panic, governments and central banks are from the same boat. All markets have tried to resist to this topic, standing near the tops for the two weeks, trying to return back, but it seems that it is not let to do. Bitcoin yesterday has dropped under 42K and this might be the beginning of massive sell-off in risky assets. Now we also see multiple signals from central banks that omicron is changing their view on the policy. Till the end of the year we could get big wave of news that could totally re-shape fundamental background. Such negative moments as inflation and supply chain problems could increase even further. This topic is so huge that we can't discuss all aspects even in the weekly report, but gradually we try to do this within few weeks.

Market overview

"(Last) Friday's move was overdone, but the economic outlook is even more uncertain than it was a week ago," wrote Kit Juckes, head of FX strategy at Societe Generale, in a note to clients.

Commerzbank's head of FX and commodity research Ulrich Leuchtmann wrote in a client note that the euro had initially benefited from the Omicron variant because of the dovishness of the ECB.

"If Omicron leads to lockdowns and a renewed reduction in economic activity on a global scale all rate hike expectations turn out to be in vain and then they will be priced out again pretty quickly," he said. And which currencies will be the relative winners? Of course, the ones where rate hikes were never priced in very much in the first place. And those were EUR, JPY and CHF."

"Vaccine efficacy results with the next two weeks will be the most important headline to watch out for as well as whether symptoms are different from that of other variants," Nomura analyst Jordan Rochester said in a note to clients.

Goldman Sachs said it would not change its economic forecasts on the basis of the Omicron variant until its likely impact became clearer.

Copper prices fell to a two-week low on Tuesday as worries about the damage to demand and economic growth from the Omicron coronavirus variant and monetary policy tightening in the United States weighed on sentiment.

"While the severity of the new variant remains a big uncertainty, it casts a shadow over demand growth in the near future and further complicates the supply chain," said ING analyst Wenyu Yao.

Analysts say problems with shipping metal to consumers is partly behind shortages in some locations, including Europe and the United States. The main trucking lobbies in Canada and the United States are warning that vaccine and testing requirements for workers will further disrupt supply chains because there is already a dire shortage of drivers. More than two-thirds of goods traded between Canada and the United States travels on roads and highways. Motor carriers move 70% of all U.S. freight tonnage.

It estimates that 10-20%, or between 12,000-22,000 of Canadian truck drivers, and 40%, or some 16,000 of U.S. truck drivers traveling into Canada would be sidelined if the requirement begins.

"This is not a trucking issue. This is a Canada-U.S. economic issue," Laskowski told Reuters, adding about 70% of that C$650 billion ($507 billion) U.S.-Canada trade moves by truck.

"We'll be seeing shortages of goods in stores" if the vaccine requirement deadline is not delayed, said Perrin Beatty, president of the Canadian Chamber of Commerce.

Moderna's CEO said COVID-19 vaccines are unlikely to be as effective against the Omicron variant as they have been with other types. "There is no world, I think, where (the effectiveness) is the same level . . . we had with Delta," Moderna Chief Executive Stéphane Bancel told the Financial Times in an interview.

"Market participants’ fears over a more disruptive outcome for the global economy have been reinforced overnight by comments from Moderna Inc. CEO," Mizuho strategists said in client note.

The euro surged on Tuesday and was on track for its biggest three-day rising streak this year, as traders cut their short positions on the single currency after Moderna's CEO said COVID-19 vaccines were unlikely to be as effective against the Omicron variant as they have been with other types.

Risk appetite took a battering across all markets for a second day in less than a week after his comments reinforced expectations that the global economy is set for a rocky and longer return to normalcy in the coming months. That was most evident in the jump in the value of the euro on Tuesday as traders rushed to cut their large short bets on the U.S. Federal Reserve raising interest rates quicker than its global peers next year.

"This is Round 2 of Omicron jitters evident in the unwinding of short euro/long stock positions," said Kenneth Broux, an FX strategist at Societe Generale in London. There is an element of short euro covering as well and the unwinding of U.S. rate hike bets is also undermining the dollar."

Money markets pushed back their expectation of a first, full 25 basis-point rate hike to September 2022, versus July last week. Unwinding of popular carry trades in the currency markets was the theme in London trading, with the Aussie tanking 0.8% versus the Swiss currency while the franc held within striking distance of a July 2015 low against the euro.

The Australian and New Zealand dollars remained under pressure on Wednesday having hit their lowest levels of the year after the U.S. Federal Reserve flagged a quicker withdrawal of stimulus, while worries about the Omicron variant also weighed.

"Further market pricing for FOMC rate hikes and/or negative news about Omicron can push AUD/USD below 0.7000," analysts at Australia's top bank Commonwealth of Australia said in a note.

Against the backdrop of Omicron uncertainty and rising COVID-19 cases in Europe, the end of crisis-level interest rates in the United States looms even larger following hawkish comments from Federal Reserve Chair Jerome Powell overnight. The dollar index already logged its biggest monthly rise since June in November on the thinking that inflation could drive rates U.S. higher sooner rather than later.

It again leapt briefly and short-dated bonds and interest rate futures whipped lower after Powell told lawmakers it was time to retire his description of price pressures as transitory, and that policymakers would discuss a faster taper.

"His references to bringing the tapering schedule forward a few months sounded as if he sees the (Fed) thinking (it would conclude in) March or April rather than May or June," said Steve Englander, head of FX research at Standard Chartered in New York. For the dollar, the knee-jerk reaction to a more hawkish Fed is likely to be strength, but we are skeptical that this will persist if growth fears emerge," he added.

The dollar's rebound started as a report from the Institute for Supply Management came out showing that U.S. manufacturing activity picked up in November amid strong demand for goods, keeping inflation high as factories continued to struggle with pandemic-related shortages of raw materials.

Nonfarm payrolls increased by 210,000 jobs last month, the Labor Department said, well below the 550,000 jobs economists polled by Reuters had forecast. The miss is significant because it comes even before the discovery of the new Omicron variant of the coronavirus which may further cloud the growth outlook. But the economy created 82,000 more jobs than initially reported in September and October, a sign of strength. That left employment 3.9 million jobs below the peak in February 2020.


"The Fed will see the report as more than adequate to stay on course to accelerate tapering of asset purchases at the December meeting, implying an end to purchases in March," said Andrew Hollenhorst, chief U.S. economist at Citigroup in New York. "Moreover, an unemployment rate that is poised to fall below 4.0% perhaps in the coming months keeps a first Fed rate hike in June or even earlier firmly on the table."

"On the surface, the numbers came in disappointing because they did not match expectations, but it was not a weak report," said Kevin Flanagan, head of fixed income strategy at WisdomTree Investments.

U.S. Treasury yields tumbled on Friday in choppy trading, with the 10-year yield dropping below 1.4% for the first time since September as a risk-off sentiment took hold in markets, sending Wall Street lower.

"There definitely is a broader risk-off tone. Stocks are going down led by high-beta names," said Tom Simons, a money market economist at Jefferies in New York.

Friday's labor report showed labor force participation rose to 61.8%, the highest since it fell off a cliff in the early days of the pandemic, and women - many of whom stayed home from jobs to fill in childcare, schooling and eldercare gaps - entered the labor force at the fastest rate since March.

"We think the Fed will view the economy as near full employment," Barclays economists wrote in a note, adding that not only do they expect the central bank to speed up its taper in December, but also to begin raising rates in March.

Economists at Goldman Sachs noted following the report that the survey response rate that feeds into the payrolls number was the lowest for a November in 13 years. Several months this year have seen upward revisions in later readings, owing in part to the difficulty of data collection during the pandemic. From May through September, 748,000 more jobs were created than reported in the Labor Department's initial estimate.

"We think that it is clear that QE has overstayed its welcome," Blackrock chief investment officer Rick Rieder wrote in a note to investors, but added, "the next few months will be fertile with information on Omicron risks, supply and demand influences, a potentially moderately slowing demand for goods and services, having moved further from the immense fiscal and monetary stimulus, and the potential alleviation of some of the supply-chain pressures that have pressed prices higher."


The higher prices seen today are generally related to the pandemic, but some price increases are also being seen more broadly and the risk of higher inflation has increased, Federal Reserve Chair Jerome Powell said on Tuesday.

"Generally, the higher prices we're seeing are related to the supply and demand imbalances that can be traced directly back to the pandemic and the reopening of the economy," Powell said during a hearing with the U.S. Senate Banking Committee. "But it's also the case that price increases have spread much more broadly ... and I think the risk of higher inflation has increased."

"We've gotten these conflicting claims about the new variant, and Powell's comments really threw the markets for a loop," said Marc Chandler, chief market strategist at Bannockburn Global Forex. "People are still pretty nervous," Chandler said.

The Bank of Japan can hold off on expanding stimulus unless a spike in Omicron cases triggers huge market turbulence, board member Seiji Adachi said, suggesting policymakers will tread cautiously as they ascertain the risks posed by the variant. Adachi, a former economist considered as among those favoring aggressive monetary easing, also said inflationary pressures in Japan were not just being driven up by rising energy costs but also from changing corporate price-setting behavior.

"The BOJ must consider taking additional easing steps only if developments surrounding the pandemic lead to a yen spike and stock price fall, and when such market conditions persist," Adachi told a briefing.

Adachi shrugged off concern raised by some analysts that recent yen declines could push up import costs and lead to stagflation, where inflation accelerates even as the economy remains in bad shape.

"Personally, I don't think Japan is facing a 'bad weak yen' that could lead to stagflation," Adachi said. The yen's recent fall actually is bringing benefits to the economy" by boosting profits Japanese firms reap overseas, he added.

Euro zone inflation remains temporary, two key European Central Bank policymakers argued on Thursday, even as U.S. officials made the case this week for abandoning the use of "transitory " to describe what have proven to be persistent price pressures. Inflation in the 19-country currency bloc hit a record high 4.9% last month and is likely to stay above the ECB's 2% target in 2022 but the bank has long argued that price pressure will abate on its own.

"The current inflation spike is temporary and driven largely by supply factors," ECB board member Fabio Panetta told a conference. "Central banks should have the patience to look through these effects and explain their policies to the people."

The debate is especially relevant as the ECB gears up for a crucial meeting on Dec. 16 when it is likely to end a pandemic emergency support scheme but may ramp up other support measures to pick up the slack.

Finnish central bank chief Olli Rehn sided with Panetta, specifically using the word "transitory" which U.S. Fed chief Jerome Powell said this week should be abandoned, although Rehn acknowledged inflation may take longer to come down than earlier thought.

"I do recognize that the micro experience of our citizens at the fuel pump is quite difference from the macro reading of economists and central bankers," Rehn told the same conference. "Still, in our view, euro area inflation is mostly transitory... even if some of its components will probably prevail longer over the next year than previously expected," he added.

The Omicron variant of COVID-19 could potentially prolong some of the supply chain challenges that heightened inflationary pressures during the pandemic and central banks need flexibility to address the uncertain landscape, a panel of economic experts said during the Reuters Next conference on Thursday.

"On the supply side, it means the inflationary pressures will probably persist even longer," said Kristin Forbes, an economics professor with the Sloan School of Management at MIT. "And given how tight everything is right now, that could mean some notable increases in inflation ... due to supply side constraints."

Policymakers are aware that they could face substantial risks in financial markets, credit markets and in inflation if there is a negative reaction to a shift in monetary policy, said Jose Perez-Gorozpe, head of emerging markets credit research at S&P Global Ratings.

Several Federal Reserve officials have shared publicly that they are open to winding down their asset purchases more quickly so they can raise interest rates sooner if needed to address inflation, a topic that will be discussed during their Dec. 14-15 meeting.

Bank of England policymaker Michael Saunders, who voted for an interest rate hike last month, said on Friday he wanted more information about the impact of the new Omicron coronavirus variant before deciding how to vote this month. Investors were pricing in only a 33% chance of a December rate hike after the speech, down from about 75% last week before news broke of the new variant.

"At present, given the new Omicron COVID variant has only been detected quite recently, there could be particular advantages in waiting to see more evidence on its possible effects on public health outcomes and hence on the economy," Saunders said in a speech. This could require a more abrupt and painful policy tightening later," Saunders said. "For me, the balance between these considerations is likely to be a key factor at the December meeting."

To be continued...

Sive Morten

Special Consultant to the FPA

Interest rate differentials will dominate sentiment in forex markets over the next three months, a Reuters poll of FX analysts found, placing the U.S. dollar in a unique position to extend its outperformance against its peers. With that policy impetus in its sails, the dollar is likely to find new converts in coming weeks from among those analysts who still expect it to weaken in the short- to medium-term.

"The dollar is well placed to repeat what it tends to do," said Paul Meggyesi, head of FX research at JP Morgan in London. Typically, on average, the dollar has gone up by four percentage points in broad index terms in the six months before the first Fed hike, and that's probably not an unreasonable projection for thinking about how much upside there could be for the dollar this time around."


However, some analysts held to the view the dollar would eventually weaken as underlying factors supporting the greenback's strength were unsustainable in the long run.

"If what you're looking at is inflation, you have to keep at the back of your mind that you're sort of looking at the near term, it can be a year, year and a half but ultimately there's a point at which they've done enough and then you hit a period of dollar weakness," said Steve Englander, head of G10 FX strategy at Standard Chartered. I'd say this is not a high quality dollar rally. It's not like the late 90s when you saw productivity booming. This is sort of the 70s rally which we know comes and goes."

"If you strip out the noise in the market at the moment, which is driven very much by uncertainties around Omicron, the dollar is in a fairly bullish cycle," said Kyle Rodda, a market analyst at IG in Melbourne. That's on the basis that clearly U.S. economic outperformance, especially within the developed world, is fairly entrenched for the time being, and we're really pricing in that the Fed is going to increase the pace of the tapering programme in December and set up rate hikes well before the middle of next year."

Narrowing equity market breadth, rising volatility and the prospects of rate hikes are the classic signs of a market top, BofA said in a weekly report on Thursday. Just five of the biggest U.S. technology stocks accounted for 71% of the nearly 20% gains in U.S stocks, BoFA analysts noted of the performance of shares in a weekly flows note based on EPFR data. A situation in which a tiny group of stocks powers gains while others lose ground is often viewed as an indicator that a rally is running out of steam.

"Hikes plus volatility plus divergences often a market top make," strategists at U.S. investment bank BofA led by Michael Hartnett said in a note.

U.S. Treasuries saw their biggest inflows since October 2020 while investment-grade and high-yield bond funds saw large outflows. Cash funds saw the biggest weekly inflows at $27.1 billion, followed by equities at $9 billion. In a sign that investors are unwinding some of those trades, BofA said its private clients have trimmed their equity positions for the past three weeks, led by outflows from growth and industrial sectors.

Futures on the federal funds rate, which track short-term interest rate expectations, late Friday reflected a roughly 50% chance that the Fed will raise rates from its current near-zero level by May, CME's Fed Watch tool showed. That compared with around 31% in early November.

COT Report

Speculators' net long positioning on the U.S. dollar in the latest week soared to its highest level since mid-June 2019, according to calculations by Reuters and U.S. Commodity Futures Trading Commission data released on Friday. The value of the net long dollar position was $23.99 billion for the week ended Nov. 30, up from net longs of $22.11 billion in the previous week. U.S. dollar net long positioning rose for a second straight week.

U.S. dollar net longs increased after Federal Reserve Chair Jerome Powell delivered hawkish testimonies early this week despite the emergence of the highly-transmissible Omicron coronavirus variant.

"Against all the currencies covered in this report, only the yen saw an improvement in its position against the dollar as investors likely turned to its safety amid heightened risk aversion with the spread of the Omicron COVID-19 variant," said Scotiabank in its report after the release of the CFTC data.

Jane Foley, head of FX strategy, at Rabobank in London, said it would be difficult for the dollar to post further gains. "Although Powell's hawkish tone this week brought back the risk that the Fed could hike rates twice next year, the market is already priced for this," she added.

This week, indeed we see contraction of EUR positions - not just longs but shorts as well, although at less degree. It is interesting that hedgers were closing positions against dollar weakness but keep the opposite once intact:


As a result Net EUR position has turned negative again.


Fed chief Jerome Powell reckons "transitory" is no longer accurate to describe high inflation and that the Fed could in December debate speeding up its bond buying taper. Another strong inflation print could bolster expectations of a more aggressive Fed, weighing on markets already spooked by Omicron. U.S. consumer prices accelerated 6.2% in October - their biggest annual gain in 31 years - and could stay uncomfortably high into 2022 due to snarled supply chains.

So, guys, today we just briefly touch this huge topic of new economical environment, just give you the chance to taste it. From the comments above it is becoming clear that markets are watching for two moments. First is - the transmission degree of omicron and its further impact on global economy and second - how Fed will behave in this new reality, having accelerating inflation on the back. The information about omicron should appear within 1-2 weeks, so here we have no choice but to wait and agree with uncertainty that we have now.

In general, the combination of omicron impact and higher interest rates, at least in the US - is bullish combination for the US Dollar. Omicron promises re-building of limitations across the Globe while higher interest rates are dollar supportive per se. The new variant panic hardly fades by itself. Massive outcries in EU and bad statistics, pointing on rising cases (including hard cases), despite that overall immunity stands around 70-85% shakes people faith in vaccination efficiency, especially when lockdowns set for both sides, such as in Austria. But this is what we have on the surface...

In a broader view, we should understand that those who keeps people in fear, pharma industry and central banks are the same people. They are from the same boat. Delta was last fear but it has passed more or less smoothed, so, market could keep focus on positive future. Once omicron was detected - it was an attempt to play it in the same way, but it was broken. It means that somebody needs the pandemic and limitations to stay for longer. I already mentioned earlier in the video that once Japan said no CV19 cases in the country and Delta was mutating out and destroyed itself (!!!) - immediately Omicron was "launched".

That's being said, we suggest that the combination of new CV19 fears, government steps and Central Banks policy are compounded tools for resolving some economical and geopolitical tasks. We think that this is great US tool to press on economical rivals, such as EU and China (I'll show few charts in video to explain this). Problems with supply chains, military tensions in Eastern EU are the parts of the same puzzle.

Initially it was suggested that Fed should take a pause in tightening process due Omicron but they stay on the course, which could make double positive impact for the US Dollar and trigger sell-off in riskier assets, as we see on BTC performance today. We expect that Dollar should keep going higher as light relief on expectations that Fed takes the pause with tapering due Omicron will be very short term. The mutual fund dynamic and stock market performance shows the first confirmation of this suggestion. Bad Omicron consequences that should be known within two weeks supports the dollar. While good ones do the same. With heating up inflation and economy boosting - US stands on course of faster tapering anyway.


This week technical picture has minimum changes due tight standing for the whole week. But it might be the silence before the storm as fundamental background is changing rapidly. We've got proper reaction on COP target, maybe it could last for a bit longer but based on information that we've got, it should be short-term anyway. Within 1-2 weeks downward action could re-established. As in the middle of December we get Fed and ECB meetings - it could provide the background to investors' expectations.

That's being said, the downward continuation seems the question of time, even based only on technical signs. Take a look that the action to COP is direct. CD leg of AB-CD pattern is much faster. EUR has additional long term bearish factors, beyond central bank weak policy. Such as military escalation on Eastern Europe and different goods export conditions compares to the US. So, our central scenario here is the same - once pullback is over, we expect downside continuation to YPS1 first and potentially to OP around 1.0430.

Here we see minor response to XOP Agreement area and appearing of "indecision" High wave candle. In short-term perspective high wave range breakout should set the market direction:


Despite the shocks that we've got through the week, our scenario is working. So, EUR keeps retracement scenario valid by far. Trend stands bullish and market is not at overbought anymore. Now price is forming flag consolidation that potentially looks bullish and keeps chances that we get some AB-CD upside action, at least.


It seems our stake on 1H COP was correct and market accurately has bounced out from it. Now, as those who have taken position at COP as those who bought at 50% support earlier - should have more or less positive position. With the breakeven stops now we start watching for the end of the journey. Drop down below 1.1230 area tells that no upward continuation happens and we should be ready for downside continuation. Conversely, while H&S is working - we could keep an eye on 1.1430 area as most probable destination of upside retracement:


Sive Morten

Special Consultant to the FPA
Morning everybody,

So, as you can see - markets are quiet. Mostly everybody confused but contradicted information around Omicron. Within recent two weeks we have clear signal that it is dangerous and "we need pandemic to last" - borders were closing, lockdowns extended, vaccination is accelerated... Now - suddenly it finds out that Omicron is a light variant (flue kind) and even could be useful as provider of natural immunity... As a result - nobody knows what to do. It makes people worry about possible another "horror" that could sound soon about another variant.
Second reason of indecision - a lot of statistics this week. Today we start with EU GBP, and going further with inflation, US CPI, etc.

Technically, EUR performance looks bullish. Daily context is valid, price keeps flag shape:

On 4H chart the H&S shape is still valid, and slow and choppy downside action stands in favor of the pattern. So, if you still would like to buy - here is good moment, as you could place really tight stop. It doesn't promise the success, but, at least, it minimize potential loss. In fact, market has only one option - start upward action, as all preliminary steps are done already. If it doesn't do it - H&S fails and we get another drop down. So, we stand at vital moment:

On 1H chart market once again re-tested COP support, but no signs of upside thrust yet...

On other currencies - we have great thrusting action on AUD and NZD. There we could keep an eye on B&B setups on daily chart.

Sive Morten

Special Consultant to the FPA
Morning everybody,

It seems that EUR has started upward bounce finally, although not without tricks - grabber's lows was washed slightly.... And today is nothing to add to the EUR scenario. Now we just watch for the progress...

Today we take a look at CAD as it has ready to use B&B "Buy" setup on daily chart:

The target should be the 5/8 upside bounce, which is approx. 1.2770 area. But, if you drop time frame to 4H or even 1H - you'll see another great thrust in opposite direction, which is also potentially suitable for additional trade. For instance, if we get 4H DRPO "Buy" - it becomes great signal for long entry with daily B&B. And, in general, if you trade on daily time frame - now you need to wait for clear bullish reversal pattern on 1H chart.

But, if B&B "Sell" here will be formed - it could be traded separately and additionally to daily setup. So, everything depends on your preferable time frame. The same is for 1H chart, where this downside thrust also looks great.

Sive Morten

Special Consultant to the FPA
Morning everybody,

So, AUD is coming to 3/8 Fib level - B&B stands somewhere near, while CAD is preparing the reaction on daily support, 4H DRPO "Buy" might be formed there. So, we're keep watching for these setups.

Speaking on EUR - in general, it keeps bullish context by far, upside flag breakout has happened finally, but now it stuck to the same Fib level on daily chart:

At the same time, EUR has some weakness signs that could reverse price action at any moment. First is - 4H shape is too skewed to the the right, making right arm looks heavy, while it should be vice versa. Second - suddenly EUR stops at COP upside target, although upside CD leg looks fast, we see even some signs of thrust there. Usually, with H&S performance market never stops at COP's.

It means that we carefully should control the retracement now on 1H chart. Market has to stay above two highest levels, and particularly, the 1.13 K - support. Drop below it might become the 1st bell of H&S failure and downside continuation. Those who would like to buy EUR - could also consider 1.13 support as invalidation point stands right under 1.1267 lows. The risk will be minimal. Currently we have no clear bearish signs yet.

Sive Morten

Special Consultant to the FPA
Morning everybody,

Yesterday we've said to keep an eye on intraday performance, as it could clarify the odds on upward continuation. On daily chart market turns to triangle consolidation, which, as usual, keeps door open for both directions. Still, as you will see below, we tend to bearish scenario, as it seems that odds stand higher for it.

First is, on daily chart triangle has formed after sell-off, which might be the continuation pattern, and it could lead to appearing of the butterfly:

at the same time, on 4H chart we are watching for H&S performance and potential 1.1425 area to be hit, where we have OP target. Besides, the same daily triangle doesn't exclude appearing of the butterfly as well:

Still, current EUR performance has few bearish signs. First is - overall H&S shape, it has heavy right arm and on a way up EUR was not able to reach the neckline, despite CD leg acceleration. Second - retracement after COP here looks too significant. On 1H chart market has broken both levels, including 1.13 K-area without respect and with acceleration. It doesn't rely to bullish sentiment:

Finally, as B&B "Sell" on AUD as the same pattern on CAD indirectly suggest bearish pressure on EUR, as well as the bearish grabber on daily gold chart. Taking it all together, we could say that miracle could happen and weak CPI numbers could support EUR and push it to the target. But, from the odds perspective - the combination of bearish signs make us to stay aside from any new long position by far.