Forex FOREX PRO WEEKLY, December 11 - 15, 2023

Sive Morten

Special Consultant to the FPA
Messages
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Fundamentals

Despite, that we've got payrolls and unemployment data this week, I would call UAE decision to not sell oil for dollars any more as the major event of the week. Taking in consideration of V. Putin visit to UAE and S. Arabia and later Iranian visit to Moscow - it is definitely something going on in this region results should come on the surface soon. Second is - many data from EU, China and Japan remained in the shadow of NFP data, but they were also very important. Now, we could say that EU de-industrialization comes to active stage. And massive drop in consumption and population wealth is just a question of time. Although, for the truth sake we have to acknowledge that outflow of EU industry sector to the US doesn't help too much to the US either....

Market overview

The dollar rose on Friday after new data showed U.S. job growth accelerated in November and the unemployment rate dropped, pointing to underlying strength in the labor market. U.S. nonfarm payrolls added 199,000 jobs last month, the Labor Department's Bureau of Labor Statistics said on Friday. Economists polled by Reuters had forecast 180,000 jobs created. The employment report, which showed the unemployment rate fell to 3.7%, suggested that financial market expectations that the U.S. Federal Reserve could pivot to cutting interest rates as soon as the first quarter of 2024 were premature.

"So far, there’s nothing in the data that forces (the Fed) off their ‘let’s see what happens’ stance. The market was clearly leaning in the other direction," said Steven Englander, head of global G10 FX research at Standard Chartered Bank in New York.

Ahead of the payrolls report, a string of labor market data this week indicated some softening in the jobs market, while other reports in recent weeks showed a cooling of inflation and led markets to increase expectations the Federal Reserve would have the leeway to cut interest rates as soon as March. Traders of short-term U.S. interest-rate futures on Friday pared bets the Fed will start cutting interest rates in March after the report, and now see a May start to rate cuts more likely. Markets had earlier priced in about a 60% chance of a March start to Fed rate cuts but, after the readout, pared that to just under 50%.

"In the short term, the U.S. rates market has just gotten, I think, way too dovish on the Fed," said Stephen Miran, co-founder of Amberwave Partners. "The massive ease in financial conditions since the start of November basically means that the Fed doesn't need to cut to throw fuel on that fire."

U.S. Treasury yields shot higher after a strong U.S. jobs report forced markets to modify expectations for the timing of rate cuts by the Federal Reserve. U.S. Treasury yields surged following the payrolls report. The yield on the benchmark U.S. 10-year Treasury note jumped 10 basis points to 4.23%, on track for its biggest one-day gain since Nov. 9. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, shot up by 14.5 basis points, its biggest daily jump since June 29, to 4.725%.

"I don't think this gives the Fed the ability to pivot. It's not weak enough," said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management in Boston. (Fed Chair Jerome) Powell's going to push back on the market's pricing of rate cuts. He's likely to communicate that the Fed's got to stay steady in restrictive territory for the time being."

Other data from the University of Michigan showed U.S. consumer sentiment improved much more than expected in December, snapping four straight months of declines, as households saw inflation pressures easing.

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Along with recent economic data, comments from Fed officials, including Chair Jerome Powell, have fueled investor speculation about the timing of the central bank's pivot to a rate cut. The Fed's next policy meeting is on Dec. 12-13, while the next policy announcement from the European Central Bank (ECB) is on Dec. 14. Expectations have also grown the ECB was at or near the end of its rate hike cycle and a cut may be on the horizon.

The U.S. Federal Reserve will hold interest rates until at least July, later than earlier thought, according to a slim majority of economists in a Reuters poll who said the first cut would be to adjust the real rate of interest, not the start of stimulus. All but five of 102 economists in the Dec. 1-6 Reuters poll said the Fed was done hiking in this cycle.

The debate has now shifted to how long the federal funds rate will remain in its current 5.25%-5.50% range and how many cuts will be delivered next year, which the survey suggests will be significantly less than what markets are currently expecting. Economists are less convinced the Fed will start cutting so soon, with slightly more than half, 52 of 102, forecasting no rate cuts until at least July. Nearly three-quarters of forecasters, 72 of 102, predicted 100 basis points of cuts or less next year.

"We agree the Fed will cut in 2024, but think markets are underestimating how stubbornly high inflation will delay cuts until activity has more clearly slowed," said Andrew Hollenhorst, chief U.S. economist at Citi. We expect stronger core ... inflation in coming months to disrupt the slowing-inflation narrative," said Hollenhorst, who expects the Federal Open Market Committee to start cutting in the third quarter of next year. And even if we are wrong and inflation stays softer, so long as activity holds up, the committee might take the opportunity to bolster their credibility by waiting for even stronger evidence that inflation had sustainably slowed."

The world's No. 1 economy, after growing at a strong 5.2% annualized pace last quarter, was expected to lose momentum and expand 1.2% this quarter and average 1.2% in 2024.

"With the current stance of policy 'becoming more balanced', the courage for the Fed to remain on hold will be challenged," said Ellen Zentner, chief U.S. economist at Morgan Stanley who cautioned not to call next year's moves an easing cycle. When the Fed begins to cut rates in 2024, it is maintaining a certain level of restrictiveness by following inflation downward ... Cutting versus easing is not just semantics, it's an important distinction."

OUR TWO CENTS ON RECENT DATA

Well, based on recent comments from big banks and NFP numbers the major conclusion is investors start to review their previous expectations on soon rate cut from the Fed. This is what we've warned about. But this is not the end of the story yet. The bulk of indicators suggest hidden strength in job market. Such indicators, as average weekly hours, participation rate and hourly earnings (i.e. wage inflation) have shown grown above expectations. Yes, by just 0.1 level, but they are quite conservative and their growth suggest more inflationary pressure from the job market.

With these indicators, that show hidden strength, previous NFP numbers as rule are revised lower in next months. Second is, unemployment now stands at the levels that usually precedes the recession. And the cherry on the pie - core inflation measures have begun to accelerate again in recent months, and this is a problem for the Fed.

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The Fed cannot and will not ease policy while inflation remains well above the FOMC's 2% target, especially when core inflation is trending higher. The implications are that credit card and auto loan delinquency rates will continue to rise, corporate default rates will continue to rise, and bank lending will continue to decline. In other words, the economy is entering a period of weaker economic data. Its worth to mention that last time half of the 150 thousand jobs created were civil servants. Maybe someone will find out that this time everything is not as positive in the private sector as last time.

The same conclusion comes from BIS and Moody's. The Bank for International Settlements, which hosts behind-closed-doors meetings of the world's top central bankers, there is a balance to strike.

"The outlook has improved but the key point we have to bear in mind is that we are not out of the woods and that the job has to be done," Claudio Borio, the head of BIS's monetary and economics unit, said. "Unfolding of credit risk" following the huge rise in borrowing costs was still to come.

Sluggish global growth, a higher risk of borrowers defaulting on loans and pressure on profitability mean that banks face a negative outlook in 2024, credit rating agency Moody's said on Monday. Bank profitability is likely to be squeezed by high funding costs, lower loan growth and build-ups of reserves to cover potential defaults.

"Funding and liquidity will pose challenges, but capitalization will remain stable, benefiting from organic capital generation and moderate loan growth and as some of the largest US banks build up capital," said Felipe Carvallo, senior credit officer at Moody's Investors Service.

And a bit more on wages. Analysts continue to talk about wages and claim that wage distribution analysis shows that wage inflation remains stable at 4% to 5%. They also think the FOMC will likely look at this chart and conclude that a higher unemployment rate is needed to bring wage inflation down to a level consistent with the Fed's 2% inflation target.
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A separate question is what will they decide to do about it in the end? Will the rate be raised in December? The market, of course, will be "happy" about this but something tells me that hardly it will happen. Although keeping the rate at the same level already has a deplorable effect on the economy. Trends towards a slowdown in the economy are already obvious (in oil), the stock market has hit the bar, and the demand for gold as a protective asset has gone up. Apparently the market is preparing for something.

The number of vacancies in the United States fell to its lowest level since March 2021 in October, further evidence that the labor market is cooling. ️The decline was broad-based across all sectors, with notable declines in health care, financial activities, and accommodation and food services. ️October numbers were lower than all Bloomberg estimates.
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QUESTIONS TO THE DATA AGAIN

Resulting Friday's data stands very different to its component that were monitoring through previous few months. If you take a look at them, you could see that they stand in favor of weaker report. How we could get strong NFP is still a riddle...
  • The layoff rate, that is, the proportion of workers who voluntarily leave their jobs, is declining.
  • More respondents are beginning to say that it is more difficult for them to find work.
  • The workweek is shortening, indicating a decrease in labor demand.
  • There is very little difference between the wage growth of those who change jobs and those who remain in it, i.e. job changers can no longer achieve significant salary increases.
  • The number of vacancies has decreased.
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The only suggestion that we could make is - data could be boosted by the end of massive employees unrest in car production sector. Second is - indeed, numbers could be supported by raising of employment in government sector. Now the US government stimulates consumption by budget deficit. Numbers of revision in January should shed some light on this subject, but for now, I'm a bit skeptic on reported improvement on job market. Especially, on the back of massive slowdown in production and manufacturing sector, as you will see below.

FEW LIQUIDITY ISSUES

In general it is really big burden stands upon households and individuals. Despite that they have to spend their savings - american household savings are near a historic low 3.8%. The low savings rate was just before the crisis in 2008 - an average 2.9% in 2006 - 2008, which led to a systemic degradation of the stability of household financial balances against the background of high lending rates and rising debt service costs in the spending structure.

Now they additionally become the major buyers of the US debt. So, the government burden is put upon the fragile shoulders of the people. The biggest foreign buyer of U.S. Treasuries has been the yield-sensitive private sector, which has slowed purchases as rates peaked. The foreign public sector was a net seller during this cycle. The same applies to China, where US Treasury holdings have fallen by $300 billion since 2021. Given slowing economic growth in China due to demographic challenges, slowing exports and deflation in the housing market, foreign government demand for US Treasuries is likely to remain weak.

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What do you think, what the margin safety this market has if it stands only due to enthusiasm of population? Meantime, central banks across the Globe are twisting bolts, keep drying out the liquidity:

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The joint balance sheet of the main Western countries clearly indicates a tight monetary policy (liquidity in circulation is decreasing). This means that private demand is stimulated through budgetary mechanisms, which we see in the growth of debt in the United States and other countries. Such a policy is not constructive, and, secondly, it ends quite quickly.

Now if we take a look at three tools that we're monitoring - BTFP, Reverse Repo and Money market funds we will see important tendency. First is BTFP. The amount of money banks borrow through BTFP, a temporary program adopted on March 12, 2023 and running until March 11, 2024, is going up, not down.

The whole idea of the program was that it was a temporary measure that would allow banks to raise money from the Fed on the security of treasuries, mortgage securities, etc. And the whole point of the program was that banks could pledge long-term treasuries and mortgages that were half depreciated in the market and take a loan from the Fed in the amount of their face value, that is, without taking into account the fall in their market price. Of course, it is impossible to borrow money from other banks in this way.

Well, in fact, the increase in borrowing through BTFP tells us that the temporary measure did not help, everything is only getting worse, banks have to borrow more money. Therefore, if the Fed wants to create a small victory crisis, then all it has to do is not extend the BTFP beyond March 11, 2024, that is, after the end date of the program, and let the weak die.

Second is, Reverse Repo, where banks park excess liquidity under the Fed Fund rate. The amount of Reverse Repo keeps dropping. In May of this year, the volume of funds in RRP peaked at more than $2.5 trillion. That's too much money to be sitting around with little to no use. But now this volume is falling rapidly, falling by more than half from its peak. It supports markets. The question is, what happens when the number drops to zero?!

A️s we've said, the Fed and US Treasury have other reserves, such as Treasury cash account and Banking reserves. But two aspects must be taken into account: the impact on financing the budget deficit and the impact on money markets. Both of these factors ultimately mean that growth in stocks and other risky assets will not be as easy as it is now.

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The tapering process is affecting the entire US financial system, and, for example, the all-important SOFR rate (i.e. the new Libor rate) unexpectedly jumped 6 bps on December 1st, up to 5.39%, the highest level. ️This jump took many by surprise, including BofA's Mark Cabana, who closely monitors the processes and the Fed. The expert warns that current processes indicate less and less cache and more collateral in the system - that is, a growing shortage of reserves

According to a former New York Fed employee, the context for the significant increase in SOFR was simple: more collateral, less cash (a similar dynamic occurred in late 2019, and everyone remembers what happened next - then, recall, the Fed began pouring money into the system calling it "not QE"

Meanwhile, funds in money market funds are breaking records. And it means that investors are placing short money, most likely, in 3-12 months US treasury Bills.

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Six trillion dollars of short money... Let's imagine for a moment that it will become unprofitable to hold these funds in short-term debt instruments. For example, because the Fed had to lower the rate below the inflation rate. It does not matter what inflation will be at that time, at least 3%, at least 4%. The main thing is that the Fed's rate will be lows 0-1-2%, for example.

These funds will run at least for some kind of yield other than negative or into something that will protect against inflation. And, obviously, this will not be the stock market, because at the moment when the Fed is forced to lower the rate, the stock market will already be half-dead.

STRUCTURAL CRISIS IS UNDERWAY

As we've said in the beginning, EU de-industrialization becomes evident. Just brief look at fresh data shows that in 6-8 months the impact of this process will lay upon the shoulders of people. De-industrialization has become the dominant trend in the EU economy. Unsurprisingly, the volume of retail sales in the eurozone is -1.2% per year — the 13th consecutive monthly negative. And as the problems in the financial sector intensify, problems with budget subsidies to consumers and producers will begin. And here the standard of living (and retail sales) will begin to decline much faster.

But, most intriguing situation in the US. Industrial orders in the USA -3.6% per month, this is the minimum since 2020, and before that - since 2017. Long chart makes it clearly visible that after compensatory growth in the second half of 2020, a long (and gradual) acceleration) the tendency to decline in production. Neither investments in the military-industrial complex nor the transfer of production from the EU show a clear effect. And this is an extremely worrying trend for the U.S. economy.

We also have indirect sign - pay attention to the last chart in the table, which is Global Supply Chain Pressure Index from the Federal Reserve Bank of New York. It turns positive for the first time since January (i.e. there are more problems than there were on average) and is growing quite cheerfully. Jump in Uranian price tells the same - due to sanctions and other political reasons its prices are the highest in 16 years.

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Conclusion:

It seems that the US is getting in tough situation across the board - on foreign political arena, problems in domestic political arena, economical problems become evident. Maybe all of them are not urgent and the US has more time in reserve, compares to EU, but this snowball slowly but stubbornly is raising. Market starts revision of expectations in favor of "higher for longer" strategy, which should support dollar in mid term perspective. Besides, we do not have any reasons that the EU situation will normalize any time soon. Definitely it comes to an edge faster than the US and start cutting rate earlier. This makes us to consider EUR strength as short term. Today we haven't consider situation in Chinese economy (will do it tomorrow), but we should understand that US and China are the sides of the same medal. It can't be good in one country and bad in another. It means that most probable that China also dives in the crisis soon, despite all government measures. Especially with "assistance" from the US. That's being said, in perspective of 8-12 months we do not have yet strong enough reasons to suggest reversal of the major EUR/USD tendency, despite current upward bounce.
 
Technicals
Monthly

So, on monthly chart we do not see big shifts by far. EUR holds nominal bullish trend. Price shows healthy bounce up from YPP. It is few time until the end of the year, but, usually with such price action, market tends to YPR1 that stands around 1.1620 level. Besides, market still stands in wide downside range and YPR1 is precisely at its top line. Although it is unclear what drivers could let EUR to climb there.

But EUR could try to re-test K-area and trend line at least, around 1.1250-1.14 area. At the same time, speaking in very long-term perspective, this action could give us some "222" Sell pattern, where bearish trend could be re-established. The same conclusion we've made in Fundamental part. So, for now monthly chart brings mostly theoretical interest.
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Weekly

Here nominal trend is also bullish, but we're in B&B "Sell" trade that is not finished yet. The unpleasant specific of B&B's very often stands with its blur start. Not too often trade starts with bright reversal patterns on intraday charts. So, this time it has happened again. After reversal butterfly has been formed on 4H chart we've got no other patterns and market just slowly was creeping down. Recent US data in general is supportive. Besides, we have the same B&B on DXY. So, now we need to see what will happen at major daily support levels.
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Daily

So, daily trend remains bearish. 3/8 Fib support mostly is broken and B&B target is 1.0665 level. At the same time, market stands near oversold level. So, we need to see what's going on intraday charts. If any bullish signs will appear - we could get better level for short entry. Generally speaking, it is relatively safe to consider short entry until market hits B&B target.

Besides, based on recent data, Fed statement on 13th of December might be more brave, that could support dollar. Hardly we get rate hike, but still rhetoric might be more hawkish.
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Intraday

On 4H chart, despite some slip on Friday, price mostly remains around the same 1.618 butterfly target. And we've got two bullish grabbers. 1.0835-1.0840 seems nice level to consider for another short entry. Now the big question is whether pullback happens or not:
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Our H&S has turned to larger potential pattern. Where we thought the head should be - turns to shoulder and potential head just has been formed. In nearest few sessions we need to monitor price action with this pattern. If market fails to form it - this will point on downside continuation. Otherwise, we should get healthy upside bounce:
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Morning folks,

So, on EUR... daily chart mostly stands the same, as well as on DXY. Today we get CPI numbers and another important thing - 30-year bond auction. This week US Treasury makes large auctions, especially on short-term bills, which could make impact on the yield level, and, correspondingly on dollar performance. Thus, CPI and the Fed is not all yet...

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So, last week we've ended on discussion of possible upside bounce. And now we're getting some signs of it. It doesn't mean that we want to buy, although it is not forbidden for scalp traders. But, the pullback could give us 2nd chance for short entry to proceed with weekly B&B Trade and come to 1.0665 target.

As you could see our 4H grabbers are still valid. ANd yesterday we've got very positive sign - retracement has stopped precisely around 5/8 area of the grabbers. This is good background for short-term upside action:
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Correspondingly, we could get H&S on 1H chart. If this happens indeed, then our next step is to discuss entry around 1.0840 K-resistance area. For a scalp long trade it is not needed to place too far stops. It is enough supposedly to hide it below recent retracement of 1.0740. Or under 1.0716 lows ultimately. Here we're getting a kind of rounded bottom with sighs of H&S (cup?) so, if upward action starts - it should start without big falls...
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Morning everybody,

So, on EUR we've got two points - first is upside bounce to K-resistance area of 1.0835 has happened, second, scalp long trade that we also discussed has performed well either. Still, our primary scenario here is bearish and any upside action we mostly consider as a chance to sell. Because on DXY reverse H&S is formed and ready to start action.
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On 4H chart all grabbers also have been completed as market has made the new local top around 1.0835:
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So, if you were able to sell yesterday - you could move stops to breakeven and see what Central Banks reports will bring us. Meantime, EUR still has another chance on upside bounce, because the H&S pattern that we've discussed is not destroyed by far. If, say we will hear something inspiring from ECB (hardly any surprises will come from the Fed), EUR could try to complete the pattern and return back to K-area.

As usual right arm's bottom should be decisive point. Market has to stay above 1.0760-1.0765 area to keep this scenario valid and falling to the lows increase chances on major downside continuation to 1.0665 target of weekly B&B pattern.
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Morning everybody,

So, although technically there were not a lot of signs, pointing on strong upside action, except maybe 1H H&S that we've discussed - the Fed has give EUR the 2nd chance and it has bounced up again. The pace seems rather strong.

DXY also shows solid collapse. Thus, from technical point of view market stands at the edge of bearish context. It has to start downside action or context will change into bullish with more extended upside targets.

So, on daily chart price comes in touch with MACD, so, let's keep watching wether any grabbers will be formed:
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On 4H chart market stands at 5/8 last resistance area:
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On 1H chart the 1st XOP is but, but we also have another one with 1.0936 target. In general H&S is done properly.

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So, based on DXY picture, I would say that chances that bearish context fails are rather high. Still, let's keep watching what will happen in 1.0905-1.0935 area. If we get daily grabber and some bearish patterns on 1H chart - downside action still could start. If not - context will change to bullish and we start looking for upside targets and long entry.
 
Morning everybody,

So, yesterday we've got another upward action on EUR, DXY collapsed, erasing H&S pattern. So, all questions concerning direction are off the table now. As we said, if this happens, our scenario changes drastically, with significant upside targets. Because now all trends on EUR are bullish. Nearest upside target is COP around 1.1075.

Still market is at overbought now, and if upside action happens - it should continue only on next week:
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On 4H chart we consider Fib levels where we could take long position. Since COP is not touched yet and upside action shows acceleration, 3/8 support seems more probable to hold market.
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Those who would like to take more risk and more complex entry process also could consider 1H K-support area. Some chances exist that market could start "creeping with overbought" showing minimal intraday retracements. This approach is a kind of compromise on position taking process.
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