Sive Morten
Special Consultant to the FPA
- Messages
- 18,695
Fundamentals
(Reuters) - The U.S. dollar rose on Friday as Republican negotiators in the U.S. Congress put the finishing touches on a sweeping tax overhaul, raising expectations that the bill would be passed by year-end.
Representative Kevin Brady, chairman of the tax-writing House Ways and Means Committee, told reporters that Republicans on the House-Senate negotiating committee working on the revamped bill had signed the finished product and the details would be published when the full House convenes at 5:30 p.m. EST (2230 GMT).
It comes after two Republicans sought changes to the proposed legislation.
“People will be eyeing up the U.S. tax plan. There are expectations building they could have it done by next week, if not that pushes if off until next year,” said Mark McCormick, North American head of foreign exchange strategy at TD Securities in Toronto.
The tax bill needs a simple majority to pass in the Senate, in which Republicans hold just 52 of the 100 seats, and no Democrats are expected to support it.
The dollar index against a basket of six major currencies rose 0.49 percent to 93.944.
Many investors expect that the tax overhaul may boost U.S. growth, leading to more interest rate hikes and a higher dollar.
Tax legislation is seen as the last major event this year as investors wind down trading activity before the Christmas and New Year holidays.
“Markets are really consolidating at this point into holiday trading,” McCormick said.
The cost for banks to borrow short-term dollar funds from other banks, meanwhile, surged to its highest level since 2012 as financial institutions scrambled to secure funding before thinning trading volumes.
The cross currency basis swap “is moving in the U.S. direction as people seek funding to cover them through the end of the year,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York.
The three-month euro-dollar cross currency basis swap, which measures the premium banks have to pay to swap euros into dollars, traded at 100 basis points. It has widened from under minus 52 basis points at the beginning of the month.
The rising swap cost was not yet seen impacting the greenback, though it could be negative for the dollar, said Chandler.
“It’s very expensive for Europeans, say financial institutions, to buy Treasuries ... so it’s going to deter people from buying Treasuries and its going to encourage dollar-based investors to invest overseas,” Chandler said.
News in Charts: Euro area ESIs Shrug off Political Uncertainty
by Fathom Consulting
Fathom’s latest Economic Sentiment Indicator (ESI) for the euro area remained unchanged at 1.3% in November, suggesting that the currency bloc’s economic recovery continued into the fourth quarter. Moreover, the country-level indices continue to indicate that the cyclical upswing remains broad-based, across both the core and peripheral economies.
The German economy has thus far maintained its rapid growth trajectory in 2017 and the ESI suggests that this continued in November, despite Chancellor Angela Merkel’s failure to agree a coalition government. Crucially, however, much of the survey data was collected prior to the collapse of the coalition talks and so may not fully reflect the impact on business sentiment.
The Fathom ESI for France rose from 0.8% in October to 0.9% in November, predominantly driven by strength in both the manufacturing and services PMIs. The consumer confidence index also rebounded in November, increasing by two index points to 102.4. Consumer optimism peaked following President Macron’s election, but had since been in decline. Such a trend is not uncommon following the country’s national elections, and does not appear to have had an impact on consumer spending, which grew by 0.6% in the third quarter.
Italy’s ESI continues to outperform the country’s hard economic data and is hovering around all-time highs. However, elections must be held before the end of May 2018 and have the potential to spark fresh waves of volatility, with a reversal in economic sentiment a strong possibility. Even without political uncertainty, Italy’s recovery remains fragile with numerous headwinds including the profligacy of non-performing loans threatening to destabilize economic growth.
The ongoing constitutional crisis in Catalonia is yet to have a meaningful impact on Spain’s ESI, with the indicator unchanged in November at 1.6%. Spanish gross domestic product is now forecast to grow in excess of 3% for a third consecutive year, with the economy’s output gap closing rapidly from its estimated peak in excess of 7% just four years ago.
The relatively muted impact of the Catalonia crisis is somewhat surprising, given the area’s importance to the national economy – the autonomous region contributes 19% of national GVA, despite only accounting for 16% of the total population. Regional elections have been scheduled for 21 December with the outcome far from certain. A strong performance by the pro-independence parties could lead to a prolonged period of uncertainty which would weigh more heavily on economic growth.
Our UK Economic Sentiment Indicator, which distils information from numerous consumer and business surveys into one gauge of underlying economic activity, held steady at 0.6% in November.
Waning consumer confidence was offset by improving business sentiment, although firms continued to cite Brexit-related uncertainty and its impact on the economy as an issue. The November reading of GfK’s Consumer Sentiment Index slipped to -12, the same level as that seen after both the Brexit vote and this year’s general election.
Another measure, which is collated but not used in the overall GfK Index, assesses households’ propensity to save. Having swung from -11 to 8 over the past year, this implies that an increasing number (the highest in nine years) feel that now is a good time to save.
The danger is that with economic growth already subdued, and wages failing to keep pace with the rising cost of living, a further pickup in precautionary saving could tip the economy into recession. Already, the majority of people do not think that now is the right time to make major purchases.
COT Report
EUR CFTC data shows that net speculative position has hit absolute historical value around 113 K contracts. This jump is accompanied by open interest growth and shows that sentiment stands bullish. At the same time, on EUR/USD chart we do not see any significant price appreciation yet.
Extreme values of speculative position makes us to be cautious on perspective of immediate upside trade continuation. Despite strong bullish sentiment a lot of money already was put in longs and fewer and fewer money that potentially could be put in this trend. At some moment this disbalance will become crucial and trigger reversal of different strength.
At the same time, market could relatively freely fluctuate under recent 1.21 top without any significant pressure.
So, CFTC analysis confirms bullish sentiment on EUR but makes us be prepared to some pause in upside trend in way of some consolidation maybe, as market needs to make re-adjustments in investors' portfolios. May be this will happen automatically due end of financial year.
Technical
Monthly
On monthly chart we do not have big changes by far. Combination of technical 1.2175 resistance and sentiment overbought makes EUR stands in tight consolidation after rectangle breakout in July.
This is what we particularly mean above - EUR has no fuel to rise higher but bullish sentiment doesn't let it drop either. Probably market will spend time inside this small flag until equilibrium will be broken.
Large monthly rectangle still stands as a core of analysis here among with all-time support/resistance zone that cuts EUR/USD history by 1.20 edge and upside reversal swing.
In case of drop back in rectangle space - it will become open for price fluctuation and now it is impossible to say whether it will be deep retracement or real return back to lows.
But right now it is not the fact that this definitely will happen. Fundamental picture becomes more uncertain. While Fed tightening policy stands on surface - recent statement brought concern on weak inflation, while recent Fathom report shows strong positive shifts in EU economy.
It seems that 1-2 rate hike by Fed already are priced-in, not totally maybe, but 50-60%, I suppose. This could make any positive sign from EU works stronger and bring more support to EUR.
It seems, that till the end of the year EUR probably will spend in 1.16-1.21 flag and this will be our primary object for today's analysis.
Weekly
This chart totally breaks previous setup. On Friday we've got turning moment in previous analysis - EUR has closed below 3x3 DMA. It means that we haven't got DRPO "Sell" that we've counted on. This moment changes overall situation drastically.
Because, DRPO is not just a pattern, this is direction. What does it mean that market has not formed strong bearish reversal pattern, that potentially should lead to strong collapse been fulfilled by aggressive Fed policy? It could mean that Fed policy will be not as aggressive as it was suggested by investors. It also could mean that long-term sentiment is changing on market and investors now are watching in EUR side. It also could mean some disappointment in USD perspectives.
From technical point of view, it significantly increases chances on appearing of bullish patterns. My experience tells when DRPO develops in this manner - most probable pattern is upside triangle which later could shift to butterfly.
But, also it could "222" Buy as I've drawn on this chart. Which pattern will be formed now mostly will depend on depth of current downside action. Standing above 1.1550 increases chances on triangle while drop below it will turn situation into "222" Pattern...
Daily
While "222" turning point still stands rather far - let's focus on triangle here. This is second possible setup (or better to say first) and it is more often happens when DRPO fails.
Currently guys, the only one thing makes sense here. This is 1.1717 lows. And this will be the point that determines everything. So, we even do not need any other tools on this chart.
Here we have two opposite patterns. They are look even more clear on dollar index. We have large reverse H&S and smaller direct H&S, which, in fact the right shoulder of bigger pattern.
By market mechanics right shoulder of reverse pattern already has been formed and rally in the beginning of the week should become an extension stage of the market, lead price right to 1.21 area. Now we see some pause and downside reversal which looks like worrying sign. If this downside action will continue and market will break 1.1717 lows - this will break normal price behavior.
In this case minor direct H&S will start to work. Personally I think that precisely this will happen. DRPO story already is finished and triangle already stands in progress.
4-hour
Here guys, another reason why we think, that it would be better to wait for breakout of 1.17 area. Although we have clear H&S and if it will work - we will get AB=CD that should lead us directly to daily triangle's border.
But right now, we have potentially "222" Buy pattern on the slope of H&S pattern. Chances that it will wait are significant, but we do not know it definitely. What if it will not? What if it will work and EUR will start upside action based on reverse H&S pattern? Chances are small but they are above zero, right?
Besides, whatever action will happen - either immediate upside action or initial drop to 1.16 triangle line and upside action after that - it will not change overall bullish scenario. It just brings different ways of the same type of action.
That's being said standing above 1.1717 lows first and moving above 1.1850 second - will mean direct upside continuation, while breaking 1.1717 lows will lead EUR to 1.16 support area, where upside reversal should follow. That's scenario that we will be watching on next week.
Conclusion:
EUR starts to show signs of changing in long-term market's sentiment. Mostly these changes shift advantage in favor of EUR as EU economy shows very good recovery pace while Fed shows not as hawkish assessment of US economy as investors suggest.
As a result, price is coiling in wide triangle consolidation that cancels potential DRPO "Sell" pattern which we've expected previous to be formed. Despite that we have two possible scenarios of price behavior inside triangle - both of them are bullish and major difference stands only about a moment when upside action will start.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
(Reuters) - The U.S. dollar rose on Friday as Republican negotiators in the U.S. Congress put the finishing touches on a sweeping tax overhaul, raising expectations that the bill would be passed by year-end.
Representative Kevin Brady, chairman of the tax-writing House Ways and Means Committee, told reporters that Republicans on the House-Senate negotiating committee working on the revamped bill had signed the finished product and the details would be published when the full House convenes at 5:30 p.m. EST (2230 GMT).
It comes after two Republicans sought changes to the proposed legislation.
“People will be eyeing up the U.S. tax plan. There are expectations building they could have it done by next week, if not that pushes if off until next year,” said Mark McCormick, North American head of foreign exchange strategy at TD Securities in Toronto.
The tax bill needs a simple majority to pass in the Senate, in which Republicans hold just 52 of the 100 seats, and no Democrats are expected to support it.
The dollar index against a basket of six major currencies rose 0.49 percent to 93.944.
Many investors expect that the tax overhaul may boost U.S. growth, leading to more interest rate hikes and a higher dollar.
Tax legislation is seen as the last major event this year as investors wind down trading activity before the Christmas and New Year holidays.
“Markets are really consolidating at this point into holiday trading,” McCormick said.
The cost for banks to borrow short-term dollar funds from other banks, meanwhile, surged to its highest level since 2012 as financial institutions scrambled to secure funding before thinning trading volumes.
The cross currency basis swap “is moving in the U.S. direction as people seek funding to cover them through the end of the year,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York.
The three-month euro-dollar cross currency basis swap, which measures the premium banks have to pay to swap euros into dollars, traded at 100 basis points. It has widened from under minus 52 basis points at the beginning of the month.
The rising swap cost was not yet seen impacting the greenback, though it could be negative for the dollar, said Chandler.
“It’s very expensive for Europeans, say financial institutions, to buy Treasuries ... so it’s going to deter people from buying Treasuries and its going to encourage dollar-based investors to invest overseas,” Chandler said.
News in Charts: Euro area ESIs Shrug off Political Uncertainty
by Fathom Consulting
Fathom’s latest Economic Sentiment Indicator (ESI) for the euro area remained unchanged at 1.3% in November, suggesting that the currency bloc’s economic recovery continued into the fourth quarter. Moreover, the country-level indices continue to indicate that the cyclical upswing remains broad-based, across both the core and peripheral economies.
The German economy has thus far maintained its rapid growth trajectory in 2017 and the ESI suggests that this continued in November, despite Chancellor Angela Merkel’s failure to agree a coalition government. Crucially, however, much of the survey data was collected prior to the collapse of the coalition talks and so may not fully reflect the impact on business sentiment.
The Fathom ESI for France rose from 0.8% in October to 0.9% in November, predominantly driven by strength in both the manufacturing and services PMIs. The consumer confidence index also rebounded in November, increasing by two index points to 102.4. Consumer optimism peaked following President Macron’s election, but had since been in decline. Such a trend is not uncommon following the country’s national elections, and does not appear to have had an impact on consumer spending, which grew by 0.6% in the third quarter.
Italy’s ESI continues to outperform the country’s hard economic data and is hovering around all-time highs. However, elections must be held before the end of May 2018 and have the potential to spark fresh waves of volatility, with a reversal in economic sentiment a strong possibility. Even without political uncertainty, Italy’s recovery remains fragile with numerous headwinds including the profligacy of non-performing loans threatening to destabilize economic growth.
The ongoing constitutional crisis in Catalonia is yet to have a meaningful impact on Spain’s ESI, with the indicator unchanged in November at 1.6%. Spanish gross domestic product is now forecast to grow in excess of 3% for a third consecutive year, with the economy’s output gap closing rapidly from its estimated peak in excess of 7% just four years ago.
The relatively muted impact of the Catalonia crisis is somewhat surprising, given the area’s importance to the national economy – the autonomous region contributes 19% of national GVA, despite only accounting for 16% of the total population. Regional elections have been scheduled for 21 December with the outcome far from certain. A strong performance by the pro-independence parties could lead to a prolonged period of uncertainty which would weigh more heavily on economic growth.
Our UK Economic Sentiment Indicator, which distils information from numerous consumer and business surveys into one gauge of underlying economic activity, held steady at 0.6% in November.
Waning consumer confidence was offset by improving business sentiment, although firms continued to cite Brexit-related uncertainty and its impact on the economy as an issue. The November reading of GfK’s Consumer Sentiment Index slipped to -12, the same level as that seen after both the Brexit vote and this year’s general election.
Another measure, which is collated but not used in the overall GfK Index, assesses households’ propensity to save. Having swung from -11 to 8 over the past year, this implies that an increasing number (the highest in nine years) feel that now is a good time to save.
The danger is that with economic growth already subdued, and wages failing to keep pace with the rising cost of living, a further pickup in precautionary saving could tip the economy into recession. Already, the majority of people do not think that now is the right time to make major purchases.
COT Report
EUR CFTC data shows that net speculative position has hit absolute historical value around 113 K contracts. This jump is accompanied by open interest growth and shows that sentiment stands bullish. At the same time, on EUR/USD chart we do not see any significant price appreciation yet.
Extreme values of speculative position makes us to be cautious on perspective of immediate upside trade continuation. Despite strong bullish sentiment a lot of money already was put in longs and fewer and fewer money that potentially could be put in this trend. At some moment this disbalance will become crucial and trigger reversal of different strength.
At the same time, market could relatively freely fluctuate under recent 1.21 top without any significant pressure.
So, CFTC analysis confirms bullish sentiment on EUR but makes us be prepared to some pause in upside trend in way of some consolidation maybe, as market needs to make re-adjustments in investors' portfolios. May be this will happen automatically due end of financial year.
Technical
Monthly
On monthly chart we do not have big changes by far. Combination of technical 1.2175 resistance and sentiment overbought makes EUR stands in tight consolidation after rectangle breakout in July.
This is what we particularly mean above - EUR has no fuel to rise higher but bullish sentiment doesn't let it drop either. Probably market will spend time inside this small flag until equilibrium will be broken.
Large monthly rectangle still stands as a core of analysis here among with all-time support/resistance zone that cuts EUR/USD history by 1.20 edge and upside reversal swing.
In case of drop back in rectangle space - it will become open for price fluctuation and now it is impossible to say whether it will be deep retracement or real return back to lows.
But right now it is not the fact that this definitely will happen. Fundamental picture becomes more uncertain. While Fed tightening policy stands on surface - recent statement brought concern on weak inflation, while recent Fathom report shows strong positive shifts in EU economy.
It seems that 1-2 rate hike by Fed already are priced-in, not totally maybe, but 50-60%, I suppose. This could make any positive sign from EU works stronger and bring more support to EUR.
It seems, that till the end of the year EUR probably will spend in 1.16-1.21 flag and this will be our primary object for today's analysis.
Weekly
This chart totally breaks previous setup. On Friday we've got turning moment in previous analysis - EUR has closed below 3x3 DMA. It means that we haven't got DRPO "Sell" that we've counted on. This moment changes overall situation drastically.
Because, DRPO is not just a pattern, this is direction. What does it mean that market has not formed strong bearish reversal pattern, that potentially should lead to strong collapse been fulfilled by aggressive Fed policy? It could mean that Fed policy will be not as aggressive as it was suggested by investors. It also could mean that long-term sentiment is changing on market and investors now are watching in EUR side. It also could mean some disappointment in USD perspectives.
From technical point of view, it significantly increases chances on appearing of bullish patterns. My experience tells when DRPO develops in this manner - most probable pattern is upside triangle which later could shift to butterfly.
But, also it could "222" Buy as I've drawn on this chart. Which pattern will be formed now mostly will depend on depth of current downside action. Standing above 1.1550 increases chances on triangle while drop below it will turn situation into "222" Pattern...
Daily
While "222" turning point still stands rather far - let's focus on triangle here. This is second possible setup (or better to say first) and it is more often happens when DRPO fails.
Currently guys, the only one thing makes sense here. This is 1.1717 lows. And this will be the point that determines everything. So, we even do not need any other tools on this chart.
Here we have two opposite patterns. They are look even more clear on dollar index. We have large reverse H&S and smaller direct H&S, which, in fact the right shoulder of bigger pattern.
By market mechanics right shoulder of reverse pattern already has been formed and rally in the beginning of the week should become an extension stage of the market, lead price right to 1.21 area. Now we see some pause and downside reversal which looks like worrying sign. If this downside action will continue and market will break 1.1717 lows - this will break normal price behavior.
In this case minor direct H&S will start to work. Personally I think that precisely this will happen. DRPO story already is finished and triangle already stands in progress.
4-hour
Here guys, another reason why we think, that it would be better to wait for breakout of 1.17 area. Although we have clear H&S and if it will work - we will get AB=CD that should lead us directly to daily triangle's border.
But right now, we have potentially "222" Buy pattern on the slope of H&S pattern. Chances that it will wait are significant, but we do not know it definitely. What if it will not? What if it will work and EUR will start upside action based on reverse H&S pattern? Chances are small but they are above zero, right?
Besides, whatever action will happen - either immediate upside action or initial drop to 1.16 triangle line and upside action after that - it will not change overall bullish scenario. It just brings different ways of the same type of action.
That's being said standing above 1.1717 lows first and moving above 1.1850 second - will mean direct upside continuation, while breaking 1.1717 lows will lead EUR to 1.16 support area, where upside reversal should follow. That's scenario that we will be watching on next week.
Conclusion:
EUR starts to show signs of changing in long-term market's sentiment. Mostly these changes shift advantage in favor of EUR as EU economy shows very good recovery pace while Fed shows not as hawkish assessment of US economy as investors suggest.
As a result, price is coiling in wide triangle consolidation that cancels potential DRPO "Sell" pattern which we've expected previous to be formed. Despite that we have two possible scenarios of price behavior inside triangle - both of them are bullish and major difference stands only about a moment when upside action will start.
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.