Sive Morten
Special Consultant to the FPA
- Messages
- 18,715
Fundamentals
Japan's core consumer prices rose for the first time in five months in November but household spending tumbled, casting doubt on the central bank's view that robust consumption will help accelerate inflation to its 2 percent target.
The mixed batch of data will keep alive expectations that BOJ Governor Haruhiko Kuroda, who has said he will do whatever it takes to achieve his ambitious price goal, may nudge the central bank into expanding stimulus as early as next month.
"The downward pressure from falling oil prices seems to have run its course, which helped core CPI rise," said Hidenobu Tokuda, senior economist at Mizuho Research Institute.
"But consumer prices likely won't rise as fast as the BOJ projects. We expect the central bank to ease next year."
The core consumer price index (CPI), which includes oil products but excludes volatile fresh food prices, rose 0.1 percent in November from a year earlier, against a median market forecast for a flat reading, data showed on Friday.
The rise followed a 0.1 percent drop in October and came as higher food prices moderated the pressure from slumping energy costs.
A separate BOJ index that excludes oil and fresh food - but includes processed food prices - showed consumer prices rose 1.2 percent in the year to November, as companies passed on to consumers the higher import costs from a weak yen.
But household spending suffered the biggest annual fall in eight months, down 2.9 percent in November from a year earlier and exceeding a median forecast for a 2.4 percent decline.
The government downgraded its assessment to say spending was weak, underscoring the fragile state of the economy which narrowly dodged recession in July-September.
Economics Minister Akira Amari was upbeat on the outlook, pointing to rising real wages and blaming weak November spending on unusually warm weather that hurt sales of winter clothing.
"Factors that will support consumer spending are falling into place," he told reporters.
Wary of soft growth, the government plans nearly $800 billion in record spending in next fiscal year's budget. The BOJ also fine-tuned its stimulus programme to ensure it can keep up or even accelerate its money-printing to achieve its inflation target.
Policymakers are hoping a tightening job market will nudge firms into accelerating wage hikes and underpin household spending. But repeated calls from premier Shinzo Abe to boost wages have so far fallen on deaf ears.
CFTC data does not give us a lot of information by far. Yes, we see, that net short position has decreased significantly. But this drop was on a background of open interest decreasing. It means that short were just closed. Data shows that no new long positions were opened. In general this situation means that current Yen strength is mostly retracement rather than some big shifts in market sentiment. The same conclusion we could make from comments above. But it doesn't mean that this is useless for us. Retracement also could be significant and give us excellent trading setup.
Now some words on US situation and the Fed. Here, guys, I've found excellent update from Phantom Consulting. If you remember - they have done excellent analysis on GBP where we've anticipated no rate change and have made good money of GBP drop. Now some thoughts on Fed:
On Wednesday the FOMC voted to raise the target range for the federal funds rate by 25 basis points to 0.25%-0.50%. With the move widely anticipated, the focus of attention is not the outcome of the meeting, but the accompanying statement, together with the latest Summary of Economic Projections.
We find it noteworthy that the vote to tighten was unanimous, and that downward pressure on inflation is expected to be temporary. There was no mention of structural impediments, or global disinflationary pressures that would prevent a return to 2% inflation ‘over the medium term’.
In the Fed’s view, the US is returning slowly to the old normal. It has confidence in the strength of the US recovery, and this probably accounts for the 1.5% bounce in the S&P 500 that took place Wednesday. Indeed, equity markets had fallen in the wake of September’s ‘no change’ decision, when jitters over external headwinds held sway.
We believe that the US economy is well placed to deal with higher borrowing costs. Job creation has been robust, and the unemployment rate has fallen to 5.0%. At 5.0%, this rate is lower than usual for the beginning of a tightening cycle. Indeed, at this stage, the real policy rate would normally be well into positive territory.
Interestingly, the FOMC’s median estimate of the appropriate level of the fed funds rate at the end of next year remained unchanged at 1.4%. As our first chart demonstrates, in each of the four previous meetings, that rate had been revised down.
Looking at changes to official interest rate forecasts more broadly, it is clear that revisions have been more to the level than to the slope of the dollar curve. Since September of last year, the anticipated pace of tightening has come in a little from 135 basis points per annum over the next two years, to 100 basis points per annum. But that is still twice the rate that is priced in by markets at the time of writing.
In our view, Wednesday’s announcement marked the beginning of what could be a long period of divergent monetary policies across the major economies. The Bank of England is in no hurry to follow the Fed. The European Central Bank, the Bank of Japan, and the People’s Bank of China are all firmly in loosening mode.
Overnight, the Bank of Japan voted to buy more long-dated Japanese Government Bonds (JGBs) and to increase its purchases of the Nikkei 400 index. This weeds out underperforming companies by incorporating only those that rank within the top 400 in terms of market capitalisation, return on equity and operating profits.
Historically, the dollar has tended to fall once a US tightening cycle is underway. But given the divergent trends set out above, and with risks to the market-implied path for US rates to the upside in our view, this time may well be different.
Technicals
Monthly
As we've promised, today we will take a look at Yen. Actually, guys, we were looking over it for all these time that passed since our last update and we keep watching for other currencies as well. If we do not prepare researches on them, this just means that it is not the time yet, and no major setup has been formed.
On Yen situation stands very close when significant shifts could happen. Currently we are not absolutely sure with this, but if this will not happen - this also will be result with opposite conclusions. When you will read our analysis you'll get it.
Here is the combination that we would like to play. Yen stands at major 5/8 Fib resistance level. And has the chance to form DRPO "Sell" pattern. Even last part of the thrust up has 8 bars and it is sufficient for trading. Right now December candle stands below 3x3 DMA and JPY has all chances to complete DRPO pattern. We just need to get close below green line on next week.
Also guys, may be existence of DRPO, even at Fib level is not sufficient. But, as you can see price has spiked up slightly former top. It means that we've got reversal swing and - we have bearish W&R that makes DRPO pattern more reliable.
Potential target of this setup - 50% support of most recent thrust up. It stands approx. around 111-112. But, if we will get some kind of AB-CD retracement after reversal swing - downward action could significantly stronger.
Also guys, take a look at we have not just simple Fib resistance but Agreement. AB-CD pattern is not very nice, but this is the only one that we have here. Anyway, it's target has been hit.
Finally, existing of DRPO pattern is 2-sided setup. Because as direct DRPO as DRPO "Failure" - are both direction pattern. And, for instance, if we will get DRPO "Failure" - this will mean that upward action will continue....
But initially we will work with DRPO "Sell" directly.
Weekly
This time frame brings more details and most of them are bearish as well. So, we know that market stands at strong resistance and reversal pattern is forming on monthly chart.
Here, on weekly, trend is bearish and we see solid divergence with MACD. Second - price dropped below MPS1, which could indicate bearish trend starting.
Also take a look at bearish engulfing on top. On monthly chart W&R pattern is not as obvious. But here - market has jumped up but immediately returned right back down. This clearly indicates some stop grabbing just above the tops of 2007. Here W&R looks as it should.
And most important, but you probably see it by yourself already - H&S pattern. Left part takes the shape of butterfly (we've traded it by the way previously). It means that DRPO takes the shape of H&S on weekly chart. Not worst combination.
Daily
On daily chart trend is bearish as well, market is not at oversold. This chart lets us to narrow necessary battlefield. We probably will need just most recent swing down. The top of right shoulder already has been formed. Market has tested this level three times and later re-test with final attempt to break it and then dropped.
Also on the right part of H&S pattern we see classical bearish acceleration on the head's slope and on the slope of right shoulder. This is what we would like to get, when we deal with H&S.
Right below the market we have support area of 50% level and WPS1. So, if retracement up will happen right from there, we could try to use it for short entry.
Here, guys, we have a bit tricky situation. From one point of view, we have H&S on daily chart that almost has been formed, at least right shoulder's top is here and we definitely know invalidation point. It means that we already could start trade it.
But from another point of view - H&S is DRPO "Sell", but this pattern has not been confirmed yet, since December candle is not closed yet, and we need it to be closed below 3x3 DMA. Right now chances are good that this will happen, but who knows...
That's being said - trading H&S will work as anticipating of DRPO "Sell" and this is risky. DiNapoli advises to not anticipate any directional patterns. It means that if we will go short based on H&S, but later we will not get confirmed DRPO "Sell", it would be better to leave this trade.
4-hour
Trend is bearish here by far as well, but probably we will get bullish divergence as soon as market will reach 119.90 support area. If retracement up will start - we should watch for two possible areas. First one is WPP and 120.80 Fib resistance, while second is WPR1 and K-area.
If market is really bearish, it should not move significantly higher. Usually WPR1 holds any bullish retracements within bear trend. Still, our major invalidation point is 123.56 - invalidation point of right shoulder. If market will move above it this will be significant challenge on possible H&S failure. From this standpoint, we could accept deeper retracement.
Conclusion
Right now Yen is forming multiple reversal patterns on different time frames. We do not want to say that this will be absolute reversal but, nevertheless, taking in consideration the scale of setup, which is monthly and weekly - move down could be significant and provide us context for trading for few weeks, or even months.
At the same time, major patterns have not been confirmed yet and just stand in a process of creation. That's why, in general we could try to take position, but later we have to get real confirmation of these patterns from the market.
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.
Japan's core consumer prices rose for the first time in five months in November but household spending tumbled, casting doubt on the central bank's view that robust consumption will help accelerate inflation to its 2 percent target.
The mixed batch of data will keep alive expectations that BOJ Governor Haruhiko Kuroda, who has said he will do whatever it takes to achieve his ambitious price goal, may nudge the central bank into expanding stimulus as early as next month.
"The downward pressure from falling oil prices seems to have run its course, which helped core CPI rise," said Hidenobu Tokuda, senior economist at Mizuho Research Institute.
"But consumer prices likely won't rise as fast as the BOJ projects. We expect the central bank to ease next year."
The core consumer price index (CPI), which includes oil products but excludes volatile fresh food prices, rose 0.1 percent in November from a year earlier, against a median market forecast for a flat reading, data showed on Friday.
The rise followed a 0.1 percent drop in October and came as higher food prices moderated the pressure from slumping energy costs.
A separate BOJ index that excludes oil and fresh food - but includes processed food prices - showed consumer prices rose 1.2 percent in the year to November, as companies passed on to consumers the higher import costs from a weak yen.
But household spending suffered the biggest annual fall in eight months, down 2.9 percent in November from a year earlier and exceeding a median forecast for a 2.4 percent decline.
The government downgraded its assessment to say spending was weak, underscoring the fragile state of the economy which narrowly dodged recession in July-September.
Economics Minister Akira Amari was upbeat on the outlook, pointing to rising real wages and blaming weak November spending on unusually warm weather that hurt sales of winter clothing.
"Factors that will support consumer spending are falling into place," he told reporters.
Wary of soft growth, the government plans nearly $800 billion in record spending in next fiscal year's budget. The BOJ also fine-tuned its stimulus programme to ensure it can keep up or even accelerate its money-printing to achieve its inflation target.
Policymakers are hoping a tightening job market will nudge firms into accelerating wage hikes and underpin household spending. But repeated calls from premier Shinzo Abe to boost wages have so far fallen on deaf ears.
CFTC data does not give us a lot of information by far. Yes, we see, that net short position has decreased significantly. But this drop was on a background of open interest decreasing. It means that short were just closed. Data shows that no new long positions were opened. In general this situation means that current Yen strength is mostly retracement rather than some big shifts in market sentiment. The same conclusion we could make from comments above. But it doesn't mean that this is useless for us. Retracement also could be significant and give us excellent trading setup.
Now some words on US situation and the Fed. Here, guys, I've found excellent update from Phantom Consulting. If you remember - they have done excellent analysis on GBP where we've anticipated no rate change and have made good money of GBP drop. Now some thoughts on Fed:
On Wednesday the FOMC voted to raise the target range for the federal funds rate by 25 basis points to 0.25%-0.50%. With the move widely anticipated, the focus of attention is not the outcome of the meeting, but the accompanying statement, together with the latest Summary of Economic Projections.
We find it noteworthy that the vote to tighten was unanimous, and that downward pressure on inflation is expected to be temporary. There was no mention of structural impediments, or global disinflationary pressures that would prevent a return to 2% inflation ‘over the medium term’.
In the Fed’s view, the US is returning slowly to the old normal. It has confidence in the strength of the US recovery, and this probably accounts for the 1.5% bounce in the S&P 500 that took place Wednesday. Indeed, equity markets had fallen in the wake of September’s ‘no change’ decision, when jitters over external headwinds held sway.
We believe that the US economy is well placed to deal with higher borrowing costs. Job creation has been robust, and the unemployment rate has fallen to 5.0%. At 5.0%, this rate is lower than usual for the beginning of a tightening cycle. Indeed, at this stage, the real policy rate would normally be well into positive territory.
Interestingly, the FOMC’s median estimate of the appropriate level of the fed funds rate at the end of next year remained unchanged at 1.4%. As our first chart demonstrates, in each of the four previous meetings, that rate had been revised down.
Looking at changes to official interest rate forecasts more broadly, it is clear that revisions have been more to the level than to the slope of the dollar curve. Since September of last year, the anticipated pace of tightening has come in a little from 135 basis points per annum over the next two years, to 100 basis points per annum. But that is still twice the rate that is priced in by markets at the time of writing.
In our view, Wednesday’s announcement marked the beginning of what could be a long period of divergent monetary policies across the major economies. The Bank of England is in no hurry to follow the Fed. The European Central Bank, the Bank of Japan, and the People’s Bank of China are all firmly in loosening mode.
Overnight, the Bank of Japan voted to buy more long-dated Japanese Government Bonds (JGBs) and to increase its purchases of the Nikkei 400 index. This weeds out underperforming companies by incorporating only those that rank within the top 400 in terms of market capitalisation, return on equity and operating profits.
Historically, the dollar has tended to fall once a US tightening cycle is underway. But given the divergent trends set out above, and with risks to the market-implied path for US rates to the upside in our view, this time may well be different.
Technicals
Monthly
As we've promised, today we will take a look at Yen. Actually, guys, we were looking over it for all these time that passed since our last update and we keep watching for other currencies as well. If we do not prepare researches on them, this just means that it is not the time yet, and no major setup has been formed.
On Yen situation stands very close when significant shifts could happen. Currently we are not absolutely sure with this, but if this will not happen - this also will be result with opposite conclusions. When you will read our analysis you'll get it.
Here is the combination that we would like to play. Yen stands at major 5/8 Fib resistance level. And has the chance to form DRPO "Sell" pattern. Even last part of the thrust up has 8 bars and it is sufficient for trading. Right now December candle stands below 3x3 DMA and JPY has all chances to complete DRPO pattern. We just need to get close below green line on next week.
Also guys, may be existence of DRPO, even at Fib level is not sufficient. But, as you can see price has spiked up slightly former top. It means that we've got reversal swing and - we have bearish W&R that makes DRPO pattern more reliable.
Potential target of this setup - 50% support of most recent thrust up. It stands approx. around 111-112. But, if we will get some kind of AB-CD retracement after reversal swing - downward action could significantly stronger.
Also guys, take a look at we have not just simple Fib resistance but Agreement. AB-CD pattern is not very nice, but this is the only one that we have here. Anyway, it's target has been hit.
Finally, existing of DRPO pattern is 2-sided setup. Because as direct DRPO as DRPO "Failure" - are both direction pattern. And, for instance, if we will get DRPO "Failure" - this will mean that upward action will continue....
But initially we will work with DRPO "Sell" directly.
Weekly
This time frame brings more details and most of them are bearish as well. So, we know that market stands at strong resistance and reversal pattern is forming on monthly chart.
Here, on weekly, trend is bearish and we see solid divergence with MACD. Second - price dropped below MPS1, which could indicate bearish trend starting.
Also take a look at bearish engulfing on top. On monthly chart W&R pattern is not as obvious. But here - market has jumped up but immediately returned right back down. This clearly indicates some stop grabbing just above the tops of 2007. Here W&R looks as it should.
And most important, but you probably see it by yourself already - H&S pattern. Left part takes the shape of butterfly (we've traded it by the way previously). It means that DRPO takes the shape of H&S on weekly chart. Not worst combination.
Daily
On daily chart trend is bearish as well, market is not at oversold. This chart lets us to narrow necessary battlefield. We probably will need just most recent swing down. The top of right shoulder already has been formed. Market has tested this level three times and later re-test with final attempt to break it and then dropped.
Also on the right part of H&S pattern we see classical bearish acceleration on the head's slope and on the slope of right shoulder. This is what we would like to get, when we deal with H&S.
Right below the market we have support area of 50% level and WPS1. So, if retracement up will happen right from there, we could try to use it for short entry.
Here, guys, we have a bit tricky situation. From one point of view, we have H&S on daily chart that almost has been formed, at least right shoulder's top is here and we definitely know invalidation point. It means that we already could start trade it.
But from another point of view - H&S is DRPO "Sell", but this pattern has not been confirmed yet, since December candle is not closed yet, and we need it to be closed below 3x3 DMA. Right now chances are good that this will happen, but who knows...
That's being said - trading H&S will work as anticipating of DRPO "Sell" and this is risky. DiNapoli advises to not anticipate any directional patterns. It means that if we will go short based on H&S, but later we will not get confirmed DRPO "Sell", it would be better to leave this trade.
4-hour
Trend is bearish here by far as well, but probably we will get bullish divergence as soon as market will reach 119.90 support area. If retracement up will start - we should watch for two possible areas. First one is WPP and 120.80 Fib resistance, while second is WPR1 and K-area.
If market is really bearish, it should not move significantly higher. Usually WPR1 holds any bullish retracements within bear trend. Still, our major invalidation point is 123.56 - invalidation point of right shoulder. If market will move above it this will be significant challenge on possible H&S failure. From this standpoint, we could accept deeper retracement.
Conclusion
Right now Yen is forming multiple reversal patterns on different time frames. We do not want to say that this will be absolute reversal but, nevertheless, taking in consideration the scale of setup, which is monthly and weekly - move down could be significant and provide us context for trading for few weeks, or even months.
At the same time, major patterns have not been confirmed yet and just stand in a process of creation. That's why, in general we could try to take position, but later we have to get real confirmation of these patterns from the market.
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.
