Sive Morten
Special Consultant to the FPA
- Messages
- 18,863
Fundamentals
As Reuters reports - The dollar edged higher against a basket of currencies on Friday, ending its strongest week in six months, as traders piled into the greenback in a safe-haven move on worries about a weakening global economy.
The euro hovered at a two-week low with support at $1.13. The single currency still posted its steepest weekly drop against the dollar in over four months in the wake of data that showed an economic slowdown in Europe was spreading.
“The rally that propelled the dollar broadly higher last year has enjoyed renewed life with U.S. growth remaining solid while peers abroad lose momentum,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.
The European Commission cut its growth and inflation forecasts on Thursday as downside surprises to German and Spanish industrial orders fuelled worries about an accelerating slowdown.
Those figure have weighed on local bond markets. Core European government debt yields touched their lowest in over two years. Benchmark German yields were just 10 basis points away from zero percent.
U.S. yields also fell on the week, holding above the lows of their recent trading range.
MYSTERY BUYER Despite the weak data, traders were unwilling to sell the euro aggressively below $1.13. After hitting a low of $1.1323 on Thursday, the euro ended the day at $1.1338. It was stuck around that level on Friday.
“We are all scratching our heads on who the mystery buyer is on euro/dollar,” said Kenneth Broux, a currency strategist at Societe Generale in London.
One analyst pointed to the presence of large currency options amounting to nearly $1 billion around $1.1280 expiring later in the day as another possible prop.
Other traders said option structures between $1.12 to 1.16 have kept the currency in a tight band as banks have tried to curb volatility.
Implied volatility in the euro, or expected swings in the single currency, have fallen to below 4% vol, its lowest levels since late January.
Philip Wee, a currency strategist at DBS, thinks it is likely the euro will fall below $1.10 this year, given Europe’s weaker growth and inflation outlook compared that of the United States.
The dollar failed to make the most of the euro’s weakness, however. It traded a shade higher against its major rivals as trade tensions remained dominant.
Anxieties about the global economy were compounded by comments from U.S. President Donald Trump indicating he did not plan to meet with Chinese President Xi Jinping before a March 1 deadline to achieve a trade deal.
That helped the perceived safe-haven currencies such as the Japanese yen and the Swiss Franc hold up against the dollar. The dollar was last at 109.785 yen, while the greenback was down 0.23 percent at 1.00015 Swiss franc.
COT Report
Finally, as US shutdown is finished, CFTC resumes publishing of COT report. Somehow I do not see table sheet update on CFTC website and can't say how open interest has changed. Here, on the chart we see that speculative short position has decreased slightly, but still stands short. It could reflect impact of Fed meeting that was week before. Real sentiment on the market we still need to estimate.
Source: CFTC.com
Charting by Investing.com
So, overall background has not changed significantly. There are two major long-played topics and driving factors for markets across the board - US-Sino negotiations and fluids of world global crisis that already are in the air.
Since this is important indeed, recent Fathom consulting report clarifies some moments in anticipation of global crisis.
Fathom specifies that to avoid crisis world economy and US one in particular needs to achieve some subjects. They are - leading indicators of economy should remain positive and indicate growth, US equity markets needed clearly to underperform other developed and emerging equity markets and either credit spreads needed to widen or market liquidity needed to rebound.
Currently not all indicators match to desirable direction.
"There has been some progress with regard to the first two conditions set out above. Our leading indicator (FLI) remains weak, but it has at least stabilised, reflecting an easing of concerns over the trade war following a resumption in US-Sino negotiations, as well as additional policy stimulus in China and continued strong employment data in the US. In addition, equity markets have broadly kept pace with their US counterpart, which should be seen as progress given their sizeable underperformance in 2018."
Although shares shows some positive dynamic, it's not everything good on bond market and credit spreads.
As Fathom tells "the widening of credit spreads and the underperformance of credit indices in December, now partly reversed, was simply not material enough in our view, particularly at a time when regulators were drawing attention to potential difficulties in that sector. "
Weak performance of credit spreads looks a bit unnatural on a background of big contraction of assets in bond funds.
"For example, investors redeemed a record $85.9 trillion from high yield funds in December according to the Investment Company Institute, while issuance fell off a cliff with only $0.6 million new bonds issued in the US high yield market. That is against a backdrop of a record $13 trillion total corporate debt outstanding. Also, as much as 19% of investment grade bonds and 11% of high yield bonds are due to mature over the course of the next two years, in an environment where tightening liquidity, as highlighted by our FLiq, may only get a temporary breather from the Fed."
The major conclusion that Fathom makes is recession has big chances to start if no change will follow with three factors mentioned above. Investors have become too inhabit with tight credit spreads and underestimation of credit risks. This is potentially dangerous situation that could become a reason for new global collapse when new harbinger appears in a role of new Enron, Lehman etc.
"Overall, we feel that the market has been too dismissive, and has failed to look in the right places. Due the evolution of leverage ratios among US firm, we are concerned about the rapid deterioration in the health of so called ‘good companies’, not the health of the always risky high yield or leverage loan markets."
"The bottom line is that unless we see corporate spreads rise to match the levels of concern expressed by equity investors, or unless liquidity improves significantly, then the prospects of a ‘dead cat bounce’ appear greater than those of a more sustainable rally in risk assets. As a result, we maintain our more cautious stance for now. This matches the findings of our fixed-income allocation model, the full results of which were released to clients last week. Currently, it unequivocally favours a more defensive stance, given faltering expectations for growth and tight liquidity conditions."
Fathom doesn't tell how liquidity, credit risk and volatility perception and leading indicators could be improved to escape financial collapse. This situation mostly, stands supportive for US dollar. The light example of what could happen we saw last week and the worst picture we saw in 2008.
Currently world stands in total political disagreement, situation doesn't show significant improvement, especially when nobody makes efforts to stabilize it. In such environment, it is very difficult to count on self-resolving of this situation.
Technicals
Monthly
This week action was a bit stronger. Although monthly chart is too big to show it, but even here we see EUR is moving lower, although it still stands inside the flag.
Here we mostly wait for clarity - either downside breakout and start action to 1.08 and later to 1.03 or ability of the EUR to hold above 1.12 and turning up. Market stands at support area around major 5/8 Fib level. In case of upside action, YPP will be important target , because, as a rule, market tends to touch YPP through the year.
As Fathom consulting expects first rate change by Fed in June, but market is not ready for this step (as wee see from Fed watch tool by CME) - this is the first moment when EUR could show big action.
As we said this many times previously - indirect technical factors point on market's weakness, at least in long-term perspectives, as EUR can't jump out from strong support within more than 5-6 months and just lays upon it. Trend stands bearish here.
Monthly situation shortly could be described as indecision with light gravitation to the downside. In fact, long standing around Yearly Pivot confirms things that we've discussed above. MACD trend stands bearish here.
Thus we keep valid our downside COP target around 1.03 by far.
Weekly
Previously we mentioned two setups that could be realized on EUR, although upside scenario by our view has less chances, just because market shows too choppy and heavy action, while upside action demands impulse, which we do not have.
First is our initial bearish setup, which, in fact, is continuation on the same logic that we have on monthly chart. Here we have downside channel.Since market shows very weak reaction on major 5/8 Fib support level - it brings some signs of bearish dynamic pressure, when MACD shows upside trend but price action stands flat. This week signs of dynamic pressure become brighter and price shows bearish week with tail close.
Conversely, we have MACD divergence and possible reverse H&S shape. But market has to climb back to neckline at least, to resurrect this scenario, and break the channel up. Precisely this type of action we do not see yet. It means that we could get some different action, say, fallen wedge pattern instead. Anyway, currently weekly chart doesn't support any bullish inspiration and overall price action looks mostly indecision.
Clear pullback this week and inability to break long-term trend line just confirms our previous doubts on this scenario.
Speaking on sentiment, personally, when I'm looking at this chart, somehow I sense more bearish rather than bullish context. But this is something relates more to perception rather than strict technical analysis.
Daily
Price action confirms our doubts on bullish perspectives by far. Indeed few times we've mentioned through the week that downside acceleration is the feature that doesn't correspond to bullish market, as well as no reaction on strong support areas. This has let us to suggest further downside action on EUR.
Bears now have good technical background as well because all major Fib levels around have been broken already. More or less strong support we have around MPS1 and trend line of 1.13 area and 1.12-1.1240 - lows and OP target. This also will be an OS level.
Here I adjust borders of the flag pattern and apply softer condition by moving lower border down a bit, based on "B" point and at least theoretically provides additional support EUR around 1.13 area.
Still, with downside acceleration, easy passing through COP target confirms existing of bearish sentiment. Now we still do not see any context for bullish trades:
Intraday
Here market stands just 17 pips above first support level - MPS1 and trendline. It means that theoretically some bounce could happen up from there. Since we have good thrust down, the patterns that we were watching on Fri but didn't get it, we could watch again on Monday. They area B&B "Sell" or DRPO "Buy".
It could be really the challenge to trade EUR long, so we do not call for that.
Currently, as we have bearish context, we treat potential pullback as a chance for short entry at better level, say around K-resistance area:
Conclusion:
Last week shows that market stands under pressure and no signs of bullish reversal has been formed yet. Next week, as market stands near first 1.13 support area, we will keep an eye on possible technical bounce. Major daily target stands around 1.12-1.1240 area.
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.
As Reuters reports - The dollar edged higher against a basket of currencies on Friday, ending its strongest week in six months, as traders piled into the greenback in a safe-haven move on worries about a weakening global economy.
The euro hovered at a two-week low with support at $1.13. The single currency still posted its steepest weekly drop against the dollar in over four months in the wake of data that showed an economic slowdown in Europe was spreading.
“The rally that propelled the dollar broadly higher last year has enjoyed renewed life with U.S. growth remaining solid while peers abroad lose momentum,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.
The European Commission cut its growth and inflation forecasts on Thursday as downside surprises to German and Spanish industrial orders fuelled worries about an accelerating slowdown.
Those figure have weighed on local bond markets. Core European government debt yields touched their lowest in over two years. Benchmark German yields were just 10 basis points away from zero percent.
U.S. yields also fell on the week, holding above the lows of their recent trading range.
MYSTERY BUYER Despite the weak data, traders were unwilling to sell the euro aggressively below $1.13. After hitting a low of $1.1323 on Thursday, the euro ended the day at $1.1338. It was stuck around that level on Friday.
“We are all scratching our heads on who the mystery buyer is on euro/dollar,” said Kenneth Broux, a currency strategist at Societe Generale in London.
One analyst pointed to the presence of large currency options amounting to nearly $1 billion around $1.1280 expiring later in the day as another possible prop.
Other traders said option structures between $1.12 to 1.16 have kept the currency in a tight band as banks have tried to curb volatility.
Implied volatility in the euro, or expected swings in the single currency, have fallen to below 4% vol, its lowest levels since late January.
Philip Wee, a currency strategist at DBS, thinks it is likely the euro will fall below $1.10 this year, given Europe’s weaker growth and inflation outlook compared that of the United States.
The dollar failed to make the most of the euro’s weakness, however. It traded a shade higher against its major rivals as trade tensions remained dominant.
Anxieties about the global economy were compounded by comments from U.S. President Donald Trump indicating he did not plan to meet with Chinese President Xi Jinping before a March 1 deadline to achieve a trade deal.
That helped the perceived safe-haven currencies such as the Japanese yen and the Swiss Franc hold up against the dollar. The dollar was last at 109.785 yen, while the greenback was down 0.23 percent at 1.00015 Swiss franc.
COT Report
Finally, as US shutdown is finished, CFTC resumes publishing of COT report. Somehow I do not see table sheet update on CFTC website and can't say how open interest has changed. Here, on the chart we see that speculative short position has decreased slightly, but still stands short. It could reflect impact of Fed meeting that was week before. Real sentiment on the market we still need to estimate.
Source: CFTC.com
Charting by Investing.com
So, overall background has not changed significantly. There are two major long-played topics and driving factors for markets across the board - US-Sino negotiations and fluids of world global crisis that already are in the air.
Since this is important indeed, recent Fathom consulting report clarifies some moments in anticipation of global crisis.
Fathom specifies that to avoid crisis world economy and US one in particular needs to achieve some subjects. They are - leading indicators of economy should remain positive and indicate growth, US equity markets needed clearly to underperform other developed and emerging equity markets and either credit spreads needed to widen or market liquidity needed to rebound.
Currently not all indicators match to desirable direction.
"There has been some progress with regard to the first two conditions set out above. Our leading indicator (FLI) remains weak, but it has at least stabilised, reflecting an easing of concerns over the trade war following a resumption in US-Sino negotiations, as well as additional policy stimulus in China and continued strong employment data in the US. In addition, equity markets have broadly kept pace with their US counterpart, which should be seen as progress given their sizeable underperformance in 2018."
Although shares shows some positive dynamic, it's not everything good on bond market and credit spreads.
As Fathom tells "the widening of credit spreads and the underperformance of credit indices in December, now partly reversed, was simply not material enough in our view, particularly at a time when regulators were drawing attention to potential difficulties in that sector. "
Weak performance of credit spreads looks a bit unnatural on a background of big contraction of assets in bond funds.
"For example, investors redeemed a record $85.9 trillion from high yield funds in December according to the Investment Company Institute, while issuance fell off a cliff with only $0.6 million new bonds issued in the US high yield market. That is against a backdrop of a record $13 trillion total corporate debt outstanding. Also, as much as 19% of investment grade bonds and 11% of high yield bonds are due to mature over the course of the next two years, in an environment where tightening liquidity, as highlighted by our FLiq, may only get a temporary breather from the Fed."
The major conclusion that Fathom makes is recession has big chances to start if no change will follow with three factors mentioned above. Investors have become too inhabit with tight credit spreads and underestimation of credit risks. This is potentially dangerous situation that could become a reason for new global collapse when new harbinger appears in a role of new Enron, Lehman etc.
"Overall, we feel that the market has been too dismissive, and has failed to look in the right places. Due the evolution of leverage ratios among US firm, we are concerned about the rapid deterioration in the health of so called ‘good companies’, not the health of the always risky high yield or leverage loan markets."
"The bottom line is that unless we see corporate spreads rise to match the levels of concern expressed by equity investors, or unless liquidity improves significantly, then the prospects of a ‘dead cat bounce’ appear greater than those of a more sustainable rally in risk assets. As a result, we maintain our more cautious stance for now. This matches the findings of our fixed-income allocation model, the full results of which were released to clients last week. Currently, it unequivocally favours a more defensive stance, given faltering expectations for growth and tight liquidity conditions."
Fathom doesn't tell how liquidity, credit risk and volatility perception and leading indicators could be improved to escape financial collapse. This situation mostly, stands supportive for US dollar. The light example of what could happen we saw last week and the worst picture we saw in 2008.
Currently world stands in total political disagreement, situation doesn't show significant improvement, especially when nobody makes efforts to stabilize it. In such environment, it is very difficult to count on self-resolving of this situation.
Technicals
Monthly
This week action was a bit stronger. Although monthly chart is too big to show it, but even here we see EUR is moving lower, although it still stands inside the flag.
Here we mostly wait for clarity - either downside breakout and start action to 1.08 and later to 1.03 or ability of the EUR to hold above 1.12 and turning up. Market stands at support area around major 5/8 Fib level. In case of upside action, YPP will be important target , because, as a rule, market tends to touch YPP through the year.
As Fathom consulting expects first rate change by Fed in June, but market is not ready for this step (as wee see from Fed watch tool by CME) - this is the first moment when EUR could show big action.
As we said this many times previously - indirect technical factors point on market's weakness, at least in long-term perspectives, as EUR can't jump out from strong support within more than 5-6 months and just lays upon it. Trend stands bearish here.
Monthly situation shortly could be described as indecision with light gravitation to the downside. In fact, long standing around Yearly Pivot confirms things that we've discussed above. MACD trend stands bearish here.
Thus we keep valid our downside COP target around 1.03 by far.
Weekly
Previously we mentioned two setups that could be realized on EUR, although upside scenario by our view has less chances, just because market shows too choppy and heavy action, while upside action demands impulse, which we do not have.
First is our initial bearish setup, which, in fact, is continuation on the same logic that we have on monthly chart. Here we have downside channel.Since market shows very weak reaction on major 5/8 Fib support level - it brings some signs of bearish dynamic pressure, when MACD shows upside trend but price action stands flat. This week signs of dynamic pressure become brighter and price shows bearish week with tail close.
Conversely, we have MACD divergence and possible reverse H&S shape. But market has to climb back to neckline at least, to resurrect this scenario, and break the channel up. Precisely this type of action we do not see yet. It means that we could get some different action, say, fallen wedge pattern instead. Anyway, currently weekly chart doesn't support any bullish inspiration and overall price action looks mostly indecision.
Clear pullback this week and inability to break long-term trend line just confirms our previous doubts on this scenario.
Speaking on sentiment, personally, when I'm looking at this chart, somehow I sense more bearish rather than bullish context. But this is something relates more to perception rather than strict technical analysis.
Daily
Price action confirms our doubts on bullish perspectives by far. Indeed few times we've mentioned through the week that downside acceleration is the feature that doesn't correspond to bullish market, as well as no reaction on strong support areas. This has let us to suggest further downside action on EUR.
Bears now have good technical background as well because all major Fib levels around have been broken already. More or less strong support we have around MPS1 and trend line of 1.13 area and 1.12-1.1240 - lows and OP target. This also will be an OS level.
Here I adjust borders of the flag pattern and apply softer condition by moving lower border down a bit, based on "B" point and at least theoretically provides additional support EUR around 1.13 area.
Still, with downside acceleration, easy passing through COP target confirms existing of bearish sentiment. Now we still do not see any context for bullish trades:
Intraday
Here market stands just 17 pips above first support level - MPS1 and trendline. It means that theoretically some bounce could happen up from there. Since we have good thrust down, the patterns that we were watching on Fri but didn't get it, we could watch again on Monday. They area B&B "Sell" or DRPO "Buy".
It could be really the challenge to trade EUR long, so we do not call for that.
Currently, as we have bearish context, we treat potential pullback as a chance for short entry at better level, say around K-resistance area:
Conclusion:
Last week shows that market stands under pressure and no signs of bullish reversal has been formed yet. Next week, as market stands near first 1.13 support area, we will keep an eye on possible technical bounce. Major daily target stands around 1.12-1.1240 area.
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.