Forex FOREX PRO WEEKLY, February 24 - 28, 2020

Sive Morten

Special Consultant to the FPA
Messages
13,140
Fundamentals

EUR stands under impact of long-term driving factors that we've specified last year and mentioned often in recent reports. Price accurately moves lower, confirming long-term bearish trend. This week FX market mostly was driven by two factors. First is EUR - weak sentiment data in the beginning of the week, second - massive dismissing of JPY as safe-haven currency and run into USD, because of more virus cases in Japan. Currently the new wide opinion that Japan probably will become second largest country under virus epidemic.

The euro extended losses on Tuesday to plumb a new three-year low against the dollar, after a German survey showing a slump in investor confidence added to pessimism about Europe’s largest economy.

The euro has lost around 3.4% of its value against the U.S. dollar this year, as weak manufacturing and gross domestic product data from Germany confirm the euro zone is more vulnerable than most economies to the impact of the coronavirus outbreak which started in China.

The U.S. economy has proved more resilient than the rest of the world, keeping the dollar at 4-1/2 month highs against a basket of currencies. Other safe-haven assets such as the Swiss franc and Japanese yen have also benefited.

Germany’s ZEW research institute said in its monthly survey that investors’ mood had deteriorated far more than expected in February, on worries coronavirus would dampen world trade . The survey added to expectations the German economy will lose more momentum in the first half as slumping exports keep manufacturers mired in a recession.

“The scale of the erosion in confidence potentially sets the stage from similarly poor results Friday when Germany and the euro zone issue preliminary PMI surveys,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.

Some economists fear the coronavirus, which started in China and is impacting both the global supply chain and Chinese demand, could result in weaker German growth in the first quarter.

“Breaking the $1.0800 level seems to be a question of when rather than if,” Petr Krpata, chief currency strategist at ING, said. “The mix of soft euro zone data, the market pricing renewed ECB deposit rate cuts and attractive euro funding characteristics do not bode well” for the euro, he added.

“Only when the virus issue dies down and the impact from all the stimulus around the world starts to become apparent, will we see downward pressure on the USD,” Brad Bechtel, managing director, Jefferies in New York, said in a note.


The euro’s tumble below $1.08 for the first time in three years may be only the first milestone in its downward journey, with global newsflow, economic data and option market positioning all seemingly stacked against the single currency.
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Less than two months into 2020, the currency pair is showing signs it might break out of last year's $1.15/$1.09 range which was the narrowest ever. And one-month implied volatility, a gauge of expected price swings, has spiked a whole percentage point above record lows touched last month.

Sluggish growth aside, the euro is dogged by the economic impact of the coronavirus outbreak, the risk of U.S. trade tariffs, and finally, its low volatility - which makes it an ideal candidate for “shorting” against higher-yielding currencies.

Now many reckon the 17-year low of $1.0340 - reached in January 2017 - could be in sight for the currency. Whether that low is hit or not, market players are betting on more downside.

“The gutsy way to play it would be to cover your eyes and sell euro (in the spot market) but most people would play it through options,” said Stephen Gallo, European head of FX strategy at BMO Capital. “At the moment it’s a gift to buy euro downside options.”

Options are derivatives that allow holders to buy or sell an asset at a pre-agreed price within the stipulated time period for an upfront premium. Very simply, a ‘put’ confers the right to sell, while ‘call’ options allow holders to buy.

Gallo has a $1.03 strike price - the level where the option is exercised - noting the trade would be profitable even if the euro only dropped as low as $1.06. Clearly, many other traders are also placing such bets.

Data from the Depositary Trust & Clearing Corporation (DTCC) shows a spike in demand for euro 'put' options over the past week. That's taken the ratio of euro put-call traded volumes to the widest since last August.

And if there were around 5 billion euros worth of euro put options outstanding a week back, priced between 1.0850 and $1.0750 and expiring through March 31, that’s since doubled as investors scramble to cover the risk of deeper declines.

To gauge just how dramatic the repricing has been, take a look at one-month euro-dollar risk reversals. As recently as Feb. 5, these option contracts showed an implied volatility premium for euro calls over puts at a two-year high. That’s now flipped into a premium for euro puts over calls .

Credit Suisse analysts said they saw the euro extending falls toward $1.0650, adding: “Fading euro strength remains our key message.”

The euro has paused for now, possibly benefiting from option barriers around $1.0775.

But traders say $1.0775 is the last of the big downside barriers, though lesser amounts may have been placed at half-cent intervals. In the event of fall under $1.0700, more euro downside may loom, as the break of major option levels often sends traders rushing to sell the currency in cash markets.

As for a recovery, Commerzbank analysts said the euro would need to hold at $1.076. But they added that “near-term rallies will need to regain $1.0879 as an absolute minimum in order to alleviate immediate downside pressure.”

The yen was set for its worst week in two-and-a-half years on Friday, as fears over the creeping spread of the coronavirus epidemic drove funds out of Asia and looking for safety in the U.S. dollar, gold and bonds. Though it barely budged on Friday, the yen has lost 2% against the dollar in the previous two days, due to weak Japanese economic data and coronavirus worries.

China reported an uptick in infections from a virus that has already killed more than 2,200 people there and paralysed its economy. South Korea reported 52 new cases, lifting its national total by a third to 156. Japan has reported new deaths and, along with Singapore, stands on the brink of recession.

“Market participants are getting anxious over the spread of COVID-19 in other countries now,” said Johanna Chua, emerging markets Asia economist at Citi in Hong Kong. “The risk sentiment in Asia deteriorated rapidly. The weakness was most felt in emerging markets Asia FX.”

“New cases in (South) Korea and in Japan, (have) obviously given some people a little bit of cold feet regarding Japan and the yen as a safe haven,” said David Bloom, global head of FX at HSBC. “They’re thinking: ‘Maybe Swissy and gold are better’. So there is a little bit of scratching of heads, there’s no doubt about it,” he said, adding he was not yet prepared to abandon the idea of the yen as a safety play.

Meanwhile factory activity in Japan suffered its steepest contraction in seven years this month, data showed on Friday. Should European Purchasing Managers’ Index data show similar softness, another round of dollar buying may be in the offing.

“The U.S. is simply less exposed to any slowdown in global trade, and in terms of currencies it’s the obvious candidate in terms of relatively limited impact from coronavirus,” said Westpac FX analyst Sean Callow. “If European business takes fright at coronavirus concern, that could be a fresh cause of dollar buying across the board.”

Still, a bit later some relief comes as US PMI data was a bit worse than expected.

Survey of purchasing managers showed U.S. business activity in the manufacturing and services sectors stalled in February as companies have grown increasingly concerned about the coronavirus.

The IHS Markit flash services sector Purchasing Managers’ Index dropped to 49.4 this month, the lowest since October 2013 and signaling that a sector accounting for roughly two-thirds of the U.S. economy was in contraction for the first time since 2016. Economists polled by Reuters had forecast a reading of 53. The manufacturing sector barely escaped a slip into contraction, with a flash reading of 50.8, the lowest since August.

“Fundamentally, the case is clearly a bearish one for the yen, though the dynamics underpinning the currency as a safe haven should keep the Japanese currency on the list of outperforming currencies,” Jonathan Coughtrey, managing director at Action Economics, said in a note.

Sterling rose against the dollar after British factories reported the fastest rise in output for 10 months in February, assuaging some fears over the economy as Britain prepares for trade talks with the European Union.


CFTC Data

It seems that our suggestion on starting of new long-term tendency is correct as EUR has add another 20K bearish contracts to its net position and it has big room to add more as record low stands around 226K contracts. :

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Source: cftc.gov
Charting by Investing.com


In general, speculators boosted their net long bets on the U.S. dollar to a seven-week high in the latest week, according to calculations by Reuters and U.S. Commodity Futures Trading Commission data released on Friday. The value of the net long dollar position was $14.78 billion for the week ended Feb. 18, up from $13.94 billion last week. That is the largest net long dollar position this year.

U.S. dollar positioning was derived from net contracts of International Monetary Market speculators in the Japanese yen, euro, British pound, Swiss franc and Canadian and Australian dollars.

In a wider measure of dollar positioning includes net contracts on the New Zealand dollar, Mexican peso, Brazilian real and Russian ruble, the U.S. dollar posted a net long position valued at $11.183 billion, up from $9.694 billion a week earlier.

The dollar has outperformed most currencies this year as global investors poured money into U.S. stocks and bonds amid expectations the United States will be less vulnerable to economic fallout from the coronavirus, which already threatens to dent China’s growth rate and push Japan and the eurozone into recession.

Thus as a bottom line of the happened events - USD is a king by far. Economic indicators are reinforcing the U.S growth engine’s outperformance. The United States has the highest bond yields among developed nations and its companies keep beating earnings forecasts. It’s relative resilience to coronavirus damage makes it today’s safe-haven of choice.

President Donald Trump has been oddly silent on the subject but it’s probably a matter of time before he accuses rivals of devaluing their currencies to aid exports. Could the G20 meeting in Riyadh be the forum where Washington starts to chastise? And will it do that in private meetings or opt to name and shame?

Another question is when dollar strength will make its impact felt on U.S. trade and companies’ bottom lines. Corporate America waving red flags may be what finally gives the dollar pause. For now, the 1971 comment by U.S. Treasury Secretary John Connelly comes to mind: “The dollar is our currency, but it is your problem.” It’s certainly a problem for the global economy.

-U.S. labor market remains strong; manufacturing likely stabilising

-Broadly strong dollar grinds yen to 10-month low

-Euro slump spreads far and wide vs trading peers

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USD probably will keep the leadership while panic on virus spreading and its consequences dominates on the markets. US economy domination over EU also is solid and probably should last through the whole year or even longer, but, at the same time, Fathom consulting points on first worrying signs in US job market:

Last week’s U.S. job openings data was again weaker than expected. Total job openings fell by more in the final two months of last year than in any two-month period since the global financial crisis. How alarmed should we be? In absolute terms, the U.S. labor market remains tight. It is still the case that there are more vacancies in the US economy than there are unemployed people: the vacancy-to-unemployment ratio, a popular measure of labor market tightness, remains above 1. Nevertheless, the turnaround in the vacancies data has been abrupt. It is an indicator worth monitoring as we move further into 2020.

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Technicals
Monthly


Technical picture is not as interesting as fundamental one this week as EUR has spent almost all time in consolidation around 1.08 area. As Dollar Index (DXY) as EUR has tested former extreme point. On EUR it was 1.08 lows. They were broken but price has not gone too far and mostly is coiling around it. As we've mentioned earlier, EUR now stands in tricky situation and could turn to free falling as no valuable support levels stand behind.

Bearish test of YPP and drop below YPS1 supports our worry. As we've shown above - various traders point on 1.03 level as next long-term target on EUR. Option trades also mention 1.07 support - indeed it coincides with our harmonic swing down here. But, in general, we could talk on 1.07-1.08 support area. that's what we've mentioned last time as well:

"As we've said - if EUR indeed drops a bit more showing real breakout, we focus on our next 1.03 lows target. Additionally we could point on 1.07 level. EUR accurately keeps harmonic swings here - as to the upside as to the downside. Thus, next downside harmonic target is 1.07."

Since market looks overextended down, we will keep an eye on a pullback. It should give us good chance to sell and take part in downside continuation.

To break this tendency, EUR has to climb at least above 1.1220, or better to reach 1.1450 area, to set some background for further upside action, which now is difficult to imagine.

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Weekly

Trend here stands bearish, but we do not have some specific clear patterns. We just could acknowledge that EUR hits predefined targets - major weekly OP and harmonic swing, which also could be treated as separate AB=CD action. Price stands near but still, not at oversold level by far. Additionally we have support of channel trend line.

Based on these tools, we hope that EUR shows some reaction on them, and we will get moderate upside bounce next week.
eur_w_24_02_20.png


Daily

As on EUR as on DXY - the major thing that stands in focus, as a background of possible trade is thrust. Picture stands relatively clear here - we're watching for classic DiNapoli B&B "Sell" trade. Thanks to Overbought level we could definitely point the level that is good for selling. This is first 3/8 Fib resistance 1.0898. Push through 3x3 DMA already has started and we have 1st close. Pure B&B trade suggests that EUR should reach Fib level on Mon-Tue.

Roger also points the signal on this trade already.

The same trade (but in opposite direction) you could take on DXY, or you could take them both...

Theoretically DRPO "Buy" is also possible here but we can't definitely say it right now and need to see the price action within 1-3 sessions.

eur_d_24_02_20.png


Intraday

Here is too few tools to suggest possible performance, but in general, we could get downside pullback first, as market stands long time in downside action and momentum is strong here. Besides, EUR has formed upside reversal swing on Friday. Whether this will be H&S shape or not, but then, it seems logical to suggest some AB=CD upside action.

If retracement will be right to 5/8 Fib support then, AB-CD target creates an Agreement with our primary daily Fib level.
eur_1h_24_02_20.png


Conclusion:

Long-term driving factors that we've specified in 2019, now turn to active phase, triggering strong sell-off on EUR. Last week trading plan is completed as major targets of 1.07 - 1.08 are hit. Now we're ready to the second stage - moderate pullback that we intend to use for short entry.
 

Sive Morten

Special Consultant to the FPA
Messages
13,140
Morning everybody,

So, let's keep going with our EUR trading plan. On daily chart we do not have big changes and still watching for 1.0890 Fib level to go short there. That should be the starting point of B&B "Sell" pattern.
eur_d_25_02_20.png


On 4H chart, although we've put the price shape just theoretically in our weekly report - but, as you can see EUR accurately follows it. Indeed, week has started with 5/8 drop as we've suggested and now market is going with our AB-CD pattern, which should lead us precisely to daily resistance:
eur_4h_25_02_20.png


Upside action could be finalized by nice 1.618 butterfly "sell" on 1H chart:
eur_1h_25_02_20.png
 

Sive Morten

Special Consultant to the FPA
Messages
13,140
Morning guys,

So, our B&B "Sell" trade is ready to start on EUR. As you can see within 3 sessions above 3x3 DMA price mostly has reached major 3/8 Fib level (just few pips below it). Another advantage here is near standing Overbought level, thus, we could place stop just above it and it fits perfectly in 50 pips range. The the setup we have on Dollar index as well...
eur_d_26_02_20.png


On 4H chart our AB=CD pattern is completed, creating Agreement with daily Fib resistance:
eur_4h_26_02_20.png


On 1H chart our butterfly has not been formed as market dropped yesterday. Now we do not have some special reversal patterns. Overall price action takes shape of wedge pattern, we have MACD divergence.

It is not necessary, but it would be nice if we would get "222" Sell pattern. In this case it will be perfect entry setup, as it also could be accompanied by bearish grabber. But I'm not sure that it definitely will be formed.
eur_1h_26_02_20.png


Let's see how market will play it today.
 

Sive Morten

Special Consultant to the FPA
Messages
13,140
Morning guys,

Yesterday there was no proper reaction, suggested by B&B on Fib resistance level. Now EUR missed two major conditions of this setup - too much candles above 3x3 DMA and no response to major 3/8 Fib resistance. It means that current upside action we can't consider any more in context of DiNapoli pattern.

Still... market momentum is fundamental issue, and it is still on the market. We suggest that downside pullback should happen in nearest time, but it will be based on different trading context.

Meantime, we could take a look at GBP. Here very short-term trading setup could be formed. Take a look, at daily chart we have 2-day bearish grabber (as I call it), which takes the shape of nice bearish engulfing. Thus, if upside pullback on intraday charts will be gradual, we could get continuation in 1.2850 area:
gbp_d_27_02_20.png


On 1H chart you could suggest H&S shape, although this is not H&S in terms of background - price just takes the same shape. So, if upside action will be gradual, especially if we will get AB-CD pattern - we could consider short entry from 1.2970 5/8 Fib level. Target is based on large downside AB-CD pattern.
But avoid short entry if it will be upside acceleration right to 5/8 level.
gbp_1h_27_02_20.png
 

Sive Morten

Special Consultant to the FPA
Messages
13,140
Morning guys,

We have non-market driving factors that move markets across the board. Not only FX but stocks, commodities as well. For instance, DAX dropped within one week the same distance as 15- week in 2018. Overall price action is irrational, this is not own market factors and big capital flows stand beyond it.

It means that on EUR long-term picture changes drastically as well. We will talk about it in our weekly report. Now market stands deep in overbought area, which is absolutely not typical for financial markets. Despite that upside momentum is very strong, we have rare V-shape reversal, but now few things that we could do. It would be better to wait some, at least minor relief.
eur_d_28_02_20.png


On 4H chart price hits AB=CD target around 5/8 Fib resistance, which is barely broken. On DXY chart this looks better as market is just coming to OP, which creates perfect Agreement with 5/8 Fib level. Anyway, this is an area that market could show reaction to, and next week we will be watching for pullback to consider position taking
eur_4h_28_02_20.png
 
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