Sive Morten
Special Consultant to the FPA
- Messages
- 18,695
Currently, guys, some currencies shows really interesting setup and need an update. For instance, JPY - our DRPO "Buy" pattern has been formed, CAD also needs more attention. But recently there are a lot of talking about Brexit, besides, we haven't taken a look at GBP since Nov. Thus, today we will fix this space and will talk on Cable...
Fundamentals
(Reuters) - The dollar rose broadly on Friday after mostly upbeat U.S. economic data renewed some expectations that the Federal Reserve could raise interest rates again this year.
The dollar index, a measure of the greenback's value against six major currencies, posted its best weekly performance since November. Against the Japanese yen, the dollar rose to a more than one-week high.
Friday's data showed that U.S. economic growth slowed in the fourth quarter, but not as sharply as anticipated, while consumer spending rose. Those reports, if followed by another robust U.S. nonfarm payrolls report next week, should put rate hikes back on the Fed's agenda.
"The dollar's move today is almost entirely attributed to the data, which was an upside surprise," said Jason Leinwand, managing director at Riverside Risk Advisors in New York.
"The market was lightly positioned, looking for and confident that the Fed won't do anything and expecting the data points to support that, but this (Friday's data) showed that's not the case."
The dollar index rose 0.86 percent to a three-week high of 98.260. The euro was down 0.8 percent against the dollar at $1.0931 after falling to a three-week low of $1.0912.
Helping the dollar was a report showing U.S. consumer spending rose 0.5 percent last month, higher than the forecast of a 0.3 percent gain. More importantly, the core PCE index, an inflation indicator keenly watched by the Fed, inched higher to 0.3 percent.
"We're finally starting to see the effects of lower energy costs and stronger wage growth coming through in actual consumer spending," said Brian Dolan, head market strategist at DriveWealth LLC in Chatham, New Jersey.
"Taken together, it's a good start for the year and should go a long way to dispelling fears of a consumer-led slowdown."
Sterling hit a seven-year low against the dollar on worries about a British exit from the European Union, which left the currency on track for its biggest weekly loss since 2009.
The dollar climbed 0.77 percent to 113.990 yen , breaking the Japanese currency's streak of gains. The yen, however, was still on track for its best month in more than seven years.
CFTC data shows interesting picture. In general everything is OK - as GBP falls as net short position increases in a row with open interest. Last 2-3 weeks GBP has stand in pause and minor retracement - net short position also has decreased a bit.
Long-term chart shows that net short position could be greater - take a look at 2013 bottom, while open interest stands almost at all time record, so it almost has no room to increase more. How Brexit will impact on GBP? If we suggest that this will be bearish for GBP - what does it mean from CFTC numbers point of view?
It means that if Brexit will bring negative impact indeed - we should be ready for miserable plunge down, collapse. Because net short position with flat open interest could grow only if traders will start to close longs and open shorts simultaneously. This could lead to strong bearish action....
Now fresh report from Fanthom Consulting on Brexit
In the run up to the UK’s referendum on EU membership, the ensuing uncertainty will drive up the risk premium on all sterling assets. Investors have not yet properly priced this in, though perhaps markets are beginning to do so. This presents investible opportunities. Sterling is roughly 30% over-valued on a trade-weighted basis in our view. And regardless of the outcome of the Brexit referendum, it should depreciate in the medium-term. The UK has run a large and persistent current account deficit over the past decade and a half, worsening since the financial crisis reflecting a preference shift away from UK financial services. Cumulatively, this has pushed the UK’s net external debt position to around 20% of GDP. Such fundamental drivers do not always matter, but the referendum could bring them into sharper focus, causing investors to reappraise the UK’s ability to finance its debts. It may prove to be the key that opens the trap door under sterling. Using our proprietary FVI, we find that in the most extreme case, the prospect of Brexit heightens the risk of a ‘sudden stop’ crisis for sterling.
The Brexit debate has heated up this week as the UK completed a new formal agreement with EU members and set the referendum date for 23 June. Additionally, several high profile politicians declared themselves in favour of leaving the EU, which sent sterling down against the dollar, going through $1.40 – its lowest level since early 2009.
Sterling is an early casualty
In our judgement, much of the fall in sterling against the dollar and the euro since November has been due to relative monetary policy expectations. Indeed, this accounted for some of the movement this week as Governor Carney and MPC member Gertjan Vlieghe revealed that they were willing to vote to loosen policy further if deemed necessary. In the near-term and regardless of the outcome of the vote, we expect further falls in sterling to come as the risk premium on sterling assets increases.
The very prospect of the UK voting “out” could unlock the trap door under sterling and cause a sterling crisis, regardless of the actual outcome of the referendum. In the most extreme case, a reduction of capital flows into the UK could trigger a full ‘sudden stop’ crisis, although we think this unlikely.
Sterling will fall, but by a little or a lot?
Two weeks ago we set out our medium-to-long-term view that sterling is fundamentally over-valued. The UK has run persistently high current account deficits over the past fifteen years, and accumulated a near 20% of GDP net external debt position as a result.
According to traditional models, sterling would need to fall by a further 30% in effective terms to bring the current account back to zero. This would require falls not just against the dollar, but against the euro which carries a trade-weighting of almost 50%, although uncertainty about ECB action clouds the near-term.
In the most extreme case, the weak external position may cause investors to lose faith, and the flow of new capital to the UK could slow. A full-blown ‘sudden stop’ crisis of this nature is unlikely due to the UK’s integration in global capital markets, but some outflow or reduced inflow is likely.
According to our Financial Vulnerability Indicator, FVI, the UK is currently ranked as the 30th most vulnerable country to a currency crisis, the highest of any developed economy except Hong Kong. And a Brexit vote has significantly raised the prospect of a sterling crisis.
Monetary policy reaction to a sterling crisis
In the event of a sterling crisis, inflation is likely to move materially above target. Between 2008 and 2011 the MPC looked through above target inflation. However, it is far from clear that it would do the same again. The Bank may be tempted to raise rates to stem capital outflows in order to attempt to prevent a crisis.
However, rates would have to rise significantly – much more than highly indebted households could cope with. Doing so would probably bring about a recession and sharp correction in the housing market. The Bank would be forced to trade off the inflation target and capital outflows against a potentially severe recession.
That's being said - 30% drop in long term from current levels, this is more brave suggestion that we have right now. Our long term target suggests drop to 1.30 level, but we've placed it 3 years ago. While Fanthom Consulting suggests drop even to 0.8 area....
Technicals
Monthly
Here, nothing drastic has happened. Everything is OK. Market continues move down to our targets. As usual, we continue to keep our long-term analysis that we’ve made in December 2013 in our Forex Military School Course, where we were learning Elliot Waves technique.
Long Term Forecast on GBP rate
Our long term analysis suggests first appearing of new high on 4th wave at ~1.76 level and then starting of last 5th wave down. First condition was accomplished and we’ve got new high, but it was a bit lower – not 1.76 but 1.72. This was and is all time support/resistance area. Now we stand in final part of our journey. According to our 2013 analysis market should reach lows at 1.35 area. Let’s see what additional information we have right now."
Trend is bearish here, but GBP is not at oversold. Pictures like this, when you do it on really large scale, makes you thrill. Because when you've done analysis, you look at it and ask yourself - Will it really happen like this? Because you see such great market swings and visually don't believe that this could happen.
Time is passing and when you see that this setup works and almost done - you can't believe even more
))
So, GBP picture right now looks simple. Market has broken on meaningful supports on a way down. IT has started from Yearly Pivot, then major 5/8, Yearly PS1 and former low (marked by arrow). Now the only destination is previous lows, and then our first long-term target around 1.30. Here we have to make some notes.
First, is - lows will not survive, despite how long they will hold price. Mostly because AB-CD target stands right below it. If even market will not drop further - it will wash out lows. There is really high probability for this.
Second - It is interesting, that if we would take 2.11 level as our "A" point - 100% AB=CD target (next one) will stand precisely around 0.8 level and will coincide with Fanthom Consulting analysis. Interesting... Right now by our AB-CD 100% target stands around 1.05....
That's being said monthly chart suggests further downward action to previous lows around 1.35 first.
Weekly
Here trend is bearish as well, but market stands at oversold, or very close to it. We continue to work with our butterfly here. Currently market looks really heavy and has phantom hope on any meaningful upside retracement. Recall that GBP has no valuable supports on monthly chart - all of them have been broken. Here, on weekly, Cable recently has passed through MPS1 as well. IT means tools that could provide some retracement are only Fib extensions and oversold.
In very short-term perspective, next destination is 1.37 area - 1.618 completion point of butterfly and oversold. Second one is AB=CD target around 1.33. But this level stands slightly below monthly 1.35 lows.
It is difficult to count on solid upside reaction around 1.37. Take a look that in similar "1.27" butterfly target - reaction was very small, although market also was oversold. Besides, last week was strong bearish acceleration, accompanied by gap down, so it decrease chances on solid upside retracement even more.
It means that we probably should watch for minor retracements on daily and intraday charts to get opportunity for short entry (if, of course, you do not have short position yet).
Daily
Our chance could come from this butterfly, on daily chart:
Although market is oversold, but it creeps day by day lower, across oversold level. Take a look that daily butterfly has the same target as weekly one - around 1.37-1.3720 area. Also this will be WPS1, daily and weekly O/Sold level. Thus, may be all together they will be able to trigger bounce up to WPP or even WPR1.
Intraday
Intraday charts are not very useful right now, at least until market will reach predefined targets. After that we will need them to find upside reversal patterns, that will confirm that retracement really will start.
On 4-hour chart we see that GBP holds harmonic swing of upside retracement, but this bounce already has happened. Unfilled gap stands too far and hardly will be reached and closed until bounce will start. And this could happen only on 2nd part of the coming week.
Conclusion:
Nothing has changed with our long-term view on GBP - it is still bearish and recent action and Brexit rumors even make it stronger. Our first destination on a way down is 1.30 area.
Analysis of long-term charts does not suggest any strong retracement any time soon. But on daily and intraday charts it still could be valuable and give us opportunity to go short.
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.
Fundamentals
(Reuters) - The dollar rose broadly on Friday after mostly upbeat U.S. economic data renewed some expectations that the Federal Reserve could raise interest rates again this year.
The dollar index, a measure of the greenback's value against six major currencies, posted its best weekly performance since November. Against the Japanese yen, the dollar rose to a more than one-week high.
Friday's data showed that U.S. economic growth slowed in the fourth quarter, but not as sharply as anticipated, while consumer spending rose. Those reports, if followed by another robust U.S. nonfarm payrolls report next week, should put rate hikes back on the Fed's agenda.
"The dollar's move today is almost entirely attributed to the data, which was an upside surprise," said Jason Leinwand, managing director at Riverside Risk Advisors in New York.
"The market was lightly positioned, looking for and confident that the Fed won't do anything and expecting the data points to support that, but this (Friday's data) showed that's not the case."
The dollar index rose 0.86 percent to a three-week high of 98.260. The euro was down 0.8 percent against the dollar at $1.0931 after falling to a three-week low of $1.0912.
Helping the dollar was a report showing U.S. consumer spending rose 0.5 percent last month, higher than the forecast of a 0.3 percent gain. More importantly, the core PCE index, an inflation indicator keenly watched by the Fed, inched higher to 0.3 percent.
"We're finally starting to see the effects of lower energy costs and stronger wage growth coming through in actual consumer spending," said Brian Dolan, head market strategist at DriveWealth LLC in Chatham, New Jersey.
"Taken together, it's a good start for the year and should go a long way to dispelling fears of a consumer-led slowdown."
Sterling hit a seven-year low against the dollar on worries about a British exit from the European Union, which left the currency on track for its biggest weekly loss since 2009.
The dollar climbed 0.77 percent to 113.990 yen , breaking the Japanese currency's streak of gains. The yen, however, was still on track for its best month in more than seven years.
CFTC data shows interesting picture. In general everything is OK - as GBP falls as net short position increases in a row with open interest. Last 2-3 weeks GBP has stand in pause and minor retracement - net short position also has decreased a bit.
Long-term chart shows that net short position could be greater - take a look at 2013 bottom, while open interest stands almost at all time record, so it almost has no room to increase more. How Brexit will impact on GBP? If we suggest that this will be bearish for GBP - what does it mean from CFTC numbers point of view?
It means that if Brexit will bring negative impact indeed - we should be ready for miserable plunge down, collapse. Because net short position with flat open interest could grow only if traders will start to close longs and open shorts simultaneously. This could lead to strong bearish action....
Now fresh report from Fanthom Consulting on Brexit
In the run up to the UK’s referendum on EU membership, the ensuing uncertainty will drive up the risk premium on all sterling assets. Investors have not yet properly priced this in, though perhaps markets are beginning to do so. This presents investible opportunities. Sterling is roughly 30% over-valued on a trade-weighted basis in our view. And regardless of the outcome of the Brexit referendum, it should depreciate in the medium-term. The UK has run a large and persistent current account deficit over the past decade and a half, worsening since the financial crisis reflecting a preference shift away from UK financial services. Cumulatively, this has pushed the UK’s net external debt position to around 20% of GDP. Such fundamental drivers do not always matter, but the referendum could bring them into sharper focus, causing investors to reappraise the UK’s ability to finance its debts. It may prove to be the key that opens the trap door under sterling. Using our proprietary FVI, we find that in the most extreme case, the prospect of Brexit heightens the risk of a ‘sudden stop’ crisis for sterling.
The Brexit debate has heated up this week as the UK completed a new formal agreement with EU members and set the referendum date for 23 June. Additionally, several high profile politicians declared themselves in favour of leaving the EU, which sent sterling down against the dollar, going through $1.40 – its lowest level since early 2009.
Sterling is an early casualty
In our judgement, much of the fall in sterling against the dollar and the euro since November has been due to relative monetary policy expectations. Indeed, this accounted for some of the movement this week as Governor Carney and MPC member Gertjan Vlieghe revealed that they were willing to vote to loosen policy further if deemed necessary. In the near-term and regardless of the outcome of the vote, we expect further falls in sterling to come as the risk premium on sterling assets increases.
The very prospect of the UK voting “out” could unlock the trap door under sterling and cause a sterling crisis, regardless of the actual outcome of the referendum. In the most extreme case, a reduction of capital flows into the UK could trigger a full ‘sudden stop’ crisis, although we think this unlikely.
Sterling will fall, but by a little or a lot?
Two weeks ago we set out our medium-to-long-term view that sterling is fundamentally over-valued. The UK has run persistently high current account deficits over the past fifteen years, and accumulated a near 20% of GDP net external debt position as a result.
According to traditional models, sterling would need to fall by a further 30% in effective terms to bring the current account back to zero. This would require falls not just against the dollar, but against the euro which carries a trade-weighting of almost 50%, although uncertainty about ECB action clouds the near-term.
In the most extreme case, the weak external position may cause investors to lose faith, and the flow of new capital to the UK could slow. A full-blown ‘sudden stop’ crisis of this nature is unlikely due to the UK’s integration in global capital markets, but some outflow or reduced inflow is likely.
According to our Financial Vulnerability Indicator, FVI, the UK is currently ranked as the 30th most vulnerable country to a currency crisis, the highest of any developed economy except Hong Kong. And a Brexit vote has significantly raised the prospect of a sterling crisis.
Monetary policy reaction to a sterling crisis
In the event of a sterling crisis, inflation is likely to move materially above target. Between 2008 and 2011 the MPC looked through above target inflation. However, it is far from clear that it would do the same again. The Bank may be tempted to raise rates to stem capital outflows in order to attempt to prevent a crisis.
However, rates would have to rise significantly – much more than highly indebted households could cope with. Doing so would probably bring about a recession and sharp correction in the housing market. The Bank would be forced to trade off the inflation target and capital outflows against a potentially severe recession.
That's being said - 30% drop in long term from current levels, this is more brave suggestion that we have right now. Our long term target suggests drop to 1.30 level, but we've placed it 3 years ago. While Fanthom Consulting suggests drop even to 0.8 area....
Technicals
Monthly
Here, nothing drastic has happened. Everything is OK. Market continues move down to our targets. As usual, we continue to keep our long-term analysis that we’ve made in December 2013 in our Forex Military School Course, where we were learning Elliot Waves technique.
Long Term Forecast on GBP rate
Our long term analysis suggests first appearing of new high on 4th wave at ~1.76 level and then starting of last 5th wave down. First condition was accomplished and we’ve got new high, but it was a bit lower – not 1.76 but 1.72. This was and is all time support/resistance area. Now we stand in final part of our journey. According to our 2013 analysis market should reach lows at 1.35 area. Let’s see what additional information we have right now."
Trend is bearish here, but GBP is not at oversold. Pictures like this, when you do it on really large scale, makes you thrill. Because when you've done analysis, you look at it and ask yourself - Will it really happen like this? Because you see such great market swings and visually don't believe that this could happen.
Time is passing and when you see that this setup works and almost done - you can't believe even more
))So, GBP picture right now looks simple. Market has broken on meaningful supports on a way down. IT has started from Yearly Pivot, then major 5/8, Yearly PS1 and former low (marked by arrow). Now the only destination is previous lows, and then our first long-term target around 1.30. Here we have to make some notes.
First, is - lows will not survive, despite how long they will hold price. Mostly because AB-CD target stands right below it. If even market will not drop further - it will wash out lows. There is really high probability for this.
Second - It is interesting, that if we would take 2.11 level as our "A" point - 100% AB=CD target (next one) will stand precisely around 0.8 level and will coincide with Fanthom Consulting analysis. Interesting... Right now by our AB-CD 100% target stands around 1.05....
That's being said monthly chart suggests further downward action to previous lows around 1.35 first.
Weekly
Here trend is bearish as well, but market stands at oversold, or very close to it. We continue to work with our butterfly here. Currently market looks really heavy and has phantom hope on any meaningful upside retracement. Recall that GBP has no valuable supports on monthly chart - all of them have been broken. Here, on weekly, Cable recently has passed through MPS1 as well. IT means tools that could provide some retracement are only Fib extensions and oversold.
In very short-term perspective, next destination is 1.37 area - 1.618 completion point of butterfly and oversold. Second one is AB=CD target around 1.33. But this level stands slightly below monthly 1.35 lows.
It is difficult to count on solid upside reaction around 1.37. Take a look that in similar "1.27" butterfly target - reaction was very small, although market also was oversold. Besides, last week was strong bearish acceleration, accompanied by gap down, so it decrease chances on solid upside retracement even more.
It means that we probably should watch for minor retracements on daily and intraday charts to get opportunity for short entry (if, of course, you do not have short position yet).
Daily
Our chance could come from this butterfly, on daily chart:
Although market is oversold, but it creeps day by day lower, across oversold level. Take a look that daily butterfly has the same target as weekly one - around 1.37-1.3720 area. Also this will be WPS1, daily and weekly O/Sold level. Thus, may be all together they will be able to trigger bounce up to WPP or even WPR1.
Intraday
Intraday charts are not very useful right now, at least until market will reach predefined targets. After that we will need them to find upside reversal patterns, that will confirm that retracement really will start.
On 4-hour chart we see that GBP holds harmonic swing of upside retracement, but this bounce already has happened. Unfilled gap stands too far and hardly will be reached and closed until bounce will start. And this could happen only on 2nd part of the coming week.
Conclusion:
Nothing has changed with our long-term view on GBP - it is still bearish and recent action and Brexit rumors even make it stronger. Our first destination on a way down is 1.30 area.
Analysis of long-term charts does not suggest any strong retracement any time soon. But on daily and intraday charts it still could be valuable and give us opportunity to go short.
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.
