Forex FOREX PRO WEEKLY, July 10 - 14, 2023

Sive Morten

Special Consultant to the FPA
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Fundamentals

Although we've got a lot of noise from job data release - first is from ADP next day from NFP, the main news still is the actual and official recognition of a serious industrial downturn in the United States and Western Europe. "The US Federal Reserve expects a recession to begin in the US economy later this year, predicting a reduction in the country's GDP in the fourth quarter of 2023 and the first quarter of 2024." Although "recession" is a term of the cyclical theory of crises, which is not applicable to the current structural crisis. In fact, the decline has been going on in the US since the fall of 2021, in the EU, most likely, since the beginning of 2022.

As a confirmation, it can be noted that the number of corporate bankruptcies and job cuts in EU and Germany particularly has increased significantly. And not only in Germany. More bankruptcies were registered in June than at any time in the previous seven years. In total, 1,050 bankruptcies of partnerships and corporations were registered in the first summer month, the Halle Institute for Economic Research (IWH) reported in its investigation. This is 16% more than in May this year, and 48% more than in June 2022. However, the bankruptcies that have occurred due to the insidious quarantine are being processed right now, so this figure will need to be checked for several more months. And in general, the structural crisis continues in full accordance with the theory.

Market overview

So, the dollar slumped on Friday after signs of a less resilient U.S. labor market reduced the outlook for how long the Federal Reserves will keep interest rates higher, while the yen surged on concerns the 10-year Treasury's yield rose above 4% (we talked about it few weeks!, recall this chart). The U.S. economy added the fewest jobs in 2-1/2 years in June, the Labor Department said in an employment report that also showed 110,000 fewer jobs were created in April and May than earlier reported. A jump in the number of people working part-time for economic reasons also suggested a weaker labor market, but the pace of job growth remains strong and with inflation still double the Fed's target rate, a rate hike this month is likely.

Marc Chandler, chief market strategist at Bannockburn Global Forex in New York, said markets are looking at next week's release of the Consumer Price Index (CPI), which could show inflation slowing to 3.1%. That would reduce the likelihood of another rate hike by the Fed after one expected in late July.

"This is a inflection point," he said. "The dollar's rally in the second half of June was a counter-trend correction and the dollar’s underlying downtrend that began last September-October will resume."

Strong U.S. economic data on Thursday pushed short-dated Treasury yields to their highest since 2007, reflecting the view that the Fed is likely to raise rates by 25 basis points when it concludes a two-day policy meeting on July 26.After the jobs data, futures pointed to an 88.8% probability that the Fed hikes in three weeks.

Speaking about situation in global finance - few charts as usual that indicates the deterioration. Two most obvious trends are drop in production/manufacturing sector and second - drop in personal consumption, because savings remain low while public loan debt stands at very high levels. We've talked about this many times and this leads to tightening of loan conditions by banks, which is, in turn, starts the spiral of more decrease in production area.

Also we forget a little bit about the EU, but the configuration there is no less interesting. If you look at the data on household savings, there is not even the beginning of the "eating away" of excess savings, as we have seen in the United States, that is, the population does not support demand. It seems that the downturn in the real sector may last as long as it takes for the planned relocation/destruction/weakening of the same European industry or until a full-scale financial crisis occurs.

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Concerning recent doom & gloom due job reports, many people ask now about ADP - "what was that"? We have to say that many times point that the US job market statistics is very tricky with multiple adjustments and changing methodic of calculation. Recall huge NFP jump in January due so called "seasonal adjustments"... (here you could see it on the chart in the table above). By the way, the same adjustment are made for Retail Sales. Here is an illustration, why US job statistics is not very reliable - the red curve is the number of unemployed per 100,000 population vs Fed interest rate. Everybody knows, even from liberal economy theory that an increase in the rate causes an increase in unemployment. There is indeed growth, but it slows down as the rate rises. Theoretically, of course, this may be (after all, unemployment cannot be greater than the entire working-age population), but not at such low values. In general, something is clearly wrong here.

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Assessments of the situation in the global and American economy give reason to believe that the recession in the United States began in the fall of 2021, and now it has reached the indicators of 6-8% of GDP per year. But since this indicator itself is of an accounting nature, it can be quite varied, for example, by translating an increase in the capitalization of financial assets into an increase in balance sheet income. Therefore, a more or less accurate formulation sounds like this: if you fix the share of financial assets in GDP relative to real ones, then GDP falls.

This decline in the real sector of the economy is hidden mainly due to an underestimation of consumer inflation.
Industrial one (PPI) has already gone into deflation. For this reason, it is extremely difficult to accurately assess the effect of this factor. But since there is a classic structural decline in the Western economy, which is usually going gradual and stable - the rate of decline this year will roughly coincide with the pace of last year, and this means that the cumulative result since the beginning of the year, the decline in the real sector in the United States amounted to 3-4 percent in 6 months. (recall that they have shown 2% increase). In the EU, everything is more difficult, since Germany and France are pulling their GDP at the expense of the rest of the union countries, despite the fact that they are additionally losing industry due to the loss of access to cheap raw materials.

Most likely, some acceleration of the industrial downturn is not due to the objective situation (with a structural crisis, the rate of decline is quite stable), but to the fact that they were underestimated in previous months trying to hide it, or what is more probable were hoping for soon improvement. They counted that in a fairly short time the decline will be replaced by growth and this distortion can be corrected. In reality, the decline continued and the accumulated distortions grew so much that it became impossible to ignore them. Accordingly, it was necessary not only to show the decline, but also to strengthen it a little — so that the distortions of statistics would not be so conspicuous.

Next week we get CPI numbers, which is expected to rise for 0.3% MoM. Recall our report couple weeks ago when we have considered slowdown of CPI and PCE indexes, while core numbers remain stubbornly high. We said that decrease was purely due statistical effect of high comparison base - inflation was the highest in summer of 2022. Thus, we said that decline is temporal, and in Aug-Sep we should see the reversal up again. So, maybe we could see it even in July. Besides, we see divergence of demand and prices on housing market, that is healthy background for inflation.

Fears about a looming recession have kept many investors holding large cash positions throughout the first half of this year, even though the surprising resilience of the global economy has helped equity markets to rally sharply. Investors globally ploughed more money into cash funds in the week to Wednesday, with total cash assets under management reaching a "monster" $7.8 trillion, according to a report from Bank of America (BofA) Global Research. The data caused a sharp sell-off in which equity markets tumbled and short-dated bond yields on both sides of the Atlantic climbed past March levels to post-financial crisis highs. ICI Money market statistics confirms BofA calculations:

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"Financial conditions tightening again in early-Q3, keeps the 'higher-for-longer/hard landing' view entrenched," said BofA in the report, noting that a further tightening of financial conditions in the third quarter would create a great opportunity for investors to position for a hard economic landing.

The BofA "bull & bear" indicator, which measures market sentiment and is based on a series of technical market measures, remained unchanged, being more bearish than bullish at 3.2, where 10 is extremely bullish and 0 is the opposite.

The U.S. dollar will hold its ground against most major currencies for the rest of the year despite expectations of narrowing interest rate differentials as the U.S. economy stays resilient, according to FX strategists polled by Reuters. The dollar will not give up those recent gains anytime soon, according to the June 30-July 5 poll of 80 FX strategists despite some major central banks, like the European Central Bank and Bank of England, set to keep raising rates for longer.

"The tightness of the U.S. labour market may help the economy and the dollar in the very short term," said Kit Juckes, chief FX strategist at Societe Generale. "Even if we see (interest) rate convergence, it seems unlikely a new major euro uptrend will start without stronger growth."

Indeed, a majority of common contributors showed the dollar view against most major currencies for the coming six months has been either upgraded or kept unchanged from a month ago. When asked how the dollar would perform against major currencies over the next three months, 45% of strategists, 27 of 60, said it would remain range-bound and 19 said it would strengthen. Only 14 said it would weaken.

"We see room for a dollar rebound in the near term. The U.S. economy looks in better shape than Europe and Asia, which suggests 'higher for longer' is somewhat more credible coming from the Fed than most others," said Jonas Goltermann, deputy chief markets economist at Capital Economics.

"The dollar is getting a tailwind from the Fed ... the current strength is on a repricing of the Fed (rate) higher," said John Hardy, head of FX strategy at Saxo Bank. But at the same time, we have extremely strong global risk sentiment and liquidity and financial conditions are very easy. That normally associates with the dollar weakness. Those two things are balancing each other out."

A BIT MORE ABOUT US RECESSION

Here is, guys few "specific" indicators, that rare are mentioned among major statistics data, but still, they describe overall situation very well.

1) The Restaurant Performance Index has dropped sharply in recent months.
2) Credit card and auto loan delinquencies continue to rise.
3) Weekly bank lending data is slowing rapidly, and weekly credit card data shows that consumer spending on durable goods requiring credit, such as furniture and electronics, is slowing down.

In general, the rate hike is starting to hurt consumer spending, as also shown in the weekly summary. But a slowdown does not mean a decline, and the delays are not yet at critical levels. So we are waiting for another 1-2 quarters, as before.

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The tendency is clear, but at the same time, all these data so far do not take into account the change in liquidity in the system since the growth of the national debt since mid-July.

In fact, two things happened there - liquidity from the financial sector was taken away, but, at the same time, demand through state budget expenditures was pumped up, because out of the conditional trillion increase in public debt, the increase in the TGA account of the Ministry of Finance in the Fed was only $ 400 billion. The rest is additional expenses. How this will ultimately affect public spending is still unclear, because we do not yet understand what these costs went to.

While hype of AI will be dispersed in the stock market by the whales (GS, JPM etc), there will be no mass "flight from risk to safety" from the market, that is, into US Treasuries, which means that the growth of public debt will occur mainly due to money from reverse repos, banks and free money on the market / in the banking system. Even at the cost of a considerable premium to the Fed's rate on short securities and an increase in yields on long-term treasuries. This is why now US yields are rising.

Yes, this will lead to further tightening of credit conditions and the growth of holes in the balance sheet of banks. But the most interesting moment is when the Ministry of Finance will stop increasing the TGA account and will already start spending money from there. Both in the sense of when exactly this moment will come (before the acute phase of the crisis begins and these savings are needed to delay the acute phase or after and these savings are created to save drowning people later), and in what exactly will happen in the market and with the economy as a whole.

Now the Ministry of Finance is gradually accumulating money. Those that came from the reverse repo so far remain inside the Fed. If the Ministry of Finance stops increasing its account with the Fed, but continues to increase the national debt due to liquidity from reverse repo before the acute phase of the crisis occurs, then the same quasi-QE will begin when new liquidity begins to appear in the system, which, in theory, should push inflation up, and the rates will press. And this is the whole absurdity of the situation. The Fed is doing exactly the opposite. Withdraws liquidity from the system and raises the rate, ostensibly to fight inflation.

During this time, the state will get into its raking paws, in fact, all the liquidity existing outside the system (Fed is due selling its balance off, US Treasury due selling new debt for existed cash in Repo accounts). In theory, if the Fed did not raise the rate further, then in this form, the system could somehow exist until money remains on the reverse repo and in bank reserves, that is, 2-3 years, because these two source together are around $3.5 Trln. But the Fed, of course, will raise the rate further, because it is necessary. But when it already burns, the Fed will not even need to print new money, the state will have accumulated more liquidity than the Fed has poured into the system for the entire covid crisis.

An alternative option is that they will accumulate money just as long as they can do it without much pumping money out of the market, that is, while the HYPE in the same stocks will be heated up and, in theory, until the recession begins, because if they want to avoid it, it will be necessary to start supporting demand more strongly and spending money already. Yes, inflation in this case is likely to go up and the Fed, again, will have a reason to raise the rate until everything breaks down.

In short, you can be clever as much as you like, but the options for the development of events are, in fact, like branches on a tree. The first cut-off point is somewhere in the beginning-middle of August, because during this time all the hype stories in the shares will more or less already be played out and it will become clear what the Ministry of Finance and banks will do next.

Meantime, the processes are going on - Fed balance sheet shows largest contraction since May. The Federal Reserve's balance sheet shrank $42.6 billion last week (the biggest drop since May). The rate is currently already well below pre-SVB levels and at its lowest level since August 2021. QT continues to accelerate: the Fed sold $38.6 billion worth of assets from its balance sheet last week.

Right now, the sovereign debt markets are telling us that the system is about to go crazy.
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Conclusion:

Recent data slightly uncover the cunning plan of the Fed and US Treasury to accumulate liquidity as much as they can. Actually we've told the same, but at those moment it was unclear how they intend to do it. Now it is becoming more evident. It means that rates will rise further. Last two weeks we have focused your attention to 10-year yields, saying that it is irrational performance, if we suggest Fed pivot and believe in strong US economy. Yields have to go down, but somehow, despite the rally on stock market - they keep climbing higher. Analysts start to put down the importance of EU/US interest rates conversion, which previously was treated as important factor of EUR appreciation. Recent data tells that the last word of US Dollar strength is not said yet.

Even more, I strongly recommend to read this article. For instance, the author tells that despite forecasts of impending quantitative tightening (QT), the liquidity cycle has already passed the bottom and will tend to grow in the coming years. According to the Congressional Budget Office estimates cited by Howell, the assets of the Fed Treasury should increase to $7.5 trillion by 2033 from almost $5 trillion today. But he believes that this forecast is too low.

"In a world of excessive debt, large central bank balance sheets are a necessity. So, forget about QT, quantitative easing is back. The pool of global liquidity, which, according to our estimates, is about 170 trillion dollars, will not be significantly reduced soon.".

According to the Congressional Budget Office estimates cited by Howell, the assets of the Fed Treasury should increase to $7.5 trillion by 2033 from almost $5 trillion today. But he believes that this forecast is too low.

"More realistic figures indicate that the Federal Reserve Treasury requires assets of at least $10 trillion. This will proportionally double the current $8.5 trillion balance sheet and will mean a double-digit increase in the Fed's liquidity over several years. American households and pension funds will demand higher interest rates, exacerbating the deficit and debt problem, he said.

Liquidity is already seeping into the system one way or another. Although we are told about QT. But that's not true. The growth of the cue ball and gold, as well as individual stocks, is a matter of time. Geopolitical wars will fuel global inflationary processes...

Although he said nothing new, we tell that there is no other solution to the debt problem except QE in our Gold reports, but he discovers few sources how it could be done. That's why, all these data concerning problems in the US economy are temporally stand in focus. Soon it might be forgotten. The only riddle still exists, how they intend to avoid hyperinflation. The intuition tells me, that this is somehow related to CBDC and Fed Now, but how particularly? Could they have two different currencies at once? One is for foreign partners, US dollar, which they could print and pay off the debt, and CBDC new strong currency without any debt - for domestic and AUKUS properties? Some time both currencies could circulate together, but for different purposes. I don't know, but they have some plan, hopefully we will get some hints to resolve this riddle. And suggestion of further dollar weakness in long term doesn't look obvious.
 
Technicals
Monthly

July has started on positive tone for EUR, but monthly chart barely has changed as price action still stands inside of May plunge. Speaking generally, monthly swings are too large, and EUR has to pass really big distance to change the major tendency. Even action to 1.16 which is YPR1 doesn't mean yet the bullish trend. Thus, we mostly will be focused on lower time frames in near term.
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Weekly

Weekly chart performance, especially if we take in consideration events of last week, suggests upward action to the border of the wedge and strong 1.1250 K-resistance area. The only nuance that we have to control is the possible bearish grabber, as price starts flirting with MACDP line.
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Daily

Here market confirms the bullish sentiment that we've talked about, and wedge has been broken. Once again, despite what has happened before, NFP could change any direction - that's what we've warned above on Friday morning.

Still, as you could see - trend remains bearish by far, at least nominally. That's why the first thing that we have to control - bearish grabber. Second - based on swings structure here, market has to start moving to OP target, which, by the way, agrees with weekly destination point. If we will see that EUR can't go above COP, turns down or shows irrational performance - this will be signs of weakness, which could break all bullish context. Especially if price suddenly drops back in the wedge
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Intraday

The only thing that we've missed with last week is 1.0810 target, ADP factor was no strong enough and market was not able to reach it. But upside H&S pattern now is completed. Taking all stuff together, we will be watching for retracement to one of the Fib levels. 1.0915 as usual looks interesting, because it is K-area.

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Morning everybody,

So, EUR in general keeps accurate our scenario. As we've said in weekend - no deep retracement should be, if market is bullish indeed. Daily OP stands a bit far for now - above 1.12 and mostly agrees with strong weekly resistance area (see weekly report), thus, we need some closer standing target. The one that we could use here, on daily is overbought area around 1.1080:
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On 4H we have another AB-CD pattern with COP at 1.1066. Upside 1.27 extension of most recent retracement (BC swing) stands in the same area of 1.1060. Thus, we could say 1.1065-1.1080 is nearest upside target:
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As we've suggested, retracement indeed was small on Monday, which is good and confirms bullish sentiment. If you already have long position - its OK. but if you just would like to buy, here is one of the scenarios that you could consider. Until market hits our target - any pullback is relatively safe for long entry. Here, on 1H we could get B&B "Buy" DRPO "Sell" setups with chances to enter around Fib levels - 1.1095 or 1.1075. Also take a look - here we could very rare pattern - 3-bars DRPO "Sell". This is the fastest type of it.
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Morning everybody,

So, Eur accurately keeps our trading plan by far. It is just few pips until our 1.1060-1.1065 target and it could be touched on CPI report, maybe be in a way of spike - it doesn't matter. The point is, overall is coming to it.
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On 4H chart, yesterday, on pullback that we've discussed (3-bars DRPO - remember?), we also have got the grabber, so intraday entry setup has worked nice, in general. But for now - it is a bit tricky question whether to take new position or not. Because it is just 30-35 pips till the target, and second, which is more important - CPI. So, loss might be greater than potential benefit.
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Still, if you would like to - it is not forbidden. Just keep an eye on grabbers as on 4H chart as on 1H. Once they will be formed - EUR could start moving to the major target again. Our 3-bar DRPO "Sell" has worked perfect, reached the target precisely at 5/8 Fib support.
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For others, who are not ready to step -in let's wait for CPI and see what reaction comes.
 
Morning everybody,

So, CPI has made investors happy and EUR has overcome our nearest COP target, reaching daily Overbought area. In general on weekly/daily chart it has not become a surprise, because we've talked about next OP target around 1.1210 area in recent two weeks. Mostly because this is strong K-resistance area. Additionally we have upside butterfly on daily chart with the same target. The way how market is turning from daily COP to OP confirms its normal bullish sentiment:
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On 4H chart local OP stands at the same area - 1.1210. And we could keep doing the same stuff that we did while market was going to COP. Until OP stands above, any retracement might be used to consider long entry. Especially now, when market stands at Overbought, chances for this pullback are not bad:
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I would consider two nearest K-support areas, ignoring the nearest level, because of daily OBought. The most easy way is to take two entries on both levels, splitting your trading lot. But, of course, you could also watch for the shape of retracement, trying to catch most probable reversal point. In fact we have 4H potential B&B/momentum type of trade.
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That's why we do not consider any shorts by far, watching for retracement and watching for 1.1210-1.1220 as next target
 
Morning everybody,

So, EUR has formed no reaction on overbought, decided to not postpone the reaching of the OP :cool:

Now, situation slightly has changed - it is Obought alone, but with butterfly extension target and weekly K-resistance area. Some reaction has to happen here. That's why we do not consider any long positions by far.

Still, we have to say that so strong action and struggling with OB suggests existence of solid reasons on the back. From this point of view, EUR has good chances to proceed higher later, and 1.1380 will be the next level that we will consider:
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Right now, we do not have anything to do. On 4H chart thrust looks great, even better than yesterday, OP is done as well, but too few time passed, so EUR has not started any reaction yet:
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Among the possible retracement targets, I would consider 1.11 first. Still, we're at OB, at weekly K-area, so retracement has chances to be more or less extended.
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So, today we take a rest, it is good that we do not need to make decision before weekend. And see next week what will happen here.
 
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