Forex FOREX PRO WEEKLY, July 11 - 15, 2022

Sive Morten

Special Consultant to the FPA
Messages
16,471
Fundamentals
We're living in exceptional time, guys and could see events that happen once in a few centuries - the crash of global political and financial system. On first glance, this week doesn't have a lot to talk about, at least on economical stage. But it is not true. We have so big mass of information that is vitally to discuss, but I do not know how to put it all here. This is not comfortable truth that media are trying to avoid to publicate. And this is not the drop of the EUR that was expected. This is vital issues on the US Bond market, employment, EU consumption and Germany trade balance. I'll try to cover at least a little bit for every important moment.

B. Johnson retirement and shooting of S. Abe are the parts of the same chain, guys. This is mostly political issue and it stands beyond the scope of our economical research. Shortly speaking, the economic crisis inevitably turns into a political one. A radical drop in Biden's rating, the collapse of the cabinet in the UK, regular protests and discontent in Europe - this is just the beginning. I wouldn't surprise too much if the chair of O. Sholtz or E. Macron start shaking very soon.

The current generation in western countries is not yet familiar with the concept of a "protracted crisis", has never lived in a shortage of resources and limited consumption, has never faced a strategic impasse when no action within the current management paradigm can lead to a positive result. We are on the verge of a historic transformation of the economic and political architecture, so B. Johnson will be followed by politicians in Europe, and then in the United States. It's inevitable.

With the big degree of certainty we could say that every next politician will be worse than the previous one. Just take a look who is ready to come on a B. Johnson place. The trend is steady and unshakable, when it seems that it is difficult to break the bottom, some Biden or Johnson appears and "pleasantly" surprises.

Market overview

The euro sank on Tuesday to its weakest level against the dollar in almost 20 years while oil futures tumbled and bond prices rose as investors sought safety after the latest data fueled fears of a global economic slowdown. Euro zone recession fears were exacerbated by concerns about an energy crisis in Europe and by Tuesday's data, which showed a sharp slowdown in business growth in June, following Monday's news of a seasonally adjusted May trade deficit in Germany versus expectations for a surplus.

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Analysts predict the single currency, which on Tuesday hit its weakest since 2002, will soon fall to parity. The euro is seen as particularly vulnerable given Germany, Italy and others' heavy dependence on Russian gas, and fears that sizeable European Central Bank rate hikes could reignite another euro zone debt crisis.

"All of this means the euro will fall further and markets are waking up to that," said Jordan Rochester, FX strategist at Nomura Securities. "We are looking for parity and the question is whether that is too small a move or whether it can go lower. We think it can."

Nomura's analysts have cut their euro/dollar target to $0.95 and said parity could be breached as soon as August. Citibank says a move to parity is "inevitable." However, Nomura said that $0.95 was not that important historically, noting that the euro fell from $1.17 after its creation to $0.82 in October 2002. Extrapolating backwards using its legacy currencies, the euro traded as weak as $0.6444 in February 1985, they added.

Natural gas prices have doubled from June lows and soared 465% over the last year. A huge pipeline maintenance row has blown up between Russia and Germany; the euro area imported about 40% of its energy needs from Russia just before the war in Ukraine broke out. Added to that, Norwegian oil workers have just gone on strike, which could take 292,000 barrels of the oil equivalent of natural gas out of the market

Economists expect the euro area to slip into recession faster than rivals. Nomura expects the euro economy to fall into recession by the third quarter with a total decline in GDP of 1.7%. A spike in bond yields is further stoking recession risks. European government borrowing costs have risen faster in the past fortnight compared with the United States, indicating a quicker tightening of financial conditions.

The euro's slump is another headache for the European Central Bank (ECB), which is grappling with record-high inflation since a weak currency fuels import prices. The ECB is widely expected to start hiking rates this month, its first increase since 2011. Yet soaring energy prices raise recession risks, so money markets have scaled back aggressive rate hike bets .

The European Central Bank's biggest shareholder, Germany's Bundesbank, laid out its conditions for providing fresh support to the euro zone's most indebted countries on Monday after opposing such aid at an emergency meeting last month. ECB policymakers pledged to buy more bonds from debt-laden countries such as Italy at an emergency meeting on June 15 to contain a widening spread between their borrowing costs and Germany's as the central bank prepares to raise interest rates.

But Nagel, who disagreed with that decision according to sources at the meeting, warned on Monday against trying to decide the right market spread as that was "virtually impossible" and risked making governments complacent.

"I would thus caution against using monetary policy instruments to limit risk premia, as it is virtually impossible to establish for sure whether or not a widened spread is fundamentally justified," Nagel said in a speech.

Speaking soon after Nagel, ECB vice-president Luis de Guindos said it was critical to prevent financial fragmentation between the euro zone's 19 countries if the ECB was to raise interest rates and fight high inflation - a hot topic in Germany. It was the first visible disagreement between Nagel and Christine Lagarde's ECB since the former took office in January and tried to end years of conflict between both institutions.

The euro's tumble has pushed the European Central Bank back against a wall, leaving its policymakers with only painful and economically costly choices. Letting the currency fall would push up already record high inflation, raising the risk of price growth becoming entrenched at a rate well above the ECB's target of 2%. But fighting back against 20-year lows for the euro would require more rapid interest rate hikes, which could add to the misery for an economy already facing a possible recession, looming gas shortages and sky-high energy costs that are depleting purchasing power.

The U.S. dollar will remain strong for at least the next three months as it basks in both expectations for aggressive Federal Reserve interest rate rises and safe-haven appeal stemming from global recession fears, a Reuters poll showed.

The U.S. dollar was little changed against a basket of currencies on Friday ahead of the weekend following a choppy session that saw the greenback posting both gains and losses after data showed the world's largest economy created more jobs than expected in June. The report cemented expectations of another 75 basis-point hike at the Federal Reserve's policy meeting later this month. U.S. nonfarm payrolls increased by 372,000 jobs last month, the Labor department reported on Friday. Economists polled by Reuters had forecast 268,000 jobs added last month.

With jobs out of the way, investors are now focused on Wednesday's inflation report. Economists are forecasting that the year-on-year consumer price index will hit a fresh 40-year high of 8.8% in June, according to a Reuters poll. The monthly core index is seen slipping, however, to 5.8% from 6.0% in May.

Speaking on the US job market, guys, we suspect some tricks. Previously we already said that the unemployment rate doesn't include those who sit on a "stocks welfare", as they do not search job by far. These people use covid government stimulus for investing on the US stock market. Approximately they are 5-6% of working population. Thus, unemployment should be around 8-10% now. But today we would like to talk about different things.

Previously we already have mentioned the massive jobs contraction plans of big US companies. Now, if you take a look at Initial claims chart -

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and chart of jobs contraction plans (United States Challenger Job Cuts) - you'll see that NFP looks too optimistic and it seems that something is wrong with the numbers, or they are hardly lagging.
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Now is concerning Germany trading deficit. Of course, it is not about Germany's export but about high price of hydrocarbons import. But it doesn't make situation easier. This event has political issues mostly. Economical ones are more or less clear. Thus it is no doubt that if the German elites do not radically change their policy, then Britain's dreams of the collapse of not only the European Union, but Germany, may well come true.

And, just to close the topic with ECB and EUR - I would like to offer very simple question, which even the baby could answer. So, how do you think,
with the consumer inflation around 10% and producers' inflation around 40%, all-time high negative trading balance (in EU on average), shortage of hydrocarbons and near 100% Debt/GDP ratio - could ECB policy of the 0.25% rate hike and selling of Germany bonds to finance purchasing of Italy, Spain, Greece ones help EU economy and inforce the EUR? That's it. It is at least 0.9, guys, no doubts.

The US


Here are few issues are interesting. First is, why is stock market stop falling, what is going on on the US debt market and what really Fed intends to do.

Since J. Powell has promised to fight inflation the net liquidity has increased, but not fallen, as it might seem at first glance. We need to watch over the hands, when interacting with cheaters... Net liquidity from the Fed and the US Treasury increased by $ 242 billion from May 4 to July 6, 2022, which was due to a reduction in the cash position of the US Treasury by 276 billion, while Fed liquidity have decreased only for 34 billions since May 4:


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This release of cash from the Treasury's deposit is due to the needs of financing the budget deficit (as you could see from the chart - there was 964 billion cash, now it is around 688 billion) on a background of record US bonds sales by foreign holders and stagnation on the primary US Treasuries market. However, according to the securities balance sheet, the Fed has not fulfilled its QT obligations in June to reduce the balance sheet, because of growing fears of market destabilization. As real estate and
mortgages market balancing at the edge -
there were no sales of MBS from the Fed at all.

Now there are 23.9 trillion US treasuries in public circulation, 4 trillion municipal bonds, 8.4 trillion MBS, 2.5 trillion agency securities (ABS), 12 trillion corporate debt of national issuers. Totally - 46 trillion burden that is needed to be served somehow. From December 2019 to March 2022, the net issue amounted to $9.5 trillion (where only the treasury is 6.6 trillion), and the total volume of issue is over $ 28 trillion (largely due to repayments of short-term bonds), i.e. 8-9 trillion is spent annually on refinancing. Now the market's configuration doesn't let even to talk about any net placements (new debts), there is an acute problem in the effective refinancing of existing debt. And it is already problems with this.

The debt market for the US government is also blocked – the situation continues to deteriorate. Over the past 4 months from March 2022 to June 2022 net issue of all types of treasuries (issue minus repayments) amounted to only $ 52 billion (!!!).

Additionally we see selling accelerating from foreign holders of the US Treasuries, especially China. Thus, in recent two months total amount has dropped for ~260 Bln. It is not the collapse yet but the tendency promises nothing good to the US debt market. It becomes clear now why Fed has failed to complete its 1st QT months.
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A few more months of such a horror in the debt markets and the Fed breaks and charges another rescue plan. This will be a red line, that indicate the complete Fed capitulation, the failure of the fight against inflation with a total undermining of the Fed confidence. Temporarily money printing (new QE) could help to stabilize markets, but only temporarily, as later inflation start creeping to 20%+ and collapse become unavoidable.

Thus, the amount of debt is so large that raising rates above 4% will bury the whole system alive. But they need to rise rate above 8% to stabilize the economy, so the soft landing is totally impossible. Thus the Federal Reserve has faltered and is probably close to capitulation. The Fed is not fulfilling its obligations to reduce the balance sheet. The Fed is caught in a vice – the market needs to be saved and inflation must be fought, and the further they delay the fight against the inflation, the more terrifying the perspectives. Two mutually exclusive processes. It is either necessary to save the market and miss inflation, which will then lead to a complete catastrophe (although not immediately)...or fight inflation by allowing the market to collapse. They will choose the former for political reasons, i.e. they will save the market. This was confirmed in June, when they did not fulfill their obligations...

The dynamic of Treasury deposit explains why S&P 500 stops falling. Because the integral liquidity in the system was growing, despite the fake plans to reduce the balance (confirmation on the chart above). As long as there is money in the system, the short-term stability of the stock market in the system will be maintained.

Still, the expectations of future companies' earnings are deteriorating even without "help" from the Fed. Thus, as we warned many times previously - do not trust in your eyes. Trust in FPA :). The pause on stock market, as well as on BTC is temporal and very soon we get another downside spiral, if, of course, Fed will not switch the printing machine "On" again:


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It is interesting that the trend on S&P now accurately repeats the one of 2008 crush starting point, buy popcorn, guys.
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Previously we also talked about real estate market problems - with the rates around 6%, monthly average mortage payment around 2500-3000$ and housing price cost rising for 36%, real estate market should start falling. Accordingly, in the coming months, we should expect a collapse in demand for real estate, housing construction will collapse with all the ensuing consequences, prices will begin to decline, and along with prices, a bubble in the real estate market will burst and banks will have problems as usual.

Conclusion

Hopefully we have explained you why the stock and crypto market rises, why we think that EUR has no chances on reversal in nearest time and why we treat current tendencies on the market, especially gold sell-off and run into the US Bonds, as the biggest mistake. Now the question is what Fed and other central banks intend to do and what they want in general. In general they need to close the gap between supply of goods and extreme demand, pumped by uncontrolled money printing.

The challenge is to find a balance between controlled recession and an chaotic cascading crisis. They are trying to drive the system into a limited controlled recession, when excessive demand will be able to be eliminated, while leaving the basis of the past architecture of the consumer economy and the existing reproductive mechanisms, intersectoral and financial links in the system. But the current situation needs to cut consumer demand for 8-10% while they want it just at 1-2%, which seems impossible.

Among the major tools we could recognize different types of QT, and close any liquidity stimulus programmes. Additional attempt might be taken to control commodity prices via market prices manipulating (as they do on Gold and thin TIPs market, controlling inflationary expectations). Simultaneously they try to depress the speculative activity on the stock market as this is direct rival to the bond market. Supposedly all these tools should result in a moment when the restriction of speculative idiocy and the existed US economy base will naturally deflate inflationary pressure, which should allow them (as they think) to return to the previous policy. But they are wrong. The processes are irreversible.

This scenario is very dangerous from the social and political point of view. As Fed policy will be associated with a sharp drop in the households' wealth. if this drop starts, Fed has no tools to manage it. For this reason, despite the tough speeches of the US leaders and monetary authorities, there are serious reasons to believe that Fed could start new QE in some way by the end of the summer.
In fact, we have come to what mathematicians call the "bifurcation point" or, in other words, the "decision moment". Once it is taken, it becomes impossible to change the way of how economy goes. Unfortunately the people who have to make this decision are in a state of deep inadequacy, which makes impossible to forecast what particular decision they will finally take.

To keep it practical and simple - just watch over Fed balance and Treasury deposit. If you see that deposit is dropping and Fed doesn't complete its QT programme - be prepare for stock market rising and higher inflation in the medium-term perspective. And vice versa. EUR/USD now is driven by different fundamental factors, mostly domestic that are negative enough, at least in perspectives of few months and keep us on downside course below the parity.

To be continued...
 
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Sive Morten

Special Consultant to the FPA
Messages
16,471
Technicals
Monthly

This week technical background as not as interesting, compares to the fundamental one. On monthly chart recent swings are strong but still looks small on a historical background. With the drop below OP, it is the only direction to XOP, as market enters new extension mode. Our major target that we could calculate is 0.9, nearest local target is 0.9750, which is 1.27 butterfly extension.

Downside action shows good thrust. Thus, if ECB surprises with 0.5% rate change for instance or some other EUR support measures this might give us B&B Sell setup that should be great for short entry. If not - EUR should keep creeping lower, as market is not at some support and not at oversold area.
eur_m_11_07_22.png


Weekly

Trend stands bearish by market is strongly oversold, so the pullback has chances to happen, especially on some silence before ECB and Fed meetings later in the month. 1.05-1.0520 K-area looks like most probable destination in a case of retracement. 1.08 area is only theoretically possible for now, if, say, ECB will surprise markets with more hawkish decision. But all these games around the rates, guys, who will rise more, makes only short-term effect guys and not change the fundamental background. Thus, if even ECB hikes the rate for the 1.0% - after initial strong upside reaction, EUR returns on a downside way. But somehow it is hard to believe that miracle will happen, knowing the ECB...
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Daily

The daily picture can't match better than it does to the weekly chart. As EUR is oversold on weekly - here we have butterfly "Buy" pattern and daily oversold as well. This makes good background for short-term long position with limited risk (just below the lows) and 1.0350-1.04 target:

eur_d_11_07_22.png


Those who would like to go short should wait when butterfly setup will be over. Supposedly around 1.04 K-resistance it might be good setup for short entry again.

Intraday

Since the major daily target has been hit, on 1H chart we could watch for some bullish reversal pattern, something like this:
eur_1h_11_07_22.png
 

Sive Morten

Special Consultant to the FPA
Messages
16,471
Greetings everybody,

So EUR is challenging the parity. In fact, we've discussed everything, set the targets etc. Today is just minor update. If you remember, on weekend we've discussed the butterfly and possible minor pullback. Thus, butterfly has failed, and as we've said - "if butterfly fails - it fails miserably". It means that we should turn directly to our next monthly target at 0.9750, which is monthly butterfly extension.
It could be some flirt around the parity, but hardly for too long.
eur_d_12_07_22.png


The same you could see on 1H chart - here is what we were waiting for and what we get. H&S has not been formed and market just break it forming and pressing down. This action also could mean higher CPI this week and more aggressive rate change from the Fed, demand for USD is growing:
eur_1h_12_07_22.png


It means that we do not consider any longs, our next target is 0.9750. For new short entry it is possible trying to catch some minor pullback, maybe from parity. Or use Stop "Sell" order for parity downside breakout. Volatility probably will be high, but it is possible to try.
 

Sive Morten

Special Consultant to the FPA
Messages
16,471
Morning everybody,

EUR shows no big changes by far. So, it makes sense to take a look at GBP. Cable has completed daily 3-Drive destination point. Although we're not fascinated to trade it long and mostly interested with it to get better short entry level, but it is not forbidden, especially on intraday charts. Theoretically its minimum target is the top between 2nd and 3rd Drives around 1.24. Whether it reaches it or not - is rhetoric question ;)
gbp_d_13_07_22.png


On 4H chart the large butterfly is 3rd drive of the pattern, while minor one is a reversal pattern. It is more or less clear situation for the bears - they have to wait either for pattern's failure or its completion. While for the bulls it is more difficult process of decision making...
If you intend to trade daily pattern, you need to get more or less extended pattern here. For example, if GBP forms reverse H&S based on butterfly, with the neckline around 1.2050
gbp_4h_13_07_22.png


Alternatively, you could try to use very small pattern on 1H chart, which is also H&S. It could lead price particularly to the neckline of larger pattern. So, choose what you like more.
gbp_1h_13_07_22.png
 

RahmanSL

Major
Messages
2,886
Hi Sive.... for me, EUR/USD is the only pair with clear direction leading up to expected next FED's interest rate hike on 16-17 July.... i.e. short EUR/USD on any meaningful retracement and close out at the 1.0000 level... kinda scalping and day trade. I don't have any trading plans after 16-17 July.
 

Sive Morten

Special Consultant to the FPA
Messages
16,471
As we've said, guys, since Fed has done nothing to dry liquidity out and failed QT for June - CPI is moving to the sky and now 9.1%. It seems that 1.0% rate change in July looks now not as impossible as previously... The show must go on....
 

Sive Morten

Special Consultant to the FPA
Messages
16,471
Morning everybody,

So, as we've discussed few months ago in our weekly reports - Fed rate change doesn't help to control inflation, it should keep going higher, because the reasons for it are not monetary, they are structural - big disbalance between demand and supply in national economy.

Thus, I suspect that we could stay focused on 1% rate change on nearest meeting. And also we should say "hello" to C. Lagarde with her 0.25-0.5% rate change. EU inflation with such a policy very soon start tending to 15-20%. Thus, no doubts that EUR should keep going lower and now I'm even start to think that my 0.9 target starts looking conservative.

We do not have something really interesting on the chart. Market is coiling around the parity, but I suspect, mostly because of oversold on weekly chart, that supports EUR. But this is not for too long.
eur_d_14_07_22.png


On 4H chart I would watch for DRPO Failure, which, in fact, already stands in place, and for downside continuation. Retail Sales also hardly will be positive today...
eur_4h_14_07_22.png


That's being said - keep shorts if you have it, watch for new ones. No longs by far.
 

Sive Morten

Special Consultant to the FPA
Messages
16,471
Morning everybody,

Today we turn to a bit specific cross-market analysis and take a look at JPY long-term chart. Fundamentally, JPY is very weak currency by three reasons. First is - QE programme. While all other G7 countries turns to tightening, Japan keep going with money printing and easing policy, providing more and more liquidity. Second is very specific bond market. Japan has 200+% Debt/GDP ratio and in fact no foreign market investors, the major part of national debt is held by BoJ.
Finally, the third reason, Japan now is loosing trading balance surplus and has difficult time as export-oriented economy because of commodities price jump. These three factors suggest continuation of downside trend on JPY.

We suggest that it should reach major OP target around 145 area. At the same time, right now market is coming to all-time 5/8 resistance around 139 and at the same time is completing 1.618 butterfly target around 142. In short-term this combination (maybe together with intervention, who knows) could provide background for tactical retracement. So, if you intend to take position - you could wait for this pullback:
1657869981771.png


But it is not all yet. Take a look at GBP/JPY chart. It also confirms that JPY should become weaker as the shape is very similar to USD/JPY and also has few targets above the market:
jpy_m_15_07_22.png


Supposedly GBP/JPY targets should be reached in the same moment as 145 OP on USD/JPY charts. But this is not all yet. Take a look that GBP/JPY target stands significantly lower than the previous top, while on USD/JPY chart it stands higher. Thus comparison suggests that GBP should keep dropping against USD in near term. Thus, our suggestion of downside breakout of 1.14 area on GBP/USD has cross-market background as well.
Thus, cross-market analysis sometimes might be very useful...
 

Vokin

Private, 1st Class
Messages
31
A textbook example of a calculation using cross analysis.
Thank you for that.
Only in the case of USDJPY, I am worried about what will happen when the recession in the USA takes full effect. Will the JPY manage to reach 145 without the safehaven taking effect?
Or am I a few miles ahead in my thinking again.
 
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