Sive Morten
Special Consultant to the FPA
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- 18,690
Guys, due events in Turkey and attempt of military usurpation of governing power markets probably will show strong reaction on Monday. Thus, we will prepare our research but be ready for increasing demand for safe haven assets, as USD, CHF, JPY. Currently it seems that situation is under government control, but information is very contradictional...
Fundamentals
(Reuters) The dollar rose to a three-week high against the yen on Friday and posted its largest weekly gain against the Japanese currency in 17 years after strong U.S. and Chinese economic data diminished the appetite for the yen as a haven from risk.
U.S. retail sales rose 0.6 percent in June, strongly outpacing the 0.1 percent rise expected by economists. It was the third straight month of gains and lifted sales 2.7 percent from a year ago.
Dean Popplewell, chief currency strategist at Oanda in Toronto, said the data's surprise to the upside was a big positive for the dollar. "That’s leading the market to consider re-pricing potential (interest rate) hikes again."
Fed funds futures showed investors see an increased likelihood that the U.S. Federal Reserve will raise the nation's overnight interest rates this year. Chances for a rate increase by December rose to 46 percent on Friday, according to CME Group's FedWatch tool. Traders had priced in less than a 20-percent chance as recently as late June.
Data from China overnight also showed growth. Industrial output and retail sales all beat forecasts, indicating there was some resilience in the economy.
The dollar rose to 106.30 yen, its strongest level since June 24, in Asian trade. It vacillated between positive and negative territory throughout the U.S. session, and was last up 0.25 percent at 105.53 yen.
The yen's moves largely followed those of equities, analysts said, with the yen moving in the opposite direction of U.S. stocks throughout much of the day.
For the week, the dollar rallied 5 percent against the yen, its largest weekly rise since February 1999, as expectations of significant stimulus from Japan weighed on the yen.
Speculation has grown since Prime Minister Shinzo Abe's ruling coalition won elections over the weekend and were fanned when former Federal Reserve Chairman Ben Bernanke visited the Bank of Japan earlier this week.
The British pound fell 1 percent against the dollar, slipping from a two-week high of $.13481 after the Bank of England's chief economist said Britain needed "muscular" stimulus to boost the economy.
Still, sterling rose nearly 2 percent for the week against the greenback thanks to a surprise decision by the BOE on Thursday to keep rates on hold. Investors had largely expected a rate cut following Britain's vote to leave the European Union.
It was sterling's biggest weekly rise against the dollar since early March.
The Turkish lira fell to a three-week low versus the U.S. dollar in late U.S. trading on Friday as Turkish Prime Minister Binali Yildirim said a group within Turkey's military has attempted to overthrow the government and security forces have been called in to "do what is necessary".
Reports of the coup attempt also stoked safehaven bids for U.S. Treasury bonds, paring their earlier losses.
The Turkey lira was last down 5.0 percent at 3.0300 lira per dollar.
"Have you seen the latest headlines on Turkey? That probably has something to do with it. This dollar surge is very much headline-driven," said Vassili Serebriakov, currency strategist at Credit Agricole in New York.
Helicopter money – a primer
by Fathom Consulting
Here, guys is interesting article explaining all sides of unprecedented "easing" programs that now are taken by all major Central Banks and possible pitty consequences...
The fallout from last month’s Brexit referendum will almost inevitably hit the UK economy hard. It will quite probably lead to a slowdown in the rest of Europe. And it may yet be sufficient to trigger a global economic downturn. In this environment, policymakers will come under increasing pressure to try something radical. One idea, mooted by Milton Friedman as long ago as 1969, is that of ‘helicopter money’.
Policymakers in many countries have come to rely almost exclusively on monetary stimulus since the global financial crisis struck in 2008. Having failed to revitalise economic growth, a growing number of prominent political and economic figures are advocating a return to fiscal activism, arguing that monetary policy should not be the only game in town. But with ample research pointing to the drag on economic growth that large governments can exert, policymakers are under increasing pressure to experiment with new and radical policy options.
One option is helicopter money. Although yet untested, the idea itself is not new. Writing in 1969, Milton Friedman proposed an experiment which involved printing, and then distributing indiscriminately physical bank notes from a helicopter for the general public to collect and spend. This notion of using permanent money transfers as a policy response to deficient demand has resurfaced through the decades, with endorsement from the likes of Ben Bernanke, Willem Buiter,Paul Krugman and Adair Turner.
In practice, a helicopter drop is unlikely to take the literal form of cash raining down from the sky! Instead, it would be a joint venture between the government and the central bank. The central bank would create new money, crediting private bank accounts, whether of individuals or of firms, on behalf of the government. Rather than funding this fiscal stimulus through the issuance of new government debt to the private sector, the government provides the central bank with a perpetual bond — meaning that, potentially at least, it will never mature and never be repaid. This enables the central bank’s balance sheet to balance (the perpetual bond is the asset and the increase in commercial bank reserves the liability).
Helicopter money is an indefinite expansion of the money supply. And because the government need never raise taxes, nor reduce spending in order to repay the perpetual bond, it is hoped that it will prove more expansionary than conventional fiscal stimulus, which is subject to the problem of Ricardian Equivalence (in the limit, fiscal stimulus may have no impact at all if households anticipate future measures required to balance the budget and put money aside accordingly). With helicopter money, there is no explicit future fiscal tightening (to repay government borrowing), or consumer spending sacrifice (a consequence of bringing forward consumption from the future to the present). It is, as its advocates argue, ‘free money’.
To its critics, helicopter money is a step closer to fiscal irresponsibility and hyperinflation — with the latter an implicit future tax. Already, central banks’ large-scale asset purchases have helped supress interest rates along the government yield curve, weakening budgetary discipline. The promise to finance government expenditure indefinitely risks even greater complacency on the part of politicians. Why suffer the unpopularity of raising taxes or reducing spending when the central bank can finance your fiscal deficit?
According to Willem Buiter, and other helicopter money enthusiasts, this challenge to central bank autonomy can be avoided by the government inviting the central bank to monetise its debts in exchange for a perpetual bond, with the central bank retaining the right to refuse.
Arguably, the line between fiscal and monetary policy has already been blurred. As Mervyn King reminds us in his new book, ‘The end of alchemy’, the acquisition of assets other than government bonds involves taking on credit risk, with that risk ultimately falling on taxpayers. In other words, central banks that have expanded their quantitative easing programmes to include private sector assets have already entered the realms of fiscal policy. More recently, the purchase of negative yielding government bonds by some central banks has acted as a form of debt monetisation, with governments paying back less than they borrowed. Concern that central banks will become the printing press for fiscally irresponsible governments is not unwarranted.
Another objection to helicopter money is the inability of central banks to unwind their purchases, and therefore the money supply, when the time is right. As a consequence, they are confined to increasing either short-term interest rates or reserve ratio requirements. This implies a more aggressive path for policy rates than in the past, and also threatens central bank solvency if the interest payable on reserves exceeds that received on assets. As a consequence, Borio et alargue that this will constrain the normalisation of interest rates — changing monetary policy and inflation targeting as we know it.
A solution would be to increase the proportion of commercial bank reserves that receive a very low, or zero, rate of interest. But as Borio and his colleagues argue, “this is equivalent to tax-financing — someone in the private sector must bear the cost.” For this reason, they conclude that the additional boost to demand relative to temporary monetary financing will not materialise.
While it is conceivable that this could stifle the expansionary impact of helicopter money, especially if banks bear the brunt of the cost, households are more likely to spend a financial windfall when there is no explicit future tax obligation. In other words, if it is a permanent money-financed fiscal expansion. This should boost nominal GDP through some combination of price and output effects.
An alternative means of mopping-up the money supply would be to continue the co-ordination between debt management and monetary policy — overfunding the government’s budget deficit by selling government securities to the private sector. However, as Willem Buiter points out, none of the above is necessary as long as central banks are profitable, which they typically are. Retaining the ability to raise interest rates is essential, especially as a quickening of both asset and consumer price inflation may be close at hand if policymakers resort to helicopter money.
Indeed, as our regular readers will be aware, we believe that keeping interest rates too low for too long has held back growth in productive potential. That is because emergency monetary policy enables unproductive firms, who earn a very low rate of return on their capital, to survive. If prolonged, that results in an ever increasing share of economic resources tied up in activities that deliver very little of economic value. Using helicopter money to boost demand, without reallocating those resources and improving the supply-side, risks higher inflation.
Despite these risks, with monetary policy nearing its limits, we expect the policy mix to shift towards greater fiscal stimulus in the years ahead. This is likely to be accompanied by increasing debate about the merits of monetising the fiscal debt. For Japan, it is perhaps the only policy option left. In our forthcoming Global Economic and Markets Outlook, we consider the fallout from the UK’s vote to leave the European Union. Under our risk scenario, the global repercussions are enough to push the Bank of Japan into calling in the choppers.
Indeed, it has been a frustrating first half of the year for central bank Governor Kuroda and his colleagues. Back in January, they were punished by investors for introducing negative interest rates on excess reserves. Since then, they have been punished for doing nothing. The Nikkei 225 has dropped 15% since the turn of the year, while safe haven flows into the Japanese yen have caused it to appreciate more than 10% in trade-weighted terms — undermining the Bank’s efforts to reach its 2% inflation target. Both headline and core CPI measures are now in deflation territory. Brexit poses yet another headwind.
n all likelihood, the Bank of Japan’s first response to signs of further weakness will be to fall back on what it knows. Interest rates will be cut further into negative territory, and the Bank of Japan’s asset purchase programme expanded, before the Policy Board tries anything radical. But as the table below highlights, the Bank of Japan is often a pioneer.
Back in 1999, the Japanese government issued shopping vouchers worth ¥20,000 to households with children under 15, and to more than half of the elderly population. The total amount distributed was ¥620 billion, or $6 billion. But crucially the vouchers were valid only for six months, and they were a one-off. There was no commitment to continue with the programme until specified objectives had been met. If Japan is to be dragged out of decades of near-zero growth and near-zero inflation, something much more ambitious will be required.
Consider the following proposal. Each household is again issued with shopping vouchers worth ¥20,000. But this time it is explicitly financed by a permanent increase in the monetary base and it is not a one-off payment. These vouchers are issued every month for three months. Then more vouchers are issued, this time worth ¥40,000. These are issued for a further three months, until they are replaced by new vouchers worth ¥80,000. And so on. The precise sums involved are not that important. The point is that, by issuing vouchers indefinitely, of ever-increasing value, Japan’s policymakers can absolutely guarantee greater nominal expenditure within the economy, and by extension a higher price level. This is the sense in which Willem Buiter argues that deflation is a policy choice.
There is a drawback of course. The rather extreme policy set out above almost guarantees a period of hyperinflation for Japan, transferring wealth from savers to spenders, and from old to young. But given the state of Japan’s public finances, such a transfer is more or less inevitable. It is a question of when, not if. When Japan’s problems began in the late 1980s, its government debt stood at a little under 70% of GDP. Elevated, perhaps, but manageable. After a decade of failed public works, it climbed to almost 150% of GDP. Last year, it reached 230% of GDP. With no growth, and no inflation, this money will never be repaid. Soft default through inflation may be the best that the country can hope for.
COT Report
Today we will take a look at EUR again. COT report shows growing bearish power as net short position have increased last week (after NFP release) and week before. Short position is growing simultaneously with open interest. It means that new short positions were opened recently. By this information we could say that sentiment on EUR is mostly bearish:
Technical
Monthly
Reversal candle that we've discussed last time has become even greater and has increased its reversal quality. As we have said previously - EUR right now shows many bearish signs, as mentioned reversal candle, inability to reach YPR1 etc.
Currently EUR stands at rather strong support area. This is lower border of downward channel and all-time 5/8 Fib support. Here EUR has formed Butterfly "buy" and it has reached first 1.27 extension here.
EUR is forming typical reversal candle in May. Price has moved above April top and tends to close below April's lows. It could not get extended continuation, but usually market shows downward continuation within next 1-3 candles. But we're on monthly chart guys...
Sometimes reversal candles lead to collapse, as it was on EUR around 1.40 area. Thrust down has started particularly by reversal candle in March 2014.
Also, market starts to show signs of bearish dynamic pressure. Although trend has turned bullish in summer of 2015 - EUR still can't abandon sideways consolidation and move above 1.15 area.
Finally EUR was not able to reach YPR1 and returned right back down to YPP, and now even stands slightly below it. This is bearish sign. Following this logic next destination could be YPS1 right around parity and 1.618 butterfly target. This is just another destination point that we have here.
That's being said, appearing of reversal candle brings nothing good to bulls. Currently we can't precisely forecast the consequences of its appearing, but even minor results will bring 1-2 months of downward action inside current 1.04 -1.15 consolidation... Although potential bearish impact could be even stronger.
Finally we have another bearish sign that looks like bearish dynamic pressure. Take a look that although trend holds bullish - market shows inablitity to move up, even from strong support area. Next strong support stands precisely at parity and will become a culmination of downward action, since this level includes support line, YPS1 and butterfly 1.618 target. Brexit results hardly will bring prosperity to EU and probably will become another bearish driving factor for EUR.
That's being said, we treat long-term perspective for EUR as moderately bearish. Any hint on rate hike from the Fed will accelearte dropping here.
Weekly
Here we first recall what we've said last time.
Trend has turned bearish on weekly chart. Current move down could get further continuation. Despite multiple fluctuations in wide range - market keeps valid the shape of butterfly. It is especially interesting that during last upside action EUR has stopped slightly below the top of major butterfly swing. As well as 1.05 low was slightly higher that low of March 2015. This lets EUR to keep chances on this large butterfly that has the same targets around parity as monthly one by the way....
But let's get closer to shorter-term perspective. Careful analysis of the swings shows that EUR keeps almost equal all downward harmonic swings inside this consolidation. Sometimes they are slightly greater, sometimes slightly smaller, but this difference is mild and mostly they are equal. So, we've estimated that that EUR should move slightly lower to major 50% support around 1.1060 area.Now this has happened.
Here again we mostly support our previous view that EUR will move down further. This stubborn standing around 1.1050-1.11could be explained combination of daily levels and YPP. But on Brexit turmoil EUR has pierced it strongly and right now this level becomes weaker and we have reversal candle on monthly chart.
Take a look carefully at weekly chart - we have drop out from the top. Last time when this has happened EUR has doubled harmonic swing on a way down and reached 1.05 lows. As we have similar situation here - harmonic swing again could be doubled. In this case we again will appear around 1.05 lows.
But this is not the end guys. Right now we see relatively rare candlestick pattern that calls "3 black crows". This is bearish reversal pattern and very often becomes a sign for significant downward action. Thus, in perspective of 1-2 months we really could get downward continuation here, on EUR.
And finally in last 3-4 weeks we clearly see inability of market to turn up again. This behavior amazingly correpsonds to the same action when EUR has dropped down from 1.16 top. After first wave of drop - it also has tried to turn up by some retracement but later failed and dropped to 1.05. Here we see very similar behavior.
If this time we will get the same continuation as last time, i.e. double of harmonic siwng - then, we again should appear around 1.05 area... But second appearing of the price there could become a fatal and EUR easily will follow to butterfly target and parity destination.
Daily
Friday drop has erased the whole week of upside retracement. As a result EUR has failed to move above MPP, just tested it twice and confirms bearish sentiment on the market. Even upside action, as we've discussed on our daily videos was really choppy and mostly reminds retracement action rather than reversal or upside trend.
Although most recent bearish grabber has been erased due Nice terrible event, but first grabber still stands valid. Recent acceleration could mean downward continuation with our major AB-CD pattern here. As 100% target already has been reached, it is logical to suggest that this could be starting point of motion to next 1.618 target that stands around 1.06 area.
4-hour
Here we see that our butterfly pattern is taking clearer shape and now is well -recognizable. First destination point her is 1.27 extension around 1.08 area. This will be significant support because it coincides with MPS1.
Although technical picture looks bearish, it better to wait first for reaction on events in Turkey on Monday. If this reaction will not break current analysis, then it will be possible to search chances on short entry.
Hourly
So, as situation in Turkey are taken under government control, on Monday market could show some relief and upward retracement. At the same time, drop was really strong and EUR is not at oversold, thus, retracement probably will not be too high.
Hourly chart shows that area around 1.1050 could become a potential target of this upside bounce, as combination of WPP and Fib level.
Take a look that price also has destroyed H&S pattern that we have discussed, as EUR has dropped below the bottom of right shoulder.
Conclusion:
Support where market stands on monthly chart is very long-term and wide. Standing there could last for months or even years, and may be sometime upward action will happen there. But right now, EUR shows bearish signs for perspective of 1-2 months. It's really high probability exists that move down will continue at least to 1.05 area or even deeper.
In shorter -term perspective we expect minor retracement up on daily and intraday charts before move down will continue. Also we call to not take any trades right at opening hours on Monday and give market few hours to show reaction on Turkey events. We will follow our trading plan only if all major points will stand intact.
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 to a three-week high against the yen on Friday and posted its largest weekly gain against the Japanese currency in 17 years after strong U.S. and Chinese economic data diminished the appetite for the yen as a haven from risk.
U.S. retail sales rose 0.6 percent in June, strongly outpacing the 0.1 percent rise expected by economists. It was the third straight month of gains and lifted sales 2.7 percent from a year ago.
Dean Popplewell, chief currency strategist at Oanda in Toronto, said the data's surprise to the upside was a big positive for the dollar. "That’s leading the market to consider re-pricing potential (interest rate) hikes again."
Fed funds futures showed investors see an increased likelihood that the U.S. Federal Reserve will raise the nation's overnight interest rates this year. Chances for a rate increase by December rose to 46 percent on Friday, according to CME Group's FedWatch tool. Traders had priced in less than a 20-percent chance as recently as late June.
Data from China overnight also showed growth. Industrial output and retail sales all beat forecasts, indicating there was some resilience in the economy.
The dollar rose to 106.30 yen, its strongest level since June 24, in Asian trade. It vacillated between positive and negative territory throughout the U.S. session, and was last up 0.25 percent at 105.53 yen.
The yen's moves largely followed those of equities, analysts said, with the yen moving in the opposite direction of U.S. stocks throughout much of the day.
For the week, the dollar rallied 5 percent against the yen, its largest weekly rise since February 1999, as expectations of significant stimulus from Japan weighed on the yen.
Speculation has grown since Prime Minister Shinzo Abe's ruling coalition won elections over the weekend and were fanned when former Federal Reserve Chairman Ben Bernanke visited the Bank of Japan earlier this week.
The British pound fell 1 percent against the dollar, slipping from a two-week high of $.13481 after the Bank of England's chief economist said Britain needed "muscular" stimulus to boost the economy.
Still, sterling rose nearly 2 percent for the week against the greenback thanks to a surprise decision by the BOE on Thursday to keep rates on hold. Investors had largely expected a rate cut following Britain's vote to leave the European Union.
It was sterling's biggest weekly rise against the dollar since early March.
The Turkish lira fell to a three-week low versus the U.S. dollar in late U.S. trading on Friday as Turkish Prime Minister Binali Yildirim said a group within Turkey's military has attempted to overthrow the government and security forces have been called in to "do what is necessary".
Reports of the coup attempt also stoked safehaven bids for U.S. Treasury bonds, paring their earlier losses.
The Turkey lira was last down 5.0 percent at 3.0300 lira per dollar.
"Have you seen the latest headlines on Turkey? That probably has something to do with it. This dollar surge is very much headline-driven," said Vassili Serebriakov, currency strategist at Credit Agricole in New York.
Helicopter money – a primer
by Fathom Consulting
Here, guys is interesting article explaining all sides of unprecedented "easing" programs that now are taken by all major Central Banks and possible pitty consequences...
The fallout from last month’s Brexit referendum will almost inevitably hit the UK economy hard. It will quite probably lead to a slowdown in the rest of Europe. And it may yet be sufficient to trigger a global economic downturn. In this environment, policymakers will come under increasing pressure to try something radical. One idea, mooted by Milton Friedman as long ago as 1969, is that of ‘helicopter money’.
Policymakers in many countries have come to rely almost exclusively on monetary stimulus since the global financial crisis struck in 2008. Having failed to revitalise economic growth, a growing number of prominent political and economic figures are advocating a return to fiscal activism, arguing that monetary policy should not be the only game in town. But with ample research pointing to the drag on economic growth that large governments can exert, policymakers are under increasing pressure to experiment with new and radical policy options.
One option is helicopter money. Although yet untested, the idea itself is not new. Writing in 1969, Milton Friedman proposed an experiment which involved printing, and then distributing indiscriminately physical bank notes from a helicopter for the general public to collect and spend. This notion of using permanent money transfers as a policy response to deficient demand has resurfaced through the decades, with endorsement from the likes of Ben Bernanke, Willem Buiter,Paul Krugman and Adair Turner.
In practice, a helicopter drop is unlikely to take the literal form of cash raining down from the sky! Instead, it would be a joint venture between the government and the central bank. The central bank would create new money, crediting private bank accounts, whether of individuals or of firms, on behalf of the government. Rather than funding this fiscal stimulus through the issuance of new government debt to the private sector, the government provides the central bank with a perpetual bond — meaning that, potentially at least, it will never mature and never be repaid. This enables the central bank’s balance sheet to balance (the perpetual bond is the asset and the increase in commercial bank reserves the liability).
Helicopter money is an indefinite expansion of the money supply. And because the government need never raise taxes, nor reduce spending in order to repay the perpetual bond, it is hoped that it will prove more expansionary than conventional fiscal stimulus, which is subject to the problem of Ricardian Equivalence (in the limit, fiscal stimulus may have no impact at all if households anticipate future measures required to balance the budget and put money aside accordingly). With helicopter money, there is no explicit future fiscal tightening (to repay government borrowing), or consumer spending sacrifice (a consequence of bringing forward consumption from the future to the present). It is, as its advocates argue, ‘free money’.
To its critics, helicopter money is a step closer to fiscal irresponsibility and hyperinflation — with the latter an implicit future tax. Already, central banks’ large-scale asset purchases have helped supress interest rates along the government yield curve, weakening budgetary discipline. The promise to finance government expenditure indefinitely risks even greater complacency on the part of politicians. Why suffer the unpopularity of raising taxes or reducing spending when the central bank can finance your fiscal deficit?
According to Willem Buiter, and other helicopter money enthusiasts, this challenge to central bank autonomy can be avoided by the government inviting the central bank to monetise its debts in exchange for a perpetual bond, with the central bank retaining the right to refuse.
Arguably, the line between fiscal and monetary policy has already been blurred. As Mervyn King reminds us in his new book, ‘The end of alchemy’, the acquisition of assets other than government bonds involves taking on credit risk, with that risk ultimately falling on taxpayers. In other words, central banks that have expanded their quantitative easing programmes to include private sector assets have already entered the realms of fiscal policy. More recently, the purchase of negative yielding government bonds by some central banks has acted as a form of debt monetisation, with governments paying back less than they borrowed. Concern that central banks will become the printing press for fiscally irresponsible governments is not unwarranted.
Another objection to helicopter money is the inability of central banks to unwind their purchases, and therefore the money supply, when the time is right. As a consequence, they are confined to increasing either short-term interest rates or reserve ratio requirements. This implies a more aggressive path for policy rates than in the past, and also threatens central bank solvency if the interest payable on reserves exceeds that received on assets. As a consequence, Borio et alargue that this will constrain the normalisation of interest rates — changing monetary policy and inflation targeting as we know it.
A solution would be to increase the proportion of commercial bank reserves that receive a very low, or zero, rate of interest. But as Borio and his colleagues argue, “this is equivalent to tax-financing — someone in the private sector must bear the cost.” For this reason, they conclude that the additional boost to demand relative to temporary monetary financing will not materialise.
While it is conceivable that this could stifle the expansionary impact of helicopter money, especially if banks bear the brunt of the cost, households are more likely to spend a financial windfall when there is no explicit future tax obligation. In other words, if it is a permanent money-financed fiscal expansion. This should boost nominal GDP through some combination of price and output effects.
An alternative means of mopping-up the money supply would be to continue the co-ordination between debt management and monetary policy — overfunding the government’s budget deficit by selling government securities to the private sector. However, as Willem Buiter points out, none of the above is necessary as long as central banks are profitable, which they typically are. Retaining the ability to raise interest rates is essential, especially as a quickening of both asset and consumer price inflation may be close at hand if policymakers resort to helicopter money.
Indeed, as our regular readers will be aware, we believe that keeping interest rates too low for too long has held back growth in productive potential. That is because emergency monetary policy enables unproductive firms, who earn a very low rate of return on their capital, to survive. If prolonged, that results in an ever increasing share of economic resources tied up in activities that deliver very little of economic value. Using helicopter money to boost demand, without reallocating those resources and improving the supply-side, risks higher inflation.
Despite these risks, with monetary policy nearing its limits, we expect the policy mix to shift towards greater fiscal stimulus in the years ahead. This is likely to be accompanied by increasing debate about the merits of monetising the fiscal debt. For Japan, it is perhaps the only policy option left. In our forthcoming Global Economic and Markets Outlook, we consider the fallout from the UK’s vote to leave the European Union. Under our risk scenario, the global repercussions are enough to push the Bank of Japan into calling in the choppers.
Indeed, it has been a frustrating first half of the year for central bank Governor Kuroda and his colleagues. Back in January, they were punished by investors for introducing negative interest rates on excess reserves. Since then, they have been punished for doing nothing. The Nikkei 225 has dropped 15% since the turn of the year, while safe haven flows into the Japanese yen have caused it to appreciate more than 10% in trade-weighted terms — undermining the Bank’s efforts to reach its 2% inflation target. Both headline and core CPI measures are now in deflation territory. Brexit poses yet another headwind.
n all likelihood, the Bank of Japan’s first response to signs of further weakness will be to fall back on what it knows. Interest rates will be cut further into negative territory, and the Bank of Japan’s asset purchase programme expanded, before the Policy Board tries anything radical. But as the table below highlights, the Bank of Japan is often a pioneer.
Back in 1999, the Japanese government issued shopping vouchers worth ¥20,000 to households with children under 15, and to more than half of the elderly population. The total amount distributed was ¥620 billion, or $6 billion. But crucially the vouchers were valid only for six months, and they were a one-off. There was no commitment to continue with the programme until specified objectives had been met. If Japan is to be dragged out of decades of near-zero growth and near-zero inflation, something much more ambitious will be required.
Consider the following proposal. Each household is again issued with shopping vouchers worth ¥20,000. But this time it is explicitly financed by a permanent increase in the monetary base and it is not a one-off payment. These vouchers are issued every month for three months. Then more vouchers are issued, this time worth ¥40,000. These are issued for a further three months, until they are replaced by new vouchers worth ¥80,000. And so on. The precise sums involved are not that important. The point is that, by issuing vouchers indefinitely, of ever-increasing value, Japan’s policymakers can absolutely guarantee greater nominal expenditure within the economy, and by extension a higher price level. This is the sense in which Willem Buiter argues that deflation is a policy choice.
There is a drawback of course. The rather extreme policy set out above almost guarantees a period of hyperinflation for Japan, transferring wealth from savers to spenders, and from old to young. But given the state of Japan’s public finances, such a transfer is more or less inevitable. It is a question of when, not if. When Japan’s problems began in the late 1980s, its government debt stood at a little under 70% of GDP. Elevated, perhaps, but manageable. After a decade of failed public works, it climbed to almost 150% of GDP. Last year, it reached 230% of GDP. With no growth, and no inflation, this money will never be repaid. Soft default through inflation may be the best that the country can hope for.
COT Report
Today we will take a look at EUR again. COT report shows growing bearish power as net short position have increased last week (after NFP release) and week before. Short position is growing simultaneously with open interest. It means that new short positions were opened recently. By this information we could say that sentiment on EUR is mostly bearish:
Technical
Monthly
Reversal candle that we've discussed last time has become even greater and has increased its reversal quality. As we have said previously - EUR right now shows many bearish signs, as mentioned reversal candle, inability to reach YPR1 etc.
Currently EUR stands at rather strong support area. This is lower border of downward channel and all-time 5/8 Fib support. Here EUR has formed Butterfly "buy" and it has reached first 1.27 extension here.
EUR is forming typical reversal candle in May. Price has moved above April top and tends to close below April's lows. It could not get extended continuation, but usually market shows downward continuation within next 1-3 candles. But we're on monthly chart guys...
Sometimes reversal candles lead to collapse, as it was on EUR around 1.40 area. Thrust down has started particularly by reversal candle in March 2014.
Also, market starts to show signs of bearish dynamic pressure. Although trend has turned bullish in summer of 2015 - EUR still can't abandon sideways consolidation and move above 1.15 area.
Finally EUR was not able to reach YPR1 and returned right back down to YPP, and now even stands slightly below it. This is bearish sign. Following this logic next destination could be YPS1 right around parity and 1.618 butterfly target. This is just another destination point that we have here.
That's being said, appearing of reversal candle brings nothing good to bulls. Currently we can't precisely forecast the consequences of its appearing, but even minor results will bring 1-2 months of downward action inside current 1.04 -1.15 consolidation... Although potential bearish impact could be even stronger.
Finally we have another bearish sign that looks like bearish dynamic pressure. Take a look that although trend holds bullish - market shows inablitity to move up, even from strong support area. Next strong support stands precisely at parity and will become a culmination of downward action, since this level includes support line, YPS1 and butterfly 1.618 target. Brexit results hardly will bring prosperity to EU and probably will become another bearish driving factor for EUR.
That's being said, we treat long-term perspective for EUR as moderately bearish. Any hint on rate hike from the Fed will accelearte dropping here.
Weekly
Here we first recall what we've said last time.
Trend has turned bearish on weekly chart. Current move down could get further continuation. Despite multiple fluctuations in wide range - market keeps valid the shape of butterfly. It is especially interesting that during last upside action EUR has stopped slightly below the top of major butterfly swing. As well as 1.05 low was slightly higher that low of March 2015. This lets EUR to keep chances on this large butterfly that has the same targets around parity as monthly one by the way....
But let's get closer to shorter-term perspective. Careful analysis of the swings shows that EUR keeps almost equal all downward harmonic swings inside this consolidation. Sometimes they are slightly greater, sometimes slightly smaller, but this difference is mild and mostly they are equal. So, we've estimated that that EUR should move slightly lower to major 50% support around 1.1060 area.Now this has happened.
Here again we mostly support our previous view that EUR will move down further. This stubborn standing around 1.1050-1.11could be explained combination of daily levels and YPP. But on Brexit turmoil EUR has pierced it strongly and right now this level becomes weaker and we have reversal candle on monthly chart.
Take a look carefully at weekly chart - we have drop out from the top. Last time when this has happened EUR has doubled harmonic swing on a way down and reached 1.05 lows. As we have similar situation here - harmonic swing again could be doubled. In this case we again will appear around 1.05 lows.
But this is not the end guys. Right now we see relatively rare candlestick pattern that calls "3 black crows". This is bearish reversal pattern and very often becomes a sign for significant downward action. Thus, in perspective of 1-2 months we really could get downward continuation here, on EUR.
And finally in last 3-4 weeks we clearly see inability of market to turn up again. This behavior amazingly correpsonds to the same action when EUR has dropped down from 1.16 top. After first wave of drop - it also has tried to turn up by some retracement but later failed and dropped to 1.05. Here we see very similar behavior.
If this time we will get the same continuation as last time, i.e. double of harmonic siwng - then, we again should appear around 1.05 area... But second appearing of the price there could become a fatal and EUR easily will follow to butterfly target and parity destination.
Daily
Friday drop has erased the whole week of upside retracement. As a result EUR has failed to move above MPP, just tested it twice and confirms bearish sentiment on the market. Even upside action, as we've discussed on our daily videos was really choppy and mostly reminds retracement action rather than reversal or upside trend.
Although most recent bearish grabber has been erased due Nice terrible event, but first grabber still stands valid. Recent acceleration could mean downward continuation with our major AB-CD pattern here. As 100% target already has been reached, it is logical to suggest that this could be starting point of motion to next 1.618 target that stands around 1.06 area.
4-hour
Here we see that our butterfly pattern is taking clearer shape and now is well -recognizable. First destination point her is 1.27 extension around 1.08 area. This will be significant support because it coincides with MPS1.
Although technical picture looks bearish, it better to wait first for reaction on events in Turkey on Monday. If this reaction will not break current analysis, then it will be possible to search chances on short entry.
Hourly
So, as situation in Turkey are taken under government control, on Monday market could show some relief and upward retracement. At the same time, drop was really strong and EUR is not at oversold, thus, retracement probably will not be too high.
Hourly chart shows that area around 1.1050 could become a potential target of this upside bounce, as combination of WPP and Fib level.
Take a look that price also has destroyed H&S pattern that we have discussed, as EUR has dropped below the bottom of right shoulder.
Conclusion:
Support where market stands on monthly chart is very long-term and wide. Standing there could last for months or even years, and may be sometime upward action will happen there. But right now, EUR shows bearish signs for perspective of 1-2 months. It's really high probability exists that move down will continue at least to 1.05 area or even deeper.
In shorter -term perspective we expect minor retracement up on daily and intraday charts before move down will continue. Also we call to not take any trades right at opening hours on Monday and give market few hours to show reaction on Turkey events. We will follow our trading plan only if all major points will stand intact.
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.