Sive Morten
Special Consultant to the FPA
- Messages
- 18,516
Fundamentals
Last week we've discussed ongoing political process that could and probably will impact on financial markets across the board. This process stands underway. Now we need just wait for clear results of these measures. They already come but mostly make impact on political processes yet, but soon it will make impact on financials either.
In financial sphere we see right now just one big event - delivery of US liquid gas in EU. It seems that this is one of agreements between Trump and Putin. Trump will by Russian liquid gas and send it back to EU but at higher price. Everybody will be happy - Russia sells its gas, US gets profit and EU gets energy diversification. This story with Russian LNG tanker in UK get logical continuation. And another one article by Bloomberg - Why the U.S. Is Buying Natural Gas From Russia. Recall that this was at moment of very cold relationships between US and Russia. Now situation is changing.
Still last week economy factors were on first stage. Despite record 4.2% US GDP numbers dollar has not shown corresponding action. As Reuters explains - the dollar slipped against a basket of currencies on Friday as it failed to erase worries that trade frictions would be a drag in the second half of 2018.
We think that this is temporal weakness. When investors will "sleep" with this number through weekend, on coming week we should get absolutely different picture.
After hints from U.S. President Trump and other government officials in recent days of a strong GDP reading for the second quarter, “the market is well versed in a strong number,” said Alan Ruskin, global head of currency strategy in Deutsche Bank in New York.
The GDP, while strong on an annualised basis, was less impressive on a year-over-year basis, coming in at 2.8 percent. This was slower than an expected 3.1 percent pace, Ruskin said.
While the latest reading may be less stellar than it first appeared, it provided solid fundamentals to own dollars.
“I believe that the current steady nature of our economy is preventing the greenback from sinking,” said Juan Perez, senior currency trader at Tempus Consulting in Washington.
The latest GDP figure also reinforced the notion that the Federal Reserve would further raise interest rates, which is also a positive for the dollar.
“This number is very supportive the Fed’s outlook for four rate hikes in 2018,” said Minh Trang, senior foreign currency trader at Silicon Valley Bank in Santa Clara, California.
Take a look at new probabilities of Fed rate change. Now it stands near 90% of rate increase in September and chances on final rate change in December also has increased. Two weeks ago probabilities were 15% less than now:
On ECB we've talked last week. Indeed, its position looks weak and takes back seat, following to what Fed and US will do.
The single currency steadied after falling more than 0.7 percent on Thursday in response to the ECB sticking to ending its 2.6 trillion euro stimulus program this year and keeping rates at a record low level through the summer of 2019.
China’s yuan was heading for its longest weekly losing streak since November 2015. It fell to a 13-month low at 6.8369 per dollar as the Chinese currency has been under sustained pressure since Trump threatened to impose tariffs on all imports from China.
But, tariffs piking starts to make impact on US sentiment as well. Despite that economy shows good upside momentum, Fathom consulting points on sentiment deteriorating.
Our US Economic Sentiment Indicator (ESI) dropped from 6.1% in May to 4.9% in June. Some of this softening can be explained by trade disputes — both between the US and China (as demonstrated by our CEI and explained in last week’s video) and between the US and other trading partners.
Trade tensions aside, the decline in our ESI is not surprising, as businesses feel the effects of rising input costs, including higher oil prices, and a tightening labor market. The bigger picture though, is that at current levels our ESI suggests that the US economy continues to expand at a healthy clip. Recent hard data suggest that GDP growth firmed in Q2, and we still expect GDP growth to exceed 3% this year.
This also supports our opinion that recent reaction of "not-enough" dollar strength is temporal. Fundamental background shows that dollar positions right now are much better than EUR or GBP.
COT Report
Recent CFTC data shows that net long speculative position have increased slightly.
Open interest has increased as well. From table below we see that shorts were closed partially while long position was increased:
Still, guys - this was prior as ECB meeting as GDP release and it will be interesting how picture will change next week. Things that we see right now on the charts makes us think that EUR strength will not stand for long.
Technicals
Monthly
Price action last week was standing in the same range. So, no impact on monthly chart was made.
For two recent weeks market stands in tight daily triangle consolidation. But we see that volatility is rising because of political comments and events, and it is rising right around major technical level, while trading range stands the same. This usually leads to strong action in one or other direction.
July has no impact yet on overall monthly picture because it stands as inside candle by far. June, in turn also was an inside for May candle. As trading range is narrowing - it means that market turns to some consolidation around major support of YPP and Weekly K-support area.
Since we have bearish view on EUR in a perspectives of 6-12 months, major concern stands not around direction, but around manner of price action. Particularly speaking - whether we will get our 1.20 bounce before turning south or, EUR will continue down immediately.
Position of grabber also looks interesting, because it contradicts to other inputs. Grabber suggests action above 1.26, but this scenario doesn't agree with ECB policy and investors sentiment that we see from COT report. Since they are mutually exceptive scenarios - one of them should fail.
Also, long-term price behavior stands bearish. Reversal down has happened after completion of harmonic swing and around YPR1. The fact that EUR has failed to break through YPR1 tells that upside rally from 1.03 to 1.26 was just a retracement within larger bear trend. Now it is particularly interesting how EUR will behave around YPP. Drop below it will open road to YPS1 at ~1.09 which corresponds to our fundamental 1.10 target.
It means that to make grabber work we need to get strong positive fundamental factor. Current inputs that we have definitely are not sufficient for drastic upside reversal on EUR.
Weekly
But here we've got something new. Previously we've mentioned few times that market looks too heavy for right arm starting point. Second half of H&S pattern is the territory where bulls are gradually taking control. But right now we do not see it. Although large H&S picture stands intact - our major concern was about the pattern that could trigger upside action to right shoulder's top.
Now we've got weekly bearish grabber here and it means that chances on large daily butterfly "Buy" have increased. Besides, our 1.1450 major Fib level has not been tested. It means that major upside reversal to 1.20 (if it will ever happen, of course), still stands ahead in perspective of 2-4 weeks probably.
Daily
Trend stands bearish here. Despite EUR has started well right after GDP release, but it has exhausted very soon. As a result, Friday's trading range is very small. Last week we've mentioned bearish grabber and thought that it is weak and probably will be vanished by price action, but what do we see right now - both bullish grabbers were vanished, but bearish one still stands valid. Also we've got bearish reversal session on Thu as well.
Overall price action since EUR has touched 1.15 lows doesn't look impressive and much less as bullish reversal action. It's too heavy and slow. More than a month price stands in the range of big plunge. It means that further direction will coincide with breakout.
Taking its all together now we put the left wing of our butterfly, as technical picture shows growing chances on downside breakout.
Intraday
Short-term bearish picture could change only if market will take 1.1750 top. But right now, as we have a lot of bearish patterns, we could watch for chances to go short. On Friday we didn't get DRPO "Buy" that we've mentioned in video, but still EUR has turned up a bit later, on GDP report. As result, it is forming something that looks like H&S pattern.
It means that on Monday we could watch for AB=CD upside retracement and possible "222" Sell pattern around 50% Fib level (not shown), WPP + MPP resistance. Keep an eye on "C" point to estimate target with more precision.
Conclusion:
Right now we do not see any changes in fundamental background and even more - some US efforts for EU destabilization, it has big chances for negative effect in long term perspective for EU. Last negotiations with J-C. Junker shows that EU steps back under pressure of US trading sanctions.
Thus, 1.20-1.21 retracement still stands on the table, but, danger is threatening EU and re-establishing of long-term bear trend after retracement is very probable.
In shorter-term perspective we will be watching for bullish reversal pattern on daily chart. But first, market now has big chances to drop to 1.1450 area.
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.
Last week we've discussed ongoing political process that could and probably will impact on financial markets across the board. This process stands underway. Now we need just wait for clear results of these measures. They already come but mostly make impact on political processes yet, but soon it will make impact on financials either.
In financial sphere we see right now just one big event - delivery of US liquid gas in EU. It seems that this is one of agreements between Trump and Putin. Trump will by Russian liquid gas and send it back to EU but at higher price. Everybody will be happy - Russia sells its gas, US gets profit and EU gets energy diversification. This story with Russian LNG tanker in UK get logical continuation. And another one article by Bloomberg - Why the U.S. Is Buying Natural Gas From Russia. Recall that this was at moment of very cold relationships between US and Russia. Now situation is changing.
Still last week economy factors were on first stage. Despite record 4.2% US GDP numbers dollar has not shown corresponding action. As Reuters explains - the dollar slipped against a basket of currencies on Friday as it failed to erase worries that trade frictions would be a drag in the second half of 2018.
We think that this is temporal weakness. When investors will "sleep" with this number through weekend, on coming week we should get absolutely different picture.
After hints from U.S. President Trump and other government officials in recent days of a strong GDP reading for the second quarter, “the market is well versed in a strong number,” said Alan Ruskin, global head of currency strategy in Deutsche Bank in New York.
The GDP, while strong on an annualised basis, was less impressive on a year-over-year basis, coming in at 2.8 percent. This was slower than an expected 3.1 percent pace, Ruskin said.
While the latest reading may be less stellar than it first appeared, it provided solid fundamentals to own dollars.
“I believe that the current steady nature of our economy is preventing the greenback from sinking,” said Juan Perez, senior currency trader at Tempus Consulting in Washington.
The latest GDP figure also reinforced the notion that the Federal Reserve would further raise interest rates, which is also a positive for the dollar.
“This number is very supportive the Fed’s outlook for four rate hikes in 2018,” said Minh Trang, senior foreign currency trader at Silicon Valley Bank in Santa Clara, California.
Take a look at new probabilities of Fed rate change. Now it stands near 90% of rate increase in September and chances on final rate change in December also has increased. Two weeks ago probabilities were 15% less than now:
On ECB we've talked last week. Indeed, its position looks weak and takes back seat, following to what Fed and US will do.
The single currency steadied after falling more than 0.7 percent on Thursday in response to the ECB sticking to ending its 2.6 trillion euro stimulus program this year and keeping rates at a record low level through the summer of 2019.
China’s yuan was heading for its longest weekly losing streak since November 2015. It fell to a 13-month low at 6.8369 per dollar as the Chinese currency has been under sustained pressure since Trump threatened to impose tariffs on all imports from China.
But, tariffs piking starts to make impact on US sentiment as well. Despite that economy shows good upside momentum, Fathom consulting points on sentiment deteriorating.
Our US Economic Sentiment Indicator (ESI) dropped from 6.1% in May to 4.9% in June. Some of this softening can be explained by trade disputes — both between the US and China (as demonstrated by our CEI and explained in last week’s video) and between the US and other trading partners.
Trade tensions aside, the decline in our ESI is not surprising, as businesses feel the effects of rising input costs, including higher oil prices, and a tightening labor market. The bigger picture though, is that at current levels our ESI suggests that the US economy continues to expand at a healthy clip. Recent hard data suggest that GDP growth firmed in Q2, and we still expect GDP growth to exceed 3% this year.
This also supports our opinion that recent reaction of "not-enough" dollar strength is temporal. Fundamental background shows that dollar positions right now are much better than EUR or GBP.
COT Report
Recent CFTC data shows that net long speculative position have increased slightly.
Open interest has increased as well. From table below we see that shorts were closed partially while long position was increased:
Still, guys - this was prior as ECB meeting as GDP release and it will be interesting how picture will change next week. Things that we see right now on the charts makes us think that EUR strength will not stand for long.
Technicals
Monthly
Price action last week was standing in the same range. So, no impact on monthly chart was made.
For two recent weeks market stands in tight daily triangle consolidation. But we see that volatility is rising because of political comments and events, and it is rising right around major technical level, while trading range stands the same. This usually leads to strong action in one or other direction.
July has no impact yet on overall monthly picture because it stands as inside candle by far. June, in turn also was an inside for May candle. As trading range is narrowing - it means that market turns to some consolidation around major support of YPP and Weekly K-support area.
Since we have bearish view on EUR in a perspectives of 6-12 months, major concern stands not around direction, but around manner of price action. Particularly speaking - whether we will get our 1.20 bounce before turning south or, EUR will continue down immediately.
Position of grabber also looks interesting, because it contradicts to other inputs. Grabber suggests action above 1.26, but this scenario doesn't agree with ECB policy and investors sentiment that we see from COT report. Since they are mutually exceptive scenarios - one of them should fail.
Also, long-term price behavior stands bearish. Reversal down has happened after completion of harmonic swing and around YPR1. The fact that EUR has failed to break through YPR1 tells that upside rally from 1.03 to 1.26 was just a retracement within larger bear trend. Now it is particularly interesting how EUR will behave around YPP. Drop below it will open road to YPS1 at ~1.09 which corresponds to our fundamental 1.10 target.
It means that to make grabber work we need to get strong positive fundamental factor. Current inputs that we have definitely are not sufficient for drastic upside reversal on EUR.
Weekly
But here we've got something new. Previously we've mentioned few times that market looks too heavy for right arm starting point. Second half of H&S pattern is the territory where bulls are gradually taking control. But right now we do not see it. Although large H&S picture stands intact - our major concern was about the pattern that could trigger upside action to right shoulder's top.
Now we've got weekly bearish grabber here and it means that chances on large daily butterfly "Buy" have increased. Besides, our 1.1450 major Fib level has not been tested. It means that major upside reversal to 1.20 (if it will ever happen, of course), still stands ahead in perspective of 2-4 weeks probably.
Daily
Trend stands bearish here. Despite EUR has started well right after GDP release, but it has exhausted very soon. As a result, Friday's trading range is very small. Last week we've mentioned bearish grabber and thought that it is weak and probably will be vanished by price action, but what do we see right now - both bullish grabbers were vanished, but bearish one still stands valid. Also we've got bearish reversal session on Thu as well.
Overall price action since EUR has touched 1.15 lows doesn't look impressive and much less as bullish reversal action. It's too heavy and slow. More than a month price stands in the range of big plunge. It means that further direction will coincide with breakout.
Taking its all together now we put the left wing of our butterfly, as technical picture shows growing chances on downside breakout.
Intraday
Short-term bearish picture could change only if market will take 1.1750 top. But right now, as we have a lot of bearish patterns, we could watch for chances to go short. On Friday we didn't get DRPO "Buy" that we've mentioned in video, but still EUR has turned up a bit later, on GDP report. As result, it is forming something that looks like H&S pattern.
It means that on Monday we could watch for AB=CD upside retracement and possible "222" Sell pattern around 50% Fib level (not shown), WPP + MPP resistance. Keep an eye on "C" point to estimate target with more precision.
Conclusion:
Right now we do not see any changes in fundamental background and even more - some US efforts for EU destabilization, it has big chances for negative effect in long term perspective for EU. Last negotiations with J-C. Junker shows that EU steps back under pressure of US trading sanctions.
Thus, 1.20-1.21 retracement still stands on the table, but, danger is threatening EU and re-establishing of long-term bear trend after retracement is very probable.
In shorter-term perspective we will be watching for bullish reversal pattern on daily chart. But first, market now has big chances to drop to 1.1450 area.
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.