Sive Morten
Special Consultant to the FPA
- Messages
- 18,669
Fundamentals
The yen and Swiss franc rose on Friday as oil prices slid and bank shares led global equity markets lower, stoking a fresh wave of bids for low-risk assets.
Jitters about the June 23 referendum on Britain's membership in the European Union intensified the scramble for safe-haven investments, analysts said.
A poll by ORB for The Independent paper published on Friday showed the "Leave" camp had a 10-point lead over "Remain."
"The closer we get to the 'Brexit' vote, the more people will put on cautious positions," said Alan Ruskin, global head of FX strategy at Deutsche Bank in New York.
The Swiss franc reached an eight-week peak against the euro at 1.0845 francs per euro EURCHF=. It was last up 0.5 percent at 1.0850 francs.
The Swissie was flat against the dollar at 0.9632 franc, holding above a five-week high set on Thursday.
Safe-haven demand also supported the yen. It was up 0.4 percent at 106.65 yen against the dollar, ending nearly flat on the week versus the greenback.
The Japanese currency was 0.9 percent higher versus the euro EURJPY= at 120.09 yen after touching 119.88 yen, the lowest since April 2013.
Anxiety about the Brexit knocked sterling to a seven-week low against the dollar at $1.4180.
The dollar index .DXY was last up 0.6 percent at 94.558 for a weekly gain on 0.5 percent.
Traders also ditched emerging-market currencies ahead of the weekend with the South African rand falling 3 percent, as they favored low-risk government bonds, sending yields on Japanese and German 10-year bonds JP10YT=RR DE10YT=RR to record lows.
Falling global bond yields were seen as negative for bank profits, pressuring their shares in stock markets worldwide.
Oil prices LCOc1 CLc1 slipping from 2016 highs added to the selling of stocks.
The MSCI world equity index, which tracks shares in 45 nations, was down 1.6 percent.
Meanwhile, U.S. and Japanese policymakers are expected to produce no surprises at a meetings next week, analysts said.
Following a poor May jobs report, the Federal Reserve is widely expected to leave policy rates unchanged, while a Reuters poll showed the Bank of Japan is set to skip the chance to inject more stimulus to help its economy.
"That will add to the malaise to the yen. There has been some loss of faith in the BOJ," said David Page, senior economist of multi asset client solutions at AXA Investment Managers in London.
Low rates now the problem, not the solution
by Fathom Consulting
Although US labour market productivity in the first quarter of this year was revised up on Tuesday, broader productivity trends remain a concern. Janet Yellen expressed her worries about this in a speech this week and wants politicians to do more to encourage greater spending on investment and education. In our view, the policy mix should shift towards greater fiscal stimulus in the years ahead. That is because we believe that ultra-loose monetary policy is now causing more harm than good. Indeed, our analysis finds that low interest rates may be preventing the ‘gales of creative destruction’ that typically boost an economy’s potential supply in the aftermath of a recession.
Speaking with her three surviving predecessors back in April, Federal Reserve Chair Janet Yellen defended last year’s 25 basis point increase in the federal funds rate, the first for almost a decade. She was adamant that the tightening was warranted, and that no mistake had been made. We agree. And while she praised the “tremendous progress” made by the US economy since the depths of the financial crisis, one important qualification remains: productivity growth is worryingly sluggish.
Although Tuesday’s data contained upward revisions, productivity growth remains very low by historical standards. Indeed, the revised annualised growth rate of productivity within the nonfarm business sector was still negative in Q1, at -0.6% versus the earlier estimate of -1.0%. And this followed a contraction of 1.7% in Q4! Admittedly, Q1 productivity was 0.7% firmer than in Q1 last year, but that rate of growth is a lot lower than the historical average of around 2.0%. We think that this is because interest rates have been too low, for too long.
Alone among those economies that suffered a severe banking crisis through 2008 and into 2009, the US moved swiftly to recapitalise its own deposit-taking institutions. That was progress indeed. It is why US banks are lending again, and it is why, in productivity terms, the US has outperformed more or less every major economy since the Great Recession came to an end. Although in relative terms the US has had a good recovery, in absolute terms it has not. Our second chart shows that US productivity growth tends to move in long cycles of booms and busts. Whether we look over the past five years, or whether we look over the past ten years, US productivity growth is close to as weak as it has ever been.
In the words of Nobel prize-winning economist Paul Krugman “Productivity isn’t everything, but in the long run it is almost everything”. With demographics largely beyond the control of policymakers, it is effectively productivity growth that determines an economy’s sustainable rate of economic growth, and by extension the long-run returns to a broad range of financial assets. Consequently, understanding the causes of historically weak rates of productivity growth across the developed world is of particular importance to investors.
In putting together our latest global forecast, we spent some time trying to account for the variation through time in US productivity growth. Our suspicion was that low rates of productivity growth post-crisis were in some way related to the policy response to that crisis. By cutting interest rates almost to zero, central banks around the developed world were able to stave off a wave of corporate failures. Empirically, peaks and troughs in the US federal funds rate lead peaks and troughs in the US corporate failure rate by two to three years. This is not rocket science. But what if the corporate failure rate in turn affects productivity growth? Our research suggests that it does.
We found that we could explain more than two thirds of the cyclical variation in US productivity growth using just three variables. Specifically, we found that US productivity growth rises with the US corporate failure rate, falls with the level of the real oil price, and rises when output is growing faster than potential. By modelling the relationship between the federal funds rate and the corporate failure rate, we found that the reduction in the federal funds rate from its pre-crisis average of 4¼% almost to zero could have shaved around a percentage point off the rate of growth of US productivity. By keeping a lid on corporate failures, the Federal Reserve, along with many other central banks around the world, may unwittingly have prevented the ‘gales of creative destruction’ that typically boost an economy’s potential supply in the aftermath of a recession.
If we are right, then Chair Yellen and her team might do well to knuckle down and get on with delivering higher interest rates. Following the surprisingly weak non-farm payrolls data for May, which we regard as a ‘blip’, a June tightening is probably off the table. But if, as we suspect, we see a strong non-farm payrolls figure in June then a tightening next month is still on the cards.
COT Data
Guys, the time has come to recall GBP analysis. As we're closer and closer to Brexit voting, we have new inputs as fundamental as technical. Technical analysis we will discuss below, and here we will take a look at recent COT report that shows very bright picture.
Take a look that last week speculative net short postions have increased significantly and reached levels that weren't seen since 2013. At the same time - bearish positions stand not at extreme level and allows price to drop more. It means that Sentiment is mostly bearish and points on UK "out" results of voting.
As you can see from comments above - most recent polls of public opinion have started to show that equilibrium has shifted to "out" supporters. It is difficult to judge right now what polls are closer to reality - those that were 2 weeks ago or most recent one, this is definitely indefinite
.
But what we really could say - situation right now is more blur and nervousness than even 2 weeks earlier.
Technicals
Monthly
Recently market starts to show some signs of weakness, that could become a reason for downward continuation. CFTC data right now looks more bearish. But, as we've said above it still has potential for futher increase and this keeps door open for GBP possible drop.
As market recent time coiling around YPS1 - this barely made any impact on monthly chart. Some upward bounce but its scale insignificant for this time frame. Besides we do not have visible reasons and technical supports in area where this upside bounce has started – no AB-CD extensions, Fib levels, pivots etc. That’s why we treat this move as retracement yet and stand with our previous analysis on downward continuation in long-term perspective. Currently sterling is flirting around YPS1 and 1.40 lows.
Long Term Forecast on GBP rate
Our long term analysis suggests first appearing of new high on 4th wave at ~1.76 level and then starting of last 5th wave down. First condition was accomplished and we’ve got new high, but it was a bit lower – not 1.76 but 1.72. This was and is all time support/resistance area. Now we stand in final part of our journey. According to our 2013 analysis market should reach lows at 1.35 area. Let’s see what additional information we have right now."
Trend is bearish here, GBP is not at oversold. On monthly chart we have two important patterns.
First one is uncompleted yet small AB-CD down. It amazingly agrees with huge AB-CD pattern, that has 0.618 target @ 1.3088 area. Since this is just minor 0.618 extension of huge pattern - sooner or later but market should hit it with high probability.
Second important moment here - GBP already has broken through all important supports - YPP, major 5/8 Fib support, natural supports of some former lows. Now it stands in an area of YPS1, but upside reaction looks mild and its already has dropped back to YPS1.
This leads us to conclusion that all time lows around 1.35 probably will not survive, despite how long they will hold price. Mostly because AB-CD targets stand right below it. If even market will not drop further - it will wash out lows. There is really high probability for this.
Finally, why we've decided to make an update on GBP view - take a look at June candle. It could become a bearish stop grabber and should initiate dropping below 1.39 lows. Yes, June has not closed yet and everything could change very fast on Brexit results, but right now we have a hint on bearish result of Brexit voting as market right now anticipates mostly "out" results.
Thus, monthly chart mostly still shows existing of bearish sentiment. At least nothing crucial has happened here yet that could give a sign of tendency breaking.
Weekly
On weekly chart cable keeps intrique by far. Although it has turned to downward action - the speed of dropping is not fast yet, and theoretically we could treat it as just deeper retracement after upside AB=CD target completion.
Conversely, this downward reversal could become a sign of inability to break through resistance and bearish reversal. We already have talked on reversal candle here. If this is true reversal then first destination point will be around 1.37, second and major one coincides with monthly targets - 1.33 area.
Current action also could take a shape of butterfly. Besides, here we could see that market looks a bit heavy and shows signs of bearish dynamic pressure. As trend has turned bullish - price action mostly stands flat. Action reminds re-testing of previous lows resistance and inability to break through this area.
When you prepare to take a trade by technical analysis you should get either trend on your side or directional pattern. We have monthly bearish trend, thus, to take position we need to get weekly trend on bearish side as well. But we do not have it yet.
Directional pattern overrules trend, but here we do not have any yet. That's why we could suggest bearish continuation here but we do not have real confirmation yet...
Daily
Here the most important thing is market mechanics. Because if we will understand the background of each swing, we could make suggestion on further action.
First we need to go back to our reverse H&S pattern. Market successfully has completed AB=CD target around 1.47 area. As soon as price has formed reversal candle, we said that retracement probably could be 2-leg.
H&S has 2 targets minor one is AB-CD, classical extended is 1.618 around 1.51. Downward action that we have right now is not quite normal retracement... As AB=CD up has been completed, market has turned down to retracement. This is normal. Next swing up is an attempt to continue upside action to next target, but not a small retracement of downward AB- CD. pattern. We could make this suggestion because this was too high swing up, that is not normal to minor BC leg.
That's being said - this swing shows that GBP has failed to break 1.47 area. This is also confimed by following action. Last swing up has become even smaller and it has anticipated downward breakout. In this consolidation you could find different patterns. For example - triangle, right above neckline that was broken down. Also downward butterfly.
Right now market has stopped at Fib support, neckline and daily oversold. Still, taking in consideration the speed of dropping, we think that it should continue. Besides, as we've estimated above - current action mostly reminds action after reversal but not just AB-CD retracement down.
And the last one moment - price has dropped below MPS1. This also indicates that current action hardly is just retracement.
4-hour
So, guys, according to our analysis, in the beginning of the week we should get reacton on daily Oversold only, but not a reversal action, at least if GBP is a bearish market.
To be honest, actually we have DiNapoli bullish "Stretch" pattern on daily chart. That's why we call you to not take shorts until this pattern will work out.
If we are right and GBP indeed has capitulated on way up, it should stop upside retracement somewhere around WPP and 1.4420 K-resistance area. This upside retracement also will be enough to complete daily Stretch pattern.
If our suggestion will be confirmed by retracement depth - we will start to search chances to go short.
Conclusion:
Recent upside action barely impacts long-term perspectives for GBP. Mostly it stands in relation to daily and intraday picture and is tactical. So, we still keep bearish our long-term view. If we will get lucky - we will get monthly bearish grabber that suggests further downward action.
In short-term perspective market mostly anticipates "out" voting on Brexit, as overall picture is mostly bearish. On Mon we will monitor upside retracement depth. If GBP will stop around 1.4420 area - this will confirm our suggestion.
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.
The yen and Swiss franc rose on Friday as oil prices slid and bank shares led global equity markets lower, stoking a fresh wave of bids for low-risk assets.
Jitters about the June 23 referendum on Britain's membership in the European Union intensified the scramble for safe-haven investments, analysts said.
A poll by ORB for The Independent paper published on Friday showed the "Leave" camp had a 10-point lead over "Remain."
"The closer we get to the 'Brexit' vote, the more people will put on cautious positions," said Alan Ruskin, global head of FX strategy at Deutsche Bank in New York.
The Swiss franc reached an eight-week peak against the euro at 1.0845 francs per euro EURCHF=. It was last up 0.5 percent at 1.0850 francs.
The Swissie was flat against the dollar at 0.9632 franc, holding above a five-week high set on Thursday.
Safe-haven demand also supported the yen. It was up 0.4 percent at 106.65 yen against the dollar, ending nearly flat on the week versus the greenback.
The Japanese currency was 0.9 percent higher versus the euro EURJPY= at 120.09 yen after touching 119.88 yen, the lowest since April 2013.
Anxiety about the Brexit knocked sterling to a seven-week low against the dollar at $1.4180.
The dollar index .DXY was last up 0.6 percent at 94.558 for a weekly gain on 0.5 percent.
Traders also ditched emerging-market currencies ahead of the weekend with the South African rand falling 3 percent, as they favored low-risk government bonds, sending yields on Japanese and German 10-year bonds JP10YT=RR DE10YT=RR to record lows.
Falling global bond yields were seen as negative for bank profits, pressuring their shares in stock markets worldwide.
Oil prices LCOc1 CLc1 slipping from 2016 highs added to the selling of stocks.
The MSCI world equity index, which tracks shares in 45 nations, was down 1.6 percent.
Meanwhile, U.S. and Japanese policymakers are expected to produce no surprises at a meetings next week, analysts said.
Following a poor May jobs report, the Federal Reserve is widely expected to leave policy rates unchanged, while a Reuters poll showed the Bank of Japan is set to skip the chance to inject more stimulus to help its economy.
"That will add to the malaise to the yen. There has been some loss of faith in the BOJ," said David Page, senior economist of multi asset client solutions at AXA Investment Managers in London.
Low rates now the problem, not the solution
by Fathom Consulting
Although US labour market productivity in the first quarter of this year was revised up on Tuesday, broader productivity trends remain a concern. Janet Yellen expressed her worries about this in a speech this week and wants politicians to do more to encourage greater spending on investment and education. In our view, the policy mix should shift towards greater fiscal stimulus in the years ahead. That is because we believe that ultra-loose monetary policy is now causing more harm than good. Indeed, our analysis finds that low interest rates may be preventing the ‘gales of creative destruction’ that typically boost an economy’s potential supply in the aftermath of a recession.
Speaking with her three surviving predecessors back in April, Federal Reserve Chair Janet Yellen defended last year’s 25 basis point increase in the federal funds rate, the first for almost a decade. She was adamant that the tightening was warranted, and that no mistake had been made. We agree. And while she praised the “tremendous progress” made by the US economy since the depths of the financial crisis, one important qualification remains: productivity growth is worryingly sluggish.
Although Tuesday’s data contained upward revisions, productivity growth remains very low by historical standards. Indeed, the revised annualised growth rate of productivity within the nonfarm business sector was still negative in Q1, at -0.6% versus the earlier estimate of -1.0%. And this followed a contraction of 1.7% in Q4! Admittedly, Q1 productivity was 0.7% firmer than in Q1 last year, but that rate of growth is a lot lower than the historical average of around 2.0%. We think that this is because interest rates have been too low, for too long.
Alone among those economies that suffered a severe banking crisis through 2008 and into 2009, the US moved swiftly to recapitalise its own deposit-taking institutions. That was progress indeed. It is why US banks are lending again, and it is why, in productivity terms, the US has outperformed more or less every major economy since the Great Recession came to an end. Although in relative terms the US has had a good recovery, in absolute terms it has not. Our second chart shows that US productivity growth tends to move in long cycles of booms and busts. Whether we look over the past five years, or whether we look over the past ten years, US productivity growth is close to as weak as it has ever been.
In the words of Nobel prize-winning economist Paul Krugman “Productivity isn’t everything, but in the long run it is almost everything”. With demographics largely beyond the control of policymakers, it is effectively productivity growth that determines an economy’s sustainable rate of economic growth, and by extension the long-run returns to a broad range of financial assets. Consequently, understanding the causes of historically weak rates of productivity growth across the developed world is of particular importance to investors.
In putting together our latest global forecast, we spent some time trying to account for the variation through time in US productivity growth. Our suspicion was that low rates of productivity growth post-crisis were in some way related to the policy response to that crisis. By cutting interest rates almost to zero, central banks around the developed world were able to stave off a wave of corporate failures. Empirically, peaks and troughs in the US federal funds rate lead peaks and troughs in the US corporate failure rate by two to three years. This is not rocket science. But what if the corporate failure rate in turn affects productivity growth? Our research suggests that it does.
We found that we could explain more than two thirds of the cyclical variation in US productivity growth using just three variables. Specifically, we found that US productivity growth rises with the US corporate failure rate, falls with the level of the real oil price, and rises when output is growing faster than potential. By modelling the relationship between the federal funds rate and the corporate failure rate, we found that the reduction in the federal funds rate from its pre-crisis average of 4¼% almost to zero could have shaved around a percentage point off the rate of growth of US productivity. By keeping a lid on corporate failures, the Federal Reserve, along with many other central banks around the world, may unwittingly have prevented the ‘gales of creative destruction’ that typically boost an economy’s potential supply in the aftermath of a recession.
If we are right, then Chair Yellen and her team might do well to knuckle down and get on with delivering higher interest rates. Following the surprisingly weak non-farm payrolls data for May, which we regard as a ‘blip’, a June tightening is probably off the table. But if, as we suspect, we see a strong non-farm payrolls figure in June then a tightening next month is still on the cards.
COT Data
Guys, the time has come to recall GBP analysis. As we're closer and closer to Brexit voting, we have new inputs as fundamental as technical. Technical analysis we will discuss below, and here we will take a look at recent COT report that shows very bright picture.
Take a look that last week speculative net short postions have increased significantly and reached levels that weren't seen since 2013. At the same time - bearish positions stand not at extreme level and allows price to drop more. It means that Sentiment is mostly bearish and points on UK "out" results of voting.
As you can see from comments above - most recent polls of public opinion have started to show that equilibrium has shifted to "out" supporters. It is difficult to judge right now what polls are closer to reality - those that were 2 weeks ago or most recent one, this is definitely indefinite
. But what we really could say - situation right now is more blur and nervousness than even 2 weeks earlier.
Technicals
Monthly
Recently market starts to show some signs of weakness, that could become a reason for downward continuation. CFTC data right now looks more bearish. But, as we've said above it still has potential for futher increase and this keeps door open for GBP possible drop.
As market recent time coiling around YPS1 - this barely made any impact on monthly chart. Some upward bounce but its scale insignificant for this time frame. Besides we do not have visible reasons and technical supports in area where this upside bounce has started – no AB-CD extensions, Fib levels, pivots etc. That’s why we treat this move as retracement yet and stand with our previous analysis on downward continuation in long-term perspective. Currently sterling is flirting around YPS1 and 1.40 lows.
Long Term Forecast on GBP rate
Our long term analysis suggests first appearing of new high on 4th wave at ~1.76 level and then starting of last 5th wave down. First condition was accomplished and we’ve got new high, but it was a bit lower – not 1.76 but 1.72. This was and is all time support/resistance area. Now we stand in final part of our journey. According to our 2013 analysis market should reach lows at 1.35 area. Let’s see what additional information we have right now."
Trend is bearish here, GBP is not at oversold. On monthly chart we have two important patterns.
First one is uncompleted yet small AB-CD down. It amazingly agrees with huge AB-CD pattern, that has 0.618 target @ 1.3088 area. Since this is just minor 0.618 extension of huge pattern - sooner or later but market should hit it with high probability.
Second important moment here - GBP already has broken through all important supports - YPP, major 5/8 Fib support, natural supports of some former lows. Now it stands in an area of YPS1, but upside reaction looks mild and its already has dropped back to YPS1.
This leads us to conclusion that all time lows around 1.35 probably will not survive, despite how long they will hold price. Mostly because AB-CD targets stand right below it. If even market will not drop further - it will wash out lows. There is really high probability for this.
Finally, why we've decided to make an update on GBP view - take a look at June candle. It could become a bearish stop grabber and should initiate dropping below 1.39 lows. Yes, June has not closed yet and everything could change very fast on Brexit results, but right now we have a hint on bearish result of Brexit voting as market right now anticipates mostly "out" results.
Thus, monthly chart mostly still shows existing of bearish sentiment. At least nothing crucial has happened here yet that could give a sign of tendency breaking.
Weekly
On weekly chart cable keeps intrique by far. Although it has turned to downward action - the speed of dropping is not fast yet, and theoretically we could treat it as just deeper retracement after upside AB=CD target completion.
Conversely, this downward reversal could become a sign of inability to break through resistance and bearish reversal. We already have talked on reversal candle here. If this is true reversal then first destination point will be around 1.37, second and major one coincides with monthly targets - 1.33 area.
Current action also could take a shape of butterfly. Besides, here we could see that market looks a bit heavy and shows signs of bearish dynamic pressure. As trend has turned bullish - price action mostly stands flat. Action reminds re-testing of previous lows resistance and inability to break through this area.
When you prepare to take a trade by technical analysis you should get either trend on your side or directional pattern. We have monthly bearish trend, thus, to take position we need to get weekly trend on bearish side as well. But we do not have it yet.
Directional pattern overrules trend, but here we do not have any yet. That's why we could suggest bearish continuation here but we do not have real confirmation yet...
Daily
Here the most important thing is market mechanics. Because if we will understand the background of each swing, we could make suggestion on further action.
First we need to go back to our reverse H&S pattern. Market successfully has completed AB=CD target around 1.47 area. As soon as price has formed reversal candle, we said that retracement probably could be 2-leg.
H&S has 2 targets minor one is AB-CD, classical extended is 1.618 around 1.51. Downward action that we have right now is not quite normal retracement... As AB=CD up has been completed, market has turned down to retracement. This is normal. Next swing up is an attempt to continue upside action to next target, but not a small retracement of downward AB- CD. pattern. We could make this suggestion because this was too high swing up, that is not normal to minor BC leg.
That's being said - this swing shows that GBP has failed to break 1.47 area. This is also confimed by following action. Last swing up has become even smaller and it has anticipated downward breakout. In this consolidation you could find different patterns. For example - triangle, right above neckline that was broken down. Also downward butterfly.
Right now market has stopped at Fib support, neckline and daily oversold. Still, taking in consideration the speed of dropping, we think that it should continue. Besides, as we've estimated above - current action mostly reminds action after reversal but not just AB-CD retracement down.
And the last one moment - price has dropped below MPS1. This also indicates that current action hardly is just retracement.
4-hour
So, guys, according to our analysis, in the beginning of the week we should get reacton on daily Oversold only, but not a reversal action, at least if GBP is a bearish market.
To be honest, actually we have DiNapoli bullish "Stretch" pattern on daily chart. That's why we call you to not take shorts until this pattern will work out.
If we are right and GBP indeed has capitulated on way up, it should stop upside retracement somewhere around WPP and 1.4420 K-resistance area. This upside retracement also will be enough to complete daily Stretch pattern.
If our suggestion will be confirmed by retracement depth - we will start to search chances to go short.
Conclusion:
Recent upside action barely impacts long-term perspectives for GBP. Mostly it stands in relation to daily and intraday picture and is tactical. So, we still keep bearish our long-term view. If we will get lucky - we will get monthly bearish grabber that suggests further downward action.
In short-term perspective market mostly anticipates "out" voting on Brexit, as overall picture is mostly bearish. On Mon we will monitor upside retracement depth. If GBP will stop around 1.4420 area - this will confirm our suggestion.
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.
