Sive Morten
Special Consultant to the FPA
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- 18,644
Fundamentals
This was tough week for all markets, especially to stocks. DAX 30, DJIA, S&P has drop for the same distance within just single week that they have passed within 12-15 weeks in 2018 retracement. Investors massively close position in stocks and this have made impact on currency market as well, because big values of carry trades were closed out and demand for different currencies to close short-term loans were really high. JPY has got rehabilitation in investors' eyes as demand for it jumped again on weaker USD. Now the major rumor on the market is Fed probably will cut the rate again. This was the major reason of sharp reversal on Dollar Index and EUR.
The U.S. dollar slid to a seven-week low against the Japanese yen on Friday after Federal Reserve Chair Jerome Powell suggested the central bank could cut interest rates in the wake of the coronavirus. Powell on Friday said the central bank will “act as appropriate” to support the economy in the face of risks posed by the coronavirus outbreak, though he said the economy remained in solid condition.
Some investors suggested the Fed could even cut rates sooner.
“It’s likely that markets will force the Fed to cut even before the March 18 meeting, and the question is, will that matter? Will that be enough to settle down markets in the near term?” said Bill Zox, chief investment officer for fixed income, at Diamond Hill Capital.
The yield on the two-year Treasury note, which moves with expectations of changes in rate policy, has fallen by about 32.5% this week.
The rapid spread of the coronavirus increased fears of a pandemic, with six countries reporting their first cases and the World Health Organization (WHO) raising its global spread and impact risk alert to “very high”.
“The yen is significantly stronger from where it was even last week, when I was hearing people saying that the yen wasn’t a safe-haven anymore. We’re now back to appropriate levels,” said Mark McCormick, global head of foreign exchange strategy at TD Securities.
McCormick said one additional factor supporting the yen could be the fact that Japan’s public pension funds have been rebalancing assets.
“I think it’s pretty clear that the (Japanese Government Pension Investment Fund) is trading ahead of the announcements of their weights, which if you think about what they’ve done over the past five years, they’ve created an allocation that leans much more towards global equities, global credit, global fixed income - which in this environment would see dollar-yen rally as they’re pushing some of their flows outside of Japan.”
Indeed, guys, let's take a look on rate change probabilities based on Fed Fund Futures quotes. They suggest 94% rate cut in March 18 meeting, and 73% rate cut in April 29. Thus, within two months market expect rate cut for 0.5% to 0.75-1.0% range. That adds more fuel to the fire and increased closing of USD carry trades.
Source: cmegroup.com
The pound fell on Thursday, hitting a more than five-week low versus the euro, as Britain confirmed a hardline stance on trade talks with the EU and disappointment grew that the new finance minister may not increase spending as much as expected.
Britain said on Thursday it wanted binding obligations on access to the European Union’s financial market. London, Europe’s biggest financial centre, risks being locked out of its biggest market for services such as banking, insurance and asset management if it loses access to the EU in January.
But senior minister Michael Gove told parliament on Thursday the UK would not “trade away its sovereignty” in pursuit of a trade deal with the EU.
“The pound has reversed early gains as the government firmly places the prospect of no-deal back on the table in order to strong-arm the EU’s dynamic alignment to bend to their will,” said Simon Harvey, a forex analyst at broker Monex Europe. “The resumption of trade uncertainty comes just as business optimism starts to improve, suggesting the Brexit headwind to the economy may not have abated quite just yet and hence the need for heightened fiscal stimulus,” Harvey said.
But the new fiance minister, Rishi Sunak, has been told by Treasury officials he cannot simultaneously raise public spending as fast as Prime Minister Boris Johnson wants, keep taxes down and adhere to new Treasury rules that allow borrowing only for capital investment, the Financial Times reported.
Consequently, Sunak could postpone loosening fiscal policy, which has put pressure on the pound. The possibility of more spending was the main reason the pound strengthened in recent weeks, despite concern that Britain may not agree a trade deal with the EU by the end of this year.
Market gauges for implied volatility in sterling in all tenures from one-month to one-year options contracts all rose close to their highest levels this year.
Money markets have started to price in a higher chance the Bank of England will cut interest rates to boost the economy if data worsen and Sunak does not stimulate growth through higher fiscal spending. A 25-basis-point cut to the current 0.75% rate is priced in by August this year.
“No big fiscal push means that if there’s a slump, the burden of reviving the economy will fall on monetary policy,” said Marshall Gittler, an analyst at broker BDSwiss Group.
Right now market shows 63% of rate cut by BoE on March 26, according to CME BoE watch tool. As last time as this time that should be good background for trading as there is no evidence on rate change till the last moment. This again could provide excellent background for trading:
CFTC data
Speculators’ net long U.S. dollar positioning climbed in the latest week, matching levels seen during the week of Dec. 3, according to calculations by Reuters and U.S. Commodity Futures Trading Commission data released on Friday. The value of the net long dollar position was $21.21 billion in the week ended Feb. 25, compared with $14.78 billion the previous week. The Dec. 3 level for net long U.S. dollars was the highest since late June.
At the same time, this data doesn't include yet big sell-off of this week and it is correct to take a look on data next week. Still, EUR data shows bearish performance. Despite outstanding rally net short position has increased rapidly from 91K to 114K contracts.
Source: cftc.gov
Charting by Investing.com
The Commodity Futures Trading Commission (CFTC) said it is closely monitoring trading as pandemic fears pummel markets, sinking global equities, pushing oil futures to their lowest in a year and roiling wheat and corn markets.
As there are a lot of talks on real impact of virus panic on global merchant - Fathom Consulting shows very representative answer:
The Baltic Dry Index (BDI) gauges the volume of shipping activities across the globe. As a daily index, it is a useful, timely indicator to assess global economic activity.
Throughout the month of January, the BDI tumbled by over 55%, hitting its trough on 11 February 2020. The index was last lower in 2015–16, when according to Fathom’s measure of underlying economic activity China’s economy was also slowing sharply. This latest downturn, which is on the back of a normalisation following the sharp uptick in global sentiment over the first half of 2019, shows the impact of the COVID-19 outbreak, which has caused delays to supply chains across the world. In an attempt to control the spread of the virus, many workers in China, have remained away from factories, and controls on borders have made trade more difficult. This has disrupted the global supply chain, resulting in fewer parts being shipped across the world. Even the larger corporate global players, such as Apple who issued a profits warning this month, have been affected by the distruption to the supply chain. Despite this, as factories have started to reopen, we have seen a slight uptick in the index in the past week, suggesting an increase in shipping activity.
So, what we intend to watch on next week and in March, in general:
First is two rates decisions - by Fed first (18th of March) and by BoE second (26th of March). Next week multiple PMI data will be published - Germany, EU, UK and US. It should shed some lights on perspective of rate change. On Friday, as usual - NFP report.
I have concern on EU economy. Yes, now on a background of coming 2-steps rate cut by Fed EUR could show tactical appreciation, but the question is - for how long?
If even US will get 1% rate, this is anyway will be greater than ECB rate. Besides, US as economically as territorial has better resistance to virus consequences. EUR growth could be accepted only on suggestion that EU economy stands constant, but is it really so?
As the virus grips markets and recession risks flash amber, the focus turns to damage limitation plans. So any signals from powerhouse Germany that it is willing to suspend its debt brake - a strict rule on the amount of debt it can raise - and increase spending will be watched closely.
Europe’s biggest economy has long resisted calls to take advantage of record-low borrowing costs to support an economy close to recession. Chancellor Angela Merkel’s conservatives said on Thursday they won’t support a proposal by center-left Finance Minister Olaf Scholz to ease the debt limit and help indebted municipalities to hike spending.
But now Germany faces pressure to do more, especially given the European Central Bank is near the limits of what it can achieve.
With money markets pricing in an ECB rate cut as early as June, German savers’ exasperation over negative rates will grow. They, of course, could well join the clamor for more German spending - one thing economists say may help stem the tide of negative rates.
All this stuff makes me think that it is a bit early to congratulatory relation to recent EU jump that could become (and I'm sure it is) just a technical reflection of big money flows of carry trades closing. Recent CFTC data indirectly confirms this suggestion. That's being said - on EUR market could climb more within 1-2 weeks probably, but after that reality should on the market.
On a disguise of virus panic many important events also stand behind the scene:
The race for the Democratic U.S. presidential nomination heats up in the days to come and the results could divert some attention from the spread of the coronavirus. South Carolina’s primary election provides the appetizer on Saturday before 14 states go to the polls on Super Tuesday - the largest single-day delegate haul in the nomination fight.
Investors will be looking to see whether progressive Senator Bernie Sanders consolidates his lead or if moderates such as former Vice President Joe Biden or former New York Mayor Michael Bloomberg can make inroads. While investors have been more consumed by the coronavirus developments, election-related headlines have jostled some parts of the market.
So, as a bottom line - I dare to suggest that EUR outstanding performance has temporal background and mostly is technical rather than fundamental. So we keep long-term bearish view on EUR by far and expect exhausting of this rally within few weeks, or even faster if EU PMI data will accelerate this process. Positive US data, in turn, could make investors cut appetites for Fed rate decreasing and change short-term EUR/USD balance as well.
It is all clear about what Fed could do, but the question stands open on what ECB could answer, especially if data will become constantly worsen.
Technicals
Monthly
As we've mentioned in daily video update, recent V-shape reversal on daily chart and strong rally makes impact on longer time frames as well. Although we suspect that it might be short-term performance, technically market forms patterns that we can't ignore and take them in consideration.
Despite major bearish tendency stands intact and to break it EUR has to climb at least above 1.1220, we have few bullish moments that could lead to some upside continuation.
First is, price holds above YPS1 in February. It means that theory on new long-term bearish swing has not been confirmed yet. Second, we've got bullish grabber pattern and its minimum target stands above 1.1220 high, which is also YPP. This gives us approximate minimal target of upside continuation. Finally, February action could be treated as W&R, if market will not return back below 1.08 lows soon.
All these stuff could be just reflection of technical USD sell-off, which could finish as fast as it has started. But, if you do not want to consider bullish trades by this reason, it would be better still to avoid short entry, at least until these patterns are valid.
Weekly
Here we could suggest two scenarios that are not mutually exclusives. First is short-term, and it is based on solid "Morning star" reversal pattern, right at major weekly OP target. It suggests upside AB=CD shape action on daily chart.
Second one is more extended. If market climbs to 1.1250 area we could consider reverse 1.27 H&S pattern. Still for the truth sake, to get H&S on weekly chart there probably should be some real positives shifts in EU economy, or negative signs in US economy, dovish Fed comments etc. In two words speaking, H&S pattern suggests appearing some friendly fundamental background. This pattern is more extended and can't be formed just "technically", compares to candlestick pattern.
Daily
On coming week we focus on first one, short-term scenario. Market is strongly overbought on daily chart, and price stands at daily K-resistance level. This is potential situation for the pullback, which we, in turn, could consider for long entry.
Intraday
Here is the trading plan that we intend to follow. On 4H chart we have AB-CD pattern. CD leg shows clear acceleration, but XOP target has not been hit yet. It creates an Agreement resistance with daily K-resistance area.
Two side-by-side grabbers suggest that before downside reaction - XOP should be reached. Although price action doesn't match to DRPO "Sell" conditions, but, by its nature it is close to DRPO market mechanics.
Once XOP will be reached, we expect downside retracement to one of support level. Our primary attention stands on 1.0935-1.0956 K-support, but we also do not exclude deeper retracement to major 5/8 level as previous bearish momentum could push EUR to 1.0880 area. We could estimate it with more precision as soon as downside action will start.
Conclusion:
Next week we intend to follow short-term upside momentum on EUR, but in longer-term perspective we have doubts on duration of recent rally as we see mostly technical background of sharp V-shape reversal on EUR. If market downs US economy perspective and expects Fed dovish reaction - what consequences of global crisis will be for EU? That should become clear in few weeks when euphoria and panic around USD sell-off calms down a bit.
This was tough week for all markets, especially to stocks. DAX 30, DJIA, S&P has drop for the same distance within just single week that they have passed within 12-15 weeks in 2018 retracement. Investors massively close position in stocks and this have made impact on currency market as well, because big values of carry trades were closed out and demand for different currencies to close short-term loans were really high. JPY has got rehabilitation in investors' eyes as demand for it jumped again on weaker USD. Now the major rumor on the market is Fed probably will cut the rate again. This was the major reason of sharp reversal on Dollar Index and EUR.
The U.S. dollar slid to a seven-week low against the Japanese yen on Friday after Federal Reserve Chair Jerome Powell suggested the central bank could cut interest rates in the wake of the coronavirus. Powell on Friday said the central bank will “act as appropriate” to support the economy in the face of risks posed by the coronavirus outbreak, though he said the economy remained in solid condition.
Some investors suggested the Fed could even cut rates sooner.
“It’s likely that markets will force the Fed to cut even before the March 18 meeting, and the question is, will that matter? Will that be enough to settle down markets in the near term?” said Bill Zox, chief investment officer for fixed income, at Diamond Hill Capital.
The yield on the two-year Treasury note, which moves with expectations of changes in rate policy, has fallen by about 32.5% this week.
The rapid spread of the coronavirus increased fears of a pandemic, with six countries reporting their first cases and the World Health Organization (WHO) raising its global spread and impact risk alert to “very high”.
“The yen is significantly stronger from where it was even last week, when I was hearing people saying that the yen wasn’t a safe-haven anymore. We’re now back to appropriate levels,” said Mark McCormick, global head of foreign exchange strategy at TD Securities.
McCormick said one additional factor supporting the yen could be the fact that Japan’s public pension funds have been rebalancing assets.
“I think it’s pretty clear that the (Japanese Government Pension Investment Fund) is trading ahead of the announcements of their weights, which if you think about what they’ve done over the past five years, they’ve created an allocation that leans much more towards global equities, global credit, global fixed income - which in this environment would see dollar-yen rally as they’re pushing some of their flows outside of Japan.”
Indeed, guys, let's take a look on rate change probabilities based on Fed Fund Futures quotes. They suggest 94% rate cut in March 18 meeting, and 73% rate cut in April 29. Thus, within two months market expect rate cut for 0.5% to 0.75-1.0% range. That adds more fuel to the fire and increased closing of USD carry trades.
Source: cmegroup.com
The pound fell on Thursday, hitting a more than five-week low versus the euro, as Britain confirmed a hardline stance on trade talks with the EU and disappointment grew that the new finance minister may not increase spending as much as expected.
Britain said on Thursday it wanted binding obligations on access to the European Union’s financial market. London, Europe’s biggest financial centre, risks being locked out of its biggest market for services such as banking, insurance and asset management if it loses access to the EU in January.
But senior minister Michael Gove told parliament on Thursday the UK would not “trade away its sovereignty” in pursuit of a trade deal with the EU.
“The pound has reversed early gains as the government firmly places the prospect of no-deal back on the table in order to strong-arm the EU’s dynamic alignment to bend to their will,” said Simon Harvey, a forex analyst at broker Monex Europe. “The resumption of trade uncertainty comes just as business optimism starts to improve, suggesting the Brexit headwind to the economy may not have abated quite just yet and hence the need for heightened fiscal stimulus,” Harvey said.
But the new fiance minister, Rishi Sunak, has been told by Treasury officials he cannot simultaneously raise public spending as fast as Prime Minister Boris Johnson wants, keep taxes down and adhere to new Treasury rules that allow borrowing only for capital investment, the Financial Times reported.
Consequently, Sunak could postpone loosening fiscal policy, which has put pressure on the pound. The possibility of more spending was the main reason the pound strengthened in recent weeks, despite concern that Britain may not agree a trade deal with the EU by the end of this year.
Market gauges for implied volatility in sterling in all tenures from one-month to one-year options contracts all rose close to their highest levels this year.
Money markets have started to price in a higher chance the Bank of England will cut interest rates to boost the economy if data worsen and Sunak does not stimulate growth through higher fiscal spending. A 25-basis-point cut to the current 0.75% rate is priced in by August this year.
“No big fiscal push means that if there’s a slump, the burden of reviving the economy will fall on monetary policy,” said Marshall Gittler, an analyst at broker BDSwiss Group.
Right now market shows 63% of rate cut by BoE on March 26, according to CME BoE watch tool. As last time as this time that should be good background for trading as there is no evidence on rate change till the last moment. This again could provide excellent background for trading:
CFTC data
Speculators’ net long U.S. dollar positioning climbed in the latest week, matching levels seen during the week of Dec. 3, according to calculations by Reuters and U.S. Commodity Futures Trading Commission data released on Friday. The value of the net long dollar position was $21.21 billion in the week ended Feb. 25, compared with $14.78 billion the previous week. The Dec. 3 level for net long U.S. dollars was the highest since late June.
At the same time, this data doesn't include yet big sell-off of this week and it is correct to take a look on data next week. Still, EUR data shows bearish performance. Despite outstanding rally net short position has increased rapidly from 91K to 114K contracts.
Source: cftc.gov
Charting by Investing.com
The Commodity Futures Trading Commission (CFTC) said it is closely monitoring trading as pandemic fears pummel markets, sinking global equities, pushing oil futures to their lowest in a year and roiling wheat and corn markets.
As there are a lot of talks on real impact of virus panic on global merchant - Fathom Consulting shows very representative answer:
The Baltic Dry Index (BDI) gauges the volume of shipping activities across the globe. As a daily index, it is a useful, timely indicator to assess global economic activity.
Throughout the month of January, the BDI tumbled by over 55%, hitting its trough on 11 February 2020. The index was last lower in 2015–16, when according to Fathom’s measure of underlying economic activity China’s economy was also slowing sharply. This latest downturn, which is on the back of a normalisation following the sharp uptick in global sentiment over the first half of 2019, shows the impact of the COVID-19 outbreak, which has caused delays to supply chains across the world. In an attempt to control the spread of the virus, many workers in China, have remained away from factories, and controls on borders have made trade more difficult. This has disrupted the global supply chain, resulting in fewer parts being shipped across the world. Even the larger corporate global players, such as Apple who issued a profits warning this month, have been affected by the distruption to the supply chain. Despite this, as factories have started to reopen, we have seen a slight uptick in the index in the past week, suggesting an increase in shipping activity.
So, what we intend to watch on next week and in March, in general:
First is two rates decisions - by Fed first (18th of March) and by BoE second (26th of March). Next week multiple PMI data will be published - Germany, EU, UK and US. It should shed some lights on perspective of rate change. On Friday, as usual - NFP report.
I have concern on EU economy. Yes, now on a background of coming 2-steps rate cut by Fed EUR could show tactical appreciation, but the question is - for how long?
If even US will get 1% rate, this is anyway will be greater than ECB rate. Besides, US as economically as territorial has better resistance to virus consequences. EUR growth could be accepted only on suggestion that EU economy stands constant, but is it really so?
As the virus grips markets and recession risks flash amber, the focus turns to damage limitation plans. So any signals from powerhouse Germany that it is willing to suspend its debt brake - a strict rule on the amount of debt it can raise - and increase spending will be watched closely.
Europe’s biggest economy has long resisted calls to take advantage of record-low borrowing costs to support an economy close to recession. Chancellor Angela Merkel’s conservatives said on Thursday they won’t support a proposal by center-left Finance Minister Olaf Scholz to ease the debt limit and help indebted municipalities to hike spending.
But now Germany faces pressure to do more, especially given the European Central Bank is near the limits of what it can achieve.
With money markets pricing in an ECB rate cut as early as June, German savers’ exasperation over negative rates will grow. They, of course, could well join the clamor for more German spending - one thing economists say may help stem the tide of negative rates.
All this stuff makes me think that it is a bit early to congratulatory relation to recent EU jump that could become (and I'm sure it is) just a technical reflection of big money flows of carry trades closing. Recent CFTC data indirectly confirms this suggestion. That's being said - on EUR market could climb more within 1-2 weeks probably, but after that reality should on the market.
On a disguise of virus panic many important events also stand behind the scene:
The race for the Democratic U.S. presidential nomination heats up in the days to come and the results could divert some attention from the spread of the coronavirus. South Carolina’s primary election provides the appetizer on Saturday before 14 states go to the polls on Super Tuesday - the largest single-day delegate haul in the nomination fight.
Investors will be looking to see whether progressive Senator Bernie Sanders consolidates his lead or if moderates such as former Vice President Joe Biden or former New York Mayor Michael Bloomberg can make inroads. While investors have been more consumed by the coronavirus developments, election-related headlines have jostled some parts of the market.
So, as a bottom line - I dare to suggest that EUR outstanding performance has temporal background and mostly is technical rather than fundamental. So we keep long-term bearish view on EUR by far and expect exhausting of this rally within few weeks, or even faster if EU PMI data will accelerate this process. Positive US data, in turn, could make investors cut appetites for Fed rate decreasing and change short-term EUR/USD balance as well.
It is all clear about what Fed could do, but the question stands open on what ECB could answer, especially if data will become constantly worsen.
Technicals
Monthly
As we've mentioned in daily video update, recent V-shape reversal on daily chart and strong rally makes impact on longer time frames as well. Although we suspect that it might be short-term performance, technically market forms patterns that we can't ignore and take them in consideration.
Despite major bearish tendency stands intact and to break it EUR has to climb at least above 1.1220, we have few bullish moments that could lead to some upside continuation.
First is, price holds above YPS1 in February. It means that theory on new long-term bearish swing has not been confirmed yet. Second, we've got bullish grabber pattern and its minimum target stands above 1.1220 high, which is also YPP. This gives us approximate minimal target of upside continuation. Finally, February action could be treated as W&R, if market will not return back below 1.08 lows soon.
All these stuff could be just reflection of technical USD sell-off, which could finish as fast as it has started. But, if you do not want to consider bullish trades by this reason, it would be better still to avoid short entry, at least until these patterns are valid.
Weekly
Here we could suggest two scenarios that are not mutually exclusives. First is short-term, and it is based on solid "Morning star" reversal pattern, right at major weekly OP target. It suggests upside AB=CD shape action on daily chart.
Second one is more extended. If market climbs to 1.1250 area we could consider reverse 1.27 H&S pattern. Still for the truth sake, to get H&S on weekly chart there probably should be some real positives shifts in EU economy, or negative signs in US economy, dovish Fed comments etc. In two words speaking, H&S pattern suggests appearing some friendly fundamental background. This pattern is more extended and can't be formed just "technically", compares to candlestick pattern.
Daily
On coming week we focus on first one, short-term scenario. Market is strongly overbought on daily chart, and price stands at daily K-resistance level. This is potential situation for the pullback, which we, in turn, could consider for long entry.
Intraday
Here is the trading plan that we intend to follow. On 4H chart we have AB-CD pattern. CD leg shows clear acceleration, but XOP target has not been hit yet. It creates an Agreement resistance with daily K-resistance area.
Two side-by-side grabbers suggest that before downside reaction - XOP should be reached. Although price action doesn't match to DRPO "Sell" conditions, but, by its nature it is close to DRPO market mechanics.
Once XOP will be reached, we expect downside retracement to one of support level. Our primary attention stands on 1.0935-1.0956 K-support, but we also do not exclude deeper retracement to major 5/8 level as previous bearish momentum could push EUR to 1.0880 area. We could estimate it with more precision as soon as downside action will start.
Conclusion:
Next week we intend to follow short-term upside momentum on EUR, but in longer-term perspective we have doubts on duration of recent rally as we see mostly technical background of sharp V-shape reversal on EUR. If market downs US economy perspective and expects Fed dovish reaction - what consequences of global crisis will be for EU? That should become clear in few weeks when euphoria and panic around USD sell-off calms down a bit.
