Sive Morten
Special Consultant to the FPA
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It is difficult choice this time guys, as many markets provides interesting setups, while EUR is our major currency pair that we're tracking. At the same time I just can't miss chance to consider CAD setup, as it looks very promising. As situation on EUR stands steady, we dedicate today research to CAD and update EUR later, on the week.
Fundamentals
As Reuters reports - the dollar rose on Friday, hitting 10-week-highs against the yen, as risk appetite improved amid a more upbeat outlook on the euro and the prospect of a trade deal between China and the United States.
"Risk-on sentiment amid a global stock rally worked in favor of the euro and commodity rivals like the loonie, Aussie and kiwi dollars, while rising Treasury yields have pulled the greenback out of its biggest hole in weeks," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.
Friday's slew of weaker-than expected U.S. economic data weighed on the dollar initially, especially the manufacturing index, but the greenback rallied to trade higher on the day.
The dollar was earlier supported by data on Thursday showing U.S. gross domestic product had grown at an annual 2.6 percent rate in the fourth quarter, exceeding forecasts for a 2.3 percent gain. Benchmark 10-year U.S. Treasury yields have risen about 7 basis points this week. The yield surged to 2.731 percent on Thursday, its highest since Feb. 6.
The euro, meanwhile, was little changed against the dollar at $1.1377. It traded flat in London after data showed underlying inflation in the euro zone remained subdued. The euro zone single currency rose earlier after news that a U.S. manufacturing index had fallen in February to its lowest since November 2016 suggested economic momentum has slowed this year.
The Institute for Supply Management's U.S. manufacturing index fell to 54.2 in February from 56.6 the previous month. The prices paid index, a measure of inflation, also fell, to 49.4, the weakest since February 2016.
Other economic data were also soft, with a weaker-than-expected University of Michigan consumer sentiment index for February as well as a drop in both U.S. personal income and spending. These reports underscore expectations for weaker growth momentum in the first quarter.
"All of these things are putting a damper on the dollar. The market was looking for a stronger recovery after the shutdown," said Joe Trevisani, senior analyst, at FXstreet.com in New York.
"They're saying that the shutdown is transitory and wouldn't have that much of an impact. But looking at these numbers, that's not the story they're telling. It's not a big collapse, but it's not as strong as people thought," he added, referring to the 35-day partial U.S. government shutdown that ended Jan. 25.
Earlier data showing a drop in both U.S. personal income and spending had little impact on the dollar. A key inflation gauge in that report showed the headline rate falling to 1.7 percent from 1.8 percent, with core inflation at 1.9 percent in December, just below the Fed's 2 percent target.
The Canadian dollar closed lower against its U.S. counterpart on Friday, after news that Canada's economy grew at a slower-than-forecast pace in the fourth quarter lowered expectations the Bank of Canada would
raise interest rates any time soon.
Canada's gross domestic product grew at an annualized rate of 0.4 percent in the fourth quarter, down from 2.0 percent in the third quarter and slower than the 1.2 percent rate expected by analysts, largely due to lower export prices of crude oil and crude bitumen, Statistics Canada said on Friday.
GDP edged down 0.1 percent in December as a result of reduced output across most goods-producing industries.
"It was softer than expected obviously, with the quarter up 0.4 percent in GDP terms," said Nathan Janzen, senior economist at the Royal Bank of Canada. "It looks like a lot of the weakness can be attributed to softening of the oil patch. If you're the Bank of Canada, it's another reason to hold off on raising interest rates for a while."
The central bank, which is widely expected to leave its benchmark interest rate on hold next week at 1.75 percent, said in January that low oil prices harmed the economy in the fourth quarter of 2018 and will continue to do so in the first quarter of this year.
Canada's current account deficit widened to C$15.48 billion in the fourth quarter from a revised C$10.11 billion deficit in the third quarter as a sharp drop in energy prices triggered a higher deficit on trade goods, data from Statistics Canada showed.
Separate data from Statistics Canada showed that producer prices fell by 0.3 percent in January from December on lower prices for energy and petroleum products. Analysts had expected a 0.1 percent increase in industrial prices.
COT Report
Speculators raised their bullish bets on the U.S. dollar in the week to Feb. 19 to the largest position in four weeks, according to calculations by Reuters and Commodity Futures Trading Commission data released on Friday.
The value of the dollar’s net long position, derived from net positions of International Monetary Market speculators in the yen, euro, British pound, Swiss franc and Canadian and Australian dollars, was $23.81 billion.
That compares with a net long position of $22.15 billion the previous week.
Speaking on CAD, net short position has decreased this week from "-42K" to "-36.4K" contracts, due good performance of crude oil within few weeks and because of extreme levels of net short position of CAD. So it could be explained as technical reversal as well.
As market has shown pullback, now short position again has room to expand. Taking in consideration fundamental background this could happen within few weeks.
Source: cftc.gov
Charting by Investing.com
So overall sentiment and fundamental background suggests moderate weakness in CAD within few weeks, at least it doesn't contradict to technical setup that we have.
Last time we've talked about CAD month ago (4th of February) and found attractive setup. Although it is based mostly on technical moments, not on big shifts in fundamental background, but these moments stand on monthly and weekly charts which is promised to be solid action on daily time frame.
Technicals
Monthly
Recall that our discussion has started with strong bearish engulfing pattern by the close of January candle. Pattern stands at major 5/8 resistance. January black candle has closed below the lows of December, which could be treated as Reversal month as well. On a way down market also has tested YPP.
Strong support here stands at 1.2706 as YPS1 and 1.22-1.25 K-area.
For the monthly chart, this is tactical setup, because it doesn't suggest too extended targets, as they should stand somewhere inside recent upside swing. But... this is for monthly time frame. For daily one this could be long-term direction which makes trading process easier.
As usual, first step that we're waiting for is minor pullback inside the body of engulfing pattern. This pullback is very important for us, as it should provide entry point. Also it is not forbidden to trade it long on daily chart. Second step of trading plan - downside extension.
Now, as month has passed we see that first stage stands under way.
Weekly
Downside reversal point also was an XOP final upside target. Reversal has a shape of perfect Evening star pattern. According to our previous analysis, upside pullback should have good chances to start right from K-support as it also coincides with YPP.
And this indeed has happened. Now on weekly chart we're waiting for AB-CD upside action of different length - 1-1.618. Most probable though 1-1.272, I suppose. This should give us "222" Sell pattern that becomes the major background of 2nd stage of our trading plan - short trade.
On daily and intraday charts we focus on 1st stage - upside action.
Daily
Here you can see our butterfly that was formed month ago and this was a part of background of coming upside action. Now butterfly has become a part of H&S pattern. Upside action was fast on Friday, so chances are not bad that we get a continuation.
As butterfly is skewed a bit down, we consider just two extensions - OP and 1.27 XOP but not 1.618 one. Both stand around major 5/8 Fib resistance level, which makes this area our potential level for short entry.
Now market stands at 3/8 Fib resistance which suggests some retracement in the beginning of the week.
Intraday
On 1H chart we have pretty nice thrust. As market pretends on upside breakout, at least theoretically, pullback should not be too significant. 1.3240 Fib support looks like suitable level for this purpose. It also coincides with WPP.
If retracement will be gradual, especially if it takes AB=CD shape and we'll get "222" Buy pattern here - it could be used for long trade as well.
Conclusion:
Canadian dollar provides very interesting setup now. Since setup is forming on monthly chart - it could provide weeks and weeks of clear direction for trading on daily time frame.
Next week we expect continuation of upside action on daily chart which should provide as better and safer area for taking short position and, chance to make long trade as well.
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
As Reuters reports - the dollar rose on Friday, hitting 10-week-highs against the yen, as risk appetite improved amid a more upbeat outlook on the euro and the prospect of a trade deal between China and the United States.
"Risk-on sentiment amid a global stock rally worked in favor of the euro and commodity rivals like the loonie, Aussie and kiwi dollars, while rising Treasury yields have pulled the greenback out of its biggest hole in weeks," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.
Friday's slew of weaker-than expected U.S. economic data weighed on the dollar initially, especially the manufacturing index, but the greenback rallied to trade higher on the day.
The dollar was earlier supported by data on Thursday showing U.S. gross domestic product had grown at an annual 2.6 percent rate in the fourth quarter, exceeding forecasts for a 2.3 percent gain. Benchmark 10-year U.S. Treasury yields have risen about 7 basis points this week. The yield surged to 2.731 percent on Thursday, its highest since Feb. 6.
The euro, meanwhile, was little changed against the dollar at $1.1377. It traded flat in London after data showed underlying inflation in the euro zone remained subdued. The euro zone single currency rose earlier after news that a U.S. manufacturing index had fallen in February to its lowest since November 2016 suggested economic momentum has slowed this year.
The Institute for Supply Management's U.S. manufacturing index fell to 54.2 in February from 56.6 the previous month. The prices paid index, a measure of inflation, also fell, to 49.4, the weakest since February 2016.
Other economic data were also soft, with a weaker-than-expected University of Michigan consumer sentiment index for February as well as a drop in both U.S. personal income and spending. These reports underscore expectations for weaker growth momentum in the first quarter.
"All of these things are putting a damper on the dollar. The market was looking for a stronger recovery after the shutdown," said Joe Trevisani, senior analyst, at FXstreet.com in New York.
"They're saying that the shutdown is transitory and wouldn't have that much of an impact. But looking at these numbers, that's not the story they're telling. It's not a big collapse, but it's not as strong as people thought," he added, referring to the 35-day partial U.S. government shutdown that ended Jan. 25.
Earlier data showing a drop in both U.S. personal income and spending had little impact on the dollar. A key inflation gauge in that report showed the headline rate falling to 1.7 percent from 1.8 percent, with core inflation at 1.9 percent in December, just below the Fed's 2 percent target.
The Canadian dollar closed lower against its U.S. counterpart on Friday, after news that Canada's economy grew at a slower-than-forecast pace in the fourth quarter lowered expectations the Bank of Canada would
raise interest rates any time soon.
Canada's gross domestic product grew at an annualized rate of 0.4 percent in the fourth quarter, down from 2.0 percent in the third quarter and slower than the 1.2 percent rate expected by analysts, largely due to lower export prices of crude oil and crude bitumen, Statistics Canada said on Friday.
GDP edged down 0.1 percent in December as a result of reduced output across most goods-producing industries.
"It was softer than expected obviously, with the quarter up 0.4 percent in GDP terms," said Nathan Janzen, senior economist at the Royal Bank of Canada. "It looks like a lot of the weakness can be attributed to softening of the oil patch. If you're the Bank of Canada, it's another reason to hold off on raising interest rates for a while."
The central bank, which is widely expected to leave its benchmark interest rate on hold next week at 1.75 percent, said in January that low oil prices harmed the economy in the fourth quarter of 2018 and will continue to do so in the first quarter of this year.
Canada's current account deficit widened to C$15.48 billion in the fourth quarter from a revised C$10.11 billion deficit in the third quarter as a sharp drop in energy prices triggered a higher deficit on trade goods, data from Statistics Canada showed.
Separate data from Statistics Canada showed that producer prices fell by 0.3 percent in January from December on lower prices for energy and petroleum products. Analysts had expected a 0.1 percent increase in industrial prices.
COT Report
Speculators raised their bullish bets on the U.S. dollar in the week to Feb. 19 to the largest position in four weeks, according to calculations by Reuters and Commodity Futures Trading Commission data released on Friday.
The value of the dollar’s net long position, derived from net positions of International Monetary Market speculators in the yen, euro, British pound, Swiss franc and Canadian and Australian dollars, was $23.81 billion.
That compares with a net long position of $22.15 billion the previous week.
Speaking on CAD, net short position has decreased this week from "-42K" to "-36.4K" contracts, due good performance of crude oil within few weeks and because of extreme levels of net short position of CAD. So it could be explained as technical reversal as well.
As market has shown pullback, now short position again has room to expand. Taking in consideration fundamental background this could happen within few weeks.
Source: cftc.gov
Charting by Investing.com
So overall sentiment and fundamental background suggests moderate weakness in CAD within few weeks, at least it doesn't contradict to technical setup that we have.
Last time we've talked about CAD month ago (4th of February) and found attractive setup. Although it is based mostly on technical moments, not on big shifts in fundamental background, but these moments stand on monthly and weekly charts which is promised to be solid action on daily time frame.
Technicals
Monthly
Recall that our discussion has started with strong bearish engulfing pattern by the close of January candle. Pattern stands at major 5/8 resistance. January black candle has closed below the lows of December, which could be treated as Reversal month as well. On a way down market also has tested YPP.
Strong support here stands at 1.2706 as YPS1 and 1.22-1.25 K-area.
For the monthly chart, this is tactical setup, because it doesn't suggest too extended targets, as they should stand somewhere inside recent upside swing. But... this is for monthly time frame. For daily one this could be long-term direction which makes trading process easier.
As usual, first step that we're waiting for is minor pullback inside the body of engulfing pattern. This pullback is very important for us, as it should provide entry point. Also it is not forbidden to trade it long on daily chart. Second step of trading plan - downside extension.
Now, as month has passed we see that first stage stands under way.
Weekly
Downside reversal point also was an XOP final upside target. Reversal has a shape of perfect Evening star pattern. According to our previous analysis, upside pullback should have good chances to start right from K-support as it also coincides with YPP.
And this indeed has happened. Now on weekly chart we're waiting for AB-CD upside action of different length - 1-1.618. Most probable though 1-1.272, I suppose. This should give us "222" Sell pattern that becomes the major background of 2nd stage of our trading plan - short trade.
On daily and intraday charts we focus on 1st stage - upside action.
Daily
Here you can see our butterfly that was formed month ago and this was a part of background of coming upside action. Now butterfly has become a part of H&S pattern. Upside action was fast on Friday, so chances are not bad that we get a continuation.
As butterfly is skewed a bit down, we consider just two extensions - OP and 1.27 XOP but not 1.618 one. Both stand around major 5/8 Fib resistance level, which makes this area our potential level for short entry.
Now market stands at 3/8 Fib resistance which suggests some retracement in the beginning of the week.
Intraday
On 1H chart we have pretty nice thrust. As market pretends on upside breakout, at least theoretically, pullback should not be too significant. 1.3240 Fib support looks like suitable level for this purpose. It also coincides with WPP.
If retracement will be gradual, especially if it takes AB=CD shape and we'll get "222" Buy pattern here - it could be used for long trade as well.
Conclusion:
Canadian dollar provides very interesting setup now. Since setup is forming on monthly chart - it could provide weeks and weeks of clear direction for trading on daily time frame.
Next week we expect continuation of upside action on daily chart which should provide as better and safer area for taking short position and, chance to make long trade as well.
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.