Sive Morten
Special Consultant to the FPA
- Messages
- 18,659
Fundamentals
This week mostly was ordinary, we've got ECB meeting, some statistics. As we've said earlier - it is nothing to expect from ECB right now as their position stands anemic and they are trapped on a dead way. Inflation stands low, no necessity to rise rates, it is impossible to cut rates more - all these things were obvious. The only hope was for some stimulus but Brussels Bureaucrats are too greed and slow on decision making. So, the chance mostly was hypothetical as well. And we've got corresponding result - no reaction on ECB meeting at all.
Market overview
The dollar edged lower on Wednesday following a tame U.S. inflation report and a tepid auction of benchmark 10-year Treasury notes. U.S. consumer prices posted their biggest annual gain in a year, though underlying inflation remained tepid amid sluggish demand for services like airline travel, the data showed. The move was largely in line with economists’ expectations, though core inflation rose 0.1% versus market forecasts for a 0.2% rise.
U.S. Treasury yields slid following the data, as market participants had hoped for a more upbeat outlook on consumer prices. The dollar index has closely tracked a surge in Treasury yields this year, both because higher yields increase the currency’s appeal and as the bond rout shook investor confidence, spurring demand for safe-haven assets.
“The drive of the dollar’s movement since the beginning of the year has been U.S. interest rates, and I just don’t see that scenario changing,” said Joseph Trevisani, senior analyst at FXSTREET.COM.
Bond yields fell and prices rose after an auction of 10-year Treasury notes showed tepid demand with lower than average bid-to-cover ratio. Treasury auctions have been closely watched after poor demand for an auction of 7-year notes two weeks ago sparked a sell-off in government bonds.
“Bonds are getting stronger, which means the dollar relatively speaking, may be less attractive,” said Axel Merk, president and portfolio manager at Merk Hard Currency Fund in Palo Alto California. Bonds had quite a sell-off and many would have argued that it may have been overdone,” he said.
"The CPI was a useful reminder to market participants that U.S. inflation is still quite soft," said Joe Capurso, currency analyst at Commonwealth Bank of Australia.
It's going to take a lot to get it up to the Federal Reserve's target. Mainly, financial markets got too bullish too quickly about the Fed starting a rate hike cycle."
The dollar and U.S. Treasury yields have been rising steadily due to expectations that the Fed's loose monetary policy and fiscal stimulus will stoke inflation. The yield on the benchmark 10-year Treasury was at 1.528% on Thursday after hitting a one-year high of 1.626% last week.
Overall, analysts said sentiment for the dollar remained fairly positive as the U.S. economy recovers from the COVID-19 pandemic and as President Joe Biden's $1.9 trillion stimulus bill won final approval in Congress.
“The market had probably got itself a little bit too over-sensitive about rising runaway inflation - which there isn’t yet,” said Kit Juckes, head of FX strategy at Societe Generale. The soft inflation data “gives us respite from risk aversion and reverses some of the recent currency moves,” he added.
At the European Central Bank meeting, policymakers have expected to send a message that they will prevent bond yields from rising further and harming the bloc’s economic outlook - although SocGen’s Juckes said that, since the rise in yields is led by Treasuries, it is unlikely to be influenced by the ECB.
Analysts at ING wrote in a note to clients that they do not expect the euro to be the focus of discussion, since it has fallen since the previous meeting. The euro-dollar pair is being more driven by dollar-related factors such as Treasury yields, ING said.
“If the central bankers signal that they would not only be willing to exhaust their current asset purchasing programme but to even extend it in reaction to a further rise in yields, this might put a dampener on possible rate expectations thus putting pressure on the euro,” wrote Commerzbank strategist Thu Lan Nguyen in a note to clients. However, I would not expect a significant impact as the market is only expecting rate hikes in the euro zone to occur in the very distant future compared with the U.S. anyway,” she said.
The dollar rose on Friday following a fresh spike in Treasury yields as the prospect of economies emerging from year-long coronavirus lockdowns reignited inflation fears. Market participants have grown wary in recent weeks that massive fiscal stimulus and pent-up consumer demand could lead to a jump in inflation as expanding vaccination campaigns bring an end to lockdowns.
Data on Friday showed U.S. producer prices (PPI) had their largest annual gain in nearly 2-1/2 years, though considerable slack in the labor market could make it harder for businesses to pass the higher costs on to consumers.
Data has shown signs of an economic recovery continuing to gain momentum. The number of Americans filing new claims for jobless benefits dropped to a four-month low last week, while U.S. consumer sentiment improved in early March to its strongest in a year.
A selloff in Treasuries overnight continued into the U.S. session, with the yield on the benchmark 10-year note hitting a fresh one-year high of 1.6420%, helped by optimism around U.S. economic prospects.
“Bond yields have been in a very strong uptrend and with the PPI numbers somewhat higher than consensus, that’s contributing to the rise,” said Kathy Lien, managing director at BK Asset Management. That’s widely positive for the dollar, as the greenback has been taking its cues from yields and these new highs are really encouraging more demand for the greenback, especially at a time when you have the ECB accelerating bond purchases and being a little bit more dovish,” she said.
The European Central Bank said on Thursday that it would increase the pace of its money printing to prevent a rise in euro zone bond yields in support of the economic recovery.
Traders will be looking to the U.S. Federal Reserve’s policy meeting next week for any comments about rising yields. With the benchmark S&P 500 nearing the 4,000 level for the first time, the health of the economy, the pace of inflation and a recent rise in bond yields are expected to be hot topics when the U.S. Federal Reserve meets on Tuesday and Wednesday.
They are also keen for any information on the upcoming expiry of the Fed’s temporary easing of the “supplementary leverage ratio” (SLR), which seems to be part of the reason behind the sell-off in Treasuries, said Erik Bregar, director and head of FX strategy at the Exchange Bank of Canada.
The SLR directs large banks to hold more capital against their assets. Last April, the Fed eased the rules by exempting certain investments, including Treasuries, from a key leverage calculation in an effort to improve market liquidity as the economy cratered due to coronavirus shutdowns. So far there has been no word from the Fed on a possible extension.
“Primary dealers are shedding bonds because this exemption might not get renewed at the end of March,” Bregar said.
COT Report
Recent CFTC data shows that drop in net long positions of EUR is becoming a tendency. Last week it was solid drop on background of rising open interest. This week it becomes even worse:
As a result the net long position is dropping with fast tempo:
Source: cftc.gov
Charting by Investing.com
Week of the central banks
After a stunning selloff in U.S. Treasuries took benchmark 10-year yields above 1.6%, the highest in a year, the March 16-17 Federal Reserve meeting will be watched closely for hints policymakers are concerned about yields, asset bubbles and inflation.
A repricing of market interest rate expectations to anticipate a Fed hike as early as late 2022 is at odds with the Fed’s aim of keeping rates unchanged until the end of 2023. The Fed has appeared unperturbed so far by higher bond yields, but it may feel it’s time to push back against those rate-hike bets.
It is also expected to release fresh forecasts on economic growth as vaccines are distributed.
The central bank which pioneered yield curve control faces one of its toughest policy reviews on March 18-19.
The Bank of Japan will likely insert clearer guidance in its statement on what it sees as an acceptable level of fluctuation in long-term interest rates, according to sources -- a sign it won’t tolerate rises that hurt the economy.
Governor Haruhiko Kuroda and his deputy Masayoshi Amamiya have sent mixed messages on loosening the 10-year yield target band. Higher yields would acknowledge a global move higher but might spur unintended worries about policy tightening.
Given a nascent economic recovery, the BOJ may even suggest scope for more negative short-term rates. In the midst of this, financial year-end flows back into yen are accelerating. A currency rally will add to the BOJ’s headaches.
Thursday brings central bank meetings in Britain and Norway.
The Bank of England is not seen unveiling additional policy easing despite concerns over the recent spike in borrowing costs. Instead, any action such as upping the BoE’s bond-buying firepower is likely to come later in the year - perhaps in May, when the next set of economic forecasts emerge.
With first-quarter GDP data expected to show a near 4% drop on the back of pandemic-linked lockdowns and Brexit disruptions, economic recovery is expected to be gradual. A majority of economists polled by Reuters expect GDP will take two years to return to pre-COVID-19 levels.
Norges Bank is also tipped to keep rates unchanged but it may adopt a much more hawkish tone given signs of economic recovery in Norway, especially in housing.
Despite that wee was relatively quiet and we haven't got any breaking news, we still could make some new conclusions. First is the argue around reflation - situation is becoming more evident with more and more statistics confirming the economy recovery. This week we have Initial claims, Sentiment and spending numbers. Don't be confused by CPI data as it is lagging for 6-9 month behind the reality. PPI is lagging as well, but as it stands earlier in production cycle - it has shown increase. So, even PPI already shows some reaction. These numbers are points in favor of those analysts who suggests that recovery is started, while others still think that this is mostly speculative splash in the yields, triggered by some inner, technical reasons but not by rising inflationary pressure.
Second conclusion - upside perspective of EUR/USD stands under question now. EUR is loosing quorum as investors are abandoning it. ECB statement we mostly should treat as dovish. While EU has no signs of interest rates rising, ECB makes the statement on more money printing, if needed to keep interest rates low. In comparison to US where rates show outstanding rally but Fed shows no reaction. Additional bearish factor for EUR is interest rates difference per se. It makes US Dollar more attractive and already leads to capital flow into US assets.
Speaking on Fed meeting, it seems that they should say something about interest rates - just to show that they familiar with market concern and keep the finger on pulse. Even if they intend to do nothing right now. But we can't exclude totally possible verbal intervention if Fed expresses "concern". That could push interest rates significantly lower. Technically it should happen, because this is first rally after long-term drop, and it has to be retracement around it. The same is for Dollar Index - it has untouched major 87.40 target that should be reached. May be Fed puts the hand to this. SLR programme also should be in focus, if it keeps working, it obliges banks to hold more riskless assets on balances, supporting demand for US Bonds. And this also could become the reason for pullback on interest rates.
Even without Fed results - overall situation is not in favor of EUR. Massive run out from the EU currency could fizzle our technical upside bounce from strong support, or make it weaker. The necessity to get more confirmation for long entry increases.
Technicals
Monthly
Recent action has minimal impact on long-term charts by far. MACD trend stands bullish and EUR is far enough from vital 1.16 area. Still, with coming important Fed meeting next week and poor COT numbers situation could become worse.
Technical picture suggests that we could accept any pullback with no problems to bullish context while it stands above 1.16 lows. The invalidation point, by the way, agrees with Yearly Pivot point that has special meaning to us. Although it is preferable to the market to stay above 1.20, just to keep short-term bullish context either.
Drop below 1.16 breaks the normal market mechanics as major retracement and reaction to COP is done. Thus, another deep retracement here is not logical and should not happen. Besides, action below 1.16 means appearing of bearish reversal swing. It is not necessary leads to bearish collapse and drop below 1.02 but deeper downside action happens and we would have to forget about bullish positions on lower time frames.
Upside targets are based on the same AB-CD pattern and stand the same. EUR has to break 1.24-1.25 level to reach them.
Weekly
Here we have first reaction on our strong K-support area and oversold. As we've mentioned last week, context here has turned bearish, and if we wouldn't have support area, we probably would search chances to go short. Now we have a kind of bullish DiNapoli "Stretch" pattern here.
Commonly market should show stronger reaction on support of such scale, but we have few fundamental events on coming week that could make impact on it. In general, other signs here are not friendly to EUR, which makes us to treat any upside action as retracement by far. As we have bearish divergence here, and potential shape of H&S that could lead EUR below 1.16 area. Flat Fed statement in March could turn this scenario from potential to reality.
Besides EUR clearly shows downside acceleration to K-support, which is also could be treated as bearish sign. It means that on daily chart it would be better to not take long position blindly, waiting for clear bullish patterns for risk minimization.
Daily
Trend remains bearish by far, despite we have first bounce from support and large "222" Buy pattern. Fortunately no grabber has been formed recently and EUR just reaction on 1.20 Fib resistance area.
No clear bullish patterns are formed yet. If you trade this setup right "from the scratch", buying as soon as market hits downside OP and with stops below recent lows - then it is nothing to change. For others, who prefer to use patterns to step-in - it is still the waiting time as no clear pattern has been formed yet here.
Intraday
Maybe it makes sense to wait for something like that:
Why we a bit sceptic on immediate upside continuation, and suggest another downside swing. Well, mostly because of reversal swing down. Take a look - here downside swing is greater than previous swing up, this is not good for upside tendency. It could not mean that tendency is over but it increases risk of deeper downside retracement. As EUR likes "222" patterns - why not to watch for another one, but of a bigger scale?
This week mostly was ordinary, we've got ECB meeting, some statistics. As we've said earlier - it is nothing to expect from ECB right now as their position stands anemic and they are trapped on a dead way. Inflation stands low, no necessity to rise rates, it is impossible to cut rates more - all these things were obvious. The only hope was for some stimulus but Brussels Bureaucrats are too greed and slow on decision making. So, the chance mostly was hypothetical as well. And we've got corresponding result - no reaction on ECB meeting at all.
Market overview
The dollar edged lower on Wednesday following a tame U.S. inflation report and a tepid auction of benchmark 10-year Treasury notes. U.S. consumer prices posted their biggest annual gain in a year, though underlying inflation remained tepid amid sluggish demand for services like airline travel, the data showed. The move was largely in line with economists’ expectations, though core inflation rose 0.1% versus market forecasts for a 0.2% rise.
U.S. Treasury yields slid following the data, as market participants had hoped for a more upbeat outlook on consumer prices. The dollar index has closely tracked a surge in Treasury yields this year, both because higher yields increase the currency’s appeal and as the bond rout shook investor confidence, spurring demand for safe-haven assets.
“The drive of the dollar’s movement since the beginning of the year has been U.S. interest rates, and I just don’t see that scenario changing,” said Joseph Trevisani, senior analyst at FXSTREET.COM.
Bond yields fell and prices rose after an auction of 10-year Treasury notes showed tepid demand with lower than average bid-to-cover ratio. Treasury auctions have been closely watched after poor demand for an auction of 7-year notes two weeks ago sparked a sell-off in government bonds.
“Bonds are getting stronger, which means the dollar relatively speaking, may be less attractive,” said Axel Merk, president and portfolio manager at Merk Hard Currency Fund in Palo Alto California. Bonds had quite a sell-off and many would have argued that it may have been overdone,” he said.
"The CPI was a useful reminder to market participants that U.S. inflation is still quite soft," said Joe Capurso, currency analyst at Commonwealth Bank of Australia.
It's going to take a lot to get it up to the Federal Reserve's target. Mainly, financial markets got too bullish too quickly about the Fed starting a rate hike cycle."
The dollar and U.S. Treasury yields have been rising steadily due to expectations that the Fed's loose monetary policy and fiscal stimulus will stoke inflation. The yield on the benchmark 10-year Treasury was at 1.528% on Thursday after hitting a one-year high of 1.626% last week.
Overall, analysts said sentiment for the dollar remained fairly positive as the U.S. economy recovers from the COVID-19 pandemic and as President Joe Biden's $1.9 trillion stimulus bill won final approval in Congress.
“The market had probably got itself a little bit too over-sensitive about rising runaway inflation - which there isn’t yet,” said Kit Juckes, head of FX strategy at Societe Generale. The soft inflation data “gives us respite from risk aversion and reverses some of the recent currency moves,” he added.
At the European Central Bank meeting, policymakers have expected to send a message that they will prevent bond yields from rising further and harming the bloc’s economic outlook - although SocGen’s Juckes said that, since the rise in yields is led by Treasuries, it is unlikely to be influenced by the ECB.
Analysts at ING wrote in a note to clients that they do not expect the euro to be the focus of discussion, since it has fallen since the previous meeting. The euro-dollar pair is being more driven by dollar-related factors such as Treasury yields, ING said.
“If the central bankers signal that they would not only be willing to exhaust their current asset purchasing programme but to even extend it in reaction to a further rise in yields, this might put a dampener on possible rate expectations thus putting pressure on the euro,” wrote Commerzbank strategist Thu Lan Nguyen in a note to clients. However, I would not expect a significant impact as the market is only expecting rate hikes in the euro zone to occur in the very distant future compared with the U.S. anyway,” she said.
The dollar rose on Friday following a fresh spike in Treasury yields as the prospect of economies emerging from year-long coronavirus lockdowns reignited inflation fears. Market participants have grown wary in recent weeks that massive fiscal stimulus and pent-up consumer demand could lead to a jump in inflation as expanding vaccination campaigns bring an end to lockdowns.
Data on Friday showed U.S. producer prices (PPI) had their largest annual gain in nearly 2-1/2 years, though considerable slack in the labor market could make it harder for businesses to pass the higher costs on to consumers.
Data has shown signs of an economic recovery continuing to gain momentum. The number of Americans filing new claims for jobless benefits dropped to a four-month low last week, while U.S. consumer sentiment improved in early March to its strongest in a year.
A selloff in Treasuries overnight continued into the U.S. session, with the yield on the benchmark 10-year note hitting a fresh one-year high of 1.6420%, helped by optimism around U.S. economic prospects.
“Bond yields have been in a very strong uptrend and with the PPI numbers somewhat higher than consensus, that’s contributing to the rise,” said Kathy Lien, managing director at BK Asset Management. That’s widely positive for the dollar, as the greenback has been taking its cues from yields and these new highs are really encouraging more demand for the greenback, especially at a time when you have the ECB accelerating bond purchases and being a little bit more dovish,” she said.
The European Central Bank said on Thursday that it would increase the pace of its money printing to prevent a rise in euro zone bond yields in support of the economic recovery.
Traders will be looking to the U.S. Federal Reserve’s policy meeting next week for any comments about rising yields. With the benchmark S&P 500 nearing the 4,000 level for the first time, the health of the economy, the pace of inflation and a recent rise in bond yields are expected to be hot topics when the U.S. Federal Reserve meets on Tuesday and Wednesday.
They are also keen for any information on the upcoming expiry of the Fed’s temporary easing of the “supplementary leverage ratio” (SLR), which seems to be part of the reason behind the sell-off in Treasuries, said Erik Bregar, director and head of FX strategy at the Exchange Bank of Canada.
The SLR directs large banks to hold more capital against their assets. Last April, the Fed eased the rules by exempting certain investments, including Treasuries, from a key leverage calculation in an effort to improve market liquidity as the economy cratered due to coronavirus shutdowns. So far there has been no word from the Fed on a possible extension.
“Primary dealers are shedding bonds because this exemption might not get renewed at the end of March,” Bregar said.
COT Report
Recent CFTC data shows that drop in net long positions of EUR is becoming a tendency. Last week it was solid drop on background of rising open interest. This week it becomes even worse:
As a result the net long position is dropping with fast tempo:
Source: cftc.gov
Charting by Investing.com
Week of the central banks
After a stunning selloff in U.S. Treasuries took benchmark 10-year yields above 1.6%, the highest in a year, the March 16-17 Federal Reserve meeting will be watched closely for hints policymakers are concerned about yields, asset bubbles and inflation.
A repricing of market interest rate expectations to anticipate a Fed hike as early as late 2022 is at odds with the Fed’s aim of keeping rates unchanged until the end of 2023. The Fed has appeared unperturbed so far by higher bond yields, but it may feel it’s time to push back against those rate-hike bets.
It is also expected to release fresh forecasts on economic growth as vaccines are distributed.
The central bank which pioneered yield curve control faces one of its toughest policy reviews on March 18-19.
The Bank of Japan will likely insert clearer guidance in its statement on what it sees as an acceptable level of fluctuation in long-term interest rates, according to sources -- a sign it won’t tolerate rises that hurt the economy.
Governor Haruhiko Kuroda and his deputy Masayoshi Amamiya have sent mixed messages on loosening the 10-year yield target band. Higher yields would acknowledge a global move higher but might spur unintended worries about policy tightening.
Given a nascent economic recovery, the BOJ may even suggest scope for more negative short-term rates. In the midst of this, financial year-end flows back into yen are accelerating. A currency rally will add to the BOJ’s headaches.
Thursday brings central bank meetings in Britain and Norway.
The Bank of England is not seen unveiling additional policy easing despite concerns over the recent spike in borrowing costs. Instead, any action such as upping the BoE’s bond-buying firepower is likely to come later in the year - perhaps in May, when the next set of economic forecasts emerge.
With first-quarter GDP data expected to show a near 4% drop on the back of pandemic-linked lockdowns and Brexit disruptions, economic recovery is expected to be gradual. A majority of economists polled by Reuters expect GDP will take two years to return to pre-COVID-19 levels.
Norges Bank is also tipped to keep rates unchanged but it may adopt a much more hawkish tone given signs of economic recovery in Norway, especially in housing.
Despite that wee was relatively quiet and we haven't got any breaking news, we still could make some new conclusions. First is the argue around reflation - situation is becoming more evident with more and more statistics confirming the economy recovery. This week we have Initial claims, Sentiment and spending numbers. Don't be confused by CPI data as it is lagging for 6-9 month behind the reality. PPI is lagging as well, but as it stands earlier in production cycle - it has shown increase. So, even PPI already shows some reaction. These numbers are points in favor of those analysts who suggests that recovery is started, while others still think that this is mostly speculative splash in the yields, triggered by some inner, technical reasons but not by rising inflationary pressure.
Second conclusion - upside perspective of EUR/USD stands under question now. EUR is loosing quorum as investors are abandoning it. ECB statement we mostly should treat as dovish. While EU has no signs of interest rates rising, ECB makes the statement on more money printing, if needed to keep interest rates low. In comparison to US where rates show outstanding rally but Fed shows no reaction. Additional bearish factor for EUR is interest rates difference per se. It makes US Dollar more attractive and already leads to capital flow into US assets.
Speaking on Fed meeting, it seems that they should say something about interest rates - just to show that they familiar with market concern and keep the finger on pulse. Even if they intend to do nothing right now. But we can't exclude totally possible verbal intervention if Fed expresses "concern". That could push interest rates significantly lower. Technically it should happen, because this is first rally after long-term drop, and it has to be retracement around it. The same is for Dollar Index - it has untouched major 87.40 target that should be reached. May be Fed puts the hand to this. SLR programme also should be in focus, if it keeps working, it obliges banks to hold more riskless assets on balances, supporting demand for US Bonds. And this also could become the reason for pullback on interest rates.
Even without Fed results - overall situation is not in favor of EUR. Massive run out from the EU currency could fizzle our technical upside bounce from strong support, or make it weaker. The necessity to get more confirmation for long entry increases.
Technicals
Monthly
Recent action has minimal impact on long-term charts by far. MACD trend stands bullish and EUR is far enough from vital 1.16 area. Still, with coming important Fed meeting next week and poor COT numbers situation could become worse.
Technical picture suggests that we could accept any pullback with no problems to bullish context while it stands above 1.16 lows. The invalidation point, by the way, agrees with Yearly Pivot point that has special meaning to us. Although it is preferable to the market to stay above 1.20, just to keep short-term bullish context either.
Drop below 1.16 breaks the normal market mechanics as major retracement and reaction to COP is done. Thus, another deep retracement here is not logical and should not happen. Besides, action below 1.16 means appearing of bearish reversal swing. It is not necessary leads to bearish collapse and drop below 1.02 but deeper downside action happens and we would have to forget about bullish positions on lower time frames.
Upside targets are based on the same AB-CD pattern and stand the same. EUR has to break 1.24-1.25 level to reach them.
Weekly
Here we have first reaction on our strong K-support area and oversold. As we've mentioned last week, context here has turned bearish, and if we wouldn't have support area, we probably would search chances to go short. Now we have a kind of bullish DiNapoli "Stretch" pattern here.
Commonly market should show stronger reaction on support of such scale, but we have few fundamental events on coming week that could make impact on it. In general, other signs here are not friendly to EUR, which makes us to treat any upside action as retracement by far. As we have bearish divergence here, and potential shape of H&S that could lead EUR below 1.16 area. Flat Fed statement in March could turn this scenario from potential to reality.
Besides EUR clearly shows downside acceleration to K-support, which is also could be treated as bearish sign. It means that on daily chart it would be better to not take long position blindly, waiting for clear bullish patterns for risk minimization.
Daily
Trend remains bearish by far, despite we have first bounce from support and large "222" Buy pattern. Fortunately no grabber has been formed recently and EUR just reaction on 1.20 Fib resistance area.
No clear bullish patterns are formed yet. If you trade this setup right "from the scratch", buying as soon as market hits downside OP and with stops below recent lows - then it is nothing to change. For others, who prefer to use patterns to step-in - it is still the waiting time as no clear pattern has been formed yet here.
Intraday
Maybe it makes sense to wait for something like that:
Why we a bit sceptic on immediate upside continuation, and suggest another downside swing. Well, mostly because of reversal swing down. Take a look - here downside swing is greater than previous swing up, this is not good for upside tendency. It could not mean that tendency is over but it increases risk of deeper downside retracement. As EUR likes "222" patterns - why not to watch for another one, but of a bigger scale?