Sive Morten
Special Consultant to the FPA
- Messages
- 18,669
Fundamentals
This week financial world mostly was focused on GDP release in EU and US, as well as ECB and Fed statement on current situation and assessment of the future. Data was mixed, in terms of divergence from expectations. From one point of view - nobody has expected sweet numbers and forecasts solid decrease. At the same time, drop was approximately around expectations. Inflation data, such as PPI, CPI have increased - showing inflationary consequences of pandemic crisis. We also talked about it in one of our previous reports. Here is what Fathom tells on recent US GDP Report:
More countries have released national accounts data for the first quarter. In the US, the advance estimate pointed to a 4.8% annualised rate of decline. That was the largest drop since the depths of the Global Financial Crisis as the impact of ‘shelter at home’ orders across individual US states kept businesses shut and people at home. Private consumption, which accounts for around 70% of GDP, dropped by 7.6%, subtracting 5.3 percentage points from annualised quarterly growth. Investment, which tends to be volatile and is one of the main drags during recession, ‘only’ subtracted 1 percentage point. A collapse in imports helped to improve the overall external position, and net trade added 1.3 percentage points from annualised quarterly growth.
The downbeat figures are only going to get worse in the second quarter. A wide range of data suggest that the US economy was performing well in the first two months of the year, and so the quarterly decline was entirely due to March effects. We estimate that March GDP must have dropped at a rate of around 20% annualised to be consistent with the overall first quarter figure. Moreover, ‘shelter at home’ orders mostly came in the second half of March, implying even larger declines in GDP for a whole month of lockdown. Nonetheless, monthly data on personal consumption showed a record 7.3% decline in March, highlighting the significant effect those orders had on spending.
The large drop in March spending came with a large increase in personal savings. The savings ratio spiked by 5.1 percentage points to 13.1%. Meanwhile, consumer surveys remain relatively upbeat about future economic conditions. There is a case to be made about pent-up demand. However, even in states where restrictions are relaxed, there is unlikely to be the supply of goods and services to meet that demand.
Federal Reserve policymakers on Wednesday left interest rates near zero and repeated a vow to do what it takes to shore up the economy, saying the ongoing coronavirus pandemic will “weigh heavily” on the near-term outlook and poses “considerable risks” for the medium term. The Federal Reserve is promised to expand emergency programs as needed to help the battered U.S. economy. Improving risk appetite, if it continues, could dent the dollar further. Investors are more optimistic that economies globally are closer to reopening.
“If we are seeing a bit of a rebound in risk, and I would say the last week or so has been quite encouraging on that front, then that would suggest that this would take some of the upward pressure off the dollar,” said Craig Erlam, senior market analyst at OANDA in London.
Fed Chairman Jerome Powell offered no sanguine words about how fast the country might return - if ever - to the near-record low unemployment and solid growth of just a few weeks ago. Sentiment for the dollar also took a hit after data on Wednesday showed U.S. gross domestic product fell in the first quarter at the sharpest pace since the Great Recession. Economists say the second quarter could be even worse.
The greenback was also weighed down as signs the pandemic is receding in other countries and reduced safe-haven demand for holding funds in dollars. Additionally boosting appetite for riskier currencies were positive trial results of an experimental COVID-19 treatment. More countries are taking steps to re-open their economies as coronavirus infections slow, giving some cause for optimism. However, it will likely take several months for U.S. consumer spending to fully recover given the massive job losses, which has discouraged any extensive dollar buying.
“The Fed has already eased a lot, but the fact that it said it would be willing to do even more has taken some gloss off the dollar,” said Minori Uchida, head of global market research at MUFG Bank in Tokyo.
The European Central Bank disappointed some investors who had expected that it would expand bond purchases to junk bonds as part of its quantitative easing program.
It was “a combination of weaker risk and short-term reaction to the ECB announcement that there would be no QE expansion,” said Vassili Serebriakov, an FX strategist at UBS in New York.
CFTC Data
EUR CFTC position has not changed since last week and stands around the same 76K long contracts net. While there two changes in speculative positions that are worthy to mention here. First is GBP net position has turned bearish and S&P 500 net position has reached new negative low, coming close to the bottom of 2016 crisis levels:
Source: cftc.gov
Charting by Investing.com
It means that despite huge liquidity injections stock market remains depressed as investors probably also expect situation to worsen in IIQ.
In general Speculators' net bearish bets on the U.S. dollar grew to the largest position in nearly two years in the latest week, according to calculations by Reuters
and U.S. Commodity Futures Trading Commission data released on Friday.
The value of the net short dollar position was $11.51 billion for the week ended April 21, compared with a net short position of $11.39 billion for the week before that.
U.S. dollar positioning was derived from net contracts of International Monetary Market speculators in the Japanese yen, euro, British pound, Swiss franc and Canadian and Australian dollars.
Investors' renewed appetite for risky assets in recent weeks has pressured the dollar, which usually gets a boost from safe-haven demand. The U.S. Dollar Currency Index, which measures the greenback’s strength against six other major currencies, has slipped 2.5% since touching a more than three-year high in late March.
"The improved supply of dollar in tandem with the Fed’s aggressive policy actions on interest rates and on QE have sparked a discussion about whether the USD is now primed for a correction," Jane Foley, senior FX strategist at Rabobank, said in an note. "While the easing of panic in the market has taken the USD index off its recent highs, in our view the USD cannot be expected to weaken decidedly until investors feel confident enough to move back into emerging markets. This could be some way off," she said.
Speculators' net long position on the euro was at 87,218 contracts, the largest position in about 22 months, the data showed.
This agrees with our long-term view. USD domination could be paused for a while and markets could get some relief on "back to life" news, but statistics is stubborn argument, telling that it is too early to relax and demand for safe haven assets should hold in 2020. Thus, Fathom view, CFTC data and analysts' opinion tell about the same thing - current relief should be treated as retracement by far.
Another reason for that is events and data that yet to come on next week, especially NFP data:
Speaking of economic damage from coronavirus, investors will get a stark piece of U.S. data on Friday, when the Labor Department releases its employment report for April. The overall picture could be staggering: Non-farm payrolls are expected to fall by 20 million for the month, according to a Reuters poll. That would be a steeper drop than the 701,000 decline in March, when an historic 113 straight months of employment growth ended.
Other U.S. data too has been grim: More than 30 million Americans have sought unemployment benefits since March 21, while the economy contracted in the first quarter at its sharpest pace since the Great Recession around a decade ago. Stocks have so far shrugged off the data, with the S&P 500 .SPX up 30% from March lows. Investors looking ahead to recovery will focus also on whether more states announce gradual reopenings of business.
In EU we will be watching for April trade and industrial output data in coming days for clues on how Q2 might shape up. Italian factories and building sites reopen from Monday after Europe’s longest lockdown. So do German schools, museums and churches, following the reopening of small shops, while Britain will lay out its exit strategy in coming days.
Slowly does it, seems to be the message from governments wary of a renewed spike in infections. But with the ECB predicting the euro area economy to shrink by as much as 15% this quarter, authorities are also keen to get activity going again.
Next is the Bank of England’s monetary policy report on Thursday.
The meeting will take stock of the impact of the BOE’s record bond buying to finance the government’s coronavirus response. While interest rates, cut twice in March, should stay at a record low 0.1%, many reckon the bank could announce another 100 billion pounds ($125 billion) worth of purchases - on top of the 645 billion pounds it has already pledged.
The BOE may also face questions about its agreement to lend money directly to the government, which lays it open to accusations of “monetary financing” - when central banks fund governments by printing money. The BOE says the measure is temporary. Yet the government has huge borrowing needs this year, stemming from the pandemic but also Brexit which is exacerbating a recession tipped to be the worst in three centuries.
As a bottom line - we agree with Rabobank point of view on situation:
"The improved supply of dollar in tandem with the Fed’s aggressive policy actions on interest rates and on QE have sparked a discussion about whether the USD is now primed for a correction," Jane Foley, senior FX strategist at Rabobank, said in an note. "While the easing of panic in the market has taken the USD index off its recent highs, in our view the USD cannot be expected to weaken decidedly until investors feel confident enough to move back into emerging markets. This could be some way off," she said.
Technicals
Monthly
So, by the end of the April we've got another important pattern here on monthly chart - second bullish grabber in a row. April stands inside month to huge March doji pattern. Another important moment of April's action - challenge of the lows, long tail points on buyers' activity.
Although major conditions stands the same - technically EUR direction depends on breakout of the doji. But two side-by-side grabbers set bullish context and point on its invalidation level - grabbers' lows. This fact changes technical picture on EUR as trend on monthly chart remains bullish.
Interestingly, that doji levels coincide with Pivots support and resistance levels as well. Downside breakout opens road to the parity, while upside break should open road for equal doji distance to upside - somewhere to 1.23 area. Still the major question of EUR driving factor stands on the table. It is difficult to find something inside EU that could drive EUR up to 1.23, or at least to 1.15. Thus, in turn, something should be in US that should weaken US Dollar. Maybe NFP will become the first bell.
Also, as we've said earlier, we're keep watching on the Dollar Index chart, or better to say historical resistance level that will provide the direction. This is all time K-level. As you understand, its breakout or reversal out from it will be major event for FX market.
Weekly
Last week we said that in general the shape of consolidation suggests wide price swings that theoretically should be symmetrical or show at least some degree of symmetry. It means that solid upward swing should have to happen, but we do not see it.
Weekly chart is less informative among all time frames. The only thing that we was able to do here is to point the level, that supposedly could be used as a signal of improving of a bullish sentiment. This week EUR has not broken it, but comes close. Second thing - we have light bullish divergence with MACD.
In a new environment of monthly setup with two bullish grabbers, weekly chart could be used as approximation of EUR performance, as investors expect some relief in USD strength
Daily
Trend here is bullish, market is not at overbought. Through this week we were watching how gradually sentiment was changing - from the barely visible bullish signs on Monday till solid action by the end of the week. Downside AB-CD pattern is destroyed as former "C" point is cancelled by new top, achieved on Friday.
Still, market stands at 5/8 Fib resistance and our task here is simple. Recent upside action from 1.0725 lows is April grabber. Thus, we could consider long entry at some Fib support level of this swing:
Intraday
Beyond extended targets on higher time frames, here we have local setup of reverse H&S pattern. Our OP target has been hit. Now we could consider pullback to some Fib support level. IMO, as EUR stands not at Overbought, it should be "enough" pullback either to 1.0947 or 1.0910 K-area, that also is a neckline of H&S pattern. For position taking it would be better to split it and apply the scale-in at both levels. Stops should be below K-area.
Conclusion:
We suggest that it is too early to talk about the end of USD bullish trend. Markets are just coming out of virus stun and this brings some positive sentiment.
Still, fundamental picture suggests that it is long way to run and a lot of negative surprises ahead. First of them could come as soon as on 8th of the May if NFP will appear to be as bad as they are expected.
This makes us suggest retracement on USD, that could be solid and could be seen on daily and higher time frames, but it doesn't mean yet the end of USD bullish trend. Short-term trading plan is to consider long entry above 1.09 K-area.
This week financial world mostly was focused on GDP release in EU and US, as well as ECB and Fed statement on current situation and assessment of the future. Data was mixed, in terms of divergence from expectations. From one point of view - nobody has expected sweet numbers and forecasts solid decrease. At the same time, drop was approximately around expectations. Inflation data, such as PPI, CPI have increased - showing inflationary consequences of pandemic crisis. We also talked about it in one of our previous reports. Here is what Fathom tells on recent US GDP Report:
More countries have released national accounts data for the first quarter. In the US, the advance estimate pointed to a 4.8% annualised rate of decline. That was the largest drop since the depths of the Global Financial Crisis as the impact of ‘shelter at home’ orders across individual US states kept businesses shut and people at home. Private consumption, which accounts for around 70% of GDP, dropped by 7.6%, subtracting 5.3 percentage points from annualised quarterly growth. Investment, which tends to be volatile and is one of the main drags during recession, ‘only’ subtracted 1 percentage point. A collapse in imports helped to improve the overall external position, and net trade added 1.3 percentage points from annualised quarterly growth.
The downbeat figures are only going to get worse in the second quarter. A wide range of data suggest that the US economy was performing well in the first two months of the year, and so the quarterly decline was entirely due to March effects. We estimate that March GDP must have dropped at a rate of around 20% annualised to be consistent with the overall first quarter figure. Moreover, ‘shelter at home’ orders mostly came in the second half of March, implying even larger declines in GDP for a whole month of lockdown. Nonetheless, monthly data on personal consumption showed a record 7.3% decline in March, highlighting the significant effect those orders had on spending.
The large drop in March spending came with a large increase in personal savings. The savings ratio spiked by 5.1 percentage points to 13.1%. Meanwhile, consumer surveys remain relatively upbeat about future economic conditions. There is a case to be made about pent-up demand. However, even in states where restrictions are relaxed, there is unlikely to be the supply of goods and services to meet that demand.
Federal Reserve policymakers on Wednesday left interest rates near zero and repeated a vow to do what it takes to shore up the economy, saying the ongoing coronavirus pandemic will “weigh heavily” on the near-term outlook and poses “considerable risks” for the medium term. The Federal Reserve is promised to expand emergency programs as needed to help the battered U.S. economy. Improving risk appetite, if it continues, could dent the dollar further. Investors are more optimistic that economies globally are closer to reopening.
“If we are seeing a bit of a rebound in risk, and I would say the last week or so has been quite encouraging on that front, then that would suggest that this would take some of the upward pressure off the dollar,” said Craig Erlam, senior market analyst at OANDA in London.
Fed Chairman Jerome Powell offered no sanguine words about how fast the country might return - if ever - to the near-record low unemployment and solid growth of just a few weeks ago. Sentiment for the dollar also took a hit after data on Wednesday showed U.S. gross domestic product fell in the first quarter at the sharpest pace since the Great Recession. Economists say the second quarter could be even worse.
The greenback was also weighed down as signs the pandemic is receding in other countries and reduced safe-haven demand for holding funds in dollars. Additionally boosting appetite for riskier currencies were positive trial results of an experimental COVID-19 treatment. More countries are taking steps to re-open their economies as coronavirus infections slow, giving some cause for optimism. However, it will likely take several months for U.S. consumer spending to fully recover given the massive job losses, which has discouraged any extensive dollar buying.
“The Fed has already eased a lot, but the fact that it said it would be willing to do even more has taken some gloss off the dollar,” said Minori Uchida, head of global market research at MUFG Bank in Tokyo.
The European Central Bank disappointed some investors who had expected that it would expand bond purchases to junk bonds as part of its quantitative easing program.
It was “a combination of weaker risk and short-term reaction to the ECB announcement that there would be no QE expansion,” said Vassili Serebriakov, an FX strategist at UBS in New York.
CFTC Data
EUR CFTC position has not changed since last week and stands around the same 76K long contracts net. While there two changes in speculative positions that are worthy to mention here. First is GBP net position has turned bearish and S&P 500 net position has reached new negative low, coming close to the bottom of 2016 crisis levels:
Source: cftc.gov
Charting by Investing.com
It means that despite huge liquidity injections stock market remains depressed as investors probably also expect situation to worsen in IIQ.
In general Speculators' net bearish bets on the U.S. dollar grew to the largest position in nearly two years in the latest week, according to calculations by Reuters
and U.S. Commodity Futures Trading Commission data released on Friday.
The value of the net short dollar position was $11.51 billion for the week ended April 21, compared with a net short position of $11.39 billion for the week before that.
U.S. dollar positioning was derived from net contracts of International Monetary Market speculators in the Japanese yen, euro, British pound, Swiss franc and Canadian and Australian dollars.
Investors' renewed appetite for risky assets in recent weeks has pressured the dollar, which usually gets a boost from safe-haven demand. The U.S. Dollar Currency Index, which measures the greenback’s strength against six other major currencies, has slipped 2.5% since touching a more than three-year high in late March.
"The improved supply of dollar in tandem with the Fed’s aggressive policy actions on interest rates and on QE have sparked a discussion about whether the USD is now primed for a correction," Jane Foley, senior FX strategist at Rabobank, said in an note. "While the easing of panic in the market has taken the USD index off its recent highs, in our view the USD cannot be expected to weaken decidedly until investors feel confident enough to move back into emerging markets. This could be some way off," she said.
Speculators' net long position on the euro was at 87,218 contracts, the largest position in about 22 months, the data showed.
This agrees with our long-term view. USD domination could be paused for a while and markets could get some relief on "back to life" news, but statistics is stubborn argument, telling that it is too early to relax and demand for safe haven assets should hold in 2020. Thus, Fathom view, CFTC data and analysts' opinion tell about the same thing - current relief should be treated as retracement by far.
Another reason for that is events and data that yet to come on next week, especially NFP data:
Speaking of economic damage from coronavirus, investors will get a stark piece of U.S. data on Friday, when the Labor Department releases its employment report for April. The overall picture could be staggering: Non-farm payrolls are expected to fall by 20 million for the month, according to a Reuters poll. That would be a steeper drop than the 701,000 decline in March, when an historic 113 straight months of employment growth ended.
Other U.S. data too has been grim: More than 30 million Americans have sought unemployment benefits since March 21, while the economy contracted in the first quarter at its sharpest pace since the Great Recession around a decade ago. Stocks have so far shrugged off the data, with the S&P 500 .SPX up 30% from March lows. Investors looking ahead to recovery will focus also on whether more states announce gradual reopenings of business.
In EU we will be watching for April trade and industrial output data in coming days for clues on how Q2 might shape up. Italian factories and building sites reopen from Monday after Europe’s longest lockdown. So do German schools, museums and churches, following the reopening of small shops, while Britain will lay out its exit strategy in coming days.
Slowly does it, seems to be the message from governments wary of a renewed spike in infections. But with the ECB predicting the euro area economy to shrink by as much as 15% this quarter, authorities are also keen to get activity going again.
Next is the Bank of England’s monetary policy report on Thursday.
The meeting will take stock of the impact of the BOE’s record bond buying to finance the government’s coronavirus response. While interest rates, cut twice in March, should stay at a record low 0.1%, many reckon the bank could announce another 100 billion pounds ($125 billion) worth of purchases - on top of the 645 billion pounds it has already pledged.
The BOE may also face questions about its agreement to lend money directly to the government, which lays it open to accusations of “monetary financing” - when central banks fund governments by printing money. The BOE says the measure is temporary. Yet the government has huge borrowing needs this year, stemming from the pandemic but also Brexit which is exacerbating a recession tipped to be the worst in three centuries.
As a bottom line - we agree with Rabobank point of view on situation:
"The improved supply of dollar in tandem with the Fed’s aggressive policy actions on interest rates and on QE have sparked a discussion about whether the USD is now primed for a correction," Jane Foley, senior FX strategist at Rabobank, said in an note. "While the easing of panic in the market has taken the USD index off its recent highs, in our view the USD cannot be expected to weaken decidedly until investors feel confident enough to move back into emerging markets. This could be some way off," she said.
Technicals
Monthly
So, by the end of the April we've got another important pattern here on monthly chart - second bullish grabber in a row. April stands inside month to huge March doji pattern. Another important moment of April's action - challenge of the lows, long tail points on buyers' activity.
Although major conditions stands the same - technically EUR direction depends on breakout of the doji. But two side-by-side grabbers set bullish context and point on its invalidation level - grabbers' lows. This fact changes technical picture on EUR as trend on monthly chart remains bullish.
Interestingly, that doji levels coincide with Pivots support and resistance levels as well. Downside breakout opens road to the parity, while upside break should open road for equal doji distance to upside - somewhere to 1.23 area. Still the major question of EUR driving factor stands on the table. It is difficult to find something inside EU that could drive EUR up to 1.23, or at least to 1.15. Thus, in turn, something should be in US that should weaken US Dollar. Maybe NFP will become the first bell.
Also, as we've said earlier, we're keep watching on the Dollar Index chart, or better to say historical resistance level that will provide the direction. This is all time K-level. As you understand, its breakout or reversal out from it will be major event for FX market.
Weekly
Last week we said that in general the shape of consolidation suggests wide price swings that theoretically should be symmetrical or show at least some degree of symmetry. It means that solid upward swing should have to happen, but we do not see it.
Weekly chart is less informative among all time frames. The only thing that we was able to do here is to point the level, that supposedly could be used as a signal of improving of a bullish sentiment. This week EUR has not broken it, but comes close. Second thing - we have light bullish divergence with MACD.
In a new environment of monthly setup with two bullish grabbers, weekly chart could be used as approximation of EUR performance, as investors expect some relief in USD strength
Daily
Trend here is bullish, market is not at overbought. Through this week we were watching how gradually sentiment was changing - from the barely visible bullish signs on Monday till solid action by the end of the week. Downside AB-CD pattern is destroyed as former "C" point is cancelled by new top, achieved on Friday.
Still, market stands at 5/8 Fib resistance and our task here is simple. Recent upside action from 1.0725 lows is April grabber. Thus, we could consider long entry at some Fib support level of this swing:
Intraday
Beyond extended targets on higher time frames, here we have local setup of reverse H&S pattern. Our OP target has been hit. Now we could consider pullback to some Fib support level. IMO, as EUR stands not at Overbought, it should be "enough" pullback either to 1.0947 or 1.0910 K-area, that also is a neckline of H&S pattern. For position taking it would be better to split it and apply the scale-in at both levels. Stops should be below K-area.
Conclusion:
We suggest that it is too early to talk about the end of USD bullish trend. Markets are just coming out of virus stun and this brings some positive sentiment.
Still, fundamental picture suggests that it is long way to run and a lot of negative surprises ahead. First of them could come as soon as on 8th of the May if NFP will appear to be as bad as they are expected.
This makes us suggest retracement on USD, that could be solid and could be seen on daily and higher time frames, but it doesn't mean yet the end of USD bullish trend. Short-term trading plan is to consider long entry above 1.09 K-area.
