Forex FOREX PRO WEEKLY, May 11 - 15, 2020

Sive Morten

Special Consultant to the FPA
Messages
13,631
Fundamentals

No doubts the central moment of this week was NFP report on Friday and ADP report on Wed. Market reaction was moderate as everybody mostly was prepared to negative numbers, but these numbers are yet to be analyzed with scrutiny. Still, there are some other events that are important but they have passed unsigned in the shadow of NFP numbers.
The major thing that we need to do now is to understand how NFP data dramatic and what to expect in nearest few months.

Germany’s highest court decision challenged German participation in the euro zone’s stimulus programme, as on Tuesday gave the European Central Bank three months to justify purchases under its bond-buying programme, or lose the Bundesbank’s participation in one of its main stimulus schemes.

“Some clients are sensing that it is much easier to implement stimulus in the (United) States than it is into Europe,” said Neil Jones, head of FX sales at Mizuho.

The ECB is expected to be able to justify its bond purchases, so the German court decision is unlikely to derail the euro zone’s stimulus efforts. But the uncertainty is only the latest strain on Europe’s coronavirus response and undermines the euro zone project and the euro.

Athanasios Vamvakidis, head of G10 currency strategy at Bank of America Merrill Lynch, said he expected the euro to weaken further amid a weaker global outlook, a more severe euro zone recession than others expect, a weaker euro zone macro policy response and low oil prices.

Euro zone business activity almost ground to a halt last month as government-imposed lockdowns to stop the spread of the coronavirus forced factories, shops and restaurants to close and recreation to cease, a survey showed. In addition, retail sales in the euro zone suffered their largest decline on record in March.

The fact that speculators are now long the euro also undermines its current levels, Vamvakidis said. Leveraged funds have trimmed their long positions on the euro, but the number of longs is still close to their two-year highs. “We expect euro/dollar to weaken in the months ahead,” Vamvakidis said, adding that the saw the euro falling to as low as between $1.02 and $1.05 “with risks to the downside.

Partly on the back of the German ruling, Deutsche Bank analysts have cut their euro view from bullish to neutral and revised their mid-year forecast to $1.08, down from $1.13 previously.

The European Commission has released its spring economic forecasts. The main headlines include a significant drop in GDP driven primarily by falling consumption. Relative to other forecasts from international organisations and consensus, the European Commission is both slightly more bearish in 2020 and slightly more optimistic in 2021, while emphasising a very high uncertainty and that downside risks outweigh the upside. Fathom consulting argues for a slower recovery in growth both globally and in the Eurozone, as laid out in previous editions of this newsletter.

Among more specific areas of disagreement, Fathom finds the projected 2.1 percentage point increase in unemployment to 9.6% (and subsequent drop to 8.6% in 2021) amid one of the largest drops in economic activity somewhat wide of the mark even assuming a generous degree of effectiveness in the policies put in place to fight this pandemic. According to the Commission, the cost of these policies accounts for the bulk of the significant deterioration in public finances (budget balance expected to drop to -8.5% from -0.6%). However, a 5pp improvement in the Eurozone budget deficit as early as 2021 seems somewhat optimistic, as the experience from 2008 leads us to believe that ‘temporary’ measures during periods of crisis tend to become permanent.
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Shorter-term data in Europe continue to surprise on the downside, with German factory orders contracting 16% YoY in March, an ominous sign for German exports and an economy extremely reliant on trade.
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Moreover, the hoped for rebound in the Spanish, French and Italian April service PMIs failed to materialise, with all three measures hovering around the single digit territory.
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Looking forward, conditions in Europe and more broadly are set to improve as restrictions on mobility have clearly started to ease.
The worst may be behind us in terms of the absolute size of the shock, although some important questions remain about the cumulative damage that world economies will suffer from this pandemic. Consensus among economists seems firmly in the camp of a swift return to something very close to normal within the next twelve months. A couple of recent studies also suggest that similar expectations might be currently priced into markets.

One theory that we are eager to test over the coming weeks is whether there is a difference in the performance of assets with a greater sensitivity to changes in market liquidity than economic fundamentals. The idea being that assets highly sensitive to market liquidity may have seen a sharper rebound as they benefit more directly from central bank largesse relative to assets which are more closely linked to macro fundamentals and remain more uncertain. Conversely, something like the copper-to-gold ratio, which is much more closely related to fundamental economic trends than liquidity, has shown no clear signs of a rebound.

Overall, preliminary evidence would suggest that the sharp market rebound from the March lows has been driven primarily by central banks’ swift actions in averting a liquidity crunch. If true, there remains a question about whether central bank actions will be enough to completely discount an economic reality that is still at best uncertain, or whether economic fundamentals will eventually reassert themselves in equity markets. The jury is still very much out, but the pace and the overall shape of the recovery will be the key factors to watch.

The BoE announced its policy decision (no change) along with a series of new reports: the Minutes; the Monetary Policy Report and an Interim FSR. The Bank also provided ‘an illustrative scenario’ for the UK economy which is consistent with a V-shaped recovery while also acknowledging the prevalence of downside risks and various conditions that could lead to a more sluggish recovery.

On the monetary policy front, there was no change, with rates held at 0.1% and the increase in the stock of QE held at £200 billion. However, the decisions had a clear dovish tilt as two members (Haskell and Saunders) wanted to announce a further increase in the stock of QE of £100 billion, taking the total COVID-19 response to £300 billion. At current rates, they will have bought the extra £200 billion by the beginning of July.

The UK money and credit data are both accurate and timely, and can sometimes offer useful insights into the behaviour of both firms and households. A surge in the deposits of both non-financial, and particularly financial corporates is likely to reflect strong demand for liquid assets in a time of substantial economic uncertainty. It is likely that the sharp pickup in household deposits reflected precautionary saving — it is notable, too, that households made the largest ever repayment of unsecured debt in March.

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Finally let's talk on NFP report, how it would be correct to understand it. Whether everything is as awful as it looks in numbers? Here is what Fathom tells about this:

"The ADP private employment release for April showed that 20 million workers stopped receiving their pay cheques in April. We expect the employment report out this Friday to show that 25 million people will have ceased to be employed, greater than the -22 million consensus figure. With restrictions on mobility being relaxed around the world, economic data is likely to improve over the coming months. As this happens, we think there will be a shift in narrative towards scrutinising the cumulative impact of the COVID-19 pandemic on economies and away from the size of the initial shock. "

Yes, we know that unemployment in America has reached an unprecedented 14.7% since the Great Depression. In just a month, quarantine destroyed more than 20 million jobs in the main economy of the world, showed the first detailed report on the labor market during the lockdown, published on Friday.

This is an unprecedented failure for a country that for a decade after the financial crisis of 2008–2009 with enviable tenacity for more than 100 consecutive months created, but did not lose jobs, and as a result, by February reduced unemployment to a minimum of half a century at 3.5%.

But there are few nuances: for example, the majority of the unemployed are temporarily unemployed, but they have saved their places, while others have chosen a huge unemployment doles - until the end of July the authorities increased it on average to 4 thousand dollars a month from the usual $1.5 thousands.

Statistically, it is awful numbers as NFP never was less than "-2 Mln." (that was in 1945 due the end in WW II) and unemployment was never grater than 10%. But, the 14% that we have right now is a "shock" numbers and solid pullback we should get next month. Unlike the Great Depression, when Americans lost their jobs completely and irrevocably, most of the new cases now are people on unpaid vacation. They account for almost 80% of the increase in unemployment, by Bloomberg calculation. When quarantine is removed, many of them will immediately return to work. Others will become operational when they stop getting high dole.

But this is only the half of the problem. In conditions when it is more profitable for a freelancer or trucker to receive higher benefits rather than returning to work, unemployment data can be considered artificially inflated. On the other hand, there is another trick. The data covers only people of working age who are actively looking for job. But data ignores those who would like to, but cannot find a permanent place and are interrupted by random earnings on part-time employment. And most importantly, those who are desperate to find a place that in the quarantine situation automatically removes entire groups of people from certain professions from the labor market (and, accordingly, from unemployment data): from stewardesses and waitresses to DJs and cloakroom men.

The hidden unemployment was a problem even before the crisis. While the authorities trumpeted about record low rates, the wide group of the working-age population in the prime of life simply did not look for work. For example, one in ten men aged 25–54 years. As a result, official unemployment among this category barely exceeded 3%, although more than 12% did not really work.

Hidden unemployment was a problem even before the crisis. While the authorities trumpeted about record low rates, the skeleton of the able-bodied population in the prime of life simply did not look for work. For example, one in ten men aged 25–54 years. As a result, official unemployment among this category barely exceeded 3%, although more than 12% did not really work.

Another problem is a pure fiscal. To keep the same pace of fiscal support US government has to keep the stream of liquidity to feed unemployment army and small business falling to bankruptcy. Is it will be sufficient demand for US Treasuries to finance these programme?Yes, Fed simply could print this money, but I'm not sure that this will pass quiet for the markets. Fed fund futures shows that Fed rate could turn negative as soon as next year. Who will buy US debt with negative interest rate and huge debt burned?

CFTC Data

Recent COT report doesn't show big shifts in EUR net position. It still stands bullish, but, as it was said above by Merryll Lynch analysts:
"The fact that speculators are now long the euro also undermines its current levels, Vamvakidis said. Leveraged funds have trimmed their long positions on the euro, but the number of longs is still close to their two-year highs"
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.


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Source: cftc.gov
Charting by Investing.com


On next week there also will be some important information.

Having defied reams of poor economic data, U.S. stock markets must contend over the coming week with more evidence of how the pandemic is devastating the economy. With swathes of the economy locked down, economists polled by Reuters expect retail sales tumbled 10% in April, surpassing the record 8.4% drop in March. And with factories shuttered, industrial production is forecast to have dropped 11.6% after slipping 5.4% in March. We also get a peek at numbers related to consumer sentiment and inflation.

Will these numbers finally derail the rally in the S&P 500, which has lifted it more than 30% off March lows? Perhaps not; after all, data showing the loss of more than 30 million jobs during the past six weeks has not managed to do that.
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Having racked up the biggest weekly loss in more than a month, the euro looks headed for more weakness.

A German constitutional court told the European Central Bank to justify its bond-buying programme or risk losing the Bundesbank’s participation in the scheme. That handed what is considered the only game in town for rescuing the euro zone - the ECB - a setback that jeopardises future bond buying.

Several banks swiftly downgraded their forecasts on the single currency after the May 5 ruling.

It’s unlikely economic data can offer respite — an advance reading of the euro zone’s first-quarter gross domestic product on Friday is expected to show a contraction of almost 4% quarter-on-quarter, according to a Reuters poll. Perhaps European politicians might draw solace from Britain’s plight — the Bank of England reckons the UK economy may be headed for the biggest slump in more than 300 years.

Bitcoin


For the third time in its short life, bitcoin is about to undergo a “halving” — when the number of new coins awarded to miners of the digital currency is slashed by half. Given previous halvings propelled huge bitcoin rallies, many are wondering what the effect might be this time as the COVID-19 crisis rages.

The first halving occurred in November 2012, from 50 bitcoins to 25 and bitcoin rallied 10,000% between late-2012 and 2014. It was then cut in July 2016 to 12.5 bitcoins and prices rose roughly 2,500% from mid-2016 to record highs in December 2017 of just below $20,000.

Year-to-date, bitcoin has risen nearly 40%. It stands around $10,000 ahead of the upcoming halving that will take the reward to 6.25. Some doubt the scintillating rallies of the past two halvings can be repeated. Others reckon however that bitcoin, representing a hedge of sorts against the chaos, is well positioned to outperform. They note that during this pandemic its returns have beaten gold, stocks and U.S. Treasuries.

Technicals
Monthly


Above we've read Merrill Lynch opinion on coming EUR drop to 1.05-1.07 area. Technical picture keeps intrigue by far as patterns that we have here mostly are bullish.
Despite high expectations, NFP data makes no solid impact, because it is still unclear the real impact on economy. Numbers are too skewed by shock effect that overshadows the real situation.

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.

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Weekly

Weekly time frame mostly shows indecision. EUR shows equal swings in both directions and in recent few weeks they have become much smaller than previously. EUR was not able to move above the local top that we've pointed two weeks ago. It means that bullish turn on EUR has not happened. Besides, this week we also have got the bearish grabber that is opposite to monthly one. If it succeeds - it will cancel monthly grabbers.
This makes us to be extra careful with any bullish setups that we could get on daily chart, including the one that we've discussed last week. Yes, we have hidden bullish divergence here. It is good but too few to make a context for the trade. Besides, it is too blur in time. Definitely, some clear bullish setup has to be formed on daily chart as well to make conclusion on reversal. Now we do not have it yet, or may be we will not get it at all, taking in consideration recent fundamental background and price action here, on weekly chart.
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Daily

Daily time frame also doesn't bring additional optimism as Friday session forms bearish grabber. Last week we've done everything that we could, found good entry point and market bounced up indeed giving us possibility to move stops to breakeven. But now it seems, that "last bullish outpost" could fall as soon as next week. As we've said already - current level is exceptionally important as it works like the key to deeper standing levels. Breakout of 1.08 support lets market to drop below 1.06 lows.
So, let's keep our riskless long position but not take new longs, as context might change very soon.
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Intraday

On 4H chart we still have hidden bullish divergence, but everything mostly depends on 1H chart. The reverse H&S pattern that we've mentioned here mostly is completed. Price now is moving out from neckline to the bottom of right arm. If market will hold above 1.08 area - chances on upside action exists, while moving down through all Fib support levels suggests downside breakout. This setup is simple to manage the trades as we definitely know where is invalidation point and how market has to move to confirm bullish scenario.
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Conclusion

Longer term picture stands unclear as numbers goes crazy due stun effect on pandemic and it is unclear what the real impact on economy will be. Unemployment data has sophisticated structure and could be treated differently depending on what particular components analysts includes in numbers. Despite negative comments and headlines on US measures to support economy - awful NFP, huge liquidity injection, decreasing of rate and rising of national debt with huge tempo - these measures are clear and on a surface, wherever they good or not. Unfortunately we can't say the same about EU measures, disagreement in governing authorities makes negative effect on sentiment and leads to bearish view among economists.

In short-term perspective 1.0765-1.08 area will be decisive. Inability to hold above it opens way below 1.06 lows.
 

Sive Morten

Special Consultant to the FPA
Messages
13,631
Morning everybody,

Price action on Monday was relatively quiet. Despite that EUR still can't get started upside action, it still keeps valid bullish setup as major lows that we've pointed on daily chart have not been broken down yet:
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As we've said in our weekly reports - as on FX as on Gold market, EUR stands in tight relation to DAX stock index. And now stocks actually has lost link to reality as they show 60% pullback while no positive shifts in global economy have happened. It leads to wide expectation of deep pullback, that is what talked about already. This, in turn, mean that EUR could get support and some upside action still could happen.

On 4H chart EUR keeps valid the shape of the pattern, as well, as support line:
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On 1H chart we can't talked on small reverse H&S pattern probably, but, once AB-CD down is completed, we have "222" Buy:
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That's being said, if you have long position that was opened based on our last week analysis - you could keep it, as EUR keeps chances on upside action as well, until it holds lows on daily chart valid.
 

Sive Morten

Special Consultant to the FPA
Messages
13,631
Morning everybody,

As situation barely has changed, today we've tried to put EUR in context of possible coming events on global markets - commodities and stocks, as a major ones.

here is the letter that I've got from DiNapoli Academy today. They point that current S&P top could become a reversal point:

"Despite record unemployment numbers, worldwide government lock downs, stifled economic activity, with no signs of the COV19 situation abating... We continue to see Wallstreet trading higher, day after day, week after week! How is this possible? Is Wallstreet totally out of touch with reality? The DJIA closed 457 points lower earlier today - for what could be an important market top here.

... I'm sticking my head out to suggest that we could be making yet another major market turning point today.

To Learn why we are making this warning to traders and investors, about a possible market move in the coming days/weeks,

Sincerely, Joseph AuXano DNapoli Trading Academy

P.S.
I hate to say this about the COV19 situation, and its impact on the markets and the economy, but the worst is likely yet to come."

And this is wide opinion guys, actually we've talked about it few weeks ago. Goldman Sachs suggests 70-80% drop, almost back to the lows. Yesterday we've talked about DAX index and it has dropped yesterday - EUR has climbed.

There is another moment on Crude Oil, just watch the video, there we talked more about this. What I would like to say is - our EUR bullish context is valid as it is pointed by technical picture. And drop on stock market supports EUR, thus, the rally that we've talked about is still possible.

So, do not be deceived by the grabbers that we have on daily chart. Right now it would be better to ignore them, or at least - if you hold long positions, keep them with breakeven stops and wait to close them.
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On 4H chart everything is good, another pullback stands up from our support area:
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On 1H chart our "222" Buy has worked perfect as well. Now keep an eye on 1.0825 support area. Use recent rally of "222" pattern to build Fib levels, if you consider long entry. If you have bearish view - you could try to rely on daily grabbers and sell against 1.09 top. But current situation tells that odds are tricky on this journey.
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Sive Morten

Special Consultant to the FPA
Messages
13,631
Morning guys,

Within previous few sessions we've talked a lot about relation of EUR to stocks and some background processes that should support EUR in near term. And, indeed, first reaction has shown that it seems that we're right. But, suddenly we've got another driving factor that could destroy all bullish intentions. This is inner EU tensions between Germany and Brussels. As you know, we said in our weekly report, that Germany court has obliged EU and ECB to provide provement and background for ECB supportive programme (i.e QE) and why Germany should take particular part in this programme. In response Brussels tell that sanctions could be imposed on Germany. It seems that everybody goes crazy in EU and lost any touch to reality. Imposing sanctions on Germany this is the same as impose sanctions EU on itself. This is self-destruction. And now we see the first fruits of this initiative. EUR stuck in the range and forms bearish grabbers day by day:
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On 4H chart we see two additional bearish moments. First is - appearing of reversal candle, second - market can't jump out from support line, laying upon it. Usually this type of price action happens before downside breakout. Besides, from the H&S shape point of view - market can't reach the neckline and complete right arm. This is also sign of potential H&S failure:
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On 1H chart the same story - both our bullish entry scenarios have worked good as EUR indeed has shown rally, but every time sellers step in and buy out all supply on the market pushing EUR down. Thus, price just can't break through resistance area.
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So, conclusion here is obvious - no new longs now. Our existed longs probably close by b/e stops today. Shorts are possible against daily grabbers' tops. Since we know the reason of this bearish sentiment. While this reason is valid market will be depressed and grabbers probably work.
 

Sive Morten

Special Consultant to the FPA
Messages
13,631
Morning guys,

EUR shows no changes today, so I think we could update our long-term setup on GBP. Recall that we intend to go long based on huge weekly engulfing pattern, that suggests upside continuation. But first GBP was have to show downside pullback due weekly K-resistance area. Current downside action is the pullback and we're coming to support levels where we could start thinking about long entry.

Usually pullback stands for 30-50%, but due pandemic effect could be stronger so I do not exclude deeper retracement. Thus, it makes sense to split position at least on 2 parts (better on three) and take position gradually. First area is 1.2170 support, next is 1.21 and last one 1.18. I hope GBP will not drop to 1.18, but who knows...
On daily chart we have extension around them as well.
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On 4H chart we have additional targets around the same levels. First one is around 1.2140 - OP and butterfly extension. That is what we keep an eye today:
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Last step in our entry process is keep an eye on bullish reversal patterns on hourly chart. Currently we do not have anything yet. So, wait when market hits OP then turn to 1H and watch for reaction. If reverse H&S, double bottom, butterfly "Buy' or anything else will be formed - this makes possible to take position.
 
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