Forex FOREX PRO WEEKLY, November 27 - 01, 2023

Sive Morten

Special Consultant to the FPA
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Fundamentals

We haven't got too many important events this week, markets mostly were quiet. Last week we've discussed really epic topics, concerning US-China economical and geopolitical confrontation and situation with the US Debt and time that they have until situation might become vital. This week there are few events that also seem important and we take a look at them briefly.

Market overview

The dollar index was on pace to stem the tide of its recent downturn on Tuesday after minutes from the Federal Reserve's most recent policy meeting showed the U.S. central bank was likely to maintain a restrictive stance on interest rates for some time. Fed officials said inflation remained well above their target but noted that rates would only need to be raised if new data showed insufficient progress on reducing price pressures.

"The Fed minutes underscore the Fed's most recent messaging, that they are still not prepared to declare victory and that they have no intention thus far to cut rates in 2024," said Quincy Krosby, chief global strategist at LPL Financial in Charlotte, North Carolina.

Investors are gauging when the Fed may begin to cut rates, pricing in a nearly 60% chance of a cut of at least 25 basis points by May, according to CME's FedWatch Tool, edging up from about 58% on Monday.

"Enough people were caught off guard by the CPI number to just kind of let the market go the other way and it's had a nice move, and now it just feels a bit tired going down," said Erik Bregar, director, FX & precious metals risk management at Silver Gold Bull in Toronto. Given the size of the dollar's drop and big option expirations in the eurodollar and yen on Wednesday, the greenback could stabilize.

U.S. existing home sales dropped to the lowest level in more than 13 years in October as the highest mortgage rates in two decades and a dearth of houses drove buyers from the market. Initial claims for state unemployment benefits dropped by 24,000 to a seasonally adjusted 209,000 for the week ended Nov. 18, the Labor Department said on Wednesday, the lowest level in more than a month. Economists polled by Reuters had forecast 226,000 claims for the latest week.

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Other data, however, showed orders for long-lasting U.S. manufactured goods fell more than expected in October.

The fact that we are seeing a drop definitely suggests that the labor market is not cooling as quickly as markets or the Fed might have been expecting there," said Karl Schamotta, chief market strategist at Corpay in Toronto. And then at the same time the fact that we have this slowdown in CapEx investment ... that suggests that underlying momentum in the economy is beginning to fade so, largely still consistent with the soft landing thesis, but labor markets holding up better than expected," Schamotta added.

The greenback extended gains after the University of Michigan's survey of consumer sentiment showed U.S. consumers' inflation expectations rose for a second straight month in November.

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European Central Bank (ECB) policymaker Mario Centeno said he expected macroeconomic conditions would lead to a reversal in the bank's recent cycle of rate hikes in the near future while Governing Council member Joachim Nagel said rates in the euro zone are close to their peak in the current cycle or may have already reached it.

Germany's economy shrank slightly in the third quarter from the previous three months. German business morale improved for a third straight month in November, data showed. The single currency is pausing after gaining ground on Thursday on a series of preliminary surveys showing recession in Germany may be shallower than expected, which offset a downbeat reading on French business activity.

And just to complete market overview, I put here few charts, showing that structural crisis is keep going slowly but stubbornly - without slowdown or acceleration and migrating from one sphere to another in all countries across the Globe. Situation mostly has not changed:
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Feast of Disobedience

In recent two weeks we see some unexplainable issue - investors totally ignore as Fed's comments as raising inflationary expectations and warnings from economists. They run into risky assets. One more is being added to the basket of reasons for the rally in the American market in recent weeks. Companies have increased the repurchase of their own shares by several times compared to the seasonal trend and volumes since the beginning of the year. This can be done at the current rate only if the company firmly believes that the rate will decrease. Because burdening yourself with debt (or giving away your cash instead of investing it at a comparable interest rate) otherwise is suicide. According to BofA, last week there were the largest weekly buybacks in the entire history of the bank’s data (since 2010). Global equity funds shows the same dynamics.

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In addition, according to Goldman, over the past 10 days, CTAs have bought nearly $70 billion worth of US stocks. This is the largest purchase in such a short time.
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But not only corporations are believed in a bright tomorrow. An imminent reduction in rates, were some banks that, against the backdrop of another rally (in the bond market), which led to a decrease in yields on long-term treasuries, decided to reduce mortgage rates. Its not too big, just around 0.5%, but still it is, and this means that not only the broad market, but also, let’s say, professional players believe that the Fed, for some unknown reason, will change its policy and turn around. Moreover, cautious investors understand that the only reasonable reason can be a recession, when rates, on the contrary, need to be raised, since the risks of defaults in a recession grow disproportionately. But cautious investors in the market seem to have all been washed out by shorts on S&P.

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Finally, Investors are buying up US corporate debt in the hope that the peak rates have passed. Inflows into corporate bond funds reached their highest level since July 2020. According to EPFR, in the month to November 20, corporate bond funds received more than $16 billion: this is more than in any full month since July 2020. This trend is most clearly visible in the junk bond segment—funds investing in low-quality, high-yield bonds received $11.4 billion this month. Another $5 billion went to investment-grade funds holding higher-quality corporate bonds.

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So, despite the fact that all the world’s central banks say that they are not going to lower the rate yet, investors are having a holiday of disobedience - they are buying bonds in the hope of a reversal. At the same time, inflation expectations are growing. It seems irrational, unless you take into account the fact that for the most part there is simply nowhere to park bond money. Bond investors are reluctant to invest in stocks, and they simply won’t fit into stocks in full.

For the same reason, by the way, real estate is also growing - although buyers are afraid that prices are already too high, they do not see a reasonable alternative. Although each subsequent price “step” makes investing in real estate less and less reasonable. Changing the usual ideas about what is risky and what is not turns out to be the most difficult thing.

Most bright example could be seen in Germany. DAX index stands at high. We have collapse of German economy across the board - GDP is negative, political and budget crisis. Here, just to safe space in report, I bring few links that show situation in details:

Euro-Area Business Weakness Increases the Odds of Recession
Germany financial sector facing dark clouds, Bundesbank warns
Euro zone's shadow banks face risk of margin calls, ECB says
Germany's economy shrinks slightly in third quarter
ECB Warns Weak Economy Heightens Stability Risks From Hikes

The balance sheets of euro zone banks are showing “early signs of stress” after a rise in loan defaults and late repayments from historic lows, the European Central Bank (ECB) has warned. Officials urged lenders to increase provisions to cover rising loan losses and predicted their profits would be hit by a drop in lending volumes and increased funding costs. The ECB has increased interest rates by an unprecedented 4.5 percentage points in the past year.

A longer period of high interest rates is likely to lead to higher provisions, which in turn will be a drag on profitability further down the line,” the central bank said at its twice-yearly financial stability review. “Default rates on both corporate and retail exposures have started to increase and the share of loans which are less than 90 days past due but still performing has also picked up and stands above the historically low levels seen in 2022,” it said.

ECB vice-president Luis de Guindos said that while “risks to financial stability may appear less acute, they remain elevated”, pointing to the impact of weaker economic growth, tighter financing conditions, rising loan defaults and a downturn in property markets. It also points out another interesting point about the fact that over the past years, European banks have supposedly become stronger and have accumulated a margin of safety. We note that the capital-to-asset ratio was about 1.5-2 times lower than that of the American ones. So, if banks in the US have begun to feel unwell, then European banks may also run out of reserves. Especially if some political black swan arrives.

But, in the US situation is not perfect either. FT writes that Investors dump dollar in bet that US rates have peaked. Investors are selling dollars at the fastest rate in a year as they raise their bets that the US Federal Reserve has finished its aggressive campaign of interest rate increases and will deliver multiple cuts next year. Asset managers are on track to sell 1.6 per cent of their open dollar positions this month, the largest monthly outflow since last November, according to State Street, which is custodian to $40 Bln of assets. Managers had made “significant” sales every day since weaker-than-expected US jobs data on November 3, according to the bank.

Geoff Yu, foreign exchange strategist at BNY Mellon, custodian to $46 Bln of assets, said that over the past 20 days the firm’s custody clients “have been selling dollars at the fastest pace this year”, with a preference for buying the Japanese yen, Canadian dollar and a range of Latin American currencies.

US Real Estate market shows awful data:

The crisis in the real estate market in the United States is growing – sales in the secondary market are reaching a minimum in 40 years and an absolute minimum per population. According to data for September 2023 - 3.79 million homes in annual terms. This is the lowest level since 2010. If you adjust sales per capita, current activity in the secondary real estate market 55% lower than the maximum in 2005-2006 and is the lowest for the entire period of statistics.

According to Zillow (most up-to-date indicator of real estate prices) value of real estate is growing for the seventh consecutive month, which made it possible to compensate for the drop in prices in the second half 2022 and reach a positive annual dynamics(+1.8% yoy). The weighted average price of a residential property is almost $350K (historical maximum),which 40-42% higher than before COVID crisis.

The situation is absurd – prices rise when sales fall,which is associated with inflationary processes (estate as an opportunity to save savings from depreciation),demand shifts to expensive real estate(increases the average price index) due the activity of well-off buyers and a rather low supply volume (accumulated effect of the low construction volume of the last 15 years). Adjusted for inflation, current prices are only 2-3% higher than the 2006 bubble peak, and 68% higher at face value.

Second - the US Treasury is not very good at debt managing. They mainly place short-term debt, and 90% of the increase is short-term bills. But this is not because “the issuer decided so,” but because nobody takes long ones. If we remember the early 1990s, then there was exactly the same picture - debt over 1 year simply did not exist, and the demand was for 3-6 month securities.

That is, the US debt market is being reformatted to suit the inflationary scenario. Therefore, speculation around the fact that the rate will soon reverse is most likely necessary for the sale of at least some amount of long-term securities, because if the already gigantic “planned” refinancing is additionally put under pressure by the “new” budget deficit in the amount of $1-1.5 trillion. per year, and even these bills worth $1.6 trillion, all this splendor can break much earlier than in the option of placing long-term debt. That is, almost at any time.

Besides, concerning budget deficit. It is important to understand that the argument “the Fed is reducing its balance sheet” is, of course, an important argument, but the outflow of liquidity is more about the availability of free resources for, let’s say, investment, while income is an income. Approximately the amount of money on your card and your salary are not the same. Somebody borrowed money from you and your liquidity decreased, but your income increased because you began to receive high interest on the loan.

But what was happening in parallel is doubly interesting. In parallel, the Government increased the budget deficit through borrowing and thus began to convert debt into capital. That is, borrow money and spend it. For the state, this is an increase in debt, and for those who receive this money from the state (for example, someone who provides some service for the state and receives revenue) - this becomes their own capital, now it is their money and they do not owe anyone. That is, the state began to inject liquidity into the system, increase income in the system (that is, stimulate GDP growth) simultaneously with pumping up demand.

Oddly enough, taxes are also collected from this additional income. Moreover, this money is circulated in the economy several times and taxes must be collected at each stage. As a result, it turns out that taxes should have increased if the budget deficit grew, but... they did not increase. They even fell in 2023:
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It is also noteworthy that if they reduce the budget deficit now, then budget revenues will fall. The relationship is nonlinear, but it exists. And it turns out that in the current situation it is under no circumstances possible to reduce the budget deficit, because demand will decrease, the multiplier effect from these expenses will go away, GDP will decrease, taxes will be collected even less, and so on in a circle.

In general, the system is unbalanced and is held together with spit. There is a limit to everything. And the limit lies precisely in the fact that within the system itself the balance begins to deteriorate. Somewhere, gaps arise in both income and liquidity, risks grow and a chain reaction finally works and the system will need to be saved.

So, guys, this is phenomenon - consumers inflation expectations are raising, inflation component in real estate market is raising, Central banks warn about long term high rates... It looks like total loss of survival instinct among all investors?

The Bottom line:

Additionally to issues that we've explained above, we have three fundamental concern. The US banking sector (and EU as well) that has accumulated 650+ Bln of current loss in US bonds. Many of them already could be insolvent. Banks out of top-4 by assets account for 60% of all assets of the banking sector. While the sharp slowdown in bank lending continues.

The second risk factor is commercial real estate, especially office space. Demand for office real estate has decreased significantly. Prices are falling. Defaults are rising. And many banks will end up losing money on their investments in US office real estate. Today, the bank's position in commercial real estate is about $1 trillion.

The third risk factor is the inflating of another derivatives bubble. The hidden problem with derivatives is that it is easy for some institutions to take on too much risk. Today, the US derivatives market is valued at $ 221 trillion . Once this avalanche starts moving, it will be impossible to stop it.

Besides, who said that the Fed can't continue tightening after some break. This happens five times in the history, and breaks were much longer than current 18 weeks:
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At the end I would like to mention interesting statement by Francesco Sandrini, head of multi-asset strategies at Amundi heading into 2024 he expected dollar weakness to continue “in part because we anticipate less turbulence between the US and China”, meaning investors had less need of the greenback as a safe haven.

And this week right in time we get exceptional article in FT, dedicated to this subject. Since it relates strongly to geopolitics and Gold market - we consider it tomorrow in Gold report. Here we just say that we wouldn't count on it. All this stuff together is naked, I would say, strategical miss of those who bet on rate cut too early and those who bet on sharp dollar reversal. Thus, Chief currency analyst at Deutsche Bank George Saravelos is confident that the US dollar will strengthen in the coming months, and European currencies will cost less.

️High interest rates and the strength of the US economy have been supporting factors for the dollar this year. And this disposition is unlikely to change in the coming months, despite aggressive investor bets that the Fed will begin easing monetary policy in 2024. A weakening dollar will require the Fed not only to soften its position, but also to begin cutting interest rates faster than other central banks in developed countries,” Saravelos notes.

It seems that it is a bit early to bury the US Dollar. Especially due to new turn in US-China relationships.
 
Technicals
Monthly

Monthly picture has not changed too much since last week. November is becoming nice month for EUR. Monthly trend remains bullish. Price shows healthy bounce up from YPP. It is few time until the end of the year, but, usually with such price action, market tends to YPR1 that stands around 1.1620 level. Besides, market still stands in wide downside range and YPR1 is precisely at its top line.

Here we could say that EUR should try to re-test K-area and trend line at least, around 1.1250-1.14 area. At the same time, speaking in very long-term perspective, this action could give us some "222" Sell pattern, where bearish trend could be re-established.
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Weekly

Due to the short week, EUR keeps intrigue for another one. We have bullish trend and strong upward momentum is not very friendly for B&B "Sell" trade that we're still watching for. As we've said, B&B setup enters final stage - it either happens or fails and EUR keep going higher. So, we still keep watching for performance on daily chart, whatever it will be. Meantime, price is not broken last daily resistance yet:
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Daily

As we've mentioned last time, EUR doesn't show yet any bearish signs. Once XOP has been reached, price has not formed any clear intraday bearish patterns and shows no clear signs of reversal, coiling around major 5/8 resistance area. It doesn't mean that B&B fails. It just means that EUR could show some way of upside action - either short-term spike, like W&R, or real breakout. Now we have to be patient with taking short position and see what will happen. Upside breakout will tell that we need to buy instead.

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Intraday

Here obviously we also do not have a H&S pattern, that confirms our suggestion. Now we have just "222" Sell", but potentially it could turn to Butterfly "Sell" around 1.0990. This probably will become the last chance for bears to start B&B as its target already stands above 5/8 daily resistance.

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Morning everybody,

Today we discuss the tricky moment that exists on EUR and GBP as well. First is, as you probably see already, it seems we're getting some signs of weakness on intraday EUR and GBP charts. But I see here very tricky moment. If you take a look at DXY you could see the free space below, right down to major 5/8 support and XOP target. Market is not at oversold. While on 10-year bonds we have bearish reversal session yesterday and two side-by-side grabbers, suggesting further fall of the yield.

So, maybe EUR will not climb any more but hardly it starts falling until major target is reached on DXY. The same we could say on GBP. Actually it has the same placement as DXY on a way to 5/8 level. Since on GBP we have B&B "Buy" in progress, it is reasonable to expect its completion before considering any short entry:
eur_d_28_11_23.png


On 4H chart we do not see yet any clear patterns except divergence:
eur_4h_28_11_23.png


On 1H chart indeed, some signs of weakness exist as CD leg looks slower and market shows downside bounce. If you still decide to take short position right now, place the stop order with some room to let market breath and GBP with DXY to reach major levels. For instance, if you decide to sell GBP initial stop would be better to place above daily 5/8 resistance area.
eur_1h_28_11_23.png


As I'm conservative a bit, I prefer to wait for clear patterns in place. Still, there is the factor that could impact on situation - PCE numbers. If we get them significantly higher, dollar could start raising prior reaching of logical technical objective points...
 
Morning everybody,

So, DXY has done exactly what we've worried about - it drops, together with the US yields. So, our yesterday's suggestions are seemed to be correct. The importance of current level is about the its pivot role for short-term performance. The point is, if EUR will not show any meaningful downside reaction, i.e. weekly B&B will not happen - new upside horizon will be around 1.14 area.

Meantime, as DXY and GBP are around major Agreement area, we could start looking for bearish patterns on EUR as well.
eur_d_29_11_23.png


On 4H chart market stands in upside channel. Some downside action is starting but it is too small yet to make any conclusions. Also, recall, that DXY has not reached yet the XOP target, and probably should do it today:
eur_4h_29_11_23.png


On 1H chart both our targets are done accurately:
eur_1h_29_11_23.png


Those who intends to take short position have few options. First is, to wait when DXY hits the target and watch for reversal pattern on 1H chart. For example, on EUR it might be H&S. Or, the second is, use the butterfly as triggering pattern. This cares more risk as we're going to GDP and PCE numbers, so, action around the top might be volatile. Finally, if you feel it more comfortable - it is possible to trade DXY directly or GBP instead of EUR.
 
Morning everybody,

So, EUR has started minor downside action. Those who have taken risk and sold yesterday, now have a chance to move stops to breakeven. At the same time, I'm not sure yet that this is it - started downside B&B by few reasons.

First, is, DXY, although it has hit 5/8 support area but not quite completed XOP (as well as GBP btw). With coming PCE today, volatility could raise and we can't exclude some spikes around. Yields have dropped yesterday as well.
eur_d_30_11_23.png


Second is - EUR performance of 4H chart doesn't look like bearish reversal. It is too slow. With theoretically possible 3-Drive, this is another reason, why new short position looks a bit tricky:
eur_4h_30_11_23.png


Finally, on 1H chart, market is forming something like flag consolidation, action inside also a bit choppy. All these moments together make us to be cautious on possible upside spike and postpone decision making about short entry.
eur_1h_30_11_23.png


Besides, B&B is weekly pattern. It should be something really evidently bearish and extended pattern on 1H chart. Current action is too small to fit this purpose.
 
Greetings everybody,

So, yesterday, just we've finished our video - EUR has accelerated down. GDP upward revision and stable PCE numbers show less slowdown in the US economy and potentially longer period of high rates environment, which has triggered some dollar strength.

Still, on EUR we do not have yet confirmation of reversal - formally, despite bearish MACD, EUR keeps the tendency of HH and HL. Appearing of bearish reversal swing would be welcome here:
eur_d_01_12_23.png

On 4H chart, I keep 3-Drive picture for some time, because it is also bearish reversal pattern. But, if we're correct that reversal starts, we probably should see H&S instead. Downside action now shows good pace:
eur_4h_01_12_23.png


On 1H chart EUR dropped precisely to K-support and completed XOP specified yesterday. Despite that action down looks impressive, EUR still has long lasting upside momentum, so, here we could wait for a bounce, and 1.0930-1.0940 K-resistance looks interesting for this. If we really get H&S, then the bounce might be even higher, to 5/8 resistance level...
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