Sive Morten
Special Consultant to the FPA
- Messages
- 18,531
Fundamentals
NFP should become big event of last week, but in reality price action was mild. Report was mixed as employment was two times below expectation but unemployment rate dropped and wage growth was the same 2.8%. Low employment numbers become normal now and should not confuse us because employment stands near high capacity. Low numbers is not a sign of weakness but just result of saturation of employment market. Besides, results of previous two months were revised up.
Anyway, as Reuters reports - dollar weakened on Friday after data for September showed jobs gains that fell short of expectations while wages increases slowed on an annualized basis during the month, easing concerns about a large run-up in inflation.
Nonfarm payrolls increased by 134,000 jobs last month, the fewest in a year, though data for July and August was revised to show 87,000 more jobs added than previously reported.
Average hourly earnings increased eight cents, or 0.3 percent, in September after rising 0.3 percent in the prior month. With September’s increase below the 0.5 percent gain notched during the same period last year, that lowered the annual increase in wages to 2.8 percent from 2.9 percent in August, which was the biggest rise in more than nine years.
“Wage inflation is creeping higher, but it has not accelerated as the market was fearing,” said Russell Price, senior economist at Ameriprise Financial Services in Troy, Michigan.
Investors have been watching for indications that wages may rise at a faster pace as companies, including Amazon, raise minimum wages.
Still, the data was seen as solid and supportive of the Federal Reserve continuing to tighten monetary policy.
“There is no material slowdown in the U.S. economy. These numbers will confirm the Fed remains on track for steady rate hikes,” said Paresh Upadhyaya, director of currency strategy at Amundi Pioneer Asset Management in Boston.
Hawkish Fed speakers and strong U.S. economic growth have supported the greenback in recent weeks. A dramatic surge in Treasury yields this week that may attract investors seeking higher returns is also seen as positive for the U.S. currency.
“Certainly these higher yields are giving a better bid to the U.S. dollar across the board,” said Dean Popplewell, chief currency strategist at Oanda in Toronto.
Given recent strength, investors are also likely to be cautious about being short the U.S. currency before a long weekend, Popplewell said, adding that “there is good demand for U.S. dollars definitely on pullbacks.”
It seems that recent report is treated more as positive rather than negative by markets. Take a look at 10-year US bonds yield. Week has closed at top and is coming to our 3.35% target gradually.
CME Fed Watch tool shows that probability of 4th rate action in December has increased from 74,43% week ago to 76,94%.
Besides, if you take a look at Asia Pacific currencies, such as AUD, NZD - they show opposite dynamic to EUR and GBP. Yes, they stand under tariffs impact and strongly relate to China, still these currencies dropped on a background of NFP numbers.
At the same time, since reaction was mostly neutral, this brings almost nothing to help us understand what could happen next week.
Today we do not have big long-term events that could somehow make impact on our long-term view. The one thing that we mention here is Fathom consulting update on US companies that work in China. Now they start to get advantages dropping renminbi and imposing of US tariffs. That could make impact on terms of global crisis that Fathom expects around 2020:
US-listed firms that derive a significant share of their revenue in China have significantly underperformed their peers in 2018. Fathom’s China Exposure Index (CEI) peaked at 117.3 on 22 March, the day that the US first announced that it would impose tariffs on imports from China; it has now dropped to 100.1, meaning that firms in the CEI have underperformed their US-listed peers by 15% since then. Sino-US trade tensions, a weakening renminbi and China’s slowing economy explain the underperformance.
An easing of such trade tensions, and a firm commitment by China to open its markets to US firms, would be beneficial for firms in the CEI; we ultimately expect such an outcome to prevail, although a further escalation in trade tensions is a risk. Perversely, an escalation of the Sino-US trade war could delay the global recession that we expect to occur in 2020.
COT Report
Last week we said that it would be interesting to see, how position has changed due Fed statement. Indeed, it has dropped, but decrease was not strong. Now net speculative position stands short for 7K contracts which is in the range of recent 2 months.
Source: CFTC.gov
Charting by Investing.com
Open interest has increased for ~11,2K contracts. Bearish dynamic in position changing was as among speculators as among hedgers. It means that it is not simple question concerning upward action on daily chart, that we still keep on the table. Although recent sentiment changes are minimal, they stand against EUR.
Technicals
Monthly
Guys, as you understand, we do not have big changes on technical side this week. Trading range was narrow - August range holds action of September and October. Mostly we stand in the same position as on Friday, before NFP release.
On monthly chart 1.14-1.15 area is strong and very important support, because it includes YPP. Since our fundamental background supports dollar strength within a year or so - downside breakout should happen sooner or later. The fact that EUR has turned down precisely from YPR1 area tells that recent 1.05-1.26 action was an upside retracement within long-term bear trend. And YPP break could become another vital confirmation of this scenario.
In general 1.14-1.15 is important not just because of YPP. Take a look - this is upper border of former 1.05-1.14 consolidation. If price will drop back inside it - it will open road to the bottom of 1.05 area. Also this is monthly 50% support area. Price has problems with breaking borders of any consolidation, but it has no barriers inside and could freely move from up to bottom.
Weekly
Here is on weekly, we correctly suggested drop to major support area last week:
Here, guys we come closer to next week trading plan. Last week's action significantly simplifies our task on coming week. We've got bearish engulfing pattern and bearish reversal week. This combination gives good chances on downside continuation to 1.1450 area.
But, despite good trading setup, market leaves our major question without answer. What we should expect - downside continuation or keep our trading plan and count on upside action. Action that we see now stands more in favor of upside leg. May be it will not reach 1.19 as it is shown on the chart, but - downside action was held by MPS1. It means that this is retracement, but not continuation of longer-term bear trend yet. Besides, our crucial 1.1450 support still holds the market.
It means that weekly picture prevents us from taking any short position until 1.1450 support stands valid. So our context is bullish and we're looking north.
Daily
Daily chart shows a bit tricky picture. Downside action was straight forward, while we've expected AB-CD, more gradual action to 1.1450. Next is - reaction on support and NFP release rather week, at least now. Take a look - Thu and Fri action stands in the range of Wed bearish candle. This was the day of ADP report release and J. Powell comments. And market still stands inside it.
Finally, take a look that drop was so strong that daily EUR hit oversold level. In fact, here we've got bullish "Stretch" pattern - combination of Fib support and OS. But Stretch is always retracement pattern. What I'm trying to say that maybe 1.1450 is survived not because of real investors demand but because of technical oversold? This is the major concern that we have around weekly/daily setup. Take a look that by DOSC indicator - Stretch is almost done, as its target is zero DOSC level.
Still all doubts lead us to the same 1.1450 level as a cornerstone of short-term analysis. It's breakout will turn context to bearish. We need to be careful to any bearish signs in the beginning of the week.
Intraday
Here we have two major areas to keep an eye on. First is our Friday's 3-Drive "Buy" pattern, which theoretically should start to work right at 1.1450. Since daily Stretch is mostly worked out already, this could be second test of 1.1450 area, but no daily oversold will be this time. And this will be real test, that will answer on our question concerning this level. If it was due OS - then EUR will drop through it. If not - this will tell us that bullish context is still valid. Anyway, 3-Drive entry point provides best risk/reward ratio for long position.
Second is an area of WPR1 and 3/8 major Fib level. Breaking above 1.16 will be important bullish sign. So, it should be two chances to go long - either on 3-Drive, or after 1.16 breakout. For bears task is more simple - downside breakout of 1.1450.
Conclusion:
Narrow action within last 2 weeks barely impacts on long-term scenario. On coming week we hope to get a final direction. The border stands at 1.1450 level.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
NFP should become big event of last week, but in reality price action was mild. Report was mixed as employment was two times below expectation but unemployment rate dropped and wage growth was the same 2.8%. Low employment numbers become normal now and should not confuse us because employment stands near high capacity. Low numbers is not a sign of weakness but just result of saturation of employment market. Besides, results of previous two months were revised up.
Anyway, as Reuters reports - dollar weakened on Friday after data for September showed jobs gains that fell short of expectations while wages increases slowed on an annualized basis during the month, easing concerns about a large run-up in inflation.
Nonfarm payrolls increased by 134,000 jobs last month, the fewest in a year, though data for July and August was revised to show 87,000 more jobs added than previously reported.
Average hourly earnings increased eight cents, or 0.3 percent, in September after rising 0.3 percent in the prior month. With September’s increase below the 0.5 percent gain notched during the same period last year, that lowered the annual increase in wages to 2.8 percent from 2.9 percent in August, which was the biggest rise in more than nine years.
“Wage inflation is creeping higher, but it has not accelerated as the market was fearing,” said Russell Price, senior economist at Ameriprise Financial Services in Troy, Michigan.
Investors have been watching for indications that wages may rise at a faster pace as companies, including Amazon, raise minimum wages.
Still, the data was seen as solid and supportive of the Federal Reserve continuing to tighten monetary policy.
“There is no material slowdown in the U.S. economy. These numbers will confirm the Fed remains on track for steady rate hikes,” said Paresh Upadhyaya, director of currency strategy at Amundi Pioneer Asset Management in Boston.
Hawkish Fed speakers and strong U.S. economic growth have supported the greenback in recent weeks. A dramatic surge in Treasury yields this week that may attract investors seeking higher returns is also seen as positive for the U.S. currency.
“Certainly these higher yields are giving a better bid to the U.S. dollar across the board,” said Dean Popplewell, chief currency strategist at Oanda in Toronto.
Given recent strength, investors are also likely to be cautious about being short the U.S. currency before a long weekend, Popplewell said, adding that “there is good demand for U.S. dollars definitely on pullbacks.”
It seems that recent report is treated more as positive rather than negative by markets. Take a look at 10-year US bonds yield. Week has closed at top and is coming to our 3.35% target gradually.
CME Fed Watch tool shows that probability of 4th rate action in December has increased from 74,43% week ago to 76,94%.
Besides, if you take a look at Asia Pacific currencies, such as AUD, NZD - they show opposite dynamic to EUR and GBP. Yes, they stand under tariffs impact and strongly relate to China, still these currencies dropped on a background of NFP numbers.
At the same time, since reaction was mostly neutral, this brings almost nothing to help us understand what could happen next week.
Today we do not have big long-term events that could somehow make impact on our long-term view. The one thing that we mention here is Fathom consulting update on US companies that work in China. Now they start to get advantages dropping renminbi and imposing of US tariffs. That could make impact on terms of global crisis that Fathom expects around 2020:
US-listed firms that derive a significant share of their revenue in China have significantly underperformed their peers in 2018. Fathom’s China Exposure Index (CEI) peaked at 117.3 on 22 March, the day that the US first announced that it would impose tariffs on imports from China; it has now dropped to 100.1, meaning that firms in the CEI have underperformed their US-listed peers by 15% since then. Sino-US trade tensions, a weakening renminbi and China’s slowing economy explain the underperformance.
An easing of such trade tensions, and a firm commitment by China to open its markets to US firms, would be beneficial for firms in the CEI; we ultimately expect such an outcome to prevail, although a further escalation in trade tensions is a risk. Perversely, an escalation of the Sino-US trade war could delay the global recession that we expect to occur in 2020.
COT Report
Last week we said that it would be interesting to see, how position has changed due Fed statement. Indeed, it has dropped, but decrease was not strong. Now net speculative position stands short for 7K contracts which is in the range of recent 2 months.
Source: CFTC.gov
Charting by Investing.com
Open interest has increased for ~11,2K contracts. Bearish dynamic in position changing was as among speculators as among hedgers. It means that it is not simple question concerning upward action on daily chart, that we still keep on the table. Although recent sentiment changes are minimal, they stand against EUR.
Technicals
Monthly
Guys, as you understand, we do not have big changes on technical side this week. Trading range was narrow - August range holds action of September and October. Mostly we stand in the same position as on Friday, before NFP release.
On monthly chart 1.14-1.15 area is strong and very important support, because it includes YPP. Since our fundamental background supports dollar strength within a year or so - downside breakout should happen sooner or later. The fact that EUR has turned down precisely from YPR1 area tells that recent 1.05-1.26 action was an upside retracement within long-term bear trend. And YPP break could become another vital confirmation of this scenario.
In general 1.14-1.15 is important not just because of YPP. Take a look - this is upper border of former 1.05-1.14 consolidation. If price will drop back inside it - it will open road to the bottom of 1.05 area. Also this is monthly 50% support area. Price has problems with breaking borders of any consolidation, but it has no barriers inside and could freely move from up to bottom.
Weekly
Here is on weekly, we correctly suggested drop to major support area last week:
Here, guys we come closer to next week trading plan. Last week's action significantly simplifies our task on coming week. We've got bearish engulfing pattern and bearish reversal week. This combination gives good chances on downside continuation to 1.1450 area.
But, despite good trading setup, market leaves our major question without answer. What we should expect - downside continuation or keep our trading plan and count on upside action. Action that we see now stands more in favor of upside leg. May be it will not reach 1.19 as it is shown on the chart, but - downside action was held by MPS1. It means that this is retracement, but not continuation of longer-term bear trend yet. Besides, our crucial 1.1450 support still holds the market.
It means that weekly picture prevents us from taking any short position until 1.1450 support stands valid. So our context is bullish and we're looking north.
Daily
Daily chart shows a bit tricky picture. Downside action was straight forward, while we've expected AB-CD, more gradual action to 1.1450. Next is - reaction on support and NFP release rather week, at least now. Take a look - Thu and Fri action stands in the range of Wed bearish candle. This was the day of ADP report release and J. Powell comments. And market still stands inside it.
Finally, take a look that drop was so strong that daily EUR hit oversold level. In fact, here we've got bullish "Stretch" pattern - combination of Fib support and OS. But Stretch is always retracement pattern. What I'm trying to say that maybe 1.1450 is survived not because of real investors demand but because of technical oversold? This is the major concern that we have around weekly/daily setup. Take a look that by DOSC indicator - Stretch is almost done, as its target is zero DOSC level.
Still all doubts lead us to the same 1.1450 level as a cornerstone of short-term analysis. It's breakout will turn context to bearish. We need to be careful to any bearish signs in the beginning of the week.
Intraday
Here we have two major areas to keep an eye on. First is our Friday's 3-Drive "Buy" pattern, which theoretically should start to work right at 1.1450. Since daily Stretch is mostly worked out already, this could be second test of 1.1450 area, but no daily oversold will be this time. And this will be real test, that will answer on our question concerning this level. If it was due OS - then EUR will drop through it. If not - this will tell us that bullish context is still valid. Anyway, 3-Drive entry point provides best risk/reward ratio for long position.
Second is an area of WPR1 and 3/8 major Fib level. Breaking above 1.16 will be important bullish sign. So, it should be two chances to go long - either on 3-Drive, or after 1.16 breakout. For bears task is more simple - downside breakout of 1.1450.
Conclusion:
Narrow action within last 2 weeks barely impacts on long-term scenario. On coming week we hope to get a final direction. The border stands at 1.1450 level.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.