Sive Morten
Special Consultant to the FPA
- Messages
- 18,644
Fundamentals
So, there were big expectations from this week related to new round of Brexit negotiations and some hopes that stimulus still could come from US government, but all hopes have blown out like soap bubble. First shock market has got from Pelosi on Monday - the same person who has encourage markets right on Friday, when she said that 1.8 Trln stimulus pack is not enough and has been rejected. Brexit round has not brought any breakout and positive result. In dry residual fluctuations on the market were minimal with no good short-term trading setups.
Still, the positive moment is - indeed two factors that we've specified are working. They are Biden leadership and stimulus discussion. Once news on Biden's probe have appeared, markets have got the shock as dollar has strengthen. The only problem with this driving factors - we can't control or forecast them, as any news are surprising and just explains the market reaction. But we know the direction, depending on the news type. Improving Biden's leadership and more talks on stimulus support riskier assets and work against USD. The opposite is true as well - deteriorating of the leadership and close of stimulus discussion support dollar.
News surfing
The U.S. dollar strengthened on Tuesday as investors turned cautious after a Johnson & Johnson COVID-19 study was paused and as hopes dimmed that a fiscal stimulus package could be reached before the presidential election. U.S. consumer prices rose 0.2% in September, matching expectations, for a fourth straight monthly climb, though the pace has slowed amid considerable slack in the economy as it slowly recovers from a nadir caused by coronavirus shutdowns.
The U.S. currency’s safe-haven appeal has been curbed by growing expectations that a win by former U.S. Vice President Joe Biden on Nov. 3 would bring large stimulus for the pandemic-hit economy, bolstering the stock market and investor risk appetite.
“It’s becoming increasingly evident to people that there is no stimulus coming before the election,” said Erik Nelson, a currency strategist at Wells Fargo in New York.
“I wouldn’t say markets were fully pricing stimulus or fully pricing a vaccine by the end of the year but they were probably tilted towards the more positive side of those expectations.”
U.S. House Republican Leader Kevin McCarthy said Thursday he does not expect agreement on a fresh coronavirus relief package before Election Day on Nov. 3 as long as House Speaker Nancy Pelosi is involved in negotiations, saying she is the “one stumbling block” to a deal getting done.
At a news conference, McCarthy also sidestepped a question about President Donald Trump’s willingness expressed earlier Thursday to go higher than $1.8 trillion on a coronavirus aid package. McCarthy said $1.8 trillion was “a very big deal,” but added: “It doesn’t matter what our answer would be, because the Speaker has denied anything from moving.”
The White House proposed the $1.8 trillion in stimulus last week in negotiations with House of Representatives Speaker Nancy Pelosi. Pelosi, the top Democrat in Congress, rejected the offer and has stuck to her demand for a $2.2 trillion deal.
President Donald Trump on Thursday said he is willing to raise his offer of $1.8 trillion for a COVID-19 relief deal with Democrats in the U.S. Congress, but the idea was shot down by his fellow Republican, Senate Majority Leader Mitch McConnell.
“We like stimulus, we want stimulus and we think we should have stimulus,” Trump said. The president ruled out accepting Pelosi’s proposal outright “because she’s asking for all sorts of goodies.”
McConnell, the top Republican in Congress, noted that a higher amount was under discussion. But he said nearly all Senate Republicans favor a much smaller $500 billion aid bill. Many Republicans, especially in the Senate, already view the White House’s current $1.8 trillion offer as too big. Republicans voiced those concerns in a weekend call with administration officials.
“My members think what we laid out – a half a trillion dollars, highly targeted – is the best way to go. So that’s what I’m going to put on the floor,” McConnell said during an appearance in Henderson, Kentucky.
After saying a stimulus deal before the Nov. 3 election would be hard, U.S. Treasury Secretary Steven Mnuchin said he will keep trying to reach a deal on coronavirus relief with House Speaker Nancy Pelosi before that date.
“There is still plenty of distance between all parties that have a role to play in an agreement and the assumption the market has that a deal is coming sooner rather than later is being challenged,” said portfolio manager Keith Buchanan at GLOBALT Investments in Atlanta, Georgia. “That challenge becomes more and more apparent every day that ticks by without a significant progression as far as negotiations are concerned and we are just not seeing it.”
The latest information on this subject is Pelosi intends to meet S. Mnuchin in weekend. U.S. House Speaker Nancy Pelosi said on Friday that she would probably talk to Treasury Secretary Steven Mnuchin over the weekend for the latest round of negotiations on coronavirus relief.
“The secretary said yesterday that they were willing to accept our language on the testing, but they had some changes. So we’re still waiting to see what the changes are, because as you know, the devil and the angels are in the detail,” Pelosi said in an interview with MSNBC. As soon as I get it, which I haven’t gotten yet, then we will talk about it, probably on Sunday,” she added.
The delay in vaccine production and dead way in stimulus discussion weighs on market sentiment. The euro and British pound are likely to extend declines, analysts said, as a return of restrictions on economic activity in Europe and Britain to battle a second wave of coronavirus infections unnerves investors. Moves are likely to be subdued as the U.S. presidential election looms on Nov. 3, but analysts said sentiment is leaning
against riskier bets, which should support the dollar in the coming days.
"Many factors are pointing to more upside for the dollar," said Masafumi Yamamoto, chief currency strategist at Mizuho Securities. "U.S. stimulus may not come until after the election. The People's Bank of China is halting the yuan's rise. There's no reason to buy the euro, and there are a lot of euro longs that need to be unwound."
On Friday Retail sales rose 1.9% last month as consumers bought motor vehicles and clothing, dined out and splashed out on hobbies, the Commerce Department said on Friday. That followed an unrevised 0.6% increase in August. Economists polled by Reuters had forecast retail sales would rise 0.7% in September.
U.S. consumer sentiment also inched up to a seven-month high in early October as rising expectations for a better economy in the future outweighed a reversal in assessments of current conditions. Other data on Friday showed U.S. factory production fell unexpectedly in September, suggesting manufacturing's recovery was slowing heading into the fourth quarter.
“The economy is gradually improving, (but) the pace of that recovery has been modest and is likely to continue to be modest,” said Bill Merz, head of fixed income research at U.S. Bank Wealth Management in Minneapolis. “There are still a lot of reasons why long-end Treasury yields shouldn’t rise significantly for a sustained period in the near term.”
The U.S. budget deficit hit a record $3.132 trillion during fiscal 2020, more than triple the 2019 shortfall, as a result of massive coronavirus rescue spending, the U.S. Treasury said on Friday.
“The unexpectedly strong 1.9% rise in retail sales last month suggests the economy was carrying more momentum into the fourth quarter than anticipated, defying fears that the expiry of enhanced unemployment benefits in the summer would harm the economy,” Michael Pearce, a senior U.S. economist at Capital Economics, said in a note. “But with new coronavirus infections on the rise, we are not rushing to revise up our forecast that GDP growth will slow to 4% annualised in the fourth quarter,” he said.
CV19
Markets fear a new wave of lockdowns could stall the global recovery at a time hopes for U.S. stimulus before the Nov. 3 election are fading, ditching riskier assets such as equities in favor of safe-havens such as the dollar and the yen.
While weaker against the dollar, the Japanese yen strengthened 0.30% versus the euro. Bloomberg reported the European Central Bank “sees little reason” to rush into a new stimulus this month even as coronavirus cases spike and the economy slows.
France has imposed curfews as coronavirus infections rise, and other European Union members were also responding to spiking new cases with fresh restrictions.
With the number of COVID-19 cases on the rise once again in Europe, governments have announced a host of new measures targeted at bringing the virus back under control. However, politicians remain reluctant to reimpose the kinds of nationwide lockdowns seen earlier in the year. Rather, the tendency has been to adopt a more targeted approach, with a preference for imposing measures on selected industries or on targeted regions.
In the UK, this includes a second wave of restrictions on the hospitality industry, a sector whose fortunes the government was attempting to revive with the Eat Out To Help Out (EOTHO) scheme just a few weeks ago.
Of all major industries, the UK’s hospitality sector suffered by far the largest hit to output during the crisis — in April, during the depths of the crisis, it was operating at around 10% of normal capacity. It has recovered rapidly since, with output more than doubling in both June and July, and activity increasing by a further 70% in August. Although the hospitality industry is employment-intensive, it only represents a fraction of UK economic output. Indeed, despite the impact of EOTHO, growth in food and beverage service activities only added 1.3 percentage points directly to August’s monthly GDP growth rate. The total impact on activity may be slightly larger than this once second-round effects are considered.
Despite such schemes, it seems unlikely that the UK’s economy (and those of most other nations) will be able to recover their pre-crisis levels of output this year, even if the second wave of the virus is successfully headed off. Indeed, monthly GDP data are already consistent with Fathom’s view that the rapid bounceback would slow a little towards the end of the year, but that the global economy is nevertheless likely to be within 3-4% of pre-crisis levels by the start of 2021. Taking the example of the hospitality sector once more, it seems unlikely that venues such as pubs and bars will be able to operate at full capacity while social distancing remains in place.
CFTC Report
Above we've seen the opinion that there are less and less reasons to consider buying of the EUR in near term. Indeed, as we see above - ECB has no plans to increase economy help. With rising concern on pandemic relapse, whatever degree this will happen, and lack of progress in vaccine production demand for risky assets decreases. This sentiment makes pressure on the markets and this week we see the first fruits. Recent CFTC report shows net contraction of EUR positions as by hedgers as by speculators. Longs were closed more which means that currently the rally continuation is not on the table.
Source: cftc.gov
Charting by Investing.com
What is on horizon?
The tone in markets suddenly appears to have echoes of March, when the coronavirus outbreak in Europe sparked a dash into safe-haven bonds and cash.
Increased restrictions to contain a second wave, including in capitals such as London and Paris, are fuelling unease. Safe-haven German 10-year bond yields have tumbled 10 bps to levels last seen in March; and alongside U.S. and UK yields are set for the biggest weekly drop in months. New coronavirus infections rise to record highs in U.S. Midwest and beyond.
Investors are now watching for signs of economic damage -- the October flash purchasing manager index numbers for the euro zone are due out Friday.
Britain’s messy divorce with the European Union is likely to remain in the spotlight, keeping the pound jittery in response to comments from both sides about whether or not a trade deal is likely before a final Dec. 31 deadline. EU leaders agreed at their Oct. 15-16 summit to more talks but are ready for no deal. The three main areas of contention are fair competition, dispute resolution and fisheries.
The pound could gain from signs the UK will not quit the talks. But the prospect of negotiations dragging on, undermining the economic outlook just as the coronavirus cases rise again, could weigh on sterling. EU tells Britain to give ground to secure trade deal, UK to respond Friday. UK PM Johnson says it’s time to prepare for a no-trade deal Brexit.
Finally, China’s third-quarter growth data comes out on Monday and should show the effects of the pandemic receding. The world’s second-largest economy is expected to have grown 5.2% in July-September from a year earlier, faster than the second quarter’s 3.2%, according to a Reuters poll.
China’s economic recovery seen broadening in Q3 as consumers re-emerge - Chinese central bank injects 500 bln yuan of medium-term loans, rates unchanged for 6th month
So, all these fundamental stuff sounds great, but what we need to do in these weeks. It seems indeed, the enthusiasm of investors are melting day by day. Facts are stubborn thing. First is on stimulus pack... it is really big gap between what democrats want and what republicans are ready to give. $2.2 Trln vs. $0.5 Trln, it is almost 5 times gap. At first glance, $1.8 Trln seems like good compromise, although we have big doubts that this compromise will be achieved. As negotiations come into dead way, it seems that "winner wants it all" almost as in ABBA's song. Why Pelosi is so stubborn on 2.2. Trln? Because of Biden's leadership. It is the question of 2-3 weeks, and Biden victory opens "Blue wave" era when both Senate and Congress will be under Democrat's power. The evidence that in this case they will push 2.2 or even greater stimulus pack, and Pelosi doesn't want to compromise on this subject. Providing stimulus will become Democrat's win and will be the political victory. D. Trump also understands this and this is the reason why he offers higher and higher stake for stimulus pack, trying to make its providing as mutual achievement of both political parties. But here is the one problem exists - what if Biden will lose?
In this case Democrats will lose everything, even chance to become heroes and provide at least 1.8 Trln. to the nation. Democrats will become "bad guys" as D. Trump wll tell - "take a look, we're ready to give you 1.8 Trln, but they do not want", Go, get'em out!". Polls suggest that this outcome is hardly possible as Biden shows 10% gap. But this is not as simple as it looks like. Recall last elections when everybody thought that H. Clinton should win and what we've got? Why this has happened? Because of polls flaws. Polls are made by mass media that mostly belong to Democrats. They try to create an environment to people feel uncomfortable to announce that they intend to vote for D. Trump. To make feel them like white raven. And people talk to polls that intend to vote for democrats, while in reality they vote for republicans. The same story could repeat this time, especially because the electorate will have a lot of time to think, with this new feature of voting by mail. Something tells me that in November markets will get stunning shock with D. Trump victory and big crush stands on horizon. But this is story not of this week.
These two moments that I've explain, suggests that now stimulus agreement will not be achieved until Biden holds the leadership. Pelosi will come to compromise if Biden-Trump gap will start melting and becomes less that 3-4%. So, this is direct relationships between Biden leadership and chances to adopt stimulus. But in this case, Republicans could take again stronger position, decreasing the offer.
Second, indeed, situation with virus becomes worse. Even without strict lockdown, there will be some negative impact on economy. With ECB comments of now new stimulus, EUR appreciations is doubtful, that we see in recent CFTC report.
Finally, we're coming to the end of financial year across the Globe, long Thanksgiving and Christmas holidays with elections on the back. This combination suggests run into the quality. Besides, no agreement on Brexit divorce hardly makes situation better.
All these stuff makes us think that EUR rally hardly possible. In our ultimate scenario of D. Trump victory shock, the rally is more probable on US dollar instead.
Technicals
Monthly
With the new vector of events, price action on monthly chart also could be different. Once COP has been reached, we've expected some downside reaction that is commonly happens. Appearing of engulfing pattern last week has confirmed this view and let us to suggest some downside AB-CD pattern on lower time frames. Gradual deterioration of the sentiment could make finally this patterns works.
In longer-term perspective we do not deny overall positive picture here. Indeed, we have good acceleration to COP and overall context still remains bullish, keeping chances on action to 1.25-1.26 area. But first market should finish somehow the engulfing pattern.
Weekly
MACD trend stands bearish on weekly chart. Now we have to deny idea of B&B trade as market has not reached major support within 3 weeks below 3x3 DMA. DRPO "Sell" is still possible theoretically. But, this week due to sell-off, price remains below 3x3 DMA again and second, that is more important - we do not see the fundamental reasons that could push EUR back to 1.20 area.
All these things together makes us mostly focus on simple AB-CD pattern that creates Agreement with K-support area that is our primary level where we intend to consider the long entry.
Daily
Alternative scenario we could see on daily chart. While trend by MACD stands bearish here as well, bulls try to hook up for last outpost - 5/8 Fib support and bullish grabber that we've got on Thursday. In general, this scenario, if even it will work and lead price to 1.19 area still will not cancel the suggestion of the drop to 1.14 area, but bring adjustment to it, forming "222" Sell pattern here.
But, now even chances on "222" pattern here look phantom. Drop below 1.17 area, erasing the grabber and Fib support area will cancel AB-CD pattern and significantly increases chances on downside continuation. This makes bullish setup as simple as difficult to take at once. Simple - because stop could be placed very close and invalidation point is definite. Difficult because of chances on success as they are very low.
Intraday
Charts bring nothing encouraging by far. Here is minor assist to the bulls. If market indeed rebound out from here, it should break the downside tendency, forming something bullish. Right now the bounce out from COP target and Agreement support equals to harmonic swing. Yes, we have bullish divergence here, but it is not enough to make bet on upside action. We suggest that bulls have to wait for reversal pattern, and it seems that reverse H&S is the one that could be formed in a case of upside continuation. In this case entry, as usual, is suggested near 1.1730 area - the bottom of the right arm.
Bears, in turn could keep an eye on the failure of the same pattern - either immediately, on a drop down below COP, or, failure to turn up from right shoulder. This price action will explain us what to expect from weekly chart as well.
So, there were big expectations from this week related to new round of Brexit negotiations and some hopes that stimulus still could come from US government, but all hopes have blown out like soap bubble. First shock market has got from Pelosi on Monday - the same person who has encourage markets right on Friday, when she said that 1.8 Trln stimulus pack is not enough and has been rejected. Brexit round has not brought any breakout and positive result. In dry residual fluctuations on the market were minimal with no good short-term trading setups.
Still, the positive moment is - indeed two factors that we've specified are working. They are Biden leadership and stimulus discussion. Once news on Biden's probe have appeared, markets have got the shock as dollar has strengthen. The only problem with this driving factors - we can't control or forecast them, as any news are surprising and just explains the market reaction. But we know the direction, depending on the news type. Improving Biden's leadership and more talks on stimulus support riskier assets and work against USD. The opposite is true as well - deteriorating of the leadership and close of stimulus discussion support dollar.
News surfing
The U.S. dollar strengthened on Tuesday as investors turned cautious after a Johnson & Johnson COVID-19 study was paused and as hopes dimmed that a fiscal stimulus package could be reached before the presidential election. U.S. consumer prices rose 0.2% in September, matching expectations, for a fourth straight monthly climb, though the pace has slowed amid considerable slack in the economy as it slowly recovers from a nadir caused by coronavirus shutdowns.
The U.S. currency’s safe-haven appeal has been curbed by growing expectations that a win by former U.S. Vice President Joe Biden on Nov. 3 would bring large stimulus for the pandemic-hit economy, bolstering the stock market and investor risk appetite.
“It’s becoming increasingly evident to people that there is no stimulus coming before the election,” said Erik Nelson, a currency strategist at Wells Fargo in New York.
“I wouldn’t say markets were fully pricing stimulus or fully pricing a vaccine by the end of the year but they were probably tilted towards the more positive side of those expectations.”
U.S. House Republican Leader Kevin McCarthy said Thursday he does not expect agreement on a fresh coronavirus relief package before Election Day on Nov. 3 as long as House Speaker Nancy Pelosi is involved in negotiations, saying she is the “one stumbling block” to a deal getting done.
At a news conference, McCarthy also sidestepped a question about President Donald Trump’s willingness expressed earlier Thursday to go higher than $1.8 trillion on a coronavirus aid package. McCarthy said $1.8 trillion was “a very big deal,” but added: “It doesn’t matter what our answer would be, because the Speaker has denied anything from moving.”
The White House proposed the $1.8 trillion in stimulus last week in negotiations with House of Representatives Speaker Nancy Pelosi. Pelosi, the top Democrat in Congress, rejected the offer and has stuck to her demand for a $2.2 trillion deal.
President Donald Trump on Thursday said he is willing to raise his offer of $1.8 trillion for a COVID-19 relief deal with Democrats in the U.S. Congress, but the idea was shot down by his fellow Republican, Senate Majority Leader Mitch McConnell.
“We like stimulus, we want stimulus and we think we should have stimulus,” Trump said. The president ruled out accepting Pelosi’s proposal outright “because she’s asking for all sorts of goodies.”
McConnell, the top Republican in Congress, noted that a higher amount was under discussion. But he said nearly all Senate Republicans favor a much smaller $500 billion aid bill. Many Republicans, especially in the Senate, already view the White House’s current $1.8 trillion offer as too big. Republicans voiced those concerns in a weekend call with administration officials.
“My members think what we laid out – a half a trillion dollars, highly targeted – is the best way to go. So that’s what I’m going to put on the floor,” McConnell said during an appearance in Henderson, Kentucky.
After saying a stimulus deal before the Nov. 3 election would be hard, U.S. Treasury Secretary Steven Mnuchin said he will keep trying to reach a deal on coronavirus relief with House Speaker Nancy Pelosi before that date.
“There is still plenty of distance between all parties that have a role to play in an agreement and the assumption the market has that a deal is coming sooner rather than later is being challenged,” said portfolio manager Keith Buchanan at GLOBALT Investments in Atlanta, Georgia. “That challenge becomes more and more apparent every day that ticks by without a significant progression as far as negotiations are concerned and we are just not seeing it.”
The latest information on this subject is Pelosi intends to meet S. Mnuchin in weekend. U.S. House Speaker Nancy Pelosi said on Friday that she would probably talk to Treasury Secretary Steven Mnuchin over the weekend for the latest round of negotiations on coronavirus relief.
“The secretary said yesterday that they were willing to accept our language on the testing, but they had some changes. So we’re still waiting to see what the changes are, because as you know, the devil and the angels are in the detail,” Pelosi said in an interview with MSNBC. As soon as I get it, which I haven’t gotten yet, then we will talk about it, probably on Sunday,” she added.
The delay in vaccine production and dead way in stimulus discussion weighs on market sentiment. The euro and British pound are likely to extend declines, analysts said, as a return of restrictions on economic activity in Europe and Britain to battle a second wave of coronavirus infections unnerves investors. Moves are likely to be subdued as the U.S. presidential election looms on Nov. 3, but analysts said sentiment is leaning
against riskier bets, which should support the dollar in the coming days.
"Many factors are pointing to more upside for the dollar," said Masafumi Yamamoto, chief currency strategist at Mizuho Securities. "U.S. stimulus may not come until after the election. The People's Bank of China is halting the yuan's rise. There's no reason to buy the euro, and there are a lot of euro longs that need to be unwound."
On Friday Retail sales rose 1.9% last month as consumers bought motor vehicles and clothing, dined out and splashed out on hobbies, the Commerce Department said on Friday. That followed an unrevised 0.6% increase in August. Economists polled by Reuters had forecast retail sales would rise 0.7% in September.
U.S. consumer sentiment also inched up to a seven-month high in early October as rising expectations for a better economy in the future outweighed a reversal in assessments of current conditions. Other data on Friday showed U.S. factory production fell unexpectedly in September, suggesting manufacturing's recovery was slowing heading into the fourth quarter.
“The economy is gradually improving, (but) the pace of that recovery has been modest and is likely to continue to be modest,” said Bill Merz, head of fixed income research at U.S. Bank Wealth Management in Minneapolis. “There are still a lot of reasons why long-end Treasury yields shouldn’t rise significantly for a sustained period in the near term.”
The U.S. budget deficit hit a record $3.132 trillion during fiscal 2020, more than triple the 2019 shortfall, as a result of massive coronavirus rescue spending, the U.S. Treasury said on Friday.
“The unexpectedly strong 1.9% rise in retail sales last month suggests the economy was carrying more momentum into the fourth quarter than anticipated, defying fears that the expiry of enhanced unemployment benefits in the summer would harm the economy,” Michael Pearce, a senior U.S. economist at Capital Economics, said in a note. “But with new coronavirus infections on the rise, we are not rushing to revise up our forecast that GDP growth will slow to 4% annualised in the fourth quarter,” he said.
CV19
Markets fear a new wave of lockdowns could stall the global recovery at a time hopes for U.S. stimulus before the Nov. 3 election are fading, ditching riskier assets such as equities in favor of safe-havens such as the dollar and the yen.
While weaker against the dollar, the Japanese yen strengthened 0.30% versus the euro. Bloomberg reported the European Central Bank “sees little reason” to rush into a new stimulus this month even as coronavirus cases spike and the economy slows.
France has imposed curfews as coronavirus infections rise, and other European Union members were also responding to spiking new cases with fresh restrictions.
With the number of COVID-19 cases on the rise once again in Europe, governments have announced a host of new measures targeted at bringing the virus back under control. However, politicians remain reluctant to reimpose the kinds of nationwide lockdowns seen earlier in the year. Rather, the tendency has been to adopt a more targeted approach, with a preference for imposing measures on selected industries or on targeted regions.
In the UK, this includes a second wave of restrictions on the hospitality industry, a sector whose fortunes the government was attempting to revive with the Eat Out To Help Out (EOTHO) scheme just a few weeks ago.
Of all major industries, the UK’s hospitality sector suffered by far the largest hit to output during the crisis — in April, during the depths of the crisis, it was operating at around 10% of normal capacity. It has recovered rapidly since, with output more than doubling in both June and July, and activity increasing by a further 70% in August. Although the hospitality industry is employment-intensive, it only represents a fraction of UK economic output. Indeed, despite the impact of EOTHO, growth in food and beverage service activities only added 1.3 percentage points directly to August’s monthly GDP growth rate. The total impact on activity may be slightly larger than this once second-round effects are considered.
Despite such schemes, it seems unlikely that the UK’s economy (and those of most other nations) will be able to recover their pre-crisis levels of output this year, even if the second wave of the virus is successfully headed off. Indeed, monthly GDP data are already consistent with Fathom’s view that the rapid bounceback would slow a little towards the end of the year, but that the global economy is nevertheless likely to be within 3-4% of pre-crisis levels by the start of 2021. Taking the example of the hospitality sector once more, it seems unlikely that venues such as pubs and bars will be able to operate at full capacity while social distancing remains in place.
CFTC Report
Above we've seen the opinion that there are less and less reasons to consider buying of the EUR in near term. Indeed, as we see above - ECB has no plans to increase economy help. With rising concern on pandemic relapse, whatever degree this will happen, and lack of progress in vaccine production demand for risky assets decreases. This sentiment makes pressure on the markets and this week we see the first fruits. Recent CFTC report shows net contraction of EUR positions as by hedgers as by speculators. Longs were closed more which means that currently the rally continuation is not on the table.
Source: cftc.gov
Charting by Investing.com
What is on horizon?
The tone in markets suddenly appears to have echoes of March, when the coronavirus outbreak in Europe sparked a dash into safe-haven bonds and cash.
Increased restrictions to contain a second wave, including in capitals such as London and Paris, are fuelling unease. Safe-haven German 10-year bond yields have tumbled 10 bps to levels last seen in March; and alongside U.S. and UK yields are set for the biggest weekly drop in months. New coronavirus infections rise to record highs in U.S. Midwest and beyond.
Investors are now watching for signs of economic damage -- the October flash purchasing manager index numbers for the euro zone are due out Friday.
Britain’s messy divorce with the European Union is likely to remain in the spotlight, keeping the pound jittery in response to comments from both sides about whether or not a trade deal is likely before a final Dec. 31 deadline. EU leaders agreed at their Oct. 15-16 summit to more talks but are ready for no deal. The three main areas of contention are fair competition, dispute resolution and fisheries.
The pound could gain from signs the UK will not quit the talks. But the prospect of negotiations dragging on, undermining the economic outlook just as the coronavirus cases rise again, could weigh on sterling. EU tells Britain to give ground to secure trade deal, UK to respond Friday. UK PM Johnson says it’s time to prepare for a no-trade deal Brexit.
Finally, China’s third-quarter growth data comes out on Monday and should show the effects of the pandemic receding. The world’s second-largest economy is expected to have grown 5.2% in July-September from a year earlier, faster than the second quarter’s 3.2%, according to a Reuters poll.
China’s economic recovery seen broadening in Q3 as consumers re-emerge - Chinese central bank injects 500 bln yuan of medium-term loans, rates unchanged for 6th month
So, all these fundamental stuff sounds great, but what we need to do in these weeks. It seems indeed, the enthusiasm of investors are melting day by day. Facts are stubborn thing. First is on stimulus pack... it is really big gap between what democrats want and what republicans are ready to give. $2.2 Trln vs. $0.5 Trln, it is almost 5 times gap. At first glance, $1.8 Trln seems like good compromise, although we have big doubts that this compromise will be achieved. As negotiations come into dead way, it seems that "winner wants it all" almost as in ABBA's song. Why Pelosi is so stubborn on 2.2. Trln? Because of Biden's leadership. It is the question of 2-3 weeks, and Biden victory opens "Blue wave" era when both Senate and Congress will be under Democrat's power. The evidence that in this case they will push 2.2 or even greater stimulus pack, and Pelosi doesn't want to compromise on this subject. Providing stimulus will become Democrat's win and will be the political victory. D. Trump also understands this and this is the reason why he offers higher and higher stake for stimulus pack, trying to make its providing as mutual achievement of both political parties. But here is the one problem exists - what if Biden will lose?
In this case Democrats will lose everything, even chance to become heroes and provide at least 1.8 Trln. to the nation. Democrats will become "bad guys" as D. Trump wll tell - "take a look, we're ready to give you 1.8 Trln, but they do not want", Go, get'em out!". Polls suggest that this outcome is hardly possible as Biden shows 10% gap. But this is not as simple as it looks like. Recall last elections when everybody thought that H. Clinton should win and what we've got? Why this has happened? Because of polls flaws. Polls are made by mass media that mostly belong to Democrats. They try to create an environment to people feel uncomfortable to announce that they intend to vote for D. Trump. To make feel them like white raven. And people talk to polls that intend to vote for democrats, while in reality they vote for republicans. The same story could repeat this time, especially because the electorate will have a lot of time to think, with this new feature of voting by mail. Something tells me that in November markets will get stunning shock with D. Trump victory and big crush stands on horizon. But this is story not of this week.
These two moments that I've explain, suggests that now stimulus agreement will not be achieved until Biden holds the leadership. Pelosi will come to compromise if Biden-Trump gap will start melting and becomes less that 3-4%. So, this is direct relationships between Biden leadership and chances to adopt stimulus. But in this case, Republicans could take again stronger position, decreasing the offer.
Second, indeed, situation with virus becomes worse. Even without strict lockdown, there will be some negative impact on economy. With ECB comments of now new stimulus, EUR appreciations is doubtful, that we see in recent CFTC report.
Finally, we're coming to the end of financial year across the Globe, long Thanksgiving and Christmas holidays with elections on the back. This combination suggests run into the quality. Besides, no agreement on Brexit divorce hardly makes situation better.
All these stuff makes us think that EUR rally hardly possible. In our ultimate scenario of D. Trump victory shock, the rally is more probable on US dollar instead.
Technicals
Monthly
With the new vector of events, price action on monthly chart also could be different. Once COP has been reached, we've expected some downside reaction that is commonly happens. Appearing of engulfing pattern last week has confirmed this view and let us to suggest some downside AB-CD pattern on lower time frames. Gradual deterioration of the sentiment could make finally this patterns works.
In longer-term perspective we do not deny overall positive picture here. Indeed, we have good acceleration to COP and overall context still remains bullish, keeping chances on action to 1.25-1.26 area. But first market should finish somehow the engulfing pattern.
Weekly
MACD trend stands bearish on weekly chart. Now we have to deny idea of B&B trade as market has not reached major support within 3 weeks below 3x3 DMA. DRPO "Sell" is still possible theoretically. But, this week due to sell-off, price remains below 3x3 DMA again and second, that is more important - we do not see the fundamental reasons that could push EUR back to 1.20 area.
All these things together makes us mostly focus on simple AB-CD pattern that creates Agreement with K-support area that is our primary level where we intend to consider the long entry.
Daily
Alternative scenario we could see on daily chart. While trend by MACD stands bearish here as well, bulls try to hook up for last outpost - 5/8 Fib support and bullish grabber that we've got on Thursday. In general, this scenario, if even it will work and lead price to 1.19 area still will not cancel the suggestion of the drop to 1.14 area, but bring adjustment to it, forming "222" Sell pattern here.
But, now even chances on "222" pattern here look phantom. Drop below 1.17 area, erasing the grabber and Fib support area will cancel AB-CD pattern and significantly increases chances on downside continuation. This makes bullish setup as simple as difficult to take at once. Simple - because stop could be placed very close and invalidation point is definite. Difficult because of chances on success as they are very low.
Intraday
Charts bring nothing encouraging by far. Here is minor assist to the bulls. If market indeed rebound out from here, it should break the downside tendency, forming something bullish. Right now the bounce out from COP target and Agreement support equals to harmonic swing. Yes, we have bullish divergence here, but it is not enough to make bet on upside action. We suggest that bulls have to wait for reversal pattern, and it seems that reverse H&S is the one that could be formed in a case of upside continuation. In this case entry, as usual, is suggested near 1.1730 area - the bottom of the right arm.
Bears, in turn could keep an eye on the failure of the same pattern - either immediately, on a drop down below COP, or, failure to turn up from right shoulder. This price action will explain us what to expect from weekly chart as well.
