Forex FOREX PRO WEEKLY, October 23 - 27, 2023

Sive Morten

Special Consultant to the FPA
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Fundamentals

Have you signed it, that in recent 2-3 weeks we're getting less financial news and more political ones? And this is not because of Middle East conflict, but because of many financial problems are tried to be resolved by political methods. This week it almost nothing to talk about - J. Powell speech, performance of the US yields, US Banks earnings reports. Although everything seems the same on surface, there are some interesting points that today we pay attention to.

Market overview

Retail sales rose 0.7% last month as households boosted purchases of motor vehicles and spent more at restaurants and bars. Fed funds futures imply a 30% probability the Fed will raise rates in December, down from 39% before Powell's comments, and no chance of a hike in November, according to the CME Group’s FedWatch Tool. Despite the positive sales, Jeffrey Roach, chief economist for LPL Financial, noted that there are some headwinds affecting U.S. consumers.

"Investors need to look underneath the sales figures to get a better look on the health of the consumer. Rising use of credit and early signs of delinquencies could dampen some of the enthusiasm," he said in a note.
Other data on Tuesday showed that production at U.S. factories increased more than expected in September despite strikes in the automobile industry curbing motor vehicle output. Richmond Fed chief Thomas Barkin on Tuesday said that higher long-term borrowing costs are putting downward pressure on demand, but it's unclear how that will affect the central bank's rates decision in two weeks.

The dollar rose against the euro and yen on Wednesday as benchmark 10-year Treasury yields hit 16-year highs and as investors watched the war between Hamas and Israel for signs of escalation. Since mid-July, the benchmark 10-year Treasury yield has climbed about 120 basis points and the dollar index has risen around 7%.

Fed Governor Christopher Waller said he wants to "wait, watch and see" if the U.S. economy continues its run of strength or weakens in the face of the Fed's rate hikes to date. ed Bank of New York President John Williams also said interest rates will need to stay high for a while to get inflation back to the central bank's 2% target.

The U.S. central bank's "Beige Book" indicated that U.S. economic activity was little changed over the last month and a half, as labor market tightness continued to ease and prices continued to increase at a modest pace.

On Thursday after Federal Reserve Chair Jerome Powell was interpreted as being generally dovish in comments made at an economic forum, even as he warned that the U.S. central bank could raise interest rates again. The U.S. economy's strength and continued tight labor markets could warrant further rate increases, Powell said. But he also noted that recent market-driven increases in bond yields have helped to "significantly" tighten overall financial conditions.

The comments were “marginally more dovish, I guess, but he was pretty careful to leave the door open to more tightening if the economic circumstances warrant that. It was a pretty even-handed message, I think,” said Shaun Osborne, chief foreign exchange strategist at Scotiabank in Toronto. Financial conditions are tightening, there’s no getting around that. It moves the needle towards the Fed doing less rather than more,” Osborne said.

The rally in the greenback has largely stalled and the currency has consolidated since the index hit a 10-month high on Oct. 3.

“The focus has been on the Treasuries ... and most of the focus and the volatility has been in longer-term yield, which tend to have less of a direct impact on FX markets than the front-end yields typically,” said Vassili Serebriakov, an FX strategist at UBS in New York. It's to some extent the question of are long-term yields rising because of the stronger growth outlook in the U.S., or is there also an element of supply impact and concerns over longer-term fiscal policy?” he added. “I think that’s maybe why the impact on FX is a little bit less straightforward. Dollar longs are already quite significant and maybe preventing the dollar from rallying further at this point,” Serebriakov said.

The European Central Bank's rate hiking cycle is over, according to all 85 economists polled by Reuters, but it won't be until at least July 2024 before it begins easing as the battle against elevated inflation rattles on. None of the 85 economists polled by Reuters Oct. 12-19 had another lift in their outlook, but the timing of the first cut was more uncertain. The median forecast and 58% majority view among economists, 48 of 83, showed it would be in the third quarter of next year, or later, and that the deposit rate would be at 3.50% by end-September. A slight majority of economists in a separate Reuters poll see a cut by the U.S. Federal Reserve before mid-2024.

While the 20-country euro zone will narrowly dodge a recession, the economy was expected to have only flatlined last quarter and will do the same again in the current one as increased borrowing and living costs force consumers to rein in spending.

"At the moment things are turning down so it is very likely all of us will be revising down our forecasts. There really isn't much going for the euro zone right now," said Melanie Debono at Pantheon Macroeconomics.

Building permits for apartments in Germany fell 28% during the first eight months of the year, the statistics office said on Wednesday, underscoring a downturn in demand in the construction and real estate industry. The nosedive in permits comes as German Chancellor Olaf Scholz faces fresh demands to stem a property crisis in Europe's largest economy. Building permits for apartments were down an even sharper 31.6% in August from a year earlier, according to the statistics office which attributed the decline to higher building costs and worse financing conditions. Companies across the EU are cutting jobs.

Bonds, Rates and the Fed

One of the world's most influential bond market voices has warned that the dollar’s position as the world's reserve currency could be lost unless the United States gets its spending under control. Jeffrey Gundlach, chief executive of DoubleLine Capital and dubbed the "bond king" due to a history of timely market calls, said the risk came as high interest rates continued to ramp up the $33.59 trillion worth of U.S. national debt. Gundlach, whose firm oversees around $150 billion of assets under management, said the interest rate on U.S. debt could rise to 5.5% over time given the current level of Federal Reserve borrowing costs.

"Should the Federal Reserve continue to raise rates, which may happen, or should the national debt grow, which is certain to happen, this problem will get much worse," Gundlach said in an opinion piece. The future of the U.S. dollar and possibly out-of-control inflation depends on getting the budget and spending under control. The massive budget deficit and increasing interest rates on the national debt should scare every American," he said.

Indeed, guys, jokes are ended. As we've mentioned in telegram, recent data on the US bond auctions, as for nominal bonds as for TIPS show explosive jump in inflation. As a result, US 5Y inflation swap, which currently stands at 2.82%, is rising, showing signs of more resilient structural inflation:
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10 year Greek bonds already has lower yields that the US once. We consider it as a first sign that market can't absorb such amount of supply. Second - investors demand higher premium for credit risk, as storm clouds around the US debt are gathering. Jerome continues to argue that the rate will still need to be raised. And for the first time he starts talking about the problem of high yields on debt. He voiced its obvious reason: sales of various kinds of holders. Including the Fed itself, which he heads.

It seems that JPow has long given up on inflation, "retreated to pre-prepared boundaries" and is now just trying to somehow keep the pyramid of public debt.
Actually, all his endless tales about temporary inflation, "soft landing" and so on come from here. By and large, his job for the past 5 years is to feed investors with trash talks. There has been no real compliance with the inflation target for a long time. Consequently, everyone who invests in American debt over and over again receives losses, since Powell's forecasts have not come true all these years:

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All Powell does is just fooling investors, putting them in losses for many years. This, in fact, is in his execution the control of the national debt pyramid. On average, inflation should devour it, and the maximum number of investors should buy it so that the real yield does not go into a positive zone. The fact that it temporarily turned out to be there, but, is short-term and very soon we will go back to the negative real yield mode, which somehow burns American debts.

it is not funny, because 58% of the US households have investments in debt and shares. And when everybody has laughed about 7% yields proclaimed by JP Morgan - now it doesn't seem as joke any more. The "funniest" thing now in the national debt pyramid is that it turned out to be an infinite cycle. Powell raises rates in order to "beat inflation", because Biden cannot achieve this by his actions in the real economy.

Everything seems to be logical: at a certain point, credit demand will fall, warehouses will be overloaded, discounts will begin and prices will be reduced. But it works only if you have no budget deficit or at least at the level of GDP growth. In the case of the US, the deficit is daunting. As a result, there is no sense from this fastest rate increase in history. With one hand, demand is being tightened, and with the other, they are insanely increasing government spending through unsecured emission.

In fact, there is only a redistribution tool within the system. Those who work exclusively on a commercial basis suffer and may even close down, but those who sit on government orders thrive and devour commercial competitors.

True, a real perpetual motion machine will not work out of this. With such rates and the speed of debt renewal, the cost of servicing the national debt will very quickly reach up to a third of all tax collections and, like it or not, you will have to start saving. This will happen by the end of next year, if the current dynamics continues.
What do you think they will start saving on in the first place?

Banks already have record floating loss on bond portfolios, although real potential losses are few times higher. For example, BofA has reported this week of 132 Bln of accumulated loss on bonds in portfolio. This is long term bonds - you either have to fix the loss or sit until maturity, which is mostly the same if we take into consideration the inflation level. For Bank of America, $132 billion in unrealized losses is exactly half of all the capital they have.

Reuters writes that there are “at least” $650 billion in unrealized losses in the entire banking system. Although serious scientists, and not scribblers from Reuters, showed at the end of April that at that time the unrealized losses of banks were above 2 trillion dollars. Since then, the price of bonds has fallen significantly.

The further you go, the more traders will appear who have accumulated treasures in anticipation of a reversal, and there will be “insiders” from them too. Self-hypnosis is a great thing, but not in this case. As Powell decides, so it will be. I still continue to believe that we haven’t even gone through half of this sad journey yet. We already hear it from Morgan Stanley and PIMCO. But something tells me that it is not time yet. Besides, own balances as of Morgan Stanley as of Pimco are far from good.

The yield curve is just started to take correct shape, but we are not even on half way to normal situation (when long-term rates have to be higher than the short-term), even to parity with short-term rates. It is at least ~ 1% of yield action, which makes overall loss on global bond market unacceptable.
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The default season officially is started, as well as situation on job market is turning negative, despite you don't see it yet in official NFP reports.

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By the way, another factor behind the recession is the decline in real household incomes by 4.7%.
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Meanwhile, GDP is not falling. Why? Probably due to excess government spending, which creates a deficit of 6-7% of GDP at the end of the year. This luxury is permissible as long as there are buyers for government debt at rates with a relatively small premium to the Fed rate using funds in reverse repo. There are not many of them left, only 1.15 trillion. dollars and they will run out in about six months. If at the same time BTFP also ceases to operate (03/31/24), then it is unclear who, in principle, will be able to buy new treasuries. Then, apparently, the recession will appear in all its glory.

Republicans are now “fighting,” at least verbally, to reduce the budget deficit. Let's assume that now some new speaker will be agreed upon, in a couple of weeks the whole process of agreeing on a new budget will continue (if anyone doesn’t remember, it stopped for a month because a temporary budget was adopted) and expenses will be reduced as a result of the compromise.

Although the Treasury will still have its $700+ billion accumulated in the TGA account at the Fed and, for example, will continue to spend it to temporarily cover the deficit. Just 150+ billion dollars per month. Well, in theory.

If they cut part of the budget deficit, then government spending will fall, that is, support for demand in the economy will weaken. And then, instead of growing, GDP should begin to fall. In terms of timing, everything seems to be beating, but we’ll see how it turns out in reality. Logical?

Now we foresee the hybrid QE, when long-term rate exceeds the Fed fund rate. It will be possible to borrow from the Fed at 5.5% and immediately buy treasuries at, for example, 6%, immediately repay them back at par to the Fed at 5.5% with BTFP programme, and buy new treasuries, and so on all the way. it will be even more interesting for low coupon bonds that are trading now with ~ 50% discount, which increases the leverage level. That could hold yield rally for awhile, until US Banks capitals will be filled and significantly increase BTFP size, let's keep an eye on it.

Thus, the economic situation in the United States is deteriorating. If our hypothesis about the structural crisis is correct (and so far there is not a single fact that would refute it), then the decline of the US economy will continue for several more years, and in the process there will inevitably be a collapse of financial markets. And this will inevitably entail a drop in the capitalization of fictitious assets, with an inevitable sharp decrease in GDP.

For all US partners, the most painful question is: what will happen to the accumulated assets that are denominated in dollars? Some analysts reveals one important circumstance, due to which, in particular, the main recent economic news was the Hamas attack on Israel. The fact is that it was this attack that became the point after which the return of dollar-denominated capital will become impossible. Of course, there will be exceptions: in particular, Iran is likely to receive its money. But in general, the issue is already closed, no one will be able to use their capital.

Conclusion:

Tomorrow in Gold report we will consider some specific issues of Middle East conflict and explain the real background of ongoing events. It will become clear why EU now as no chance to pull the blanket on its favor. The hydrocarbons in near future will not become cheaper. The shipping costs already are raising. This situation is not just spinning up inflation, but will kill EU industrial sector as they vitally depend on LPG delivery by sea. The US have its own reserves and ability to contract export for own needs. EU has no ability to do this. The Middle East turmoil is just started and is far from resolving. The US have big problems, no doubts, but in comparison to EU and perspective of EUR/USD performance they stand at much better shape. So, our downside scenario remains intact by far, and we consider 0.9 area as downside long-term target.
 
Technicals
Monthly

Despite all big events this week, monthly time frame show minor changes. Formally, EUR is trying to keep bullish sentiment, standing above YPP. Downside break might become an even with long term consequences.

As we've mentioned earlier, the price chart clash with MACDP line should be very important event whatever direction sets. It will be important as potential breakout as potential grabber, although fundamental background doesn't suggest it.
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Weekly

Weekly trend remains bearish. For now EUR can't show any meaningful pullback from K-support area, although it would be logical to see it. It suggests either it still yet to happen or bearish pressure strong enough and doesn't let it to raise.

If still, bounce happens, it might be nice background for DiNapoli patterns as downside weekly thrust is suitable for this:
eur_w_23_10_23.png


Daily

Formally, daily chart keeps bullish context. And price stands at weekly Agreement support - combination of K-area and daily OP. Still, to start upside bounce market has to make some preparation and to make some pattern that put the starting point for possible higher action.

As we've discussed through the week, price action is very choppy and heavy on intraday charts, that doesn't correspond to idea of immediate upward action. Until price stands under 1.0640 top EUR keeps chances on deeper action first. So, butterfly "Buy" here is still possible. Without clear signals, trading process becomes tricky.

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Intraday

Here is major intrigue holds. EUR definitely has problems with the breakout of 1.0590 area - long spikes, and this is actually why we've decided to consider short entry on Friday.
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At the same time, 1H chart price is very choppy around and it is still unclear who will win finally. So, situation is not quite clear. Market could try to complete OP, but keep daily butterfly shape valid. So, for conservative traders, it would be better to stay aside for awhile. I'm not sure that OP will be touched, but we have to foresee all scenarios.

If you you still, would like to step-in... on bullish side - try to buy as close to recent lows of potential butterfly as possible. If you would like to short - the opposite is true. Take position gradually, or wait for OP completion.
eur_1h_23_10_23.png
 
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Greetings everybody,

So, as our members point - indeed, it becomes more difficult to trade these days. Mostly because of too many external factors that impossible to foresee. This time EUR has jumped on solid pullback on DXY and US yields monthly overbought level. Upgrading Black Rock ETF fill to the next level of consideration by SEC also add some fuel to the fire as psychologically (wide opinion that BTC is new protection from inflation and new preserver of the wealth) as tactically - speculators buy BTC pushing it to 36K area and sell dollars.

As a result, EUR now is confirming short-term bullish context. We consider now 1.0750-1.0810 as next upside target - combination of XOP target and K-resistance area. Here we have to recall potential weekly B&B "Sell" that we've discussed in recent few weeks. Now market hits OP. Still as we have acceleration, EUR should keep going to the next target.
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On 4H chart we have butterfly pattern and here is the same conclusion - strong acceleration to 1.27 target suggests continuation to 1.618 around 1.0710, but this will be intermediate target on a way to daily XOP:
eur_4h_24_10_23.png


With such strong performance and absence of Overbought on daily chart EUR should not show too deep pullbacks. So, we could keep an eye on nearest 3/8 level. K-support of 1.0615 might be used also as indicator of bullish scenario validity. Normally, market should not break it down if bullish context is still valid. Obviously we do not consider any shorts by far. At least until next news on Middle East escalation.

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Morning everybody,

Sorry, guys I was not able to support our Telegram channel yesterday, but you probably know that we've got poor data on sentiment in EU economy. Today could more to come from Germany IFO institute. Analysts who tell that downside EUR trend is exhausting, appealing that soon we should get bad data from the US just forget that EU data is even worse...

So, EUR was not able to keep bullish context valid, dropping under our predefined "control" level of 1.0615. As a result we've got bearish engulfing pattern on daily chart. But not just this moment suggests that bears now have some advantage. We have cross market divergence. While EUR has completed AB-CD pattern, GBP does not. Cable is forming the same downside butterfly that we were considering previously on EUR as well.

Second - DXY index also has not completed the same AB-CD and turned up. Although we do not have now any rally on yields. All this stuff together suggests that it would be better to stay aside from long positions for now
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On 4H chart we see that whole rally mostly is erased and butterfly is not satisfied just with minor 3/8 pullback. Market is coiling around major 50% support area:
eur_4hh_25_10_23.png


On 1H chart, I intentionally keep broken K-support. Since now we're dealing with a kind of engulfing - let's watch for upside bounce to Fib levels. And the first one is the same 1.0620, but now it will work like resistance. Potentially it might be the first one where short position could be possible:
eur_1h_25_10_23.png
 
Good morning,

EUR keeps short-term bearish context and engulfing pattern on daily chart. In fact, if you take a look at weekly time frame, then you will see that recent upside performance now takes the clear shape of bearish flag, that stands upon the K-area. This might be the first hint on preparing downside challenge.

DXY is raising again, together with interest rates - both support the dollar. Today we get ECB, GDP report, so, volatility should increase...
eur_d_26_10_23.png


On 4H chart market hits 5/8 support. Downside thrust looks nice, so, potentially B&B "Sell" is possible:
eur_4h_26_10_23.png


Let's see what will happen. For now, 1.06 K-resistance looks the one where we could get the first chance for short entry.
eur_1h_26_10_23.png
 
Morning everybody,

So, yesterday data was mostly dollar supportive, giving some back to the Fed and let them to be a bit more stubborn with the high rate. On EUR we do not have any significant action, but there is an important sign on cross market analysis. The point is - as DXY as GBP show bullish daily grabber. While EUR doesn't show it.

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It means that we probably should wait a bit with any bearish position here and see what will happen. On 4H chart market shows nice reaction on 5/8 support, and potentially we could get DRPO "Buy" pattern here, if grabbers start to work:
eur_4h_27_10_23.png


On 1H chart, it could take a shape of minor reverse H&S pattern. And right arm could give us the 2nd close below 3x3 DMA on 4H chart. Let's see...
eur_1h_27_10_23.png


I do not call to trade bullish setup here, but, if you consider short position taking, it would be better to wait until situation around grabbers will be clear. Maybe PCE numbers today will make it crear.
 
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