Forex FOREX PRO WEEKLY, October 25 - 29, 2021

Sive Morten

Special Consultant to the FPA
Messages
15,289
Fundamentals

So, the first stunning effect of Fed policy changes is passed, euphoria around this event is calming down and investors now try to find the reasonable sense and application of current background. This search leads to more volatility on the market and some signs of indecision that we clearly see this week on EUR, for instance. Meantime sentiment data shows that nothing has changed drastically and activity that we see is mostly the speculative games. Status quo could be re-established sooner rather than later.

Market overview

The dollar dipped on Monday after data showed production at U.S. factories fell by the most in seven months in September, erasing earlier gains on expectations that the Federal Reserve may be closer to raising interest rates than previously expected. U.S. manufacturing output was hurt as an ongoing global shortage of semiconductors depressed motor vehicle output, providing further evidence that supply constraints were hampering economic growth.

Supply disruptions are adding to concerns about high inflation and adding to expectations that the U.S. central bank will need to act to stamp out price increases.

"Prospects for global central banks to be more aggressive to counter growing inflation fears may put the USD under some pressure, though the Fed in turn may act sooner than previously expected, supportive of the dollar," said Ronald Simpson, managing director, global currency analysis, at Action Economics.

Sterling briefly hit a 20-month high against the euro after Bank of England Governor Andrew Bailey sent a fresh signal that the central bank was gearing up to raise interest rates as inflation risks mount.

Analysts at Bank of America noted on Monday that commodity-linked currencies, including the Norwegian krone and the Canadian and Australian dollars, had been the best performers since the summer as energy prices rise, while the euro and the yen had been the worst. While Goldman Sachs analysts suggest that CAD and RUB might be among best performers in 2022 as they expect Crude Oil and Copper rally next year.

Over the past week though, Dollar Index has trended lower, with a tapering of Federal Reserve stimulus as early as next month already priced in, along with a first interest-rate increase next year.

"The sense that 'transitory' inflation will last longer than previously thought has been the main catalyst" as "the market re-calibrated rate hike expectations in most jurisdictions," Westpac strategists wrote in a research note. However, the U.S. is likely to be insulated by energy market bottleneck that is "casting an ongoing cloud over rebound prospects in Europe and China," which "should leave yield spreads at the front end continuing to drift in the USD's favour," they said, adding that pullbacks in the dollar index should be limited to 93.70.

"Our strong USD forecast published in early July reflected - among other things - U.S. economic outperformance, but the USD's drivers may be changing," Commonwealth Bank of Australia strategist Joseph Capurso wrote in a client note. "The spike in global inflation and interest rates may support the USD as a safe haven if short-term interest rates price in a global monetary tightening cycle that it so strong it forces equities to correct lower," with evidence of that scenario likely seen in a decline in USD/JPY and AUD/JPY, he said.

Yields appeared to stabilize on Tuesday, however, which reduced demand for the greenback. The dollar’s move lower on Tuesday was also likely exaggerated by technical factors as investors unloaded long positions.

“The movement in rates hardly explains extent of the USD drop,” analysts at Scotiabank said in a report. “Rather, it seems USD long liquidation has snowballed into a broader clear out of positioning, triggering a technical reversal in the USD generally,” they said.

The dollar dipped on Wednesday as risk sentiment improved and as investors focused on rising commodity prices and when global central banks are likely to begin hiking interest rates to fend off persistently high inflation. Investors are pricing for even more aggressive rate increases in other countries and as commodity-linked currencies including the Canadian and Australian dollars outperform. The dollar index fell 0.24% to 93.57.

“When it comes to central banks, there’s a lot of aggressive pricing out there,” said Bipan Rai, North American head of FX strategy at CIBC Capital Markets in Toronto, noting that the market is likely overstating how quickly rate hikes will come. Rai expects the dollar may outperform if investors pare back rate hike expectations in other countries, though “that’s something that’s going to take some time to correct. When push comes to shove, given the underlying fundamentals in the United States, which are still very constructive for growth, we think the Fed is probably going to be the central bank that raises rates over the course of the coming years at a bit of a more aggressive clip than the market is pricing in now,” Rai said.

Market participants are pricing for the Fed to raise rates twice by the end of 2022.

Fed Governor Randal Quarles on Wednesday said that while it is time for the Fed to begin dialing down its bond-buying program, it would be premature to start raising interest rates in the face of high inflation that is likely to recede next year. The Fed also said in its latest Beige Book that the U.S. economy grew at a “modest to moderate” rate in September and early October, as the latest surge of COVID-19 cases crested and began to recede.

ING FX strategists said in a client note that the dollar’s recent decline could be due to a combination of markets closing long-dollar positions and “a benign risk environment, where a strong U.S. earnings season has continued to offset inflation/monetary tightening concerns. At this stage, it looks like the dollar is lacking some catalysts to contain the ongoing correction, and any support to the greenback may need to come from a cool-off in the recent risk-on mood in markets,” ING said.

Commodity currencies stood near multi-month highs on Thursday on strong raw material prices, while the improved mood chipped away at demand for the
safe-haven U.S. dollar, which has recently been supported by expectations of Federal Reserve tapering.

Sterling was also riding high on firming perceptions the Bank of England (BoE) will raise interest rates as soon as next month to curb inflation, despite softer-than-expected UK price data on Wednesday.

"It looks almost certain that the BoE will raise interest rates in November, perhaps again in December, as inflation could get out of control otherwise given a severe labour shortage," said Yukio Ishizuki, senior strategist at Daiwa Securities. And globally we are likely to see rate hikes to curb inflation in many countries, which means the U.S. dollar is standing out less than before, in terms of rate hike expectations."

"It's as if the BoE is stealing the spotlight from the Fed as it looks likely to raise rates before the Fed," said Kyosuke Suzuki, president of Financial algotech company at Ryobi Systems. What could be the game changer, though, is if the Fed is also jumping on the bandwagon of global rate hikes much sooner than expected," he added.

Oil prices have been supported by strong demand as countries started to reopen their economies, while a global coal and gas crunch showed little sign of abating. U.S. crude and fuel inventories have tightened sharply. Brent crude futures hit its highest level since 2018, while U.S. crude futures were at their loftiest level since 2014.
Better jobs and housing data and rising U.S. Treasury yields helped the dollar rise towards the end of the U.S. session on Thursday, gains it held in Asian hours.

"People are wondering whether we are at an inflection point, as the dollar has been weakening and that doesn't really fit with the broader narrative that global growth is cooling and the Fed is on the path to tapering, which should be supportive for the dollar," said Paul Mackel, global head of FX research at HSBC.

The U.S. dollar slipped against its rivals on Friday and is set for a second consecutive week of decline as news that heavily-indebted property firm China Evergrande Group had averted a default buoyed appetite for risky assets.

Concerns over the embattled property developer whose liabilities are equal to 2% of China’s gross domestic product had sent investors flocking to the perceived safe-haven currencies like the U.S. dollar and government debt. Worries of economic contagion have seen swathes of other heavily-indebted developers hit with credit rating downgrades.



But days before a deadline that would have plunged the embattled developer into formal default and sent shockwaves through global markets, the company had supplied funds to pay interest on a U.S. dollar bond. News that the Chinese property developer had made a bond payment to avert a default lifted the mood globally. Worries about contagion from a potential default have rattled markets recently.

“So while this is good news in terms of a formal imminent default being avoided over the weekend, uncertainty is set to remain high until there is further clarity on Evergrande’s position and the position of other property companies in China,” MUFG strategists said in a daily note.

The broader market narrative remained supportive of more U.S. dollar gains as rising bond yields on the back of firmer inflation expectations are expected to lend support to the greenback.



Yields on 10-year U.S. Treasury notes held near their highest levels this year at 1.7% while yield differentials between comparable U.S. and German debt held at a chunky 177 bps.

Moreover, rising expectations that the U.S. Federal Reserve will be among the leaders to tighten monetary policy before other major central banks is also prompting investors like UBS Wealth Management to keep the dollar as its most preferred currency in its portfolio.

The RBA said on Friday it had stepped in to defend its yield target for the first time in eight months, spending A$1 billion ($750 million) to dampen an aggressive bonds sell-off as traders have bet on inflation pulling forward rate hikes.

Investors continued to unload long positions that benefited from an increase in bets that the Federal Reserve will raise rates sooner than previously expected. The greenback also faced seasonal weakness that is typical in late October. Investors have taken profits since the dollar index hit a one-year high last week, when concerns that inflation will remain stubbornly high for longer led investors to bring forward expectations on when the Fed will first raise rates to mid-2022.

That repricing momentum has now faded as investors take profits and also build expectations for sooner rate increases in other currencies.

“There’s a bit of a positioning unwind taking place, we’ve obviously seen a firmer dollar since the September Fed,” said Mazen Issa, senior FX strategist at TD Securities in New York. That also dovetails with the seasonal tendency for the dollar to soften into the end of the month. Issa expects the dollar to regain traction as global central banks push back against the aggressive repricing of rate hikes, while the Fed is likely to remain relatively hawkish and move forward with a reduction in its bond purchase program. “Once we get the pushback from other central banks and the Fed’s committed to taper we should see dollar dips really being shallow,” Issa said.

The dollar pared losses on Friday after Federal Reserve Chairman Jerome Powell said the U.S. central bank should begin reducing its asset purchases soon, but should not yet raise interest rates. Powell said employment is still too low and high inflation will likely abate next year as pressures from the COVID-19 pandemic fade, even as many market participants are concerned that rising price pressures will last longer than policymakers believe.

"I do think it's time to taper; I don't think it's time to raise rates," Powell said in a virtual appearance before a conference, noting that there are still five million fewer U.S. jobs now than there were before the coronavirus pandemic. He also reiterated his view that high inflation will likely abate next year as pressures from the pandemic fade. "We think we can be patient and allow the labor market to heal," he said.

It's "very possible" the Fed's full employment goal could be met next year, Powell said on Friday. Still, it's not a certainty, and if inflation - already higher and lasting longer than initially expected - moves persistently upward, the Fed would "certainly" act, he said.

"The risks are clearly now to longer and more persistent bottlenecks and, thus, to higher inflation," he said. For now, the Fed needs to "look through" that high inflation, despite the pain it means for households having to pay more for gas and food, in order to give time for the economy to work out supply kinks.

Consumer prices have been rising at more than twice the Fed's target. And, Powell noted, "supply constraints and elevated inflation are likely to last longer than previously expected and well into next year, and the same is true for pressure on wages." Still, he said, the most likely case is for inflation pressures to abate and job growth to resume its pace from this past summer. For now, the Fed will watch and wait, Powell said.

Data on Friday showed that U.S. business activity increased solidly in October, suggesting economic growth picked up at the start of the fourth quarter as COVID-19 infections subsided, though labor and raw material shortages held back manufacturing.



COTW-18-Oct.jpg


COT Report

Recent data confirms opinion of analysts above, suggesting that as dollar as EUR performance now is a product of rebalancing positions, and mostly technical. Data shows that there is no changes in hedgers' position this week. Net long position barely increases, but open interest drops significantly and speculators have closed large positions on both sides:

1634972260044.png


This data suggests that changes are mostly technical and are not because of sentiment change. Second - they are probably short term. It means that recent upward action stands due short covering rather than new purchases. Hence, the same background we have on the dollar index, which confirms our view of just a retracement now.

Continued in the next post...
 

Sive Morten

Special Consultant to the FPA
Messages
15,289
Next week to watch

#1 ECB meeting

Not for the first time - and likely not the last - the European Central Bank has a delicate balancing act on its hand. At its meeting on Thursday, it will face pressure to acknowledge that inflation is proving stickier than anticipated. The U.S. Fed will likely start tapering within weeks, Bank of England comments suggest a UK rate hike is coming soon and the likes of Norway, New Zealand have already tightened.

Will the ECB follow?

It has good reasons, such as subdued wages, to stick with its message that long-term price pressures remain weak and surging energy prices could hurt consumer spending and growth. But markets don't square with the ECB's policy guidance, and are pricing a strong chance of a rate hike by end-2022.

Euro zone inflation expectations hit their highest levels in years, putting additional pressure on the European Central Bank over its insistence on maintaining crisis-era stimulus. The central bank is set to meet next week.

“That inflation is transitory does not necessarily mean that it is short-lived. An adjustment of supply to the changes in patterns of demand caused by the pandemic may be slow, and keep upward pressure on prices for longer,” strategists at Citi wrote in a note.

WFRDPNKG5FK6BIS3LV26OUPQ64.jpg



#2 UK Budget forecast

UK Chancellor Rishi Sunak will take the stand on Wednesday to deliver his latest budget forecasts. They are expected to show borrowing in the 2021/22 financial year is on track to come in around 40 billion pounds ($55 billion) below March predictions, thanks to faster economic growth.

But Sunak - who has adopted a more hawkish fiscal stance than many of peers - is facing a pretty bleak backdrop: The combination of higher inflation and lower growth coupled with labour market shortages and supply chain disruptions due to Brexit and COVID-19 is making investors and policy makers uneasy.

Meanwhile the pound has failed to capitalise on rising bets of an impending Bank of England rate hike as some investors believe that policymakers may be making a mistake by tightening policy too quickly, making the British currency more volatile than its major rivals in recent days.

LDOHECQEIVMYVEI35CTCGGFLYM.jpg


#3 Bitcoin ETF launch

Bitcoin's rollercoaster year has stepped up a gear. The biggest cryptocurrency hit an all-time high of $67,016 on Wednesday, fuelled by bets the first U.S. bitcoin futures exchange traded fund would pave the way for money to pour into digital assets.

Bitcoin's latest peak came six months after its last, its journey inbetween peppered by wild price swings dominated by a cryptocurrency crackdown in China.

Crypto analysts reckon the dawn of U.S. ETFs - a dozen others are in the pipeline - will support prices. Others say the view bitcoin as a hedge against inflation is a bigger factor. Whoever's right, one thing is clear: bitcoin volatility isn't going anywhere.

Bitcoin notches record high, day after U.S. ETF debut

YRNNDOQ4ANJRRKGE6BLYBIIKXI.png


So, what facts do we have to make conclusion on current situation? First is sentiment data. It shows no bullish reversal background and de facto keeps US Dollar dominate position. Partially it is reflected in price action as downside retracement on DXY, despite DRPO "Sell" pattern shows slow progress and might be over soon. Now it seems that some chase exists among the central banks on first rate hike, at least in the minds of investors. And that makes them to jump between different assets and currencies, trying to catch the first effect of rate change. It seems that GBP, CAD and AUD stand among the leaders who could make it first. So we could see short-term spike in this currencies and temporal drop of the dollar.
At the same time, we suggest that two factors make the difference. First is the quality of US Dollar. With all other things remain equal, it always has better demand than the others. Which means that as soon as Fed will step in the interest rate hiking race - investors will shift to the better. Second - UK, Australia and Canada, NZ, maybe, could rise rate once or twice but what is about the long distance? This also matters. So, it seems that Fed could loose the start but with the race... Besides all commodity currencies are very sensitive to OPEC + decisions and China energy policy. For example, recent jump in gas prices mostly stands due big demand from China as they ban coal supply from Australia by political reasons. This balance could change fast.
Finally Above we mention an opinion that Fed could adjust its policy to earlier rate change. We think that hardly this is possible in near term, as Fed is conservative in decisions and tries not to shake markets in vain.
This leads us to conclusion that in short-term, within 3-5 weeks we could get higher volatility with trading setups in favor of the EUR, especially if ECB tells something hawkish. But in longer-term major upside tendency on the dollar should remain. Based on fundamental data we do not see yet reasons suggesting dollar weakness. High hydrocarbons and basic metal prices (copper in particular) makes weaker effect on EU and China economy in long term, while US is self-sufficient country that has all necessary commodities and doesn't depend on their export.


Technicals
Monthly


Monthly chart brings no difference by far as October remains very shy trading month. Long term picture remains bearish. Market stands at important sentiment point - YPP and it is rather close to the breakout. It is difficult to call September as positive month to EUR. Trend remains bearish and market shows two bearish signs right in single month - confirms downside pennant breakout. Second - forms bearish reversal month in September. Despite that we could get some bounce in October as we've discussed, it seems that bearish saga on EUR is not over yet and could get continuation in Nov-Dec as we come closer to the first hawkish Fed step.

eur_m_25_10_21.png


Weekly

Picture has not changed since last week. We've got just inside week this time. Market still stands in an area of important and strong support. Some reaction should happen but it seems that background for it is melting and pullback could be shyer than it was suggested initially. As we've said supposedly, based on harmony here we could suggest a H&S - looking price action. It means that market could show 50% bounce to form potential right arm. Based on the EUR chart it should be somewhere to 1.20-1.21 area, but now it is more doubts appear on the upside potential. Maybe we could get some acceleration in a case of ECB support.

eur_w_25_10_21.png


Daily

Trend remains bullish here. EUR shows no patterns on daily chart but flag consolidation below 3/8 Fib level suggests that market has some hopes on upward continuation. It seems that real hopes stand for ECB decision, as UK is coming to the first rate hike next month. The DXY chart also suggests that downside action is not over yet, so, as we've said last week - we could get upside action at least to 1.1730 area or maybe even to 1.1760. Some big shifts in ECB statement could trigger more extended rally.

eur_d_25_10_21.png


Intraday

On 4H chart we have few bullish signs. First is price stands stubbornly above the neckline of H&S pattern, keeping chances to follow to the next XOP target. Narrow consolidation in a shape of triangle also suggests some bullish expectations, because downside reversals usually happens sharp and faster. Finally we could recognize signs of bullish dynamic pressure as MACD is going down while price action is not and forming higher lows:

eur_4h_25_10_21.png

Now it is a tricky moment to decide where to take the long position. If we would have the ECB on horizon, I would say that we could hide stops just under the current consolidation, but with ECB we could get a lot of spikes and W&R action. Thus, it seems that those who wants to possess for upward action have to place stops deeper, or use the alternative way to enter - Stop "Buy" order at the moment of 1.1670 level breakout. The problems could come if ECB provides anemic statement again...So, situation is difficult for position taking. Maybe it makes sense to buy options instead.

eur_1h_25_10_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
15,289
Morning everybody,

So, sweet music sounds not too long and right on Monday EUR has collapsed. Session has started on positive tone but later, with slightly worse IFO numbers and news release concerning another possible developer default in China peaks demand for US Dollar.

Another reason is the games around ECB meeting. Many analysts think right now that ECB remains white crow among central banks and pushing back on market inflation forecasts.

The ECB will likely underscore its dovish guidance, while U.S. GDP will show the economy’s rebound stalling, Westpac’s analysts said, though the scene remains set for the Federal Reserve to announce a reduction in bond purchases next week.

All these moments form negative sentiment around EUR. Technically we've got bearish reversal session that actually engulfs the performance of the whole previous week. Thus, until Thursday hardly we get any bullish setups:
eur_d_26_10_21.png


On 4H chart triangle has been broken down and price now stands below the neckline that is not good:

eur_4h_26_10_21.png


On 1H chart short-term upside tendency is also broken. Thus, we do not consider any bullish setups by far. From the bearish one, it is possible to think about 1.1618 resistance and "222" Sell pattern. With current background, EUR could reach at least next support around 1.1575.
eur_1h_26_10_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
15,289
Greetings everybody,

So, today we probably should get relatively quiet session - ECB stands for tomorrow and today we have Durable Good orders, BoC and BoJ meetings. BoJ is not interesting, but BoC might provide some volatility as Crude Oil stands on peak and they also come to first rate change...

Anyway, EUR shows downside action, mostly on intraday charts. It seems that on daily time frame we have a kind of B&B "Sell", although it doesn't hold all conditions, but the overall price shape is typical for momentum trade. It hits 3/8 level and now is moving down. So, 5/8 level here might be used as a nearest target, I suppose:
eur_d_27_10_21.png


On 4H chart we're watching for the same nearest target that have discussed yesterday - COP around 1.1579 that agrees with 5/8 support and natural support/resistance area. It is minor distance and EUR has chances to reach it. Keep an eye on bearish grabber here as well:
eur_4h_27_10_21.png


1H chart shows that our setup is started accurately and now price stands in narrowing wedge consolidation. 1.1575 stands inside, so EUR should touch it, as we've said, but breakout... hardly it happens until ECB decision. So, that's why we see nothing to do for new position taking. We have no context to buy. Downside target stands very close, so it is no sense to go short with the new position as well... You could manage existed shorts and just wait for coming ECB meeting.
eur_1h_27_10_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
15,289
Morning everybody,

So, it seems that it is low sense to talk about EUR right now as everybody waits for ECB statement. EUR stands in tight consolidation upon support area that we've discussed yesterday.

The currency that it seems interesting to discuss is CAD. Recently no breakthrough decision is made by BoC about interest rates, but this is temporal postponing. With rising oil prices and inflationary pressure Canada should make this step relatively soon, probably sooner than the US.

This is the reason why we suggest that CAD should rise more in long-term. On monthly chart we could see bearish picture (which suggest rising of CAD) - after strong drop the "222" Sell" pattern has been formed and market completed its 3/8 minimum target in 2016. But following attempt to keep bullish trend has failed and market now has dropped back to 3/8 Fib level. Here is you can see B&B "Sell" completion that we've talked about in August video.
This market behavior suggests downside continuation. Right now we could talk about next 5/8 support of 1.12 area.
cad_m_28_10_21.png


Goldman Sachs analysts suggest that 2022 should become the year of the crude oil and copper and they prefer to invest in oil-linked currencies and assets, including CAD.

On daily chart we see that monthly B&B is done at 5/8 daily support as it should. Also price creates Agreement support with XOP target. Since we have another, minor thrust here - some DiNapoli pattern could be formed, and based on current performance, it seems that DRPO "Buy" is more probable, whatever it will be be, in current circumstances we could watch for chances to go short at some major resistance level. Short-term traders also could take DRPO (if it appears) separately.
cad_d_28_10_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
15,289
Morning everybody,

So, EUR finally has shown solid action as it has got the push from multiple factors. ECB was not the strongest one and mostly this was cumulative effect of ECB, CAD and RBA that have made impact on DXY dynamic. US GDP also has brought its 2 cents....

Anyway, in short-term we have good upside impulse that we could try to use for short-term setups. DXY hits the minimal DRPO target which is 50% support. But, as we definitely see some acceleration it could go lower, especially as market now has brave expectations on BoE performance next week:
1635489366025.png


As a result on 4H chart we have clear AB=CD pattern with 1.1730 target, discussed earlier. Today some technical retracement could happen as DXY hits support as well and market needs some relief after tough Thursday.
eur_4h_29_10_21.png


Hence, on 1H chart we could consider two levels - 1.1650 and 1.1625-1.1630 K-support area, that should be theoretically suitable for long entry:
eur_1h_29_10_21.png


As always we have to be aware of direct dropping and ignore the trade if it comes, and could choose one of three ways to enter - at 1st level, at 2nd level and split position, combining both. So choose what you like more.
 
Top