Sive Morten
Special Consultant to the FPA
- Messages
- 18,561
Fundamentals
As news background has shown some relief this week - it makes impact on markets as well. As EUR as GBP spent time in gradual downside retracement which we've discussed in our daily updates through the week.
The major driving factors mostly stand the same - Brexit, ECB on this week and Fed meeting next week. As we've talked about ECB - it has not brought big surprises, M. Draghi speech mostly was predictable and neutral.
The euro erased its earlier gains on Thursday after business surveys pointed to stagnating economic momentum in the euro zone. The weakness of the region was reaffirmed on Thursday when IHS Markit’s flash composite PMI for October, seen as a good guide to economic health, remained perilously close to the 50 mark that separates growth from contraction and below forecasts.
Despite some optimism from Mario Draghi’s final news conference as president of the European Central Bank, the euro fell against the dollar on Thursday, pulled down by business surveys which point to stagnating economic momentum in the euro zone.
At its policy-making meeting Thursday, the ECB kept interest rates on hold and left its ultra-easy monetary policy unchanged. Weak growth across the euro zone notwithstanding, Draghi said the benefits of loose policy far outweighed the risks and rejected the suggestion that a public split with policy hawks in the bank had tainted his legacy.
Much of Thursday’s focus was on his decision to push through the open-ended bond-buying scheme that will tie his successor Christine Lagarde’s hands for years to come, despite opposition from a third of policymakers. Draghi played down the dissent, pointing out that all moves made in September were backed by majorities and were once again confirmed by the outcome of this month’s meeting.
“We came into the morning thinking that there would be a bit more optimism than usual from Draghi as it is his last meeting, and we didn’t think he would want to end his tenure on a downbeat note,” said Thierry Wizman, global interest rates and currencies strategist at Macquarie Group.
At the same time, there was a mixed data in US as well. New orders for key U.S.-made capital goods fell more than expected in September and shipments also declined, a sign that business investment remains weak amid the continuing fallout from the U.S.-China trade war.
However, another report on Thursday showed the number of Americans filing applications for unemployment benefits unexpectedly fell last week, pointing to a tight jobs market even as hiring and economic growth has slowed.
The major driving factor was Brexit of course. The British pound fell against the U.S. dollar on Thursday following Prime Minister Boris Johnson’s call for a national election.
Johnson said he was asking parliament to approve a national election on Dec. 12 in an effort to break the political deadlock over Brexit and ensure the UK leaves the European Union.
“Is the election positive for GBP? I argue no. The campaign will see polling swings, and investor inflows may slow whilst they wait for the result. It’s why we are long EUR/GBP,” Nomura analysts told clients.
With the Brexit end game more uncertain than traders thought last week, the pound was set up for another rocky period.
Sterling edged down again on Friday as the European Union failed to set a date for Britain’s departure from the bloc while the UK parliament squabbled over Prime Minister Boris Johnson’s call for an election to break the deadlock.
EU ambassadors agreed in principle to a delay beyond the Oct. 31 deadline, but will not decide the length of the extension until Monday or Tuesday, an official said.
A source close to French President Emmanuel Macron said an extension was not justified at this stage.
“France wants a justified and proportionate extension. However, we have nothing of the sort so far. We must show the British that it is up to them to clarify the situation and that an extension is not a given,” the source told Reuters.
Johnson’s spokesman said the government would push ahead with Brexit if lawmakers did not agree to an election.
Labour leader Jeremy Corbyn says he will only support an election if a no-deal Brexit is taken off the table.
“It seems like (there is) this weird feedback loop of uncertainty from the UK parliament leading to the EU not making a decision, leading to the uncertainty in the UK parliament,” said Jordan Rochester, FX strategist at Nomura.
Thu Lan Nguyen, FX strategist at Commerzbank, noted the risk of “running round in circles”.
“We will see more volatility if we have more elections in December - as soon as the date’s set and decided I would expect implied volatility in the one- to two-month horizon to rise again,” she said.
Sterling-dollar implied volatility - expectations of future price swings - on a one-month maturity were down to 9.4% on Friday, the lowest in more than five weeks . But the three-month contract touched a four-day high at 10.2%, as election jitters and fear of prolonged Brexit uncertainty crept in.
“There’s still a focus on the UK and sterling, but that’s going to be a feature for a long time,” said Shahab Jalinoos, global head of foreign exchange strategy at Credit Suisse.
Apart from the ongoing Brexit saga, Jalinoos said the currency market on Friday was relatively quiet.
“At the moment the market is taking a breather on most fronts. The next event that’s a major focus is the APEC summit in the middle of November when the market will want to see what transpires from Phase 1 negotiations between the U.S. and China. That’s far enough in the future that it’s eliminating some reasons to aggressively trade.”
The low volatility environment, he said, is encouraging flows into certain higher-yielding assets like emerging markets and out of the funding currencies such as the Swiss franc and the euro. The single currency was last down 0.14% against the dollar to $1.109.
Some focus will shift next week to the U.S. Federal Reserve’s two-day policy meeting. The central bank is expected to announce on Oct. 30 the third interest rate cut of the year. Money markets have largely priced in a quarter-percentage-point reduction, according to Refinitiv data.
According to recent CFTC data and Reuters calculation speculators cut their net long dollar position in the latest week, according to calculations by Reuters and U.S. Commodity Futures Trading Commission data
released on Friday.
The value of the dollar's net long position, derived from net positions of International Monetary Market speculators in the yen, euro, British pound, Swiss franc and Canadian and Australian dollars, fell to $15.31 billion in the week ending Oct. 22, from $20.79 billion the previous week. It is the smallest long dollar position since Sept. 17. In a wider measure of dollar positioning that includes net contracts on the New Zealand dollar, Mexican peso, Brazilian real and Russian ruble, the U.S. dollar posted a net long position valued at $15.10 billion, down from $20.38 billion a week earlier.
As on EUR as on GBP we see contraction of net short positions, suggesting of some short covering. On both currencies net short position has decreased for ~ 25K contracts.
Source cftc.gov
Charting by Investing.com
Finally, as we're coming to Fed decision - we need to take a look beyond the horizon a bit, because now nobody is interested in rate cut, but think about far-going perspective. We need to understand what is going on in US economy, as current situation differs significantly from what we saw in the first half of 2019. This is important for us, because our long-term view mostly depends on EU/US economy balance and now we see signs that US component starts floundering, which provides advantage to EUR.
Fathom consulting in their recent report tells that indeed - there are some points of concern.
Fathom Consulting’s latest Global Economic and Markets Outlook (GEMO) central scenario envisages a continued pause in global trade growth, resulting from the ongoing uncertainty around the US and China’s trading relationship. Though this will — and has — been a drag on GDP, we see investors’ fears of a global recession as overblown.
Our estimates point to a sharp reversal in trade growth, from 2% above trend in the middle of last year to 2% below trend now. While this fall is significant, it pales in comparison to the Global Financial Crisis, which was the deepest global recession in decades. The effects of the slowdown have not been distributed evenly. Countries more exposed to trade and those with larger manufacturing shares have been the worst affected, as the tendency for manufactured goods to be traded across borders leaves the sector especially susceptible to swings in international trade. It is therefore hardly surprising that industry has slipped into recession across the OECD economies. By contrast, the services sector has (thus far) remained relatively cocooned from this shock.
To study the distribution further, we constructed a model using bilateral goods exports flows between 171 countries. It showed that, of the major advanced economies, Germany is the most susceptible to a slowdown in global trade, and its vulnerability has doubled since 2000. This is partially captured by the higher share of GDP now accounted for by goods exports, as demonstrated in the chart below. The model predicts that a 1 percentage point reduction in world trade would knock nearly 1.2% off the level of German GDP in the long run.
In comparison, the US would emerge relatively unscathed. The US’s closed economy is also marginally less vulnerable than it was in 2000. As seen in the chart below, a divergence has emerged between the growth rates of the US and Germany. Though this also reflects the fiscal stimulus package, in the form of corporate tax cuts, delivered by the US government towards the end of 2017, the hard data coming out of the US has been more stable. In GEMO, we forecast 2019 growth of 2.3% and 0.4% in the US and Germany respectively. The IMF has recently revised down its projections closer to our view, cutting forecasts of both economies by 0.2 percentage points to 2.4% and 0.5%.
Our risk scenario entails things deteriorating further, causing productivity and investment to fall and ultimately leading to a global recession. We estimate that the 15-percentage-point rise in trade’s share of global GDP since 2001 increased total factor productivity by 9%. If firms, who can see the long-term impacts of the trade slowdown on productivity, believe the trade slowdown will get worse from here, they will cut investment immediately due to lower marginal product of capital. This could lead to a reduction sharp enough to push the global economy into a recession.
There are indeed signs that investors are getting nervous. The S&P 500 regularly changes track in line with trade news. Fathom’s US Economic Sentiment Indicator (ESI), which uses a variety of surveys to create a composite measure of confidence, has dropped sharply in recent months. As mentioned above, this is partly due to the boost of fiscal stimulus coming to an end but is exacerbated by trade tensions. Governments are aware. The Trump administration has negotiated so-called ‘mini deals’ with China and Japan to reassure businesses that it does want an eventual end to the trade war that it started. These deals are not long-term solutions however and must be followed with substantial agreements to truly rule out our risk scenario. If not, these tensions could herald new era of beggar-thy-neighbour policies and trigger a sharp fall in globalisation. This is not our central case, but its likelihood is increasing.
Technicals
Monthly
As we're coming to the end of the month - we keep an eye on technical issue here, on monthly chart, which could be important for November performance. Briefly we've mentioned it in one of our videos last week. This is bullish reversal month.
To make it confirmed EUR has to close above September top. In October price already has formed greater top but now it still stands below September high. At the same time, next week is Fed meeting and statement. Something tells me that its comments will be more dovish which keeps chances on upside action. Reversal month could become the first step in long-term direction changes but its short-term effect - continuation of upside action in November. That's what is important for us right now.
All other things stand equal by far. As we've mentioned earlier - market right now stands at crucial area from technical point of view. This is the middle of the range and YPS1. Once EUR will break it - road to the bottom of the range around 1.03 area will be opened. Conversely, if EUR, by the end of the year will be able to hold above YPS1 - 2019 action could be treated as retracement of 2016 - 2017 rally. And EUR will keep chances on extension in 2020.
Neither big support nor oversold levels stand around and it is free space till 1.03 lows. The only support is YPS1 and middle of the range. That's major technical support here.
Now the major intrigue stands around fundamental background - it is changing. It is interesting whether its change will be strong enough to make impact on monthly chart and long lasting tendency here. As economy in EU hardly will improve soon - the major driving factor depends on US - how better/worse situation will be there.
Weekly
Trend stands bullish on weekly chart. The drop of this week stands due technical reasons on daily chart. In fact, we've talked about them through the whole week. Here is 1.1109 level - the top of September, which EUR has to exceed by the end of the month to form bullish reversal month.
Technically, the nearest barrier here is 1.12-1.1235 area. It includes Fib level ( actually this is daily K-resistance), and upper border of the channel. Market is not overbought here. Next level is stronger and it stands at K-resistance of 1.1450-1.1520 area, and accompanied by OB level.
Daily
It seems that our suggestion on retracement was correct. Indeed, reversal candle has triggered downside continuation, and now as EUR as DXY stand at major 3/8 Fib levels. On DXY previous thrust looks better than on EUR and there we also have mentioned B&B "Sell" setup.
On Monday EUR should start flirting with MACDP line. Appearing of bullish grabber is welcome to us. Now we consider whether it makes sense to take long position here.
Intraday
Short-term bullish scenario is based on "222" Buy pattern on 4H chart. Now the only thing is unclear - where the final reversal point will be. Based on AB-CD pattern - it should be around XOP of 1.1040 level, because OP target is passed already. At the same time XOP stands below K-support area and it is not the fact that it will be reached.
This combination of factors tells that we could consider position taking around 1.1065 K-support area, while stop anyway has to be placed below XOP. Appearing of daily grabber on Monday will be additional plus for us.
Our Friday setup has been completed as well - EUR has reached 1.618 butterfly target. Thus, on Monday our first step will be to watch how market will response on 1.1065 K-support. 1.1040 area is also WPS1. So, our area for possible long entry is 1.1040-1.1065.
Conclusion:
There are two major fundamental factors on the table that probably will set direction till the end of the year, or maybe on longer perspective. This is Fed statement and pool of events that stand around Brexit - date, December elections, Brexit agreement approvement in Parliament.
While there is some silence around Brexit by far and Fed is coming on first stage - we have expectations that Fed will provide supportive background to EUR. Technical picture on EUR is also positive.
As news background has shown some relief this week - it makes impact on markets as well. As EUR as GBP spent time in gradual downside retracement which we've discussed in our daily updates through the week.
The major driving factors mostly stand the same - Brexit, ECB on this week and Fed meeting next week. As we've talked about ECB - it has not brought big surprises, M. Draghi speech mostly was predictable and neutral.
The euro erased its earlier gains on Thursday after business surveys pointed to stagnating economic momentum in the euro zone. The weakness of the region was reaffirmed on Thursday when IHS Markit’s flash composite PMI for October, seen as a good guide to economic health, remained perilously close to the 50 mark that separates growth from contraction and below forecasts.
Despite some optimism from Mario Draghi’s final news conference as president of the European Central Bank, the euro fell against the dollar on Thursday, pulled down by business surveys which point to stagnating economic momentum in the euro zone.
At its policy-making meeting Thursday, the ECB kept interest rates on hold and left its ultra-easy monetary policy unchanged. Weak growth across the euro zone notwithstanding, Draghi said the benefits of loose policy far outweighed the risks and rejected the suggestion that a public split with policy hawks in the bank had tainted his legacy.
Much of Thursday’s focus was on his decision to push through the open-ended bond-buying scheme that will tie his successor Christine Lagarde’s hands for years to come, despite opposition from a third of policymakers. Draghi played down the dissent, pointing out that all moves made in September were backed by majorities and were once again confirmed by the outcome of this month’s meeting.
“We came into the morning thinking that there would be a bit more optimism than usual from Draghi as it is his last meeting, and we didn’t think he would want to end his tenure on a downbeat note,” said Thierry Wizman, global interest rates and currencies strategist at Macquarie Group.
At the same time, there was a mixed data in US as well. New orders for key U.S.-made capital goods fell more than expected in September and shipments also declined, a sign that business investment remains weak amid the continuing fallout from the U.S.-China trade war.
However, another report on Thursday showed the number of Americans filing applications for unemployment benefits unexpectedly fell last week, pointing to a tight jobs market even as hiring and economic growth has slowed.
The major driving factor was Brexit of course. The British pound fell against the U.S. dollar on Thursday following Prime Minister Boris Johnson’s call for a national election.
Johnson said he was asking parliament to approve a national election on Dec. 12 in an effort to break the political deadlock over Brexit and ensure the UK leaves the European Union.
“Is the election positive for GBP? I argue no. The campaign will see polling swings, and investor inflows may slow whilst they wait for the result. It’s why we are long EUR/GBP,” Nomura analysts told clients.
With the Brexit end game more uncertain than traders thought last week, the pound was set up for another rocky period.
Sterling edged down again on Friday as the European Union failed to set a date for Britain’s departure from the bloc while the UK parliament squabbled over Prime Minister Boris Johnson’s call for an election to break the deadlock.
EU ambassadors agreed in principle to a delay beyond the Oct. 31 deadline, but will not decide the length of the extension until Monday or Tuesday, an official said.
A source close to French President Emmanuel Macron said an extension was not justified at this stage.
“France wants a justified and proportionate extension. However, we have nothing of the sort so far. We must show the British that it is up to them to clarify the situation and that an extension is not a given,” the source told Reuters.
Johnson’s spokesman said the government would push ahead with Brexit if lawmakers did not agree to an election.
Labour leader Jeremy Corbyn says he will only support an election if a no-deal Brexit is taken off the table.
“It seems like (there is) this weird feedback loop of uncertainty from the UK parliament leading to the EU not making a decision, leading to the uncertainty in the UK parliament,” said Jordan Rochester, FX strategist at Nomura.
Thu Lan Nguyen, FX strategist at Commerzbank, noted the risk of “running round in circles”.
“We will see more volatility if we have more elections in December - as soon as the date’s set and decided I would expect implied volatility in the one- to two-month horizon to rise again,” she said.
Sterling-dollar implied volatility - expectations of future price swings - on a one-month maturity were down to 9.4% on Friday, the lowest in more than five weeks . But the three-month contract touched a four-day high at 10.2%, as election jitters and fear of prolonged Brexit uncertainty crept in.
“There’s still a focus on the UK and sterling, but that’s going to be a feature for a long time,” said Shahab Jalinoos, global head of foreign exchange strategy at Credit Suisse.
Apart from the ongoing Brexit saga, Jalinoos said the currency market on Friday was relatively quiet.
“At the moment the market is taking a breather on most fronts. The next event that’s a major focus is the APEC summit in the middle of November when the market will want to see what transpires from Phase 1 negotiations between the U.S. and China. That’s far enough in the future that it’s eliminating some reasons to aggressively trade.”
The low volatility environment, he said, is encouraging flows into certain higher-yielding assets like emerging markets and out of the funding currencies such as the Swiss franc and the euro. The single currency was last down 0.14% against the dollar to $1.109.
Some focus will shift next week to the U.S. Federal Reserve’s two-day policy meeting. The central bank is expected to announce on Oct. 30 the third interest rate cut of the year. Money markets have largely priced in a quarter-percentage-point reduction, according to Refinitiv data.
According to recent CFTC data and Reuters calculation speculators cut their net long dollar position in the latest week, according to calculations by Reuters and U.S. Commodity Futures Trading Commission data
released on Friday.
The value of the dollar's net long position, derived from net positions of International Monetary Market speculators in the yen, euro, British pound, Swiss franc and Canadian and Australian dollars, fell to $15.31 billion in the week ending Oct. 22, from $20.79 billion the previous week. It is the smallest long dollar position since Sept. 17. In a wider measure of dollar positioning that includes net contracts on the New Zealand dollar, Mexican peso, Brazilian real and Russian ruble, the U.S. dollar posted a net long position valued at $15.10 billion, down from $20.38 billion a week earlier.
As on EUR as on GBP we see contraction of net short positions, suggesting of some short covering. On both currencies net short position has decreased for ~ 25K contracts.
Source cftc.gov
Charting by Investing.com
Finally, as we're coming to Fed decision - we need to take a look beyond the horizon a bit, because now nobody is interested in rate cut, but think about far-going perspective. We need to understand what is going on in US economy, as current situation differs significantly from what we saw in the first half of 2019. This is important for us, because our long-term view mostly depends on EU/US economy balance and now we see signs that US component starts floundering, which provides advantage to EUR.
Fathom consulting in their recent report tells that indeed - there are some points of concern.
Fathom Consulting’s latest Global Economic and Markets Outlook (GEMO) central scenario envisages a continued pause in global trade growth, resulting from the ongoing uncertainty around the US and China’s trading relationship. Though this will — and has — been a drag on GDP, we see investors’ fears of a global recession as overblown.
Our estimates point to a sharp reversal in trade growth, from 2% above trend in the middle of last year to 2% below trend now. While this fall is significant, it pales in comparison to the Global Financial Crisis, which was the deepest global recession in decades. The effects of the slowdown have not been distributed evenly. Countries more exposed to trade and those with larger manufacturing shares have been the worst affected, as the tendency for manufactured goods to be traded across borders leaves the sector especially susceptible to swings in international trade. It is therefore hardly surprising that industry has slipped into recession across the OECD economies. By contrast, the services sector has (thus far) remained relatively cocooned from this shock.
To study the distribution further, we constructed a model using bilateral goods exports flows between 171 countries. It showed that, of the major advanced economies, Germany is the most susceptible to a slowdown in global trade, and its vulnerability has doubled since 2000. This is partially captured by the higher share of GDP now accounted for by goods exports, as demonstrated in the chart below. The model predicts that a 1 percentage point reduction in world trade would knock nearly 1.2% off the level of German GDP in the long run.
In comparison, the US would emerge relatively unscathed. The US’s closed economy is also marginally less vulnerable than it was in 2000. As seen in the chart below, a divergence has emerged between the growth rates of the US and Germany. Though this also reflects the fiscal stimulus package, in the form of corporate tax cuts, delivered by the US government towards the end of 2017, the hard data coming out of the US has been more stable. In GEMO, we forecast 2019 growth of 2.3% and 0.4% in the US and Germany respectively. The IMF has recently revised down its projections closer to our view, cutting forecasts of both economies by 0.2 percentage points to 2.4% and 0.5%.
Our risk scenario entails things deteriorating further, causing productivity and investment to fall and ultimately leading to a global recession. We estimate that the 15-percentage-point rise in trade’s share of global GDP since 2001 increased total factor productivity by 9%. If firms, who can see the long-term impacts of the trade slowdown on productivity, believe the trade slowdown will get worse from here, they will cut investment immediately due to lower marginal product of capital. This could lead to a reduction sharp enough to push the global economy into a recession.
There are indeed signs that investors are getting nervous. The S&P 500 regularly changes track in line with trade news. Fathom’s US Economic Sentiment Indicator (ESI), which uses a variety of surveys to create a composite measure of confidence, has dropped sharply in recent months. As mentioned above, this is partly due to the boost of fiscal stimulus coming to an end but is exacerbated by trade tensions. Governments are aware. The Trump administration has negotiated so-called ‘mini deals’ with China and Japan to reassure businesses that it does want an eventual end to the trade war that it started. These deals are not long-term solutions however and must be followed with substantial agreements to truly rule out our risk scenario. If not, these tensions could herald new era of beggar-thy-neighbour policies and trigger a sharp fall in globalisation. This is not our central case, but its likelihood is increasing.
Technicals
Monthly
As we're coming to the end of the month - we keep an eye on technical issue here, on monthly chart, which could be important for November performance. Briefly we've mentioned it in one of our videos last week. This is bullish reversal month.
To make it confirmed EUR has to close above September top. In October price already has formed greater top but now it still stands below September high. At the same time, next week is Fed meeting and statement. Something tells me that its comments will be more dovish which keeps chances on upside action. Reversal month could become the first step in long-term direction changes but its short-term effect - continuation of upside action in November. That's what is important for us right now.
All other things stand equal by far. As we've mentioned earlier - market right now stands at crucial area from technical point of view. This is the middle of the range and YPS1. Once EUR will break it - road to the bottom of the range around 1.03 area will be opened. Conversely, if EUR, by the end of the year will be able to hold above YPS1 - 2019 action could be treated as retracement of 2016 - 2017 rally. And EUR will keep chances on extension in 2020.
Neither big support nor oversold levels stand around and it is free space till 1.03 lows. The only support is YPS1 and middle of the range. That's major technical support here.
Now the major intrigue stands around fundamental background - it is changing. It is interesting whether its change will be strong enough to make impact on monthly chart and long lasting tendency here. As economy in EU hardly will improve soon - the major driving factor depends on US - how better/worse situation will be there.
Weekly
Trend stands bullish on weekly chart. The drop of this week stands due technical reasons on daily chart. In fact, we've talked about them through the whole week. Here is 1.1109 level - the top of September, which EUR has to exceed by the end of the month to form bullish reversal month.
Technically, the nearest barrier here is 1.12-1.1235 area. It includes Fib level ( actually this is daily K-resistance), and upper border of the channel. Market is not overbought here. Next level is stronger and it stands at K-resistance of 1.1450-1.1520 area, and accompanied by OB level.
Daily
It seems that our suggestion on retracement was correct. Indeed, reversal candle has triggered downside continuation, and now as EUR as DXY stand at major 3/8 Fib levels. On DXY previous thrust looks better than on EUR and there we also have mentioned B&B "Sell" setup.
On Monday EUR should start flirting with MACDP line. Appearing of bullish grabber is welcome to us. Now we consider whether it makes sense to take long position here.
Intraday
Short-term bullish scenario is based on "222" Buy pattern on 4H chart. Now the only thing is unclear - where the final reversal point will be. Based on AB-CD pattern - it should be around XOP of 1.1040 level, because OP target is passed already. At the same time XOP stands below K-support area and it is not the fact that it will be reached.
This combination of factors tells that we could consider position taking around 1.1065 K-support area, while stop anyway has to be placed below XOP. Appearing of daily grabber on Monday will be additional plus for us.
Our Friday setup has been completed as well - EUR has reached 1.618 butterfly target. Thus, on Monday our first step will be to watch how market will response on 1.1065 K-support. 1.1040 area is also WPS1. So, our area for possible long entry is 1.1040-1.1065.
Conclusion:
There are two major fundamental factors on the table that probably will set direction till the end of the year, or maybe on longer perspective. This is Fed statement and pool of events that stand around Brexit - date, December elections, Brexit agreement approvement in Parliament.
While there is some silence around Brexit by far and Fed is coming on first stage - we have expectations that Fed will provide supportive background to EUR. Technical picture on EUR is also positive.