Forex FOREX PRO WEEKLY, October 31 - 04, 2022

Sive Morten

Special Consultant to the FPA

Well, well, folks. We've got a big week, but even bigger yet to come. ECB decision, GDP numbers are important, but coming Fed meeting, NFP and elections next week will drive markets in mid term perspectives.

Last week we've discussed Real Estate market and told that situation stands near critical. This week, as we've mentioned in Telegram channel, mortgage rates hit 7.16% level, highest since 2001. Here is the Reuters article, if you would like to read. If we compares situation on Real Estate market and households' prosperity you clearly could see that americans have no free money, even to support consumption at habit levels. 20% of the most poor households has lost all savings and have to loan to consume goods:

While all personal savings have dropped to 3%. This is the lowest ever level. Previously the same level was at the eve of 2008 crisis. To compensate the rigidity of fiscal policy and maintain habit consumption, the population is actively taking consumer loans and eating the savings. The problem is that incomes in real terms per capita correspond to the middle of 2018, while expenditures are 6% higher - and this gap is covered via lending and savings.


To reduce the inflationary impulse, consumption should drop more by at least 6-8%. But these are political risks. But what relation does it have to real estate market? The direct one - rates are rising while personal income is dropping. As a result we see that Real Estate market is blowing up - the price on new single family house collapsed:

Now it is a tendency as we have third month in a row - "-0.86%" in August and "-0.45%" mom in July, according to the S&P/Case-Shiller U.S. National Home Price Index. This is the most significant decrease since February 2010. From June 2020 to June 2022, residential real estate prices increased by 40%, which was the fastest price increase in history. At the peak of the mortgage bubble in 2005-2006, the maximum two-year price growth rate was 30%.

What we get in near term, as the scale of the bubble 2022 has no analogues. Usually, with a 3-4 months lag, "Building Permits" begins dropping sharply. With six months lag "Housing starts" will follow, while completed construction will follow within another 9-12 months. So far, the effect on the construction sector is insignificant, although the bookmarks of new houses are already falling by 20% YoY, but the horror is ahead.

With the new 7.16% mortgage rates the average monthly expenses on loans for the purchase of real estate increased more than 2.5 times in two years (an increase in rates and a 40% increase in real estate prices).

Thus, the combine effect of slowing nominal wages and households' wealth, the collapse of the asset market (stocks and bonds), the extremely depressed mood of the population regarding the assessment of the current situation and economic prospects (especially pronounced according to the Michigan sentiment Index, which is at a minimum for 50 years) also affects.

All this together brings down the demand for real estate (by about 40% on transactions in August-September), which leads to a drop in prices. These processes are long-term, most likely for years, so the crisis is just beginning.

On examples of problems in Real Estate sector, households saving and bond market liquidity, we see that crisis processes are rising as a snowball. Now another problems come from nobody expects. SNB, China and Japan now, but later some other countries could join this club - have problems with the national currencies weakness. SNB has less problems, while China and Japan greater ones, but it doesn't matter from the subject that we discuss. The reasons are also different - in China they are mostly political (we will talk about it tomorrow in Gold market report), while in Japan they are pure economical. But all of them have a common thing - they need to support weakening national currencies and in rather large volume, especially Japan. To do this they have to sell USD-nominated short-term assets to get dollars and to sell them on the market. As you understand short-term USD assets are Treasury bonds and bills. But, by selling them - they push yields higher, increasing the interest rates margin across the currencies and rising demand for USD from bargain hunters. This is a devil's cycle guys. Selling more Treasuries they also make impact on US domestic rates on mortgages and long-term loans. This is the reason why BofA said recently that US Treasury market could fall under uncontrolled sell-off.

“We believe the UST market is fragile and potentially one shock away from functioning challenges” arising from either “large scale forced selling or an external surprise,” said BofA strategists Mark Cabana, Ralph Axel and Adarsh Sinha. “A UST breakdown is not our base case, but it is a building tail risk.”

Not only US Treasury starts feeling liquidity problems. It is even worse to debtors on bond junk market. A sell-off in the U.S junk bond market is presenting investors with a buying opportunity but some are holding back, worried that a looming recession could spark widespread credit defaults. We have warned about it few months ago. The least quality debtors and zombie companies, that can't generate positive free cashflow will be slaughtered first. Massive defaults and bankruptcies right around the corner:

Spreads on junk-rated bonds have widened some 184 basis points this year while yields - which move inversely to prices - have spiked to over 9%, according to the ICE BofA US High-Yield index. Ratings firm Moody’s Investors Service expects trailing 12-month default rates among speculative-grade issuers to climb nearly threefold to 4.4% in August 2023 from 1.5% in August 2022. This number could hit 13% in a worst-case scenario accompanied by high unemployment and wide spreads. And it is obvious - if investors do not want to buy AAA US government bonds at ~5% yield, who buys junk one?

But it is not all yet. The same BofA suggests that this brings big risk for the stock market as well - Liquidity in the US Treasury market represents the biggest systemic risk to stocks since the 2007 housing bubble, BofA says.

"If the Treasury market fails to trade for a period of time, it is likely that the various credit channels including corporate, household and government borrowing in securities and loans would cease. This could lead to events such as a US government default if auctions do not proceed... It is hard to conceive of the spillover impacts to the dollar, equity markets, emerging markets, consumer and business confidence," BofA said. "While this sounds like a bad science-fiction movie, it is unfortunately a real threat that has absorbed a large amount of people-hours over the past 10 years with very little output from regulators or lawmakers," the bank added.

Concerns about liquidity in the Treasury market comes as the Federal Reserve begins to remove itself as a big buyer of fixed income securities. At the same time capitals run out from the stock market, and this tendency should continue, as it is too big difference in S&P dividend yield of ~ 1.8% and nominal US interest rates around 4-4.5%. It means that stock market should keep falling. Even with the additional yield around 3% from shares buybacks, bond yield is higher for the first time in 20 years:

Since we have 4.8% yield on 1-2 year Treasury bills, we could say that for the first time since 2007, bond rates are significantly higher than the market's dividend yield (1.8%) and are comparable to the full yield (dividends + buybacks ~ 4.5%) for the first time in 20 years. Thus, US Treasuries provide consistently higher guaranteed returns than the stock market, especially on a background of decreasing stock market.

What will it lead to? To what the Fed is striving for – in conditions of a shortage of demand for debt instruments, the difference in yields should support the demand for bonds, bringing down the demand for stocks. This is in theory, as it will be in practice – we'll see, but the last two months it is noted the flow of large long-term investors into bonds and out of the stocks.

Fed comes to Pivot?

At the same time, it seems that Fed is coming to some tightening limits, despite that IMF calls to keep hiking cycle until "neutral" rates level. Fed starts getting big operational loss because of huge volume of reverse Repo trades with commercial banks and rising expenses on US debt serving. More and more headlines come concerning possible Fed pivot and that maybe it makes sense to hold horses for awhile. Bank of Canada already has switched the back pedal and rises rate only for 0.5% instead of anticipated 0.75%. BoE turns to evident QE, while ECB has announced TPI programme two months ago.

"Broad dollar weakness and further but milder declines in U.S. Treasury yields than yesterday appear to reflect wishful thinking toward a Fed pivot next week," said Derek Holt, head of capital markets at Scotia Economics.

The world's top central bankers are beginning to fear that an already weak global economy will stall if they keep pressing on the brakes, unnerved by plunging commodity prices, turmoil in emerging markets and potential flashpoints at home. This has fuelled market speculation that central banks may be heading for a "pivot", market parlance for a change in direction towards smaller rate hikes that would lower inflation without wreaking havoc in the economy and markets.

"Over the last two weeks, several G10 Central Banks came across as ready-to-pivot," Alfonso Peccatiello, author of the Macro Compass financial newsletter, said. Why such a sudden change of heart? Because all these jurisdictions have something in common: inherent fragilities."
While there is nothing central bankers can do about present inflation rates, the mere optics of runaway prices made a "pivot" more difficult to justify. This requires an extraordinary balancing act by central bankers: persuading the market that they are serious about bringing down inflation without choking the economy.

"The Fed needs to open a path towards smaller interest rate hikes without sounding too dovish," Christian Scherrmann, U.S. economist at DWS, said.

The European Central Bank tried that on Thursday, when it said it planned to increase rates "further" but it had already made "substantial progress" in withdrawing fuel from the economy. The change of tone was minimal but it was enough for investors to start pricing in smaller hikes further down the road. Traders in euro zone money markets brought down their expectations of where they see the ECB's peak rate to 2.6% on Thursday from 3% only weeks ago, although that rate rebounded on Friday after the inflation data.

"After yesterday's jumbo rate hike, the December meeting could indeed deliver a dovish pivot," Carsten Brzeski, an economist at ING, said.

Most importantly, the Federal Reserve, which governs the world's reserve currency and sets the tempo for global financial markets, has started a debate over how much higher it can safely push borrowing costs and how and when to slow the pace of future increases. While a 75-basis point hike was seen as a certainty next week, investors were now positioning for a more cautious Fed going forward.

"It is inevitable that the Fed has to pause soon," Chris Iggo of the Axa IM Investment Institute, said.

This week Job market gives the first signal - Initial claims has shown solid jump to the highest level in 6 months and rising of initial claims is becoming a tendency which could make impact on NFP data in December. A consequential week for markets also includes Friday's October U.S. payrolls report, with economists polled by Reuters forecasting the economy created 200,000 new jobs.

Any signs that the pace of aggressive tightening among big developed economies could slow is key. That also puts the spotlight on the October U.S. jobs report and euro area inflation data. A fourth straight jumbo 75-basis point (bps) interest rate hike is widely expected when the Federal Reserve meets on Nov 1-2. Investors, instead are focused on whether the pace of future hikes will slow as the Fed weighs the risks to economic growth against its progress in curbing soaring inflation.

Wall Street's latest rally is underpinned by some hopes the Fed will react to softer economic data by easing up on their aggressive rate hikes. Fed chair Jerome Powell has come under political pressure to be careful of putting U.S. jobs at risk by tightening policy too much.

So, definitely we have some signs of desire to see a pressure relief. In the US media, information stuffing has been appearing for the last week (the orders supposedly comes from the US financial sector) regarding the fact that it would be nice to moderate the fervor and bitterness in raising rates. Allegedly, inflation expectations are stabilizing, inflation will turn around soon, the Fed has done its job to curb inflationary pressure, and the "economic pain" that Powell promised is premature – everything is actually not bad and it's time to stop.

After the latest inflation data, the markets grew by more than 10% – the best market recovery since July 2022 and March 2020.

But every time the market speculated around "inflation is not as terrible as it seems", "inflationary pressure is under control", the trajectory of Fed tightening will be less aggressive", literally every time there was a destruction of all hopes and expectations with painful hangover (June 9, August 19, September 13, September 21 2022).

Now markets shift expectations on December meeting from 4.75 to 4.5%. This is the main reason for the growth of markets by 6% over the past week and the stabilization of the yield of debt markets, for example, 10-year treasuries "fell off" from 4.3% and 4% in a few days.

There is no special intrigue on November 2. The Fed is expected to continue reducing the balance sheet and the 4% rate, but the market is waiting for softer comments on the further trajectory of the rate policy. Stop tightening in the spring and no more than 5% in the worst case scenario. Waiting for the Fed's capitulation...

Two cents on IIIQ GDP

Just don't believe it, ok? How GDP could rise for 2.6%, above the expectations while all statistics have not improved. In fact, I tell you, that the US economy drops for ~ 6-7% since IV 2021, if you compare inflation rate to nominal GDP data. It is not publicly acknowledged, but it could be seen from stagnation in production, for example, with existed high rate of inflation that we suggest, artificially lowed. For example, Ex treasury secretary Mnuchin says U.S. in recession, will continue. Since he is "ex" he could tell the truth.
If you take a look at GDP structure, you will see that growth was able to achieve only due to the hydrocarbons export and due to high prices on them. Eliminating this component we see decreasing on all the others. Net exports contributed to GDP at the level of 2.77%, i.e., excluding the trade balance, it is a 0.2% GDP drop.

For the second quarter in a row, investments have a negative trend. Fixed capital investments are the accumulation of physical assets such as vehicles, factories, real estate, land, industrial installations, technologies, and so on. In Q2 2022, the negative contribution to GDP was 0.92%, in Q3 2022 "-0.89%", which most clearly indicates negative business expectations regarding economic perspectives. Changes in inventories also make a negative contribution – "-1.9%" percentage points in Q2 2022 and "-0.7%"in Q3 2022. Investments act as a leading indicator, followed by consumer spending with an average lag of 6 months (70% in the structure of GDP).

What is in EU?

So, the European Central Bank raised interest rates for the third meeting in a row on Thursday and signalled an intention to start mopping up cash from the banking system to fight record-high inflation. Here are C. Lagards' highlights concerning overall situation and possible next ECB moves.

The countries of the West are falling into the strongest crisis since 2008, according to the latest calculations of S&P Global. The most terrible situation stands in Germany. According to the latest operational data for September 2022, business activity in Germany has been continuously falling for the fourth month with an accelerating rate of decline since August, falling from 45.7 to 44.1 points. This is the lowest indicator since the COVID crisis, and the trend corresponds to the crisis of 2008.

The deterioration stands in all sectors that have the greatest weight in the structure of the German economy, and the most rapid decline is in the manufacturing industry, where the rate of decline is noticeably accelerating. The business has been recording a significant weakening in demand for products since July, with a clearly negative trend for the next six months. The stability of the labor market hardly last for too long either with current trends.

The suppressed activity of the population and the extreme uncertainty of business regarding the trends of inflation, expenses and rates depressing investment activity, which should result in the deepening of crisis processes in the next year. This will negatively affect output and employment in the near future. Business notes the overstocking of warehouses and sharp drop in new orders to a covid minimum. The same tendencies we will see soon in all other countries.

Thus we could say that EU on a full throttle to wide scale crisis. Consumer confidence in the EU countries is completely destroyed – it has never been so bad. Indicator has dropped to "-30" and has been there for the last three months. This is much worse than the crisis of 2009 (-21), the COVID crisis (-24.7) and the crisis of the early 90s (-18.9).

There are no analogues in terms of the rate of collapse of the index, except for COVID knockdowns, but then it lasted two months, this time for over six months and there are no prospects for improvement.

Consumer inflation is at unprecedented levels (in Germany, the maximum since the 20s). The trends for deterioration are visible. First - rates are rising, which increases the burden on the household budget and complicates the process of debt refinancing. Second - the tendency to reduce staff and salaries in Europe is becoming more pronounced, which is becoming now another factor of social destabilization. Just take a look at 3.5% monthly CPI change in Italy. Unbelievable spike:

Perspectives in Europe now look blur, because if inflationary pressure decreases in 2023 (as it is expected), destabilizing factors will turn to debt burden and the labor market. One problem shifts to another one.

The deterioration of the industrial sector, services, and construction has been going continuously since March 2022. The integral index of The Economic sentiment indicator is a composite measure has collapsed to 90 points, which corresponds to the inevitable decline of the European economy by at least 2% in the next 6 months.


Based on media headlines, statistics we could conclude that situation is becoming tougher. The space for maneuver for all central banks is narrowing. The "public" effect of the crisis still stands ahead but now it already clear that Fed comes to some limits. It seems that even job market starts reel under crushing blows of Fed policy. Real Estate market comes first and the bubble is blasted up - prices collapsed, launching the chain crisis reaction. Households are coming to an edge - consumer loans peaked to all time highs, while savings and income drop. Finally, the third limit is US Bonds market that is getting hurt by lack of liquidity and external impact from foreign holders. But Fed has sufficient liquidity reserves by far to curb this problem for some time. As you will see tomorrow, big political shifts and events yet to come increase problems, especially in EU.

EU has much worse situation than in US by many reasons that we've discussed previously. Mostly become they are not autonomic from raw materials point of view and strongly depend from US energy supply, which soon come to an end.

Japan needs separate discussion. It probably becomes the first evident victim of the crisis. Because they are in situation that has no successful exit. We could only gamble on how it could impact on other countries, especially the US, and at what moment this will happen. We explain this tomorrow in Gold report.

That's being said, as EU situation is worse and the US still has room to tight more based on statistics that we have, at least two rates change on November and December should happen, we do not see reasons by far to take off 0.90 target yet.

Sive Morten

Special Consultant to the FPA

Although we have big events globally, technical picture stands quiet. October is still an inside month and makes no impact on overall picture. Thus on monthly chart we have nothing to change by far, watching for reaching of major 0.9 target, whenever it will happen as we do not see any technical reasons to change our plan.


Weekly trend still stands bullish, we do not see big changes here as well. Price is retreating out from daily overbought and resistance, while here, on weekly chart - has not reached even the K-area. Upside impulse strong enough to suggest reaching of 1.03 resistance level, but it comes mostly due technical picture. Due to array of loud events next week, the reality could be different:



Thus, we could speak on downside continuation to XOP only when technical pullback will be over on daily chart. Here we're going to follow our trading plan that we've discussed on Friday. As Friday's action was anemic, it mostly stands the same. Price shows reaction on daily overbought level and 5/8 resistance, forming perfect bearish engulfing pattern. It suggests that the pullback should be deeper. Thus, bulls have nothing to do yet, while bears could try to take short-term positions on intraday charts:


Last time we've agreed to wait a pullback for short position taking. Meantime, market is still coiling around fist K-support area:

On 30m chart in fact market has completed our plan on 3/8 pullback to K-resistance area. If you have taken position - you could move stops to breakeven. Currently it is not clear whether 5/8 pullback is possible, because market stands in tight range right above K-area on 4H chart. It mostly favors downside continuation:


Thanks Sive, great work putting all this together once again.

I wonder, how do you see crypto in general reacting to these macro conditions/expectations?
Same as S&P/stocks? (usually you mention BTC behaves as a second rate stock)

And is it correct to interpret that if the dovish/pivot signs appear (fed speeches in the short term, actual smaller rate hikes in Q1 2023) we should expect liquidity coming back to risk-on assets and these to rally?

Sive Morten

Special Consultant to the FPA
Thanks Sive, great work putting all this together once again.

I wonder, how do you see crypto in general reacting to these macro conditions/expectations?
Same as S&P/stocks? (usually you mention BTC behaves as a second rate stock)

And is it correct to interpret that if the dovish/pivot signs appear (fed speeches in the short term, actual smaller rate hikes in Q1 2023) we should expect liquidity coming back to risk-on assets and these to rally?
Good question Vince,

Well, in two words - answer is "yes". But there are a lot of different "if" around. The first is - when Fed stops QT what inflation rate will be. Without inflation control, despite that Fed stops tightening - yields will keep going higher because of high inflation. In this case if even you have free liquidity you will buy bonds or gold to safe the money.

If you're read our reports - the scenario above suggests USD devaluation and we think that Fed probably choses this one, rather than rise rates above 6% to neutral level to totally crush the bond market.

If inflation peaks and stands stable then yes, after some time stocks should turn up, and BTC will follow them. (But hardly this happens ;) ).

All other scenarios will be negative, I suppose.

Sive Morten

Special Consultant to the FPA
Morning folks,

So, markets has jumped slightly yesterday, inspired by BoA decision to lift rates only for 25 points. This is the second case after Canada. But, I would compare Canada and Australia to the US, EU and even more to Japan. The former countries have export economy, mostly in commodities. As I said previously - Australia has superb fundamentals - low debt, positive trade balance, low budget deficit. And they do not rise rates to struggle inflation (although this is also stand on the table) but mostly to reduce technical impact of rate differentials with the Fed and reduce pressure on national currency. Japan makes interventions but Australia chances rate with lower level.

"The feeling is maybe the Fed will tone down the magnitude of hikes, but certainly the message will be the job is not yet done, inflation remains well entrenched," said Rodrigo Catril, a currency strategist at National Australia Bank. Our general sense is that the dollar probably has peaked, but that doesn't necessarily mean it's coming down. It's certainly a risk-on day, and that's being reflected in currencies with the Aussie and the kiwi topping the leaderboard, but all within recent ranges," Catril added.

"We have been bullish AUD/USD recently due to some wobbles in the U.S. dollar on the Fed outlook and given Australia's still very strong external position," said Sean Callow, a currency strategist at Westpac. The RBA's continuation of modest 25bp tightening steps is only a minor setback."

In our fundamental reports we come to conclusion that Fed is not peaked yet. And this makes us think that current rally is doubtful, at least it is not sufficient context right now for position taking. From the technical point of view we need to wait for grabber appearing here. This could be at least something that we could use to justify long position:

On 4H chart minimal butterfly target is completed and price stands around the K-area:

Still, on 1H chart we need to get some reversal confirmation, It would be nice if it will be some pattern and XOP target will be completed as well. Today, due to the thin Holiday market, performance might be tricky.

Sive Morten

Special Consultant to the FPA
Morning guys,

So, EUR is totally finished preparation for upward action, if it is still bullish. Normal bullish market has to turn up right from here. If we will not see it by the end of the session, then EUR is not bullish and we should be ready for deeper downside action.

As we've agreed - we're waiting for bullish grabber. Price is already flirting with MACDP line:

On 4H chart EUR stands at K-support area:

And XOP target, that we've discussed yesterday is done mostly. What else should be done for bullish reversal? Price stands at K-area and Agreement.

There are two ways to act here. I prefer the first one, which is waiting for the patterns - as grabber on daily as some reversal pattern here, on 1H chart. I'm a bit conservative.

Still, as we do know that action probably will be triggered by external factor - Fed, NFP, market could just get not enough time to form something here, on 1H chart. Second way is to anticipate patterns' appearing and take position just right here, around K-support. And then to control appearing of daily grabber. Second way is more risky. Both ways have its own adv/disadv. but mostly the choice relates to psychology and trader personality.

Sive Morten

Special Consultant to the FPA
Greetings everybody,

So, Fed comments confirm our fundamental analysis view that it is not near the pivot yet. We discuss it in weekly report with more details. As a result - we have bearish trend on daily and bearish reversal bar. Both suggest that now it is no room for long position by far.

In mid term, Fed comments tells that more EUR weakness should come, because Fed decision is not a short-term, it suggest some time horizon, at least few months.

On 4H chart 2nd K-area also has been broken, although initial spike up was not bad. Now, we sharp downside reversal market has "free space" till the last 5/8 support. New AB-CD pattern has OP target right in the same level - 0.9750. This is our nearest downside target:

For intraday traders, it is possible to consider near standing levels for position taking. K-resistance looks nice but with current circumstances, it seems that EUR could not climb there, nearest 3/8 level looks more probable.

And let's see what we will get on NFP. Although, I suspect that they will be somewhere near expectations. J. Powell should knew the numbers already. Since Fed has not changed tone at all - it indirectly hints on more or less positive NFP data.

Sive Morten

Special Consultant to the FPA
Morning guys,

Its not many thinks to update, as you could see. Everybody watch for NFP data. EUR has dropped a bit more yesterday, as we've expected. Now it shows minor bounce up from intraday support area. Still, we think that Fed has put mid term background, and sharp change in market performance is hardly possible:

Our 4H target is reached, market hits OP and 5/8 support level:

Still, bounce shows the retracement type of action, no thrust. Now it looks like pullback only. Once again, it is nothing to do for the bulls, except maybe, if you would like to bet on numbers much worse than expectations.
For short position taking OP agreement looks more reliable, and if we wouldn't have NFP I would focus on nearest level. But, with NFP maybe EUR could touch XOP and K-resistance here.