Sive Morten
Special Consultant to the FPA
- Messages
- 18,699
Fundamentals
(Reuters) - The U.S. dollar tumbled against a basket of major currencies on Friday while hitting a three-week high against the Mexican peso on U.S. political uncertainty after the FBI said it would review more emails related to Democratic presidential candidate Hillary Clinton's private email use.
The reports added a new twist to the U.S. presidential campaign with just 11 days to go before Election Day on Nov. 8. Analysts said the dollar's losses against major rivals were largely on renewed uncertainty over the outcome of the election, since traders were largely expecting a Clinton victory.
Markets have tended to see Clinton as the candidate of the status quo, while there is greater uncertainty over what a victory for Republican presidential candidate Donald Trump might mean for U.S. foreign policy, international trade deals or the domestic economy.
"No one can doubt that this is a serious complication for the Clinton campaign if the investigation stays open," said Joseph Trevisani, chief market strategist at WorldWideMarkets in Woodcliff Lake, New Jersey.
Clinton has been holding a commanding lead in the race to win the Electoral College and claim the presidency, according to results from the Reuters/Ipsos States of the Nation project released on Saturday.
The euro hit an eight-day peak against the dollar of $1.0991 EUR=, putting it up about 0.9 percent on the day, while the dollar fell about 0.7 percent against the yen to a session low of 104.49 yen JPY=after hitting a three-month high of 105.53 earlier.
The dollar hit an eight-day low against the Swiss franc CHF= of 0.9859 franc. The dollar index .DXY, which measures the greenback against a basket of six major currencies, hit an eight-day low of 98.242. The index was set to post a weekly decline of about 0.4 percent.
The dollar jumped more than 1.3 percent, however, against the Mexican peso to a three-week high of 19.1002 pesos MXN= before paring gains. A Trump victory has been viewed as a key risk for the Mexican currency given Trump's promises to clamp down on immigration and rethink trade relations
"This news that came out has the potential to give a little bit more strength to Trump's campaign, which is obviously not very good news for Mexico," said Sireen Harajli, currency strategist at Mizuho Corporate Bank in New York.
The dollar was last up 0.57 percent against the peso at 18.9380 pesos, with analysts attributing the moderation to profit-taking.
Since next week BoE MPC meeting is coming, Fathom Consulting warns on possible rate cut despite high inflation. This report is really great stuff, since it gives us new fundamental insight on GBP and brings very valuable add-on to our long-term technical analysis.
UK rate cut on cards despite 3½% inflation (by Fathom Consulting)
- It is now almost universally accepted that UK inflation will overshoot the Bank of England’s 2% target. But when, and by how much?
- We find that the 15% fall to date in sterling since the June referendum is likely to add almost a percentage point to average inflation through 2017.
- If the currency falls further, as we suspect it will, then inflation could peak at 3.4% in August next year, up from 1.0% currently.
- The dramatic fall in the exchange value of the pound, if maintained, reflects a permanent reduction in the purchasing power of UK residents. It is likely to prove deflationary over the medium term, and that is why we continue to expect one final, and ultimately futile reduction in UK Bank Rate.
In the eyes of the media, UK consumer price inflation hit “dizzying heights” in September. Of course, this is something of an overstatement - headline inflation of 1% is half the Bank’s target rate, and very low by historic standards. Nevertheless, the quickening pace, up from 0.6% in August, is a taste of what is to come.
Indeed, it is now almost universally accepted that headline inflation will overshoot its 2% target, reflecting both rising fuel prices and weaker sterling. But when exactly that target will be breached depends on: future movements in sterling; the extent to which, and the pace at which the depreciation feeds through to
consumer prices; and the Monetary Policy Committee’s reaction.
In this Newsletter, using our proprietary inflation model, we seek to answer two questions. What
effect will the 15% fall to date in sterling since the June referendum have on the consumer price index, and how long will it take to feed through?
In response to the first question, we find that inflation will be 0.7 percentage points higher, on average, in 2017 than it would have been had the exchange rate remained steady. Reflecting that, and our belief that sterling is likely to fall further still, our latest Global Economic and Markets Outlook puts annual consumer price inflation at 3.0% in 2017, peaking at 3.4% in the twelve months to August. That is considerably higher than we had forecast back in April, at which point we imagined that the UK would vote to remain a member of the EU, and that sterling would be relatively stable
In the past, large exchange rate movements have started to feed through more or less immediately to consumer prices, with the impact on the monthly inflation profile peaking at four months. We find that around half of the final impact on the level of prices is felt after six months, with pass through 85% complete after one year. As a consequence, if retailers respond as they have on average in the past, we would expect to see the impact of sterling’s depreciation to date come through in earnest in the November data.
However, this time the impact of the fall in sterling may take longer to feed through into headline inflation than our model suggests. The timings of previous large scale adjustments to the value of sterling have been hard to predict. But, to paraphrase Donald Rumsfeld, the Brexit referendum was a ‘known unknown’, which took place on a predetermined date. Businesses would therefore have had time to hedge some of their currency exposure, with options markets pointing to record demand for protection against weak sterling ahead of the referendum. Businesses may therefore be protected from sterling weakness for the time being, delaying the pass through to consumer prices.
For now, consumers are in good spirits, with survey-based data revealing a surprising resilience to the uncertainty caused by the Brexit vote. But looking ahead, with sterling acting as a “shock absorber”, consumer price inflation is likely to quicken to 3%, or beyond. This will exceed wage inflation, which we expect to slow over the coming year, squeezing real household income and diminishing purchasing power. As a consequence, in the medium term, the fall in sterling will be deflationary, not inflationary. Recognising this, and the fact that raising rates risks destabilising the economy at an already highly uncertain time, the MPC is almost certain to look through this period of above-target inflation, just as it did in 2008-09 and 2011-12.
COT Report
Despite interesting GBP fundamental research, today we will take a look at EUR, since GBP has limited downside potential due overloaded short positions. On EUR we have quite different picture. Recent CFTC data shows that bearish action is taking stronger pace as net short position is growing for 5th consecutive week. Open interest is also increased. This indicates good bearish sentiment on EUR.
Technical
Monthly
Recent action barely impacts on broad monthly picture. Thus, chart mostly stands the same - important bearish reversal candle and flag-shaped consolidation within last 3-4 months that has been broken down recently. This combination doesn't look really bullish for EUR here.
Currently EUR stands at rather strong wide support area. This is lower border of downward channel and all-time 5/8 Fib support. Here EUR has formed Butterfly "buy" and it has reached first 1.27 extension here. Probably it needs some time to pass through this level and supportive fundamental background of US strength.
EUR is forming typical reversal candle in May. Price has moved above April top and closed below April's lows. It could not get extended continuation, but usually market shows downward continuation within next 1-3 candles.
Sometimes reversal candles lead to collapse, as it was on EUR around 1.40 area. Thrust down has started particularly by reversal candle in March 2014.
Speaking on big scale bearish signs, we have these ones:
EUR was not able to reach YPR1 and returned right back down to YPP. Following this logic next destination could be YPS1 right around parity and 1.618 butterfly target. This is just another destination point that we have here.
Appearing of reversal candle brings nothing good to bulls. Currently we can't precisely forecast the consequences of its appearing, but even minor results will bring some months of downward action inside current 1.04 -1.15 consolidation... Although potential bearish impact could be even stronger.
Finally we have another bearish sign that looks like bearish dynamic pressure. Take a look that although trend holds bullish - market shows inablitity to move up, even from strong support area. Next strong support stands precisely at parity and will become a culmination of downward action, since this level includes support line, YPS1 and butterfly 1.618 target. Brexit results hardly will bring prosperity to EU and probably will become another bearish driving factor for EUR. We aleardy see consequences of Brexit on GBP, so, some negative impact on EUR also will happen, this is just a question of time.
Also take a look at different behavior near low border of channel. Previously when market has touched it - it shows immediate upside pullback, it was V-shape reversal. Right now behavior is absolutely different, price just hangs on the border and shows no upside action. Any tight consolidation near trendline could become a sign of coming breakout.
Thus, based on monthly chart we could make two major conclusions. First is - real bullish trend will be re-established only when EUR will erase reversal candle and overcome its top above 1.16. Second, if EUR will still keep moderate bearish sentiment, downside potential hardly will be lower than parity, due recent Fed dovish adjustments to its policy for 2017-2018.
Right now EUR stands in some kind of range action of 1.05-1.16. That's why logical next destination for monthly chart stands around 1.05.
Weekly
This time frame, in fact, determines setup for coming week. It specifies the object that we will work with, and this object is upside bounce. Take a look, EUR has formed nice bullish engulfing pattern right at 5/8 Fib support area and Brexit candle's bottom. Also here is minor AB=CD target stands (we will see it on daily picture).
That's being said, we need to identify patterns that could be formed as a result of this engufling setup and try to estimate upside potential of this action. So, as you can see, on coming week we will have just tactical setup:
Daily
So, right on Friday, EUR has rallied, depsite good 2.9% GDP numbers. Major reason for that is a weak consumer spending part of GDP that has increased just 2.1% compares to 4.3% on II Q. As Consumer spending takes 70% of GDP, this has led to opposite reaction on markets on GDP release...
Still, we've mostly watched for 1.09 level. As EUR has not dropped below it, we've got no confirmation of bear trend contination and turned to second leg of upside retracement. As you can see upside target of last week has been met and EUR has reached as 1.10 K-resistance area on daily chart, as doubled harmonic upside retracement swing. So, what's next?
It seems that we could try to get B&B "Sell" here. Thrust is not perfect, due existing of multiple upside bounces on a road down, but probably we could try, 3x3 DMA envelopes this bounces very well and overall sell-off was not bad.
Besides, weekly engulfing pattern assumes appearing of some kind of AB-CD action. Thus, B&B "sell" could become BC leg of it.
Now we have Friday's first close above 3x3 DMA. To get B&B we need to see reaching of important Fib level. First one stands at 1.1013 area, but EUR also could reach 1.1064, since it likes 50% retracements. Which level will be hit mostly will depend on patterns that we have or we will get on intraday charts:
Hourly
Here we have very nice thurst up. Market jumped directly to 100% AB=CD extension. CD leg is thrust itself, so, some minor intraday DRPO or B&B's could be formed here. You could keep an eye on this thurst if you're interested with these trades.
Market could form minor retracement down on coming week. Most probable area is a range around WPP, that is former tops area and K-support. If EUR really has intention to move higher, it should not drop below it.
Currently we do not see any bearish reversal patterns here and it means that it is not time yet to take position based on potential daily B&B "sell". We need to watch for upward continuation instead. Next destination point here is 1.618 extension that stands around 1.1035 area and WPR1. May be there we will get some clarity on daily B&B "Sell" pattern:
Please read conclusion carefully to avoid any misapprehension.
Conclusion:
Our long-term view mostly bearish on EUR, based on action that it shows around major support, due dovish recent ECB comments and anticipation of more agressive Fed policy. Bearish view will be valid until market will stand below 1.16 top.
In shorter -term perspective as Friday reaction was really strong, first, we will watch for rally on intraday chart. It has chances to be continued to 1.1035 area. If EUR will form then any reversal patterns - that could give us reason to think about daily B&B "Sell" pattern.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
(Reuters) - The U.S. dollar tumbled against a basket of major currencies on Friday while hitting a three-week high against the Mexican peso on U.S. political uncertainty after the FBI said it would review more emails related to Democratic presidential candidate Hillary Clinton's private email use.
The reports added a new twist to the U.S. presidential campaign with just 11 days to go before Election Day on Nov. 8. Analysts said the dollar's losses against major rivals were largely on renewed uncertainty over the outcome of the election, since traders were largely expecting a Clinton victory.
Markets have tended to see Clinton as the candidate of the status quo, while there is greater uncertainty over what a victory for Republican presidential candidate Donald Trump might mean for U.S. foreign policy, international trade deals or the domestic economy.
"No one can doubt that this is a serious complication for the Clinton campaign if the investigation stays open," said Joseph Trevisani, chief market strategist at WorldWideMarkets in Woodcliff Lake, New Jersey.
Clinton has been holding a commanding lead in the race to win the Electoral College and claim the presidency, according to results from the Reuters/Ipsos States of the Nation project released on Saturday.
The euro hit an eight-day peak against the dollar of $1.0991 EUR=, putting it up about 0.9 percent on the day, while the dollar fell about 0.7 percent against the yen to a session low of 104.49 yen JPY=after hitting a three-month high of 105.53 earlier.
The dollar hit an eight-day low against the Swiss franc CHF= of 0.9859 franc. The dollar index .DXY, which measures the greenback against a basket of six major currencies, hit an eight-day low of 98.242. The index was set to post a weekly decline of about 0.4 percent.
The dollar jumped more than 1.3 percent, however, against the Mexican peso to a three-week high of 19.1002 pesos MXN= before paring gains. A Trump victory has been viewed as a key risk for the Mexican currency given Trump's promises to clamp down on immigration and rethink trade relations
"This news that came out has the potential to give a little bit more strength to Trump's campaign, which is obviously not very good news for Mexico," said Sireen Harajli, currency strategist at Mizuho Corporate Bank in New York.
The dollar was last up 0.57 percent against the peso at 18.9380 pesos, with analysts attributing the moderation to profit-taking.
Since next week BoE MPC meeting is coming, Fathom Consulting warns on possible rate cut despite high inflation. This report is really great stuff, since it gives us new fundamental insight on GBP and brings very valuable add-on to our long-term technical analysis.
UK rate cut on cards despite 3½% inflation (by Fathom Consulting)
- It is now almost universally accepted that UK inflation will overshoot the Bank of England’s 2% target. But when, and by how much?
- We find that the 15% fall to date in sterling since the June referendum is likely to add almost a percentage point to average inflation through 2017.
- If the currency falls further, as we suspect it will, then inflation could peak at 3.4% in August next year, up from 1.0% currently.
- The dramatic fall in the exchange value of the pound, if maintained, reflects a permanent reduction in the purchasing power of UK residents. It is likely to prove deflationary over the medium term, and that is why we continue to expect one final, and ultimately futile reduction in UK Bank Rate.
In the eyes of the media, UK consumer price inflation hit “dizzying heights” in September. Of course, this is something of an overstatement - headline inflation of 1% is half the Bank’s target rate, and very low by historic standards. Nevertheless, the quickening pace, up from 0.6% in August, is a taste of what is to come.
Indeed, it is now almost universally accepted that headline inflation will overshoot its 2% target, reflecting both rising fuel prices and weaker sterling. But when exactly that target will be breached depends on: future movements in sterling; the extent to which, and the pace at which the depreciation feeds through to
consumer prices; and the Monetary Policy Committee’s reaction.
In this Newsletter, using our proprietary inflation model, we seek to answer two questions. What
effect will the 15% fall to date in sterling since the June referendum have on the consumer price index, and how long will it take to feed through?
In response to the first question, we find that inflation will be 0.7 percentage points higher, on average, in 2017 than it would have been had the exchange rate remained steady. Reflecting that, and our belief that sterling is likely to fall further still, our latest Global Economic and Markets Outlook puts annual consumer price inflation at 3.0% in 2017, peaking at 3.4% in the twelve months to August. That is considerably higher than we had forecast back in April, at which point we imagined that the UK would vote to remain a member of the EU, and that sterling would be relatively stable
In the past, large exchange rate movements have started to feed through more or less immediately to consumer prices, with the impact on the monthly inflation profile peaking at four months. We find that around half of the final impact on the level of prices is felt after six months, with pass through 85% complete after one year. As a consequence, if retailers respond as they have on average in the past, we would expect to see the impact of sterling’s depreciation to date come through in earnest in the November data.
However, this time the impact of the fall in sterling may take longer to feed through into headline inflation than our model suggests. The timings of previous large scale adjustments to the value of sterling have been hard to predict. But, to paraphrase Donald Rumsfeld, the Brexit referendum was a ‘known unknown’, which took place on a predetermined date. Businesses would therefore have had time to hedge some of their currency exposure, with options markets pointing to record demand for protection against weak sterling ahead of the referendum. Businesses may therefore be protected from sterling weakness for the time being, delaying the pass through to consumer prices.
For now, consumers are in good spirits, with survey-based data revealing a surprising resilience to the uncertainty caused by the Brexit vote. But looking ahead, with sterling acting as a “shock absorber”, consumer price inflation is likely to quicken to 3%, or beyond. This will exceed wage inflation, which we expect to slow over the coming year, squeezing real household income and diminishing purchasing power. As a consequence, in the medium term, the fall in sterling will be deflationary, not inflationary. Recognising this, and the fact that raising rates risks destabilising the economy at an already highly uncertain time, the MPC is almost certain to look through this period of above-target inflation, just as it did in 2008-09 and 2011-12.
COT Report
Despite interesting GBP fundamental research, today we will take a look at EUR, since GBP has limited downside potential due overloaded short positions. On EUR we have quite different picture. Recent CFTC data shows that bearish action is taking stronger pace as net short position is growing for 5th consecutive week. Open interest is also increased. This indicates good bearish sentiment on EUR.
Technical
Monthly
Recent action barely impacts on broad monthly picture. Thus, chart mostly stands the same - important bearish reversal candle and flag-shaped consolidation within last 3-4 months that has been broken down recently. This combination doesn't look really bullish for EUR here.
Currently EUR stands at rather strong wide support area. This is lower border of downward channel and all-time 5/8 Fib support. Here EUR has formed Butterfly "buy" and it has reached first 1.27 extension here. Probably it needs some time to pass through this level and supportive fundamental background of US strength.
EUR is forming typical reversal candle in May. Price has moved above April top and closed below April's lows. It could not get extended continuation, but usually market shows downward continuation within next 1-3 candles.
Sometimes reversal candles lead to collapse, as it was on EUR around 1.40 area. Thrust down has started particularly by reversal candle in March 2014.
Speaking on big scale bearish signs, we have these ones:
EUR was not able to reach YPR1 and returned right back down to YPP. Following this logic next destination could be YPS1 right around parity and 1.618 butterfly target. This is just another destination point that we have here.
Appearing of reversal candle brings nothing good to bulls. Currently we can't precisely forecast the consequences of its appearing, but even minor results will bring some months of downward action inside current 1.04 -1.15 consolidation... Although potential bearish impact could be even stronger.
Finally we have another bearish sign that looks like bearish dynamic pressure. Take a look that although trend holds bullish - market shows inablitity to move up, even from strong support area. Next strong support stands precisely at parity and will become a culmination of downward action, since this level includes support line, YPS1 and butterfly 1.618 target. Brexit results hardly will bring prosperity to EU and probably will become another bearish driving factor for EUR. We aleardy see consequences of Brexit on GBP, so, some negative impact on EUR also will happen, this is just a question of time.
Also take a look at different behavior near low border of channel. Previously when market has touched it - it shows immediate upside pullback, it was V-shape reversal. Right now behavior is absolutely different, price just hangs on the border and shows no upside action. Any tight consolidation near trendline could become a sign of coming breakout.
Thus, based on monthly chart we could make two major conclusions. First is - real bullish trend will be re-established only when EUR will erase reversal candle and overcome its top above 1.16. Second, if EUR will still keep moderate bearish sentiment, downside potential hardly will be lower than parity, due recent Fed dovish adjustments to its policy for 2017-2018.
Right now EUR stands in some kind of range action of 1.05-1.16. That's why logical next destination for monthly chart stands around 1.05.
Weekly
This time frame, in fact, determines setup for coming week. It specifies the object that we will work with, and this object is upside bounce. Take a look, EUR has formed nice bullish engulfing pattern right at 5/8 Fib support area and Brexit candle's bottom. Also here is minor AB=CD target stands (we will see it on daily picture).
That's being said, we need to identify patterns that could be formed as a result of this engufling setup and try to estimate upside potential of this action. So, as you can see, on coming week we will have just tactical setup:
Daily
So, right on Friday, EUR has rallied, depsite good 2.9% GDP numbers. Major reason for that is a weak consumer spending part of GDP that has increased just 2.1% compares to 4.3% on II Q. As Consumer spending takes 70% of GDP, this has led to opposite reaction on markets on GDP release...
Still, we've mostly watched for 1.09 level. As EUR has not dropped below it, we've got no confirmation of bear trend contination and turned to second leg of upside retracement. As you can see upside target of last week has been met and EUR has reached as 1.10 K-resistance area on daily chart, as doubled harmonic upside retracement swing. So, what's next?
It seems that we could try to get B&B "Sell" here. Thrust is not perfect, due existing of multiple upside bounces on a road down, but probably we could try, 3x3 DMA envelopes this bounces very well and overall sell-off was not bad.
Besides, weekly engulfing pattern assumes appearing of some kind of AB-CD action. Thus, B&B "sell" could become BC leg of it.
Now we have Friday's first close above 3x3 DMA. To get B&B we need to see reaching of important Fib level. First one stands at 1.1013 area, but EUR also could reach 1.1064, since it likes 50% retracements. Which level will be hit mostly will depend on patterns that we have or we will get on intraday charts:
Hourly
Here we have very nice thurst up. Market jumped directly to 100% AB=CD extension. CD leg is thrust itself, so, some minor intraday DRPO or B&B's could be formed here. You could keep an eye on this thurst if you're interested with these trades.
Market could form minor retracement down on coming week. Most probable area is a range around WPP, that is former tops area and K-support. If EUR really has intention to move higher, it should not drop below it.
Currently we do not see any bearish reversal patterns here and it means that it is not time yet to take position based on potential daily B&B "sell". We need to watch for upward continuation instead. Next destination point here is 1.618 extension that stands around 1.1035 area and WPR1. May be there we will get some clarity on daily B&B "Sell" pattern:
Please read conclusion carefully to avoid any misapprehension.
Conclusion:
Our long-term view mostly bearish on EUR, based on action that it shows around major support, due dovish recent ECB comments and anticipation of more agressive Fed policy. Bearish view will be valid until market will stand below 1.16 top.
In shorter -term perspective as Friday reaction was really strong, first, we will watch for rally on intraday chart. It has chances to be continued to 1.1035 area. If EUR will form then any reversal patterns - that could give us reason to think about daily B&B "Sell" pattern.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
