Sive Morten
Special Consultant to the FPA
- Messages
- 18,555
Fundamentals
So, guys the year is gradually coming to an end and the majority of big events already are in the past. We're coming to the Christmas holidays, so investors do either and today on the table we have almost the same driving factors - CV19, Stimulus discussion, Fed statement and Brexit. No drastic shifts have happened yet with these factors but some changes exist still.
Week overview
Strong euro zone survey figures and hopes of progress on Brexit negotiations pushed the euro above $1.22 against the U.S. dollar on Wednesday for the first time since April 2018. The Swiss franc, meanwhile, gained briefly after the U.S. Treasury labelled Switzerland a currency manipulator. The euro has risen nearly 13% since the European Union announced a recovery fund in May. Stronger economic activity data in recent months have also boosted bets that Europe is likely to outperform the United States in the coming months. Those expectations got a further boost with manufacturing survey data from Germany and France indicating that Europe's biggest economies may be recovering quickly.
"European PMIs, Brexit and a likely dovish Fed are boosting risk appetite in the currency markets," said Kenneth Broux, a strategist at Societe Generale in London.
The Treasury said that through June 2020 both Switzerland and Vietnam had intervened in currency markets to prevent effective balance of payments adjustments.
The Swiss National Bank paid no heed to being branded a currency manipulator by the United States, promising on Thursday to continue an expansive monetary policy and forex interventions it said were vital to cushion the impact of the coronavirus pandemic. Analysts expect the SNB to remain undeterred by U.S. pressure and plough ahead with currency purchases.
Fed statement has brought no surprises and disappointed investors slightly. As we've suggested - only purchasing rebalancing was announced, in favor of longer-term bonds, while no word was saying about additional stimulus pack. The Federal Reserve on Wednesday promised to keep funneling cash into financial markets further into the future to fight the recession, even as policymakers’ outlook for next year improved following initial rollout of a coronavirus vaccine.
Repeating a pledge to keep its benchmark overnight interest rate near zero until an economic recovery is complete, the U.S. central bank said it would also now tie its program of monthly government bond purchases to that same goal. Fed says it will continue to buy $80 bln a month in Treasuries and $40 bln a month in agency-backed securities until substantial further progress has been made on maximum employment and price stability goals. Here are few points in Fed statement that deserve of our attention.
Powell says there is a need for households and businesses to have fiscal support and would welcome work Congress is doing right now, but no view on the size of it. And by end of Q1, Q2 vaccinations will start to have an effect, expect second half of next year economy should be stronger. Effects for monetary policy are months and months into the future, as inflation now a faint heartbeat of what it was years ago.
Negotiations in the U.S. Congress over final details of a $900 billion COVID-19 aid bill could spill into the weekend, requiring another stopgap spending bill to avert a looming government shutdown, Republican Senate Majority Leader Mitch McConnell said on Thursday.
“We’ve got a global reflation on the way,” said Axel Merk, president and chief investment officer at Merk Investments in Palo Alto, California, noting that investors are selling the dollar to buy other assets. “That’s been the theme we’ve had and, if anything, that’s been accelerating,” Merk said.
It would be the largest relief package since this spring, when Congress approved more than $4 trillion in aid. The COVID-19 pandemic has killed 311,000 Americans, by far the most in the world, and put millions out of work. Economists say growth will likely remain sluggish until vaccines are widely available in mid-2021.
The Senate is to convene at 11 a.m. (1600 GMT) on Saturday. Representative Steny Hoyer, the second-most senior Democrat in the House of Representatives, said on Friday any vote on a package would not come before Sunday afternoon. Republicans and Democrats say they are close to a deal, but significant differences remain.
Republicans are pushing to rein in Federal Reserve lending programs for midsize businesses and municipal bond issuers that were intended to ease the pandemic’s sting, saying those programs were meant to be temporary. But Democrats say the move is an attempt to tie the hands of President-elect Joe Biden, who will take office on Jan. 20.
The parties also disagree over how much to give to arts venues closed by COVID-19 restrictions, and how much emergency aid should go to local governments for supplies like personal protective equipment for schools.
But many issues have been settled. The legislation is expected to include one-off $600 checks for most Americans, enhanced unemployment benefits of $300 per week, help for states distributing coronavirus vaccines and more assistance for small businesses.
As U.S. stimulus talks dragged on, Democratic President-elect Joe Biden’s incoming chief economic adviser said on Friday a coronavirus relief plan under negotiation in Congress should not include a provision that would restrict the ability of the Treasury Department and the Federal Reserve to fight economic crises.
“As we navigate through an unprecedented economic crisis, it is in the interests of the American people to maintain the Fed’s ability to respond quickly and forcefully,” Brian Deese, who will head the White House National Economic Council for Biden, said in a statement.
BREXIT
The odds of Britain agreeing a trade deal with the EU before the end of a transition period have risen to 57% on Monday, up from 40% last week, according to punters betting on the Smarkets exchange. Chances of no deal had risen to as much as 61% on Friday from 19% in late November, according to the exchange. Odds of no-deal on bookmaker Betfair had receded to 38% on Monday, down from 58% the previous day.
“In our view, a deal is still more likely than not, but with each day that passes, the risk of a no-deal outcome grows,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. UBS added that the announcement of an agreement could push sterling to $1.35, while increasing uncertainty about a no-deal outcome could lead it to revisit September lows around $1.28.
ING’s currency strategists said they expected a pound rally to materialize in the next two weeks, with a deal still being the most likely scenario. Still, they warned of more downside risk to the currency as it was pricing in a “good probability of a deal.”
Goldman Sachs said it expected sterling to appreciate by 1.5-2% against the euro on apparent progress towards a deal or “at least avoiding a no deal outcome for now.”
Economists at Citi said that even if a deal is agreed over the coming days, “persistent acrimony remains likely”, which would weigh on the medium-term outlook. They said a Canada-style deal with the EU is now the best possible outcome. Jeffrey Sacks, head of EMEA investment strategy at Citi Private Bank suggests buying into the pound on any weakness as he sees further upside in the currency if there is a deal. He expects the pound to hit $1.37 over the next 6-12 months.
“It (sterling) is a cheap currency in real-exchange rate terms and the rally that we’ve seen over the pandemic period has been largely driven by a weaker dollar,” he said.
The European Union said on Friday there were just hours left to strike a Brexit trade deal while Britain called on the bloc to see sense as the two sides race to prevent a turbulent finale to the Brexit crisis at the end of the month. Both London and Brussels are demanding the other compromise amid a flurry of often conflicting messages that, variously, a deal is possible, a deal is in serious trouble or that a deal is imminent.
Some EU diplomats think the rhetoric indicates an agreement is being hashed out in Brussels, though Britain has cautioned that it could take until after Christmas to get a deal - if there is one at all. Johnson, the face of the 2016 Brexit campaign, will ultimately have to decide whether to accept the narrow deal on offer from the EU or risk the economic chaos - and applause from hardline Brexiteers - that walking away would trigger.
Senior British minister Michael Gove earlier had put the chances of securing a trade deal with the European Union at less than 50% on Thursday, striking a pessimistic tone that contrasted sharply with remarks by the EU’s chief negotiator suggesting there had been good progress.
The Bank of England, on Thursday, said it was ready to tolerate an inflation spike in the event of a no-deal Brexit in two weeks’ time, but kept its stimulus unchanged as Britain and the European Union enter the end game of their trade deal talks.
EU powers are concerned London wants the best of both worlds - preferential access to EU markets but with the advantage of setting its own rules. Failure to agree a deal on goods trade would send shockwaves through financial markets, hurt European economies, snarl borders and disrupt supply chains.
With the clock ticking and British and European negotiators in the tunnel, weary investors are looking again at unloved British assets. Some argue they might deserve a second chance. Since the 2016 Brexit referendum vote, global investors have ditched British assets, with the country’s stock market suffering $60 billion of outflows.
The pound is among the most undervalued of the major currencies on a trade-weighted basis, while equity risk premia for the stock market are above their long-term average. With policymakers likely to keep monetary conditions ultra-easy, Britain’s economy may benefit in 2021 from the nationwide rollout of a COVID-19 vaccine.
Covid 19
With this subject we have two components - vaccine performance and recent lockdown steps in Europe. Amid surging new cases, Northern Ireland decided last night to impose a lockdown from 26 December, while London and much of Southeast England moved into the highest tier of restrictions short of a lockdown. Yesterday Germany entered a hard lockdown due to last until 10 January, after recording 952 deaths on Wednesday, while the Netherlands has also begun a five-week lockdown. Both the European Central Bank (ECB) and the Bank of England (BoE) expect their economies to contract by around 2% in Q4. Growth will be more resilient in Q4 in the US, where the surge in COVID cases and reintroduction of lockdown measures occurred later. Atlanta and New York Fed Nowcasting models point to annualised GDP growth of 11.2% and 2.45% respectively. Nevertheless, US weekly jobless claims have begun to rise, indicating a further slowing in the labour market in December; and the lockdowns will weigh on growth in the US and elsewhere in coming months.
The Moderna vaccine is expected to become the second vaccine approved by a Western government to assist the fight against COVID-19. Last night the external advisory panel of the US Food and Drug Administration (FDA) voted by 20:0 to approve Moderna, with one abstention, and the FDA is expected to authorise it for emergency use within hours. The move comes a week after the FDA followed the UK and Canadian authorities in approving the Pfizer/BioNTech vaccine, and began distributing the first 2.9 million doses. The US has suffered more than 300,000 COVID-related deaths, including 3,580 on Wednesday. The chief adviser to Operation Warp Speed, the US COVID vaccine programme, has suggested that at least 100 million Americans in mostly high-risk groups should be vaccinated by the end of 2021 Q1 and the whole population by the end of Q2. The EU Medicines Agency meanwhile will meet to discuss the Pfizer/BioNTech vaccine on 21 December, and the President of the EU Commission suggested it was likely Europeans would begin to be vaccinated before year-end.
Net non-farm US payrolls in November pointed to an increase of 245,000 people in employment. That marked a slowdown from October’s 610,000 increase, but suggested some resilience in the economy despite a sharp increase in coronavirus infections through the month. It seems likely however that December’s jobs report will show a drop in US employment, as surging infections lead to increased economic restrictions in some states. The California governor, Gavin Newsom, announced on 3 December that stay-at-home orders would automatically be triggered when regions fell below 15% spare capacity in intensive care units. Within days, areas accounting for more than three quarters of the state’s population were subject to the restrictions. The Golden State accounts for 12% of US employment, and 15% of GDP.
COT Report
CFTC data is mixed this week as we see massive profit taking among investors before Xmas holidays and some uncertainty around Brexit and US stimulus measures. As culmination on both factors could happen right on Christmas, investors reduce risk impose. As a result, on the chart we see growth of net long speculative position on EUR, but table data shows significant decreasing of open interest and closing of long positions. Positions were closed across the board - hedgers, speculators, spread positions etc. Totally it was closed more than 40K contracts, equals 5.3 Bln EUR.
But net long position has increased:
Source: cftc.gov
Charting by Investing.com
So, recent information gives us few thoughts for suggestion on medium-term market perspectives. Concerning CV19 situation, we think that recovery happens slower than it is anticipated right now. Mostly because of less efficiency of vaccines by fact. Laboratory tests is quite different thing but even first Pfizer vaccine application opens negative surprises for allergic individuals and this forced authorities to re-classify the vaccine for "emergency" use only. The same is expected for Moderna. Another problem is global production of vaccine that we've mentioned previously that should extend the time of massive vaccination. Slower than expected recovery means two things. First is - depressed interest rates for longer period, second - greater and extended stimulus packs. Both things are supportive to riskier assets and US dollar rivals. Despite that EU should provide its own stimulus in early 2021, EU gets major benefits from US dollar weakness. Besides, as we've mentioned previously EU, and Germany in particular, stands one step ahead of US on CV19 struggle. As vaccine effect delays - the dominance turn to other measures, such as lockdowns, sanitation and health control. Germany shows good performance on this stage while US hasn't started it yet at all.
J. Biden political team is aimed on providing more stimulus, as Democrats always do, aiming on higher economy growth. With J. Yellen as a Secretary of Treasury, more stimulus could come from whole three authorities - Fed, Treasuries and US government.
Finally, on Brexit topic, information changes every week. Just in previous update we've considered facts that situation is worsened. This week markets show improvement despite that politicians bring everything in negative colors. Still, somehow I'm tending to trust more to banks rather than politicians. All major banks tell that EU and GB should avoid hard scenario. My suggestion is based mostly on common sense. First is a sticking point - fishery. Guys, UK fishery industry is just a 0.12% of GBP, costing around 1Bln. pounds. The "Fishery" mostly looks like the "flag of struggle" rather than real object of argumentation. I'm sure that both sides understand that. And disaster of hard Brexit, if follows, can't be compared to "Fishery" value. 50-60% of mutual trading could turn in collapse without regulation, new taxation and custom registration. Nobody wants this. It means that agreement should be achieved, but it could be not perfect, with some prolongations, limitations etc. For example, they could out Fishery object to longer-term discussion and sign the major document. Whatever agreement will be signed, this should trigger demand for GBP and UK stocks. BoE keeps most strict policy among other central banks, providing only necessary stimulus and this makes pound to weight more compares to rivals. Stock market looks undervalued and bargain hunters could run there in the beginning of the 2021. Technical picture doesn't exclude scenario of 1.44-1.45 rally within few months.
Taking it all together, by far we do not see any reasons to change our medium-term strategy with anticipation of 1.28-1.30 level on EUR. GBP targets have greater uncertainty because not everything is under control of economical factors. Still, we hope that common sense prevails and desirable agreement will be achieved. In this case 1.44 target could be reached within 5-8 months.
Technicals
Monthly
Despite that we have a lot of time till the end of the year - December month shows good performance with minor reaction on COP target and acceleration on CD leg. As 1.25 resistance has been tested already in the beginning of 2018, EUR has relatively free area till the previous top around 1.25-1.2550 level. Overbought area stands around 1.27 and doesn't prevent upward action at all. MACD trend stands bullish, so on monthly chart we do not see any technical barriers for further EUR appreciation. The next target above 1.25 stands around 1.2850-1.30, that is OP and extension of BC retracement swing:
Weekly
On weekly chart, as our 1.2260 target has been met, we need to set the next one. Trend here has tuned bullish, but price stands closer to overbought level than on monthly chart. Here we need to recall our AB-CD pattern, which is still valid. It Points on XOP around 1.2450. It looks realistic as it stands in "performance envelope" compares to overbought range. So, gradually market could try to hit it within a week.
As major reaction on OP target is over, by market mechanics, price stands in extension mode as it is going to XOP. It means that any deep retracement here is irrational and only Fib levels of 1.16-1.22 swing are acceptable as pullback targets.
Daily
Daily chart, in turn, shows that we do not need the whole upward swing, but only the part till 1.2050 area, as here we're mostly interested in oversold level that cuts off all that we do not need to consider. In our "trading" area for coming week we have two support levels - 1.2140 and wide K-area around former 1.20 top, starting from 1.2050, since we have few Fib levels that envelope the former high.
Massive position closing and reaching of 1.2260 target could trigger technical pullback that we've mentioned last week. By the price action that we have in place, it seems, that EUR could form "Evening star pattern" in a case of sell-off to 1.2180 area on Monday. The "small retracement" scenario suggests minor pullback to some Fib support, mentioned above, while "Extended retracement" could be based on H&S pattern that might be formed here. First scenario seems more probable right now, but let's keep in mind the both.
Intraday
Here is what we intend to do next week. Market barely has tested our XOP target, so it could flirt a bit around 1.2270 top, but, as all other major targets already have been hit, it has no reasons to show significant appreciation, except direct continuation to 1.2450. It means that if reversal comes - market should start dropping somewhere from 1.2275-1.2280 area and right to 1.2180-1.22 level. Conversely, upward action will continue. There are a lot trading solutions might be. Bulls could use two features - wait for downside retracement and use Stop "Buy" orders, somewhere around 1.2290-1.23 area, aiming on 1.2450 target. Bears could use opposite scenario, waiting for reversal pattern on 30-60 min charts as MACD divergence already stands here. The action around 1.2270-1.2280 area should tell us what the next step will be:
So, guys the year is gradually coming to an end and the majority of big events already are in the past. We're coming to the Christmas holidays, so investors do either and today on the table we have almost the same driving factors - CV19, Stimulus discussion, Fed statement and Brexit. No drastic shifts have happened yet with these factors but some changes exist still.
Week overview
Strong euro zone survey figures and hopes of progress on Brexit negotiations pushed the euro above $1.22 against the U.S. dollar on Wednesday for the first time since April 2018. The Swiss franc, meanwhile, gained briefly after the U.S. Treasury labelled Switzerland a currency manipulator. The euro has risen nearly 13% since the European Union announced a recovery fund in May. Stronger economic activity data in recent months have also boosted bets that Europe is likely to outperform the United States in the coming months. Those expectations got a further boost with manufacturing survey data from Germany and France indicating that Europe's biggest economies may be recovering quickly.
"European PMIs, Brexit and a likely dovish Fed are boosting risk appetite in the currency markets," said Kenneth Broux, a strategist at Societe Generale in London.
The Treasury said that through June 2020 both Switzerland and Vietnam had intervened in currency markets to prevent effective balance of payments adjustments.
The Swiss National Bank paid no heed to being branded a currency manipulator by the United States, promising on Thursday to continue an expansive monetary policy and forex interventions it said were vital to cushion the impact of the coronavirus pandemic. Analysts expect the SNB to remain undeterred by U.S. pressure and plough ahead with currency purchases.
Fed statement has brought no surprises and disappointed investors slightly. As we've suggested - only purchasing rebalancing was announced, in favor of longer-term bonds, while no word was saying about additional stimulus pack. The Federal Reserve on Wednesday promised to keep funneling cash into financial markets further into the future to fight the recession, even as policymakers’ outlook for next year improved following initial rollout of a coronavirus vaccine.
Repeating a pledge to keep its benchmark overnight interest rate near zero until an economic recovery is complete, the U.S. central bank said it would also now tie its program of monthly government bond purchases to that same goal. Fed says it will continue to buy $80 bln a month in Treasuries and $40 bln a month in agency-backed securities until substantial further progress has been made on maximum employment and price stability goals. Here are few points in Fed statement that deserve of our attention.
Powell says there is a need for households and businesses to have fiscal support and would welcome work Congress is doing right now, but no view on the size of it. And by end of Q1, Q2 vaccinations will start to have an effect, expect second half of next year economy should be stronger. Effects for monetary policy are months and months into the future, as inflation now a faint heartbeat of what it was years ago.
Negotiations in the U.S. Congress over final details of a $900 billion COVID-19 aid bill could spill into the weekend, requiring another stopgap spending bill to avert a looming government shutdown, Republican Senate Majority Leader Mitch McConnell said on Thursday.
“We’ve got a global reflation on the way,” said Axel Merk, president and chief investment officer at Merk Investments in Palo Alto, California, noting that investors are selling the dollar to buy other assets. “That’s been the theme we’ve had and, if anything, that’s been accelerating,” Merk said.
It would be the largest relief package since this spring, when Congress approved more than $4 trillion in aid. The COVID-19 pandemic has killed 311,000 Americans, by far the most in the world, and put millions out of work. Economists say growth will likely remain sluggish until vaccines are widely available in mid-2021.
The Senate is to convene at 11 a.m. (1600 GMT) on Saturday. Representative Steny Hoyer, the second-most senior Democrat in the House of Representatives, said on Friday any vote on a package would not come before Sunday afternoon. Republicans and Democrats say they are close to a deal, but significant differences remain.
Republicans are pushing to rein in Federal Reserve lending programs for midsize businesses and municipal bond issuers that were intended to ease the pandemic’s sting, saying those programs were meant to be temporary. But Democrats say the move is an attempt to tie the hands of President-elect Joe Biden, who will take office on Jan. 20.
The parties also disagree over how much to give to arts venues closed by COVID-19 restrictions, and how much emergency aid should go to local governments for supplies like personal protective equipment for schools.
But many issues have been settled. The legislation is expected to include one-off $600 checks for most Americans, enhanced unemployment benefits of $300 per week, help for states distributing coronavirus vaccines and more assistance for small businesses.
As U.S. stimulus talks dragged on, Democratic President-elect Joe Biden’s incoming chief economic adviser said on Friday a coronavirus relief plan under negotiation in Congress should not include a provision that would restrict the ability of the Treasury Department and the Federal Reserve to fight economic crises.
“As we navigate through an unprecedented economic crisis, it is in the interests of the American people to maintain the Fed’s ability to respond quickly and forcefully,” Brian Deese, who will head the White House National Economic Council for Biden, said in a statement.
BREXIT
The odds of Britain agreeing a trade deal with the EU before the end of a transition period have risen to 57% on Monday, up from 40% last week, according to punters betting on the Smarkets exchange. Chances of no deal had risen to as much as 61% on Friday from 19% in late November, according to the exchange. Odds of no-deal on bookmaker Betfair had receded to 38% on Monday, down from 58% the previous day.
“In our view, a deal is still more likely than not, but with each day that passes, the risk of a no-deal outcome grows,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. UBS added that the announcement of an agreement could push sterling to $1.35, while increasing uncertainty about a no-deal outcome could lead it to revisit September lows around $1.28.
ING’s currency strategists said they expected a pound rally to materialize in the next two weeks, with a deal still being the most likely scenario. Still, they warned of more downside risk to the currency as it was pricing in a “good probability of a deal.”
Goldman Sachs said it expected sterling to appreciate by 1.5-2% against the euro on apparent progress towards a deal or “at least avoiding a no deal outcome for now.”
Economists at Citi said that even if a deal is agreed over the coming days, “persistent acrimony remains likely”, which would weigh on the medium-term outlook. They said a Canada-style deal with the EU is now the best possible outcome. Jeffrey Sacks, head of EMEA investment strategy at Citi Private Bank suggests buying into the pound on any weakness as he sees further upside in the currency if there is a deal. He expects the pound to hit $1.37 over the next 6-12 months.
“It (sterling) is a cheap currency in real-exchange rate terms and the rally that we’ve seen over the pandemic period has been largely driven by a weaker dollar,” he said.
The European Union said on Friday there were just hours left to strike a Brexit trade deal while Britain called on the bloc to see sense as the two sides race to prevent a turbulent finale to the Brexit crisis at the end of the month. Both London and Brussels are demanding the other compromise amid a flurry of often conflicting messages that, variously, a deal is possible, a deal is in serious trouble or that a deal is imminent.
Some EU diplomats think the rhetoric indicates an agreement is being hashed out in Brussels, though Britain has cautioned that it could take until after Christmas to get a deal - if there is one at all. Johnson, the face of the 2016 Brexit campaign, will ultimately have to decide whether to accept the narrow deal on offer from the EU or risk the economic chaos - and applause from hardline Brexiteers - that walking away would trigger.
Senior British minister Michael Gove earlier had put the chances of securing a trade deal with the European Union at less than 50% on Thursday, striking a pessimistic tone that contrasted sharply with remarks by the EU’s chief negotiator suggesting there had been good progress.
The Bank of England, on Thursday, said it was ready to tolerate an inflation spike in the event of a no-deal Brexit in two weeks’ time, but kept its stimulus unchanged as Britain and the European Union enter the end game of their trade deal talks.
EU powers are concerned London wants the best of both worlds - preferential access to EU markets but with the advantage of setting its own rules. Failure to agree a deal on goods trade would send shockwaves through financial markets, hurt European economies, snarl borders and disrupt supply chains.
With the clock ticking and British and European negotiators in the tunnel, weary investors are looking again at unloved British assets. Some argue they might deserve a second chance. Since the 2016 Brexit referendum vote, global investors have ditched British assets, with the country’s stock market suffering $60 billion of outflows.
The pound is among the most undervalued of the major currencies on a trade-weighted basis, while equity risk premia for the stock market are above their long-term average. With policymakers likely to keep monetary conditions ultra-easy, Britain’s economy may benefit in 2021 from the nationwide rollout of a COVID-19 vaccine.
Covid 19
With this subject we have two components - vaccine performance and recent lockdown steps in Europe. Amid surging new cases, Northern Ireland decided last night to impose a lockdown from 26 December, while London and much of Southeast England moved into the highest tier of restrictions short of a lockdown. Yesterday Germany entered a hard lockdown due to last until 10 January, after recording 952 deaths on Wednesday, while the Netherlands has also begun a five-week lockdown. Both the European Central Bank (ECB) and the Bank of England (BoE) expect their economies to contract by around 2% in Q4. Growth will be more resilient in Q4 in the US, where the surge in COVID cases and reintroduction of lockdown measures occurred later. Atlanta and New York Fed Nowcasting models point to annualised GDP growth of 11.2% and 2.45% respectively. Nevertheless, US weekly jobless claims have begun to rise, indicating a further slowing in the labour market in December; and the lockdowns will weigh on growth in the US and elsewhere in coming months.
The Moderna vaccine is expected to become the second vaccine approved by a Western government to assist the fight against COVID-19. Last night the external advisory panel of the US Food and Drug Administration (FDA) voted by 20:0 to approve Moderna, with one abstention, and the FDA is expected to authorise it for emergency use within hours. The move comes a week after the FDA followed the UK and Canadian authorities in approving the Pfizer/BioNTech vaccine, and began distributing the first 2.9 million doses. The US has suffered more than 300,000 COVID-related deaths, including 3,580 on Wednesday. The chief adviser to Operation Warp Speed, the US COVID vaccine programme, has suggested that at least 100 million Americans in mostly high-risk groups should be vaccinated by the end of 2021 Q1 and the whole population by the end of Q2. The EU Medicines Agency meanwhile will meet to discuss the Pfizer/BioNTech vaccine on 21 December, and the President of the EU Commission suggested it was likely Europeans would begin to be vaccinated before year-end.
Net non-farm US payrolls in November pointed to an increase of 245,000 people in employment. That marked a slowdown from October’s 610,000 increase, but suggested some resilience in the economy despite a sharp increase in coronavirus infections through the month. It seems likely however that December’s jobs report will show a drop in US employment, as surging infections lead to increased economic restrictions in some states. The California governor, Gavin Newsom, announced on 3 December that stay-at-home orders would automatically be triggered when regions fell below 15% spare capacity in intensive care units. Within days, areas accounting for more than three quarters of the state’s population were subject to the restrictions. The Golden State accounts for 12% of US employment, and 15% of GDP.
COT Report
CFTC data is mixed this week as we see massive profit taking among investors before Xmas holidays and some uncertainty around Brexit and US stimulus measures. As culmination on both factors could happen right on Christmas, investors reduce risk impose. As a result, on the chart we see growth of net long speculative position on EUR, but table data shows significant decreasing of open interest and closing of long positions. Positions were closed across the board - hedgers, speculators, spread positions etc. Totally it was closed more than 40K contracts, equals 5.3 Bln EUR.
But net long position has increased:
Source: cftc.gov
Charting by Investing.com
So, recent information gives us few thoughts for suggestion on medium-term market perspectives. Concerning CV19 situation, we think that recovery happens slower than it is anticipated right now. Mostly because of less efficiency of vaccines by fact. Laboratory tests is quite different thing but even first Pfizer vaccine application opens negative surprises for allergic individuals and this forced authorities to re-classify the vaccine for "emergency" use only. The same is expected for Moderna. Another problem is global production of vaccine that we've mentioned previously that should extend the time of massive vaccination. Slower than expected recovery means two things. First is - depressed interest rates for longer period, second - greater and extended stimulus packs. Both things are supportive to riskier assets and US dollar rivals. Despite that EU should provide its own stimulus in early 2021, EU gets major benefits from US dollar weakness. Besides, as we've mentioned previously EU, and Germany in particular, stands one step ahead of US on CV19 struggle. As vaccine effect delays - the dominance turn to other measures, such as lockdowns, sanitation and health control. Germany shows good performance on this stage while US hasn't started it yet at all.
J. Biden political team is aimed on providing more stimulus, as Democrats always do, aiming on higher economy growth. With J. Yellen as a Secretary of Treasury, more stimulus could come from whole three authorities - Fed, Treasuries and US government.
Finally, on Brexit topic, information changes every week. Just in previous update we've considered facts that situation is worsened. This week markets show improvement despite that politicians bring everything in negative colors. Still, somehow I'm tending to trust more to banks rather than politicians. All major banks tell that EU and GB should avoid hard scenario. My suggestion is based mostly on common sense. First is a sticking point - fishery. Guys, UK fishery industry is just a 0.12% of GBP, costing around 1Bln. pounds. The "Fishery" mostly looks like the "flag of struggle" rather than real object of argumentation. I'm sure that both sides understand that. And disaster of hard Brexit, if follows, can't be compared to "Fishery" value. 50-60% of mutual trading could turn in collapse without regulation, new taxation and custom registration. Nobody wants this. It means that agreement should be achieved, but it could be not perfect, with some prolongations, limitations etc. For example, they could out Fishery object to longer-term discussion and sign the major document. Whatever agreement will be signed, this should trigger demand for GBP and UK stocks. BoE keeps most strict policy among other central banks, providing only necessary stimulus and this makes pound to weight more compares to rivals. Stock market looks undervalued and bargain hunters could run there in the beginning of the 2021. Technical picture doesn't exclude scenario of 1.44-1.45 rally within few months.
Taking it all together, by far we do not see any reasons to change our medium-term strategy with anticipation of 1.28-1.30 level on EUR. GBP targets have greater uncertainty because not everything is under control of economical factors. Still, we hope that common sense prevails and desirable agreement will be achieved. In this case 1.44 target could be reached within 5-8 months.
Technicals
Monthly
Despite that we have a lot of time till the end of the year - December month shows good performance with minor reaction on COP target and acceleration on CD leg. As 1.25 resistance has been tested already in the beginning of 2018, EUR has relatively free area till the previous top around 1.25-1.2550 level. Overbought area stands around 1.27 and doesn't prevent upward action at all. MACD trend stands bullish, so on monthly chart we do not see any technical barriers for further EUR appreciation. The next target above 1.25 stands around 1.2850-1.30, that is OP and extension of BC retracement swing:
Weekly
On weekly chart, as our 1.2260 target has been met, we need to set the next one. Trend here has tuned bullish, but price stands closer to overbought level than on monthly chart. Here we need to recall our AB-CD pattern, which is still valid. It Points on XOP around 1.2450. It looks realistic as it stands in "performance envelope" compares to overbought range. So, gradually market could try to hit it within a week.
As major reaction on OP target is over, by market mechanics, price stands in extension mode as it is going to XOP. It means that any deep retracement here is irrational and only Fib levels of 1.16-1.22 swing are acceptable as pullback targets.
Daily
Daily chart, in turn, shows that we do not need the whole upward swing, but only the part till 1.2050 area, as here we're mostly interested in oversold level that cuts off all that we do not need to consider. In our "trading" area for coming week we have two support levels - 1.2140 and wide K-area around former 1.20 top, starting from 1.2050, since we have few Fib levels that envelope the former high.
Massive position closing and reaching of 1.2260 target could trigger technical pullback that we've mentioned last week. By the price action that we have in place, it seems, that EUR could form "Evening star pattern" in a case of sell-off to 1.2180 area on Monday. The "small retracement" scenario suggests minor pullback to some Fib support, mentioned above, while "Extended retracement" could be based on H&S pattern that might be formed here. First scenario seems more probable right now, but let's keep in mind the both.
Intraday
Here is what we intend to do next week. Market barely has tested our XOP target, so it could flirt a bit around 1.2270 top, but, as all other major targets already have been hit, it has no reasons to show significant appreciation, except direct continuation to 1.2450. It means that if reversal comes - market should start dropping somewhere from 1.2275-1.2280 area and right to 1.2180-1.22 level. Conversely, upward action will continue. There are a lot trading solutions might be. Bulls could use two features - wait for downside retracement and use Stop "Buy" orders, somewhere around 1.2290-1.23 area, aiming on 1.2450 target. Bears could use opposite scenario, waiting for reversal pattern on 30-60 min charts as MACD divergence already stands here. The action around 1.2270-1.2280 area should tell us what the next step will be: