September 8th, 2014
by Cliff Wachtel, FX Empire
Did the EURUSD's surprise new stimulus, likely the last for 2014, signal an end to bad news for the EUR? FX Traders' weekly EURUSD fundamental & technical picture
- Technical Outlook: Near term neutral, longer term bearish
- Fundamental Outlook Part 1: Top Market Movers, Related Lessons - Just 1 Big Driver
- Fundamental Outlook Part 2: Lessons From ECB, US Jobs Reports, Ukraine Pain
- Fundamental Outlook Part 3: Coming Week Market Movers-Variations On Current Themes
- Biggest Questions For The EURUSD
EURUSD Weekly Chart August 26 2014 to Present
KEY: 10 Week EMA Dark Blue, 20 WEEK EMA Yellow, 50 WEEK EMA Red, 100 WEEK EMA Light Blue, 200 WEEK EMA Violet, DOUBLE BOLLINGER BANDS: Normal 2 Standard Deviations Green, 1 Standard Deviation Orange. Green downtrend line from EURUSD peak of July 2008 to present, green uptrend line from August 2012 to present. White Fibonacci retracement lines for downtrend of August 2008 To June 2010, yellow Fibonacci retracement lines for downtrend of May 2011 To July 2011.
Source: MetaQuotes Software Corp, www.fxempire.com, www.thesensibleguidetoforex.com
Key Take-Aways Weekly Chart
With the weekly close at 1.2952, the pair has decisively taken out what had looked like the next big support and 1.31 (which had the support of the descending channel's lower line), and has also probably broken the psychologically important 1.30 band (which had the support of the 23.6% Fibonacci retracement line of the 2008-10 downtrend). The odds continue to favor more downside in the weeks ahead. Consider that the pair:
- Could only muster a small bounce after the big miss for US NFP jobs report, and the implied end of any hopes for accelerated Fed tightening for
- Is actually showing accelerating downward momentum
These bearish technical factors as well as the number of former strong support areas that are now converted to strong resistance bands suggests enough technical damage to limit any rallies in the future, even before considering that the ECB is done with new easing measures for the rest of the year (see our fundamental analysis for more on that).
The next support level is the 1.2750 area. With the divergence in Eurozone and U.S. data and monetary policy expected to continue widening in the coming weeks, the only questions are:
- Not if, but how soon, is this area tested?
- How long can it hold before breaking and opening the way for a test of the next major support level in the 1.25 area.
It should only be a matter of time before this support is tested with a move down to 1.25 becoming increasingly likely.
Indeed, the decline that began in May has taken the EURUSD down enough to be in range of testing support of its 13 year uptrend line in the 1.2952 area.
The weak attempt at a bounce, fueled by false hopes of calming in the Ukraine, was crushed by Thursday's ECB announcement of new easing, which led to the third breakdown of near-term support in as many weeks.
Fundamental Outlook Part 1: Top Market Movers And Related Lessons
A look at the daily price action tells us all we need to know about the EURUSD's recent top price drivers.
EURUSD Daily Chart July 22, To September 5, 2014
KEY: 10 Week EMA Dark Blue, 20 WEEK EMA Yellow, 50 WEEK EMA Red, 100 WEEK EMA Light Blue, 200 WEEK EMA Violet, DOUBLE BOLLINGER BANDS: Normal 2 Standard Deviations Green, 1 Standard Deviation Orange
Source: MetaQuotes Software Corp, www.fxempire.com, www.thesensibleguidetoforex.com
Top Market Movers & Their Lessons For The Weeks Ahead
ECB Surprise New Easing: All That Mattered
Looking at the daily chart above it's clear that the only thing to materially move the pair this week was the sooner than expected new ECB easing announced at Thursday's monthly meeting and press conference. See below for lessons and ramifications of this ECB surprise move.
Ukraine: Ceasefire Hopes Drive Modest Bounce Wednesday
Granted, Wednesday's ultimately false rumors of a Ukraine-Russia cease fire appeared to give all things European a modest boost, including the EURUSD. However so far nothing suggests Russia has any intentions of reversing its drive to control more Ukraine territory, directly or via local proxies 'rebels.' Indeed, Russia denied being able to be party to a ceasefire because it denies any role in the conflict. Similar to negotiations on Iranian nuclear weapons or on a Hamas deal to peacefully coexist with Israel, these talks to are just delaying tactics designed to lull the more gullible elements of the opposing side into a dangerous complacency and delay any meaningful opposition.
US Jobs Reports
As we predicted last week, the combined impact of the NFP and unemployment reports were minimal, at most, it provided an excuse for a modest counter move higher that still leaves the pair sharply lower on the week. Why did these reports fail to move the pair up much, despite the theoretical weakening of the USD because weaker employment reports should delay USD-supportive Fed tightening? The short answer is, that the jobs report changes nothing in the Fed's policy and thus in perceptions of the value of the USD.
- First, while the headline NFP figure missed (142,000 new jobs in August, versus an expected 230,000), there was some good news too.
- The unemployment rate dropped to 6.1% from 6.2%, per the latest release from the BLS, and was in-line with expectations.
- Wage growth was also in-line with expectations, with wages growing 2.1% year-over-year, and 0.2% month-over-month.
- The average number of weekly hours worked held steady at 34.5 hours.
- The July jobs report was also revised modestly higher, to 212,000 from 209,000
- The "U-6″ unemployment rate, which includes those marginally in the labor force or those employed part time for economic reasons, fell to 12% from 12.2% in July.
- Second, Fed Chairperson Yellen has long made clear that Fed policy moves with longer term data trends, not the somewhat erratic single monthly data points. The Fed is already skeptical about the health of the US job market even with the recent string of overall good data, so this month's NFP miss merely confirms that view.
With US data continuing to show improvement, only a smashing beat of forecasts could have aroused speculation that the Fed might view US unemployment as improved enough to warrant faster, greater tightening.
In sum, the reports didn't pack enough of a negative surprise to change sentiment about the pace of Fed tightening. Meanwhile, the ECB is indeed accelerating its easing, so the USD continues to look better relative to the EUR.
See below for lessons on this.
Fundamental Outlook Part 2: Lessons
ECB Meeting: When Top Tier Events Surprise In Direction Of Established Trends
Instead of holding policy steady, or merely saying that new easing steps were coming, the ECB surprised most observers with not just one but two surprise easing steps:
-At the monthly rate announcement, an interest rate cut of 10 bps: This took the ECB's main overnight rate down to 0.05% (from 0.15%), its marginal lending facility down to 0.3% (from 0.4%), and its deposit facility went deeper into negative, to -0.2% (from -0.1%). Following this announcement, the EUR plummeted against the dollar, trading below $1.30, its lowest level since last summer.
- Next, at his ECB President Mario Draghi's press conference that followed the rate decision, he again surprised markets by announcing that the ECB would begin buying asset-backed securities and Euro-denominated covered bonds in October. He said the scale of these purchases was as yet unsettled, but he did say the ECB was ready to expand its balance sheet as part of these operations (i.e. no corresponding asset sales to "sterilize" or maintain the current money supply.
-He also repeated much of what he said in August at Jackson Hole. In particular, he pushed for fiscal and structural reforms as equally or more important means of spurring growth in addition to the ECB's monetary easing. These remarks were widely seen as a challenge to politicians around the Eurozone, namely German chancellor Angela Merkel, to cut back their austerity programs, which Draghi and many other policymakers believe, have done more harm than good, because they cut GDP as fast or faster than they cut debt.
-The ECB staff also cut its inflation and GDP forecasts. GDP projections for 2014 and 2015 were reduced to 0.9% and 1.6%, respectively. Inflation predictions were reduced to 0.6% and 1.1% in 2014 and 2015, respectively.
Lessons From The ECB Meeting
By cutting interest rates and also preannouncing ABS purchases earlier than expected, we conclude:
- It's grown so worried about the outlook for inflation and growth that they believe they can't afford to wait until the new 4 year loans are rolled out later this month. As we've noted in recent weeks, at Jackson Hole Draghi admitted that he no longer saw deflation as a temporary problem. What's changed since then? Continued bad EU economic data, and growing risk from economic sanctions stemming from Russian aggression against Ukraine.
- Thus even though the full effects of the TLTRO won't be felt until November or December, clearly the ECB no longer thinks that the TLTRO will be enough to revive the deteriorating EU economy. Remember that the central bank has been criticized for months in much of the European financial press for doing too little too late in the past and once again being too slow to react to the mounting evidence of the EU's economic stalling. The ECB no doubt sees the better US economic performance and is coming around to the Fed's preference for erring on the side of more stimulus rather than less, especially with deflation concerns replacing inflation concerns, even for the inflation-phobic Germans.
Details on the ABS program will be released next month. Based on Draghi's remarks, markets can expect a substantial package. Note that this one big open item provides the remaining big fundamental fuel from the ECB for some additional EUR downside.
Beyond that ABS announcement, new ECB stimulus announcements are likely done for the year. Although some kind of QE remains on the menu, we've don't see that coming in 2014. The ECB has two good reasons to wait before doing anything more.
-There's already a huge wave of new stimulus coming, with the TLTRO, ABS and interest rate cut. Any central bank would need to see how well these measures are received by the market and the economy before considering a more radical option like QE, even if that was clearly legal.
However QE is currently widely seen as illegal. The direct funding of national budgets by the ECB is illegal per the EU's Maastricht treaty. Granted, there are those who've said that if QE is done for the sake of price stability, which is part of the ECB mandate, that perspective shift might be enough to get Germany, the only likely opponent that matters, to withhold objections.
There are other issues with QE in the EU (although we still think it's likely to happen eventually). See here for details.
Meanwhile, the EURUSD and other major EUR pairs should remain under pressure from:
- Uncertainty about the details of the ABS program to be announced in October
- Concern about the impact of the escalating economic sanctions war with Russia
- US economic outperformance of the EU
Again, the next support level that we are looking at is 1.2750.
7 Key Points On ECB Announcement
- ECB moving towards the Fed's preference to err on the side of too much stimulus, announcing both a 10bp rate cut and ABS (asset backed securities) program, and doing it earlier than expected.
- QE still an option, was under discussion at the meeting, with some ECB members wanting to do more, some less
- ECB ABS buying will materially expand its balance sheet and the money supply (no sterilizations to keep money supply steady)- markets will expect a BIG ABS program, and so should keep the EURUSD pressured as they attempt to price in the EUR-dilutive measure.
- No more rate cuts - Draghi says interest rates are now at lower bound.
- Rate cut was mostly to reinforce lower bound and encourage TLTRO borrowing
- Downgrades 2014, 2015 GDP and inflation forecasts.
- Geopolitical risks and structural reform like continued government spending cuts and liberalization of labor markets (i.e. less wage and job protection) pose downside risk to economy as these hit household incomes.
Lessons From The US Jobs Reports
Friday's very modest EURUSD bounce, plus the gains logged in most leading global indexes, both reflect a consensus that the reports didn't change anyone's perceptions about US growth.
- The NFP miss was just one month's data and NFP data can be "noisy" with outlier monthly data not uncommon. Most of Wall Street does not believe the report influenced the Fed's likely timing of its first rate hike in Q2 2015.
- There were some positives: the unemployment rate fell to 6.1% from 6.2%, wage growth was in-line with expectations, growing 2.1% year-over-year and 0.2% month-over-month.
- There is no significant data showing slowing labor demand.
The Top Market Mover Of The Week
The ECB was expected to ease eventually, maybe even talk in general terms about coming measures. It was not generally expected to actually announce a rate cut as well as new plans for additional easing. Instead it did both, thus sending the EUR plunging and EU stocks soaring, in accordance with the news' expected effect on the value of the EUR (bad because it's dilutive and suggests more of the same policy coming) and stocks (good because it's expected to inflate asset prices
Admittedly, the ECB's surprise rate cut, and announcement of coming asset purchases of European bonds, ultimately had little immediate impact on US or Asian markets.
However, its impact on European stock markets and the entire currency market (which dwarfs the global equities market in trading volume) was so strong that the event ranks as a/the top market mover of the week, especially given the limited impact of other events on global markets
Lesson: An Example Of The Ingredients Needed For A Market Moving Event
The results were what one might expect when we get that rare combination of
- a top tier event
- from a leading economy moving
- providing a major surprise
- AND that surprise feeds a multi-month ongoing trend.
Lesson: Why Any Good Fundamental Analysis Requires Awareness Of The Technical Picture Too
As I discuss in my book, except for very short term trading and day trading, fundamentals usually drive trends. However there are certain situations in which the technical picture actually influences how markets react to fundamental data.
One of the ways in which technical analysis (study of price action) overlaps with fundamental analysis (study of supply and demand factors) is when there is an established trend, because it gives investors a bias to heed news that confirms the trend and to ignore or react less to news that contradicts the trend.
There are other situations. For example, nearby strong support or resistance can bias traders' reaction to news. I discuss these too in depth in my book.
Continued US Outperformance Of EU
The US continues to utterly outperform the EU. Following a 22.5% gain in durable goods orders 2 weeks ago, last week's data highlights include:
- US ISM August manufacturing indexcame in at its highest level since March 2011, coming in at 59.0 against expectations for 57.0. Markit's August manufacturing PMI came in at 57.9, up from 55.8 in July, and serving as the index's best reading since April 2010.
- Construction spending rebounded sharplyin July, up 1.8% after dropping -0.9% in June.
- S. auto sales had a huge monthin August. The annualized rate of sales bounced to 17.45 million in August, beating both the 16.4 million in July and the 16.6 expected by most analysts.
- S. factory orderspopped 10.5% in July following a prior 1.5% gain, though this jump was slightly less than the 11% expected by economists.
- Services: ISM's non-manufacturing PMI reportfor August was 59.6, up from 58.7 in July, thus marking its highest print since August 2005.
Fundamental Outlook Part 3: Coming Week Market Movers
Speculation about the size of the coming ECB ABS purchases package, and about economic damage from Russia/Ukraine related sanctions, continue to be the big drivers to watch. Otherwise, there isn't much else for now.
Note that the USD's rally continues to be driven more by weakness in the EUR, as well as in the GBP and JPY (all of these three were hit by fundamental issues) rather than any improvement in America's economic outlook, which remains one of slow but steady improvement. For example, the USD gained 1.6% against the Pound, 1.4% versus the EUR and 1% versus the JPY, while it was did little against the commodity dollars.
So with USD strength still based on the misfortunes of the EUR, GBP and JPY, we need to watch events influencing those currencies.
This week's calendar doesn't offer a lot, though the following week's FOMC rate statement and press conference on the 17th may offer some updated insights, though we doubt it.
Remember however, that the crowded EURUSD short position makes the current trend vulnerable to short term bounces on even modestly bullish news.
Top Calendar Events To Watch
China: Trade balance
China: CPI, PPI y/y
EU: Ecofin meetings
US: Retail sales m/m, preliminary UoM consumer sentiment, business inventories (remember, much of the recent GDP beat was attributed to inventory buildup, so we want to see if inventories are getting sold or setting up to become a drag on the next GDP reading as payback.
China industrial production y/y, fixed asset investment ytd/y
Biggest Questions For The EURUSD
- Will US retail sales and UoM consumer sentiment continue to the upbeat trend in US data?
- Will speculation about the size of ECB ABS package continue to pressure the pair?
- Is there any real chance the October 17th FOMC meeting will reveal anything new?
To be added to Cliff's email distribution list, just click here, and leave your name, email address, and request to be on the mailing list for alerts of future posts. For information on a free intro to currencies video course based on my award winning book, see here.
DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING OR INVESTING DECISIONS LIES SOLELY WITH THE READER.