Next week, the key event in the Eurozone will be the European Central Bank meeting on Thursday. Analysts from Danske Bank expect the central bank to announce an extension of the purchase program by nine months at a pace of EUR30bn.
“In the euro area, the most important event of the week is the ECB meeting on Thursday. We have changed our call and now expect the ECB to announce a QE extension of nine months at a pace of EUR30bn. In our view, a larger scaling down of purchases would ease future QE implementation and higher reinvestment volumes of maturing bonds would also add to the monthly QE flows in 2018. Apart from a scaling down of QE purchases, we expect the ECB to make no changes to its forward guidance at the upcoming meeting.”
“The PMIs are due for release on Tuesday. Manufacturing PMI has been on a rising trend since August 2016, getting close to the post-financial crisis peak of 59.0 in February 2011. In October, we expect manufacturing PMI to remain around the current level of 58.1, as the stronger euro may have started to affect new export orders adversely. After four straight months of decline, services PMI recovered in September to 55.8 and we believe services PMI will increase further in October to 56.2. Overall, the high PMIs support our expectation of robust growth for H2 in the euro area.”
“On Wednesday, we are due to get German ifo expectations, which we expect to rise further to 107.9 in October, in line with the improved economic expectations indicated by the ZEW October release last week.”
The yellow metal eased yesterday’s gains and dropped below $1,280/oz approaching weekly lows.
Stronger USD pushed gold lower
Positive expectations that Trump’s administration will be able to introduce its tax reform plan triggered a rally of the US dollar across the board late on Thursday. The bullish tone around the US dollar remained intact over Friday. Equity prices hit new record highs in Wall Street and US bond yield rose. The 10-year yield climbed from 2.32% to 2.38%, the highest intraday level since October 6; moving closer to the key resistance at 2.40%.
Gold opened the day slightly above $1,290 before turning to the downside. Recently hit a fresh low at $1,278.30 and it was under pressure, near the lows. So far during the week lost 1.70%, moving back to the 20-week moving average after being rejected from above $1,300 on Monday. The metal is now closer to Thursday low located at $1,276.
XAU/USD key levels
To the downside, support levels might be located at $1,276 (Oct 18 low), $1,270 (Oct 4 low) and $1,265. On the upside, immediate resistance is seen at $1,282 followed by $1,291 (Oct 20 high) and the $1,300 zone.
Analysts from Wells Fargo, explained the reasons why existing home sales rose 0.7% in September after three consecutive declines and they warned that existing sales fell on a year-to-year basis, marking the first drop since mid-2016.
“After declining three straight months, existing home sales rose 0.7 percent in September. Despite this past month’s gain, sales fell on a year-to-year basis, which captures the cumulative effect of the prior three months of declines.”
“Hurricane Harvey and Hurricane Irma likely weighed on September’s sales. Existing home sales fell 0.9 percent the South, which was the only region seeing a decline.
“While sales are down 1.5 percent year to year, the inventory is off even more, down 6.4 percent on the year. The sharper drop in inventories really drives home the point that home sales are being held back primarily due to the lack of homes for sale.
“For the 67th consecutive month, prices increased year to year, rising 4.2 percent. Gains have moderated significantly, however, and are rising at their slowest year-to-year pace since June 2014.”
The US dollar continued to rise across the board the board an printed a fresh 3-month high against the yen. It is headed toward the second highest weekly close since the first quarter.
USD/JPY: Data, yields and risk appetite
The pair started to rally after the US Senate passed the budget plan, paving the way for Trump’s tax reform plan. That still remains the main driver in today’s price action. It pushed US bond yields to the upside and boosted the greenback. The dollar received more support from US housing data. Existing home sales rose 0.7% in September to an annual rate of 5.39 million above the 5.30 expected.
Risk appetite across financial markets weakened the yen. The Dow Jones was up 0.52% at record highs near 23,300.
Later today, after markets close, Janet Yellen will speak on what will probably be her last words before the November FOMC meeting. On Sunday, Japan will have general elections. Markets discount a victory of PM Abe’s party. “As the majority of voters have still not decided who to vote for, there is still some uncertainty attached to the election outcome. However, financial markets seem complacent that Abe will remain Prime Minister after the election and there is hardly any election risk premium priced into the FX option market”, said analysts at Danske Bank.
USD/JPY Technical levels
The pair reached 113.56, the highest level since July 9 and at the moment of writing, it was trading around 113.40. USD/JPY still has not been able to consolidate on top of 113.45.
To the upside resistance levels might be located at 113.65 (Jul 5 high), 113.95/00 and 114.45/50 (Jul highs). On the flip side, supports could be seen at 113.05/10 (US session low), 112.80 (Oct 10 low) and 112.45 (Oct 17 high / Oct 20 low).
Fueled by the optimistic remarks coming from the EU leaders and British PM Theresa May following their Article 50 discussion at the EU summit today, the GBP/USD pair advanced to the 1.32 handle before losing its momentum in the NA session. At the moment, the pair is trading at 1.3178, up 0.15% on the day.
Earlier today, May said that the UK was ready to honor the financial commitments made to the EU and added that the EU didn't need to be concerned over their budget plan. Speaking at a joint press conference with European Commission President Jean-Claude Juncker, European Council President Donald Tusk said that they succeeded at today's summit to rebuild an atmosphere of trust with the UK on Brexit. In the meantime, Juncker stated that he hated the "no-deal" scenario.
However, the pair struggled to extend its gains during the second half of the day as the greenback started to gather strength against its peers. Today's better-than-expected existing home sales data and a sharp upsurge witnessed in the US Treasury-bond yields lifted the US Dollar Index to its highest level in two weeks at 83.67. At the moment, the index is at 93.65, adding 0.7% on the day, while the 10-year T-bond yield is up 3%. The US Senate's 2018 fiscal year budget approval, which paves the way for Trump administration to go on with their proposed tax reform without Democrats' approval, seems to be the main catalysts behind the T-bod yields' rally.
Cleveland Fed President Loretta Mester will be delivering a speech later in the session but it's unlikely that she would reverse the positive mood surrounding the DXY.
The initial hurdle for the pair aligns at 1.3200 (psychological level/daily high) ahead of 1.3285 (Oct. 17 high) and 1.3340 (Oct. 13 high). On the downside, supports could be encountered at 1.3100 (100-DMA), 1.3030 (Oct. 6 low) and 1.3000 (psychological level).
Headlines from the EU summit:
The upcoming election in Japan is expected to be a non-event, with markets complacent that Shinzo Abe will remain Prime Minister, noted analysts at Danske Bank. They see any action by the ECB as the catalyst for a move in EUR/JPY over the coming 12 months and target EUR/JPY at 132 in 1M, 135 in 3M, 140 in 6M and 145 in 12M.
“The Japanese economy is running on all cylinders and GDP growth picked up speed in Q2, with annualised growth of 2.5%. CPI inflation has also been increasing in 2017 but this has been due mainly to rising energy prices. Hence, the underlying price pressure in Japan remains very low, despite solid growth and a closed output gap and the Bank of Japan’s (BoJ) 2% inflation target is nowhere within reach.”
“Our main scenario is that the BoJ will keep its policy unchanged, maintaining the short-term policy interest rate at -0.1% and the 10Y Japanese government bond (JGB) yield at 0% over our 12M forecast horizon, assuming BoJ governor Haruhiko Kuroda is reappointed when his term ends in April.”
“The general election on 22 October looks much less of a competition than one could have feared (or hoped), as Tokyo governor and leader of the new Party of Hope Yuriko Koike decided not to run for parliament, which has resulted in a loss of momentum for the opposition. The latest polls project that Prime Minister Shinzo Abe’s LDP party and its coalition partner Komeito are likely to retain their two-thirds majority after the election, with the LDP winning more than 300 of the 465 seats according to some polls.”
“Financial markets seem complacent that Abe will remain Prime Minister after the election and there is hardly any election risk premium priced into the FX option market.”
The UK's Brexit Secretary David Davis recently crossed the wires, via Reuters, saying that the UK didn't want a "no deal" scenario in negotiations with the US and added that if that was the case, they would be ready.
"The New York Fed Staff Nowcast stands at 1.5% for 2017:Q3 and 2.6% for 2017:Q4," the Federal Reserve Bank of New York announced on Friday.
USD/CAD continued to rise during the American session. The Loonie dropped dramatically across the board after the release of Canadian economic data and kept falling afterward.
USD/CAD: best day in months
The pair has risen more than a hundred pips over the last three hours. It was hovering around 1.2490 before the data and it just printed a 7-week high at 1.2608. At the moment of writing it was trading around 1.2600, consolidating important gains.
The pair was already moving with a bullish bias amid a stronger US dollar. It accelerated after the release of CPI and retail sales data. According to the report, the CPI rose in September 0.2%, below the 0.3% expected while the core CPI climbed 0.2% also below expectations. In another report, retail sales also missed forecasts. Sales contracted 0.3% in August, while sales excluding the Autos sector dropped 0.7%; a minor increase was expected in both readings.
Canada: Consumer Price Index (CPI) rose 1.6% on a year-over-year basis in September
Canada: After increasing 0.4% in July, retail sales declined 0.3% in August to $48.9 bln
Equity prices in Wall Street reached new record highs and in Canada the S&P/TSX Composite Index was up 0.30%, unaffected by the announcement that Concordia International Corp will seek to restructure its debts.
USD/CAD significant levels
To the upside resistance levels might be located at 1.2605/10 (Oct 20 high), 1.2650 (Aug 10 low) and 1.2660 (Aug 31 high). On the flip side, supports could be seen at 1.2590 (Oct 17 high), 1.2555 (Oct 9 / Oct 16 high) and 1.2520 (Asian session high).
"Brent crude hit a YTD high in September, and prices continue to stabilise at much improved levels," note analysts at HSBC.
"Inventories are continuing their steady downward trend. US commercial stocks are now only 8% above their five-year average vs 21% at the peak in February, while latest (August) OECD data shows a halving of the surplus since the start of this year."
"OPEC supply was broadly flat in September, with compliance at well over 80% but a net cut of only 0.5mbd after factoring in the recovery in Libya. The OPEC agreement to rein in supply is scheduled to run to end-1Q18, but there are signs that key members are edging towards extending it to year-end 2018."
"The US oil rig count has stalled and is now down 3% from its August peak. Meanwhile, productivity data still shows average productivity per rig flat-to-down in aggregate, with increases in the Bakken a notable exception. The rate of well completions is still growing, but it is not yet matching the pace of wells drilled so the number of drilled, uncompleted wells (DUCs) continues to rise. Latest weekly data was affected by precautionary hurricane shut-ins, but the prior week’s data showed US crude supply up 1.0mbd y/y, and total supply (including NGLs) up 1.2mbd. However, latest revised monthly data for crude is showing volumes around 200kbd lower than this, and October’s Drilling Productivity Report saw another downgrade to Eagle Ford production estimates. Nevertheless, the strong momentum of US tight oil supply should continue for now, not least as completion activity catches up and DUCs fall. However, we remain convinced that higher prices than current levels are needed if this momentum is to be sustained in the longer term."
"We think the market needs sustained long term growth in US tight oil supply in order to fill an impending supply gap as conventional non-OPEC output starts to decline in the next few years. An extension of the OPEC cuts through 2018 would help keep the market tight until that point is closer to reality. Our Brent price assumptions remain US54.4/b for 2017e, rising to USD65/b for 2018e and USD70/b for 2019e."
After bottoming out in the $50.80/70 band earlier in the session, the barrel of West Texas Intermediate seems to have found renewed buying interest and has now returned to the $51.40/50 region.
WTI supported near $50.70
Prices for the black gold continue to trim earlier losses as optimism over the re-balancing of the oil market and the likelihood of an extension of the OPEC/non-OPEC output cut deal beyond March 2018 stays on the rise.
Additionally, traders managed to shrug off Thursday’s comments from Chinese officials, noting that markets may be over-optimistic over the Chinese economic growth.
In the same line, another draw in US supplies reported by the DoE on Wednesday added to the prevailing upbeat momentum in prices, which are looking to extend gains for the second straight week.
Ahead in the session, driller Baker Hughes will publish its US oil rig count (prev. -5 to 743 US active oil rigs).
WTI significant levels
At the moment the barrel of WTI is up 0.21% at $51.41 facing the next up barrier at $52.37 (high Oct.16) followed by $52.86 (high Sep.28) and finally $53.76 (high Apr.12). On the flip side, a break below $50.70 (low Oct.20) would open the door to $50.15 (low Oct.12) and then $50.08 (38.2% Fibo of $45.58-$52.86).
The EUR/USD pair broke below the 1.18 handle in the early American trading hours and refreshed its daily low at 1.1780. As of writing, the pair was trading at 1.1786, down 0.55%, or 65 pips, on the day.
The renewed selling pressure seen on the pair seems to be a product of an increasing demand for the buck. Following its sharp rise on the back of the US Senate's 2018 fiscal year budget approval in the Asian session, the US Dollar Index remained quiet in the 93.30/40 region during the first half of the day before gathering some bullish momentum in the last hour.
The data released by the National Association of Realtors showed that existing home sales rebounded in September after three straight months of contractions. "Total existing-home sales rose 0.7 percent to a seasonally adjusted annual rate of 5.39 million in September from 5.35 million in August," the NAR reported. Although this data is generally ignored by the market participants, the fact that the economic calendar didn't feature any other data from the U.S. allowed for a modest reaction. The DXY advanced to a two-day high at 93.56 and was last seen at 93.50, gaining 0.52% on the day.
Later in the session at 18 GMT, Cleveland Fed President Loretta Mester is going to be delivering a speech, which could be the last catalyst before the markets warp up the week.
Valeria Bednarik, Chief Analyst at FXStreet, writes, "...the 4 hours chart shows that the price continues hovering around the 38.2% retracement of its latest bullish run, and between the 100 and 200 moving averages, while the Momentum indicator has lost its bearish strength, now aiming to regain the upside within positive territory as the RSI turned flat around 50, offering a short-term neutral stance. The immediate support comes at 1.1770, the 50% retracement of the same rally, and where it bottomed on Thursday, being the level to break to confirm a new leg lower, targeting then the 1.1720/30 region. The 1.1820/30 price zone, on the other hand, is the immediate resistance, followed by the 1.1860 price zone."
Analysts from Danske Bank expect the Bank of England to make an interest rate hike in November and warned that is already priced in. They see little effect on the GBP while in the long-term clarifications regarding Brexit could see the GBP strengthening. They target EUR/GBP at 0.88 in 1M, 0.88 in 3M, 0.87 in 6M and 0.86 in 12M.
“September PMIs suggest that the momentum in activity has been maintained and the NIESR GDP estimate points to slightly higher GDP growth of 0.4% q/q in Q3, compared with 0.3% q/q in Q2. However, the near-term growth outlook remains subdued, as negative real wage growth weighs on private consumption and Brexit uncertainty weighs on investments. UK inflation is increased to 3.0% y/y in September from 2.9% y/y in August.”
“We expect the BoE to hike the Bank Rate by 25bp in November, which is priced in with an 85% probability in the UK money market. In our view, this is merely the BoE taking back the ‘emergency cut’ it delivered in August 2016 (following the Brexit vote) and not necessarily the beginning of a new hiking cycle. Thus, we expect the BoE to remain on hold in the 12 months following the November hike.”
“While GBP could see some support going into the 2 November BoE meeting, we see little prospect of EUR/GBP breaking below 0.87 on the announcement due to the combination of already-stretched BoE pricing and long speculative GBP positioning. Longer term, we still see potential for a further decline in EUR/GBP driven by possible clarification on Brexit negotiations and valuations. However, with the ECB moving towards an exit as well and as relative growth is set to remain EUR/GBP positive, we see only modest downside potential in the year ahead.”
The US Dollar index, which gauges the buck vs. its main rival currencies, is extending the advance to fresh 2-day tops in the 93.70 area.
US Dollar underpinned near 93.00
The index found dip-buyers around Thursday’s lows in the 93.00 neighbourhood, prompting the greenback to return to the positive territory and move to fresh 2-day highs in the 93.70 region.
Optimism around the buck rose after the Senate approved the Republicans-backed budget late on Thursday, bringing the implementation of the Trump’s tax reform even closer.
Additionally, the upside momentum around the US money markets stays everything but abated and is now lifting yields of the 10-year benchmark to fresh multi-day tops just below the 2.39% handle.
Collaborating with the up move in USD, expectations of further tightening by the Federal Reserve via rate hikes remain on the rise and, according to CME Group’s FedWatch tool, the probability of higher rates in December stays above 90% based on Fed Funds futures prices.
Further out, investors and the greenback remain anxious on the upcoming announcement by President D.Trump of the next Fed Chief, with (pro-USD) candidate J.Taylor as the current front-runner vs. FOMC’s J.Powell and former FOMC governor K.Warsh.
In the US data space, existing home sales expanded 0.7% in September, or to 5.39 million units, surpassing prior surveys.
US Dollar relevant levels
As of writing the index is gaining 0.55% at 93.64 and a break above 93.80 (high Oct.16) would open the door to 94.03 (23.96% Fibo of the 2017 drop) and finally 94.16 (100-day sma). On the flip side, the immediate support aligns at 93.06 (low Oct.19) seconded by 92.93 (55-day sma) and then 92.75 (low Oct.13).
FX Strategists at Scotiabank noted the pair is likely to have found a base around the 1.1800 handle.
“For all the focus on the stronger USD this morning, the EUR remains in touch with a 1.18 handle and hardly looks soft. We published a note yesterday highlighting 1) weak correlations between the EUR and sovereign risk currently and 2) a recovery in Eurozone inbound investment inflows as grounds for expecting the EUR to remain well-supported despite the Catalan issue and negative yield spreads. Eurozone current account data today revealed a larger than forecast surplus (EUR33.3bn) but some weakening in portfolio and direct investment inflows in Aug. We think broader financial flow trends remain bullish EURUSD, however, and look for spot to reach 1.20 through year-end”.
“EURUSD tested the 1.1860 area a number of times over the past 24 hours but the level held, prompting some liquidation of long positions ahead of the weekend. Intraday price action looks a little soft for the EUR but there are tentative signs of a base developing around the 1.1800/05 area. Broader range looks to be 1.1675/1.1875 for now”.
"After three straight monthly declines, existing-home sales slightly reversed course in September, but ongoing supply shortages and recent hurricanes muted overall activity and caused sales to fall back on an annual basis," said the National Association of Realtors in its latest report.
"Following two weeks of negotiations, the Labour party is set to form a government with the support of New Zealand First and the Greens," not HSBC economists.
"FX markets dislike uncertainty so near-term weakness is warranted given this outcome is a departure from the National-led governments of the past nine years. Indeed, NZD-USD declined 0.8% today prior to the announcement, largely in anticipation of this outcome, and has fallen a further 0.5% since. An added weight on the currency is that New Zealand First leader Winston Peters has stated that he favours changing the RBNZ’s Policy Target Agreements towards potentially targeting a weaker NZD. However, even if Labour does make a concession on this, NZ First’s proposed 'Singapore-style' FX policy seem highly unrealistic for New Zealand (e.g. FX reserves are just 10% of GDP), and we think that the RBNZ's independence should limit the impact of any other mandate tweaks."
"Beyond the knee-jerk sell-off we expect the influence of politics on the NZD to diminish, leaving cyclical factors in the ascendancy. There are some positives here. The path of inflation remains crucial to our view that the NZD will gradually lift through 2018 and it should be noted that CPI printed at 1.9% in Q3, above both Bloomberg consensus and the RBNZ’s expectations. It’s also worth noting that, under this government, more fiscal spending is likely. Already the IMF had reflected some stimulus in its October Fiscal Monitor, increasing its estimate of New Zealand’s fiscal impulse (the change in the cyclically-adjusted primary balance) by +0.9% of GDP for 2018. This too should support a stronger NZD over the medium-term."
In view of Piotr Matys, EM FX Strategist at Rabobank, the recent price action in EUR/USD could be calm before the storm as sharp move may unfold in the coming days/weeks.
“Admittedly EUR/USD has been relatively stable trading in the 1.16 and 1.21 range since July. However, this perceived stability resulted in a head and shoulders pattern possibly forming on the daily chart with the August high at 1.1910 as the left shoulder, the year-to-date high at 1.2092 as the head and the recent top at 1.1880 as the right shoulder.”
“Given that head and shoulders is a reversal pattern, the euro may struggle to hold to its impressive year-to-date gains versus the US dollar.”
“The trendline support at 1.1672 represents the neckline, which is crucial juncture. A break below the neckline would set in motion retracement with the 1.1489/80 as an initial target.”
“Even more bearish target of 1.1252 can be obtained by measuring the distance between the head at 1.2092 and the neckline at 1.1672, but such text book targets are seldom hit.”
“We often look for potential catalysts and ECB’s meeting next week is a major risk event for the euro. Progress on US tax reforms and who could be nominated by President Trump to lead the Fed will also set the tone for EUR/USD.”
“It is important to emphasise that even if such bearish scenario unfolds, it should be interpreted as a short-term correction rather than a major shift in market sentiment, which will be mainly influenced by economic fundamentals, monetary policy and politics.”
“To void this bearish technical outlook EUR/USD would have to rally well above the October high at 1.1880.”
The greenback keeps the solid pace vs. the Japanese safe haven at the end of the week, with USD/JPY now sidelined around 113.30.
USD/JPY gains capped in the mid-113.00s
After printing fresh 3-month tops around 113.50, the pair sparked a correction to the 113.10 area, where decent support appeared so far.
Yields of the key US 10-year reference are flirting with tops in the 2.38% area, or fresh 2-week tops, and are also sustaining the bull run in spot. By the same token, the US Dollar Index is also testing 2-day highs in the 93.55/60 band, extending the breakout of the 93.00 handle on a more sustainable fashion.
USD remains supported since early Asian trading after the US Senate approved the Republicans-supported budget, boosting the optimism over the possibility that the Trump’s tax reform proposal could finally see the light by year-end.
In the US data space, September’s existing home sales are due later.
USD/JPY levels to consider
As of writing the pair is gaining 0.76% at 113.39 and a break above 113.47 (high Oct.20) would open the door to 114.39 (high May 11) and finally 114.51 (high Jul.11). On the other hand, the immediate support is located at 112.50 (10-day sma) seconded by 111.75 (200-day sma) and then 111.65 (low Oct.16).
After consolidating its daily losses near mid-0.78s during the European session, the AUD/USD pair turned south once again and lost nearly 20 pips in the last 30 minutes. As of writing, the pair was trading at 0.7835, losing 0.56% on the day.
A broad-based greenback strength seems to be the main catalyst behind today's fall seen in the pair. The USD's positive reaction to the US Senate's approval of the 2018 fiscal year budget, which will open the door to the legalization of the proposed tax cuts whether or not Democrats support it, lifted the US Dollar Index to 93.45. Although the index corrected this upsurge by easing below the 93.30 mark, it reversed course when American traders hit their desks. At the moment, the index is at 93.40, up 0.43% on the day.
At the top of the hour, the National Association of Realtors in the U.S. will release the existing home sales data for September, which is expected to contract by 1%. However, the data is unlikely to trigger any significant reactions from the markets.
The RSI indicator on the daily graph dropped below the 50 mark on Friday, suggesting that sellers are taking control of the price action. The first target on the downside could come at 0.7820 (Oct. 18 low) followed by 0.7770 (Oct. 11 low) and 0.7700 (psychological level). On the flip side, resistances are located at 0.7870 (100-DMA), 0.7915 (50-DMA) and 0.8000 (psychological level).
The relentless growth of data makes it increasingly important to identify what really matters for markets and after diving into the data it seems that cross-asset volatility is near all-time lows and correlations have fallen sharply, helping to support risk assets, according to analysts at HSBC.
“A life raft for the data ocean
Data is becoming an increasingly important part of the investment process. But the deluge of data flooding the market can be daunting. It is easy to feel like there is too much information to analyse; like one is drowning in data.”
“Benign market backdrop
“Deep dive in the data
Our performance summary shows that EM equities have been the top performer for five out of nine months so far this year, while commodities continue to struggle.”
In the coming week, ECB meet and escalating Catalonian crisis are going to be the major market moving events, according to analysts at ANZ.
“The Catalonian story continues, with Spain’s PM apparently starting procedures to invoke Article 155. However, uncertainty is already in the price; and, barring an escalation in violence, we expect markets to remain unmoved. The key risk for the euro next week is the ECB meeting and its announcement on ‘QExit’. While we expect the ECB to go for a ‘slow for longer’ scenario, with EUR30bn of monthly purchases for nine months starting in January 2018, the governing council may opt for cautious wording, with some downside risks for the euro.”
Spain’s central government is likely to suspend the Catalan government in the coming weeks as Puigdemont has not responded to the request of the central government to backtrack on succession moves, explains Maartje Wijffelaars, Senior economist at Rabobank.
“The Spanish government has announced that on Saturday 21 October it will decide upon the measures it will take in line with article 155, to restore legality in Catalonia. Measures could include suspending the entire Catalan government and starting to control the region’s administration from Madrid. The Catalan president had until 10am 19 October to announce that he would discard the referendum outcome. Instead, Puigdemont wrote to Rajoy that the Catalan parliament would vote to declare independence and proceed with its path toward succession if Madrid would not open dialogue and/ or trigger article 155.”
“Article 155, and then what
“The economic cost of the independence drift
“Possible longer-term impact
The Canadian Dollar is trading in session lows vs. its American neighbour on Friday, lifting USD/CAD to fresh tops in the 1.2560 region.
USD/CAD bid on data
The pair met extra upside pressure after Canadian inflation figures showed headline consumer process rising at an annualized 1.6% and 0.2% on a monthly basis, missing estimates.
Further data saw core prices gauged by the BoC rising 0.8% over the last twelve months and 0.2% inter-month.
Still in Canada, headline retail sales missed forecasts today, contracting at a monthly 0.3% during August, while sales excluding the Autos sector dropped 0.7% MoM, both prints coming in below expectations.
In the meantime, the pair rose to fresh 3-day tops in the wake of the data, also bolstered by the generalized bid tone surrounding the buck.
USD/CAD significant levels
As of writing the pair is up 0.59% at 1.2559 facing the next up barrier at 1.2592 (high Oct.17) followed by 1.2599 (high Oct.6) and finally 1.2664 (high Aug.31). On the other hand, a breach of 1.2460 (55-day sma) would aim for 1.2431 (low Oct.12) and then 1.2253 (low Sep.22).
"After increasing 0.4% in July, retail sales declined 0.3% in August to $48.9 billion," the Statistics Canada reported on Friday.
"The Consumer Price Index (CPI) rose 1.6% on a year-over-year basis in September, following a 1.4% gain in August," the Statistics Canada announced on Friday.
BOE Carney’s less-hawkish testimony and hiccups in the Brexit talks weighed on GBP this week and these factors are likely to remain important for markets, with the BOE due to meet on 2 Nov, according to Imre Speizer, Research Analyst at Westpac.
“Recent data has been firmer than expected, our data pulse model showing short term economic momentum running above average.”
“That has kept GBP/USD confined to a 1.30-1.33 range this month, and it’s hard to see that changing during the week ahead.”
“Brexit uncertainty and the erosion of the govt’s financial margin for manoeuvre into the autumn budget are likely to keep GBP capped.”
The 19th National Congress of the Communist Party of China (NPCPC) convened this week in Beijing and will conclude on 24 October and President Xi Jinping’s remarks at the opening session summarized the achievements of the past five years and, more importantly, set out the blueprint for the Party and the country for the future, explains the research team at Nomura.
“Our main takeaways from President’s Xi’s remarks:
“The messages conveyed in his opening remarks were consistent with President Xi’s previous views.”
“We believe the president has further consolidated his power in the Party and will use his second term in office to engage in dealing with the structural imbalances facing China in order to achieve the first centenary goal of building a “moderately prosperous society” in all respects by 2021.”
“We continue to expect growth to slow in the coming years, as the focus shifts from the pace of growth to the quality of growth, underpinned by continued structural reforms.”
Catalonia rumbles on in the background, with Spanish equities sharply underperforming the Eurozone benchmark since the early Sep announcement of the referendum, notes Sean Callow, Research Analyst at Westpac. But the common assumption seems to be that there will be no actual independence and thus no strong case to sell the euro, he further adds.
“There of course are other reasons to sell the euro. As noted on p2, yield spreads are moving significantly against EUR/USD, with ECB balance sheet expansion to continue deep into 2018.”
“The euro does enjoy a strong current account position, but with risk appetite elevated, portfolio outflows from the Eurozone should be substantial.”
“Yield differentials alone suggest EUR/USD could test the 100dma around 1.1650, assuming that the ECB on Thu confirms QE will continue to at least Sep 2018.”
According to Interfax, a Russian news agency, an official for the North Korea's foreign ministry said that all attempts to strangle the country via UN sanctions would be taken as attempts to 'declare war.'
Analysts at TD are looking for a 0.3% m/m increase in the Canada’s September CPI, lifting headline inflation to 1.7% vs 1.4% in August.
“Energy prices should be a net boost on higher gasoline prices, while food prices are at risk of downward pressures in light of the rapid appreciation seen in CAD. Other sources of downside include apparel – sensitive to currency fluctuations – along with telephone services, the latter of which has plunged in the prior two months. On the upside, we expect to see continued strength in shelter prices from lagged effects of increases in the new housing price index. The fundamental story remains sound with labour market slack dissipating and wage pressures picking up, allowing core inflation measures to stabilize or firm further in this report. The Bank's three measures averaged a 1.53% y/y pace in August; a move higher toward 2% would strengthen confidence that the output gap is approaching its closure, which we estimate will still occur by yearend.”
“Retail Sales: Retail sales are forecast to rise by 0.5% m/m in August, led by another increase in motor vehicle spending. This would leave ex-auto sales up 0.4% on the month, with gasoline station receipts expected to make a positive contribution due to Hurricane Harvey's impact on prices. August saw the unemployment rate reach a post-crisis low while consumer confidence rose to record highs, both of which should support increased consumer spending. Core retail sales will also benefit from higher wage growth, which has accelerated from early-2017 lows, though unseasonably cool weather may have a negative impact. Due to rising consumer prices, we look for real retail sales to underperform the nominal print with a more modest increase, consistent with a moderation in household spending growth from Q2.”
Spanish Prime Minister Mariano Rajoy said that the measures to impose a direct rule on Catalonia would be announced tomorrow, as reported by LiveSquawk. Earlier today, El Confidencial, a Spanish digital-newspaper, claimed that the Spanish government was planning to replace the Catalan leader Carles Puigdemont and call for an election in the region in three months.
Spanish government to call election in Catalonia in late Jan/early Feb - El Confidencial
Strategist at Danske Bank Vladimir Miklashevsky noted the Russian currency stays supported in the short term.
“Given the crude price rise, and the RUB’s detaching, we are rolling our RUB levels”.
“High carry and growing demand for Russia’s local debt provide further support for the RUB in the short term”.
“We expect RUB and oil price divergence to prevail on a Brent range of USD52-60/bl”.
Crossing the wires (via LiveSquawk) at the EU summit, European Commission President Jean-Claude Juncker said that he hated the no-deal scenario on Brexit and added that he didn't know what that meant. Juncker further noted that none of the members of the UK delegation explained what no-deal meant and claimed that Theresa May has all the strength she needs to convince the UK public on the Brexit deal.
European Council President Donald Tusk recently crossed the news wires, providing the key headlines, via LiveSquawk, found below:
The USD/CHF pair recorded a 90-pip rise in the early Asian session and renewed its highest level since since mid-May at 0.9850 before going into a consolidation phase. The pair, which spent the last few hours moving sideways within a tight 25-pip range, is now trading at 0.9820, adding 0.6% on the day.
In a key development on Thursday night, the Republican-controlled US Senate approved the budget proposal for the fiscal year 2018, which would cause the federal deficit potentially rise to $1.5 trillion, but would allow the Trump administration to legalize proposed tax cuts without the Democrats' approval. Commenting on the Republicans' success, "The Budget passed late last night, 51 to 49. We got zero Democrat votes with only Rand Paul (he will vote for Tax Cuts) voting against. This now allows for the passage of large-scale Tax Cuts (and Reform), which will be the biggest in the history of our country!" US President Donald Trump tweeted.
The US Dollar Index surged to a 2-day high at 93.45 but struggled to extend its upside amid a lack of fresh catalysts on Friday. At the moment, the index is at 93.30, up 0.3% on the day.
In the meantime, as a traditional safe-haven, the CHF is having a difficult time finding demand as European stocks recover from yesterday's deep fall. As of writing, both the German DAX and the UK FTSE are up 0.3% on the day. A positive opening by major equity indexes in the U.S. could boost the pair in the second half of the day.
The RSI indicator on the daily graph gained traction above the 50 mark on Friday, signaling towards the continuation of the bullish move. On the upside, the immediate hurdle aligns at 0.9850 (daily high) ahead of 0.9900 (psychological level) and 0.9960 (May 19 high). On the downside, support could be seen at 0.9800 (psychological level), 0.9740 (Oct. 19 low) and 0.9660 (100-DMA).
Bullion is reverting yesterday’s up move and is now trading on the defensive around the $1,285 area.
Gold softer on USD-buying
The ounce troy of the precious metal is navigating the lower bound of the weekly range closer to the $1,280 handle, all amidst a pick up in the demand for the greenback.
In fact, the USD has resumed the upside in response to rising optimism over the likeliness of the Trump’s tax reform, particularly after the Senate approved late on Thursday the Republicans-backed budget.
The US Dollar Index, in the meantime, also stays supported by the likely announcement of higher rates by the Federal Reserve at the December 13 meeting. Currently, and according to CME Group’s FedWatch tool, the probability of such event is above 90%, based on Fed Funds futures prices.
Gold key levels
As of writing Gold is losing 0.39% at $1,284.92 and a breakdown of $1,278.60 (low Oct.18) would expose $1,262.80 (low Oct.6) and finally $1,260.15 (200-day sma). On the upside, the initial hurdle is located at $1,293.53 (high Oct.19) seconded by $1,301.34 (55-day sma) and then $1,308.40 (high Oct.16).
German Chancellor Angela Merkel is crossing the news wires, with key quotes, via LiveSquawk, found below:
Jane Foley, Senior FX Strategist at Rabobank, notes that latest opinion polls from Japan are indicating that PM Abe is set for a resounding win at the weekend election and is not likely to have a significant impact on the direction of JPY.
“A Nikkei Inc. poll conducted between Tuesday and Thursday this week suggests that Abe’s ruling LDP Party, along with its junior coalition party Komeito, could capture 63.9% of the Lower House compared with 68.2% when the election was announced. While this would be a little less that a super two-thirds majority, it would still strongly endorse Abe’s authority and set him on course for potentially becoming Japan’s longer serving post war prime minister.”
“For investors, a continuation of that status quo removes the potential of increased uncertainty on a variety of policies such as the future of nuclear fuel, Bank of Japan reform and the outlook regarding the expected sales tax hike in 2019. Shortly after Abe announced the snap election, the creation of the Party of Hope by the popular Tokyo Mayor Koike, had unleashed talk of a populist shock in national politics. Despite triggering the implosion of the DP opposition party as its right wing merged with the Party of Hope, Koike has not been able to draw voters in the same way as she did in her landslide victory as Toyko mayor.”
“Part of Abe’s success in winning back popularity after a sharp fall in his ratings has been the perception that Japan needs a strong and seasoned leader to cope with the crisis related to N. Korea’s nuclear programme. Abe has reportedly fashioned himself as a statesman with close links with President Trump.”
“Another factor supporting Abe has been economic success. Japanese GDP has expanded for six consecutive quarters. The recent publication of the BoJ’s Quarterly Tankan Report brought the highest reading for the manufacturing diffusion index in a decade. The better performance of the economy has brought more focus on Japan’s fiscal policy and specificity its large debt. Abe has confirmed another hike in the sales tax for 2019 “unless something happens on the scale of the Lehman shock”, even though his opponents say a hike will again have a significant negative impact on consumption.”
“Despite its good economic performance, the economy remains plagued by slack wage inflation and a vulnerable consumer. Despite an unemployment rate of just 2.8% and a jobs-to-applicants ratio at an incredible 1.52, real cash earnings rose just 0.1% y/y in August. The reluctance of companies to share profits with workers has been linked with fear that the declining population will lead to a drying up of demand. Even though this argument can be countered with the logic that slack wage inflation will itself result in weak demand, it seems unlikely that conditions in Japan will alter sufficiently to allow a spike in inflation in the near-term. This outlook supports a continuation of easy policy from the BoJ.”
“Counter to the less dovish trends emerging for several other major central banks, the BoJ is showing no signs of backing away from its huge QQE programme. The implication is that the carry trade should lift USD/JPY in the coming months. That said, the JPY’s function as a safe haven has provided a counter balance on USD/JPY through much of this year.”
“We don’t expect an Abe election victory to have a significant impact on the JPY. On the assumption that general levels of risk appetite remain well supported we look for USD/JPY to maintain a slight upward bias. However, any re-emergence of geopolitical tension could alter this outlook. We has revised up our forecasts for USD/JPY slightly and look for a move to 1.15 during 2018.”
According to Richard Franulovich, Research Analyst at Westpac, there’s next to no chance of a BoC hike next week.
“For one officials have gone out of their way to stress a renewed focus on “financial conditions”, which have tightened considerably in recent months and some key data points such as the BoC’s business survey have cooled.”
“Beyond that +50bp in BoC rate hikes by Sep-2018 is priced in, entirely reasonable given PM Trudeau’s 2016 fiscal stimulus is still flowing through the economy, US growth prospects are firming amid very easy financial conditions while oil prices are holding near multi-month highs.”
“USD/CAD should wash about in a 1.231.26 range into year’s end before potentially resuming its downtrend as US tax cut fever hits political snags and the BoC resumes rate hikes.”
There are a number of notable developments in the October 2017 US Treasury FX report, including an increased focus on India’s FX USD buying intervention and its bilateral goods trade surplus with the US, explains the research team at Nomura.
“Taiwan was removed from the monitoring list, but Korea, Germany, China, Japan and Switzerland remain on it. Overall, the US Treasury continued to emphasise the need for more market-determined exchange rates and has proposals for those countries on its monitoring list.”
“Within Asia FX, criticism of China was relatively muted, except for the lack of progress on narrowing the bilateral trade surplus. We believe the step-up in criticism of India raises the risk of the Reserve Bank of India (RBI) engaging in less FX USD buying in future, especially given its current level of ample FX reserves. On Korea, the US Treasury has noted the lack of Bank of Korea (BOK) USD buying intervention in the past 12 months, but KRW is still viewed as undervalued. On Taiwan, the removal from the monitoring list may give the Central Bank of China (CBC) more flexibility to net-buy USD ahead, but we believe it will remain watchful not to break FX intervention criteria and be placed back on the list.”
Financial markets seem complacent that Abe will remain prime minister after the general election on Sunday, and there is hardly any election risk premium priced in the FX option market, explains the research team at Danske Bank. Hence, while USD/JPY could bounce higher after the election if Abe secures a two-thirds majority, market pricing indicates that a possible relief rally would be shallow and short-lived, they further add.
“But… USD/JPY supported by Fed-BoJ divergence and global business cycle
The background of a likely glacial wind down to the ECB’s asset purchase program along with continued repricing of Fed expectations amid relatively hawkish signaling of late (e.g. Yellen: “my best guess is that these soft (inflation) readings will not persist”) should sustain USD uptrend near term, according to Richard Franulovich, Research Analyst at Westpac.
“Key uncertainties near term include Trump choice for Fed Chair: Powell and Yellen likely to see a mild pullback in the USD and yields while Taylor or Warsh should see US yields and the USD extend recent gains.”
“Accommodative financial conditions point to yet more upside surprises in coming months, adding to the USD’s tailwinds, but there’s also a likely major setback at some point when it becomes clear that political, procedural and fiscal obstacles will guide Congress toward much smaller tax cuts.”
Allan von Mehren, Chief Analyst at Danske Bank, assessed the prospects of the Chinese currency in the next months.
“Two opposing forces affect USD/CNY going forward. On the one hand, we expect a Chinese slowdown in combination with continued Fed hikes. This would put upward pressure on USD/CNY. On the other hand, we expect the overall weakening trend of the USD to continue over the next year. This tends to put downward pressure on USD/CNY – as seen this year. We expect the two forces to broadly even out, although we look for a slight increase in USD/CNY to 6.75 in 12M”.
“Against the EUR, we continue to look for weakening to 8.38 on 12M from 7.79 today and continue to recommend EURbased corporates hedge CNY receivables”.
“We expect the CNY-CNH spread to continue to trade close to zero but with temporary deviations from time to time”.
The markets expect September CPI to accelerate in Canada, but analysts at BNP Paribas think the risks are tilted to the upside for USDCAD in the near term as even though the CAD positioning has been cut ahead of the 26 October BoC meeting, but remains net long.
“Canadian September CPI and August retail sales will be released on Friday. The markets expect inflation to have accelerated to 1.7% y/y (versus 1.4% y/y in August. Our short-term fair value model STEER™ has taken profit on its short USDCAD signal for 0.85% gain and the pair is now trading in line with the model’s estimate of its fair value. USDCAD STEER has started to rise as US yields have risen and we think this should continue. We target USDCAD rising to 1.27 over the next month.”
“Our BNP Paribas FX Positioning Analysis suggests FX investors have unwound some of their long CAD positions ahead of next week’s Bank of Canada (BoC) meeting (26 October). USDCAD has already started to rise from its September lows (1.21) but the market remains net long the CAD (at +17 on a -/+50 scale). While expect USDCAD to rise into year-end, in the medium term we think USDCAD should remain broadly stable and target 1.25 in Q1 2018. The Fed and BoC are priced for broadly equivalent pricing over the next 18 months, which is in line with our view.”
Should Abe’s coalition stumble at the finish line in the upcoming elections, Japan is not likely to change political course dramatically, feels the analysis team at Danske Bank.
“Party of Hope is a conservative party close to the LDP in many areas. One key difference relates to the planned sales tax hike in October 2019, though. Abe needs it to fund social security spending and at some point pay down Japan’s enormous debts. Koike wants to freeze it to ensure economic recovery and impose a tax on companies' internal reserves instead. Also, the CDP does not want to impose the hike all at once.”
“We expect the Japanese economy to stay on track, supported by the global economic recovery. The large Japanese manufacturing sector recently showed the most optimistic business outlook in a decade and the economy in general seems in good shape. That said, it is a risk that Abe will focus too much on revising the constitution and refrain from working hard on the third pillar of Abenomics (structural reform). No matter what, it remains a challenge for Abe to keep the economic upturn going for another two years so Japan does not go into recession when the sales tax hike hits. It might be wiser to make the increase gradually in order to avoid a situation like 2014, where private consumption surged due to exactly a sales tax hike. We saw some improvement in domestic demand earlier this year, but generally the economy is still very dependent on the global economic recovery and an ultra-accommodative economic policy still looks necessary.”
“In our main scenario, we expect the Bank of Japan (BoJ) to keeps its policy unchanged, maintaining the short-term policy interest rate at -0.1% and the 10Y Japanese government bond (JGB) yield at 0% over our 12M forecast horizon, assuming BoJ governor Haruhiko Koruda is reappointed when his term ends in April - this seems likely, as Abe can do this with a simple majority.”
After bottoming out in the 1.3100 neighbourhood earlier in the session, GBP/USD has now advanced to the area of daily highs in the boundaries of 1.3170.
GBP/USD up on Brexit headlines
Cable met fresh buyers near the 1.3100 handle after UK’s PM Theresa May advocated for a common effort between EU and UK officials in order to make any progress in the Brexit negotiations.
In addition, the sharp drop in EUR/GBP below the 0.9000 key support is also another source of buying pressure around the pair.
In the data space, UK’s public sector net borrowing came in at £5.33 billion for the month of September, bettering consensus albeit higher than August’s £4.14 billion.
GBP/USD levels to consider
As of writing the pair is gaining 0.07% at 1.3167 and a breakout of 1.3228 (high Oct.19) would open the door to 1.3289 (21-day sma) and finally 1.3338 (high Oct.16). On the other hand, the next support emerges at 1.3134 (low Oct.19) seconded by 1.3121 (low Oct.12) and then 1.3045 (100-day sma).
Japanese premier Shinzo Abe called on September 22 for snap lower house elections to be held on October 22 ‐ mainly on the back of recent improvements in Abe’s approval ratings after the low July levels, notes Björn Giesbergen, Research Analyst at Rabobank.
“Abe wants to redeem his improved cabinet approval ratings, making his Liberal Democratic Party ﴾LDP﴿ the biggest. This would give him better chances to maintain his position as prime minister beyond 2018. In July, approval ratings nosedived after he and his party were accused of two scandals which were seen as contributing to the huge LDP loss in the July 2nd metropolitan elections in Tokyo. Since then, approval ratings have been on an increasing path and the most recent ones even show that approval has exceeded non‐approval.”
“Despite these ratings, a disorganized and expected weak opposition would additionally benefit Abe’s LDP‐Komeito coalition.”
“The PM and his cabinet additionally benefit from the tailwind of six consecutive quarters of economic growth and historically low unemployment levels. Although Japan’s Q2 GDP growth rate was cut by 0.4ppt to 0.6% q/q –mainly resulting from business investments which had been much weaker than previously thought, it still was the highest quarterly growth rate of all the six quarters. Meanwhile, the unemployment rate stands at a 23‐year low of 2.8% and the jobs‐to‐applicants ratio at 1.52, its highest level since 1974 – both signalling ongoing tightness in the labour market. Abe may see this as a good opportunity to claim success of his economic policies.”
“Although we still expect Abe’s coalition to win the election by majority, the disbanding of Japan’s largest opposition party and the subsequent founding of Yuriko Koike’s new Party of Hope can turn the snap election from initial logic to a gamble.”
After inching higher to a fresh weekly top at 0.9022, the EUR/GBP pair reversed course in the European morning and eased below the 0.90 handle as the GBP gathered strength against its peers on British PM Theresa May's recent remarks. At the moment, the pair is trading at 0.8970, losing 0.4% on the day.
Delivering a UK national briefing at the EU council meeting, May said that she was ambitious and positive about the Brexit negotiations. More importantly, May further added that the EU didn't need to be concerned over the current budget plan, as the UK was ready to honor the commitments made to the EU. Later in the session, Later in the day, the President of the European Council and the President of the European Commission will be speaking at a joint press conference at 12 GMT following the Article 50 discussion at the EU summit.
In addition to the GBP strength, the shared currency is having a difficult time finding demand on Friday. In fact, the Euro Index is losing 0.23% at 94.60 at the moment. Amid a lack of fresh catalysts, markets' focus will remain on the headlines coming from the summit. In the meantime, the ongoing political drama in Spain continues to keep investors away from the euro.
"EUR/GBP suddenly shot higher and nears its early October high at .9034. If bettered, we will have to allow for the 61.8% Fibonacci retracement at .9093 to be reached,” wrote Axel Rudolph, Senior Analyst at Commerzbank, in a recent report.
“Support now comes in around the 38.2% Fibonacci retracement at .8961 and at the current October low at .8856. Directly below the support line at .8809 lies a major band of support which extends down from the .8747/43 July and September lows to the .8729 level. It contains the 200 day ma, 55 week ma, and the 2015-2017 uptrend," Rudolph further added.
Abe has probably breathed a sigh of relief, as recent polls have ticked in suggesting that the LDP will win a significant majority, points out the research team at Danske Bank.
“The newspaper Mainichi gives the LDP 292 seats in the 465-seat Lower House. Adding Komeito’s projected 31 seats gives the coalition close to 70% of the seats, slightly more than they held before the house was dissolved. Party of Hope and the CDP currently stand to win only 48 and 47 seats, respectively. If the polls remain unchanged, it would put Abe on track to be re-elected as chairman of the LDP in September 2018 and thus likely to become the longest-ever serving Japanese prime minister.”
“With as many as 43% of voters preferring not to see Abe stay as prime minister and an approval rating of only 37%, this outcome could appear somewhat puzzling, though. Lack of any clear alternative is part of the explanation. That said, the majority of voters have still not decided who to vote for, which means there is still uncertainty over the election outcome.”
Theresa May, British Prime Minister, continues to speak, delivering a UK national briefing at the EU council meeting.
UK PM May: full and final financial settlement will come as final Brexit agreement
UK PM May: it would be irresponsible not to look at every eventuality
UK PM May: I have been clear that I am optimistic about winning a good Brexit deal
UK PM May: we will be going line by line through those financial commitments
Theresa May, British Prime Minister, is delivering a UK national briefing at the EU council meeting.
UK May: Made clear to EU that they do not need to be concerned over the current budget plan, we will honour commitments made to EU
UK May: If we are going to take a step forward we must work together on Brexit
UK May: Agreed with EU northern Ireland needs specific solutions post-Brexit
UK May: I am ambitious and positive about the Brexit negotiations
Crude oil prices are extending the correction lower on Friday, now dragging the barrel of the American reference for the sweet light crude oil to daily lows in sub-$51.00 levels.
WTI weaker ahead of data
Prices for the West Texas Intermediate are down for the second session in a row, testing fresh multi-day lows in the $50.70 area after climbing as high as the $52.30 region earlier in the week.
Crude oil retreated on Thursday following comments from Chinese official noting that markets may be over-optimistic over the Chinese economic growth.
Earlier in the week, prices for the black gold remained underpinned by positive prospects of the rebalancing of the oil markets, according to comments by OPEC officials. In addition, another draw in US supplies reported by the DoE added to the (previous) upbeat momentum in prices.
Ahead in the session, driller Baker Hughes will publish its US oil rig count (prev. -5 to 743 US active oil rigs).
WTI significant levels
At the moment the barrel of WTI is losing 1.11% at $50.72 and a break below $50.15 (low Oct.12) would aim for $50.08 (38.2% Fibo of $45.58-$52.86) and then $49.36 (200-day sma). On the other hand, the next resistance aligns at $51.10 (21-day sma) followed by $52.86 (high Sep.28) and finally $53.76 (high Apr.12).
Theresa May, British Prime Minister, is delivering a UK national briefing at the EU council meeting.
Theresa May, over an informal dinner with European leaders on Thursday, admitted for the first time that the current Brexit negotiations have been difficult as she continues to strive for a deal that can satisfy the British public.
GBP under pressure, eyes on Brexit talks – Danske Bank
Chief Analyst at Danske Bank Jens Sorensen assessed the recent moves around the Sterling.
GBP/USD recovers above 1.31, eyes on EU summit
The GBP/USD pair came under a new selling pressure in the Asian session and plummeted to a fresh 10-day low at 1.3087 before staging a modest recovery. As of writing, the pair was trading at 1.3135, still losing 0.18% on the day.
Major Japanese local media (Kyodo, Nikkei, and Yomiuri) updated their election predictions and their latest forecasts point towards the ruling coalition (LDP/Komeito), which will likely secure around 300 seats, potentially achieving the super majority (310) again, notes Yujiro Goto, Research Analyst at Nomura.
“PM Abe stated that he would resign if the coalition loses the majority (233), but we think the risk remains very low.”
“Kyodo forecasts the LDP to gain 265-296 seats, which is slightly below its previous forecast (273-305). That said, its central case scenario shows the LDP can secure 281 seats, and with its junior coalition partner, Komeito, the ruling coalition is expected to secure the super majority. Nikkei’s forecast remains more conservative than other media, with a wider forecast range. However, the forecast still shows around 260 seats for the LDP and the collation is expected to gain nearly 300 seats. In contrast, the Party of Hope (PoH) is now expected to secure only around 50-55 seats, which is slightly lower than its seats before the dissolution of the lower house (57 seats). We have been judging the victory of the PoH as an unlikely tail risk scenario, and the possibility remains low.”
“The ruling coalition’s victory is likely the clear market consensus at the moment, and the election outcome over the weekend may not be a game changer for the JPY. JPY weakness on Monday is likely, but just a small relief rally in USD/JPY is expected now, as occurred after the previous snap elections.”
“Domestic policy focus should shift towards the appointment of the next BOJ governor. If the ruling coalition secures around or more than 300 seats, the likelihood of PM Abe securing his third term as the LDP leader (September 2018-2021) would rise significantly. The risk of hawkish shift around the BOJ leadership change should diminish, which trims key uncertainties on JPY trading. Even though the immediate FX market reaction is likely to be muted, we think the recent political development is supportive to yen-crosses. The diverging monetary policy stance of the ECB and BOJ should remain EUR/JPY positive.”
Shinzo Abe and his Liberal Democratic Party (LDP) are poised to remain the biggest party by far and continue in government after the general election to the Lower House on 22 October, according to analysts at Danske Bank.
“In Japan, the electoral system tends to favour the biggest party. In the 465-seat Japanese Lower House, 289 seats are elected in single constituent first-past-the-post elections while the remaining seats are elected with proportional representation. The main question is currently whether the LDP and its coalition partner Komeito can maintain their two-thirds super majority that they have held since the general election in 2012. Abe needs to form a two-thirds majority in order to realise his plans to revise Japan’s 70-year-old pacifist constitution, and thus validate the existence of the Japan Self-Defense Force. For this, he probably needs to collaborate with the new Party of Hope and not the Buddhist pacifist Komeito.”
“For a while, PM Abe might have regretted his 25 September call for a snap election, as Tokyo governor Yoriko Koike founded Kibō no Tō (Party of Hope) just hours before Abe declared an early election. Koike is a popular political figure in Japan and a former minister of defence in the first Abe cabinet. When the leader of the opposition Democratic Party (DP), Seiji Maehara, announced that the party had split just a few days later, and many of the representatives started to emerge as candidates for Party of Hope, a united opposition and a strong alternative to LDP rule was suddenly a possibility. However, not all DP candidates got along with Koike, which has split the opposition once again as the new Constitutional Democratic Party of Japan (CDP) rose from the ashes. Furthermore, Koike has decided not to run for parliament, which effectively leaves Party of Hope without a PM-candidate.”
Christin Tuxen, Chief Analyst at Danske Bank, sees the cross edging higher towards the 1.18 area in the medium term.
“While the ECB has entered ‘normalisation’ mode, the SNB has been keen to stay out of ‘exit’ discussions and used every opportunity to stress that it is in no hurry to quit negative rates and that intervention remains a policy tool”.
“Indeed, the SNB is keen to embrace the pricing of an eventual ECB exit from negative rates and QE and a continued uptick in EUR/CHF with it. As the SNB has confirmed it remains in the ‘no exit now’ camp, we deem the central bank will be more than happy to let EUR/CHF edge towards 1.20 as currency help on inflation remains much needed”.
“We have kept our forecast profile unchanged and thus continue to now see the cross at 1.15 in 1M, 1.15 in 3M, 1.18 in 6M, and 1.23 in 12M”.
In light of the recent price action, the European cross could now head towards the 0.9093 level, suggested Axel Rudolph, Senior Analyst at Commerzbank.
“EUR/GBP suddenly shot higher and nears its early October high at .9034. If bettered, we will have to allow for the 61.8% Fibonacci retracement at .9093 to be reached”.
“Support now comes in around the 38.2% Fibonacci retracement at .8961 and at the current October low at .8856. Directly below the support line at .8809 lies a major band of support which extends down from the .8747/43 July and September lows to the .8729 level. It contains the 200 day ma, 55 week ma, and the 2015-2017 uptrend”.
“Below .8729 would target the .8530/78.6% retracement of the move seen this year”.
“Above the mid-August high at .9145 would retarget the .9308 August high”.
The selling mood around the shared currency stays unchanged during the European morning, with EUR/USD coming down to test the 1.1790 region just to bounce afterwards to the current 1.1800 neighbourhood.
EUR/USD weaker on USD-buying, Catalonia jitters
The pair remains under pressure at the end of the week, hovering over the 1.1800 area in response to a strong pick up in the sentiment around the buck coupled with rising concerns and uncertainty around Catalonia.
In addition, ECB’s board member E.Nowotny said earlier that the central bank is closely watching the effects of the exchange rate on inflation, while he advocated for a less degree of monetary stimulus in the months to come and noted that the single currency has become some sort of a safe haven currency.
In the data space, EMU’s current account rose to €33.3 billion during August, surpassing estimates and up from July’s €31.5 billion.
Across the pond, September’s existing home sales will be the only release of note.
EUR/USD levels to watch
At the moment, the pair is losing 0.43% at 1.1801 facing the next support at 1.1730 (low Oct.18) seconded by 1.1686 (low Oct.6) and finally 1.1662 (low Aug.17). On the upside, a break above 1.1858 (high Oct.20) would target 1.1882 (high Oct.12) en route to 1.1911 (high Aug.2).
ECB governing council member and Austrian National Bank governor Ewald Nowotny recently crossed the wires, via LiveSquawk, saying that they were watching the effect of euro on inflation and further added that the shared currency had become something of a safe-saven like the CHF.
Japanese local media, such as Asahi and Nikkei, report that the ruling coalition (LDP and Komeito) has been gaining momentum and they conducted large sample opinion polls, and based on the poll results and their own analysis they have released an initial prediction, notes Yujiro Goto, Research Analyst at Nomura.
“Asahi and Nikkei both predict that the LDP will gain more than 200 of the 289 single constituency seats. Asahi says the party should gain about 68 proportional representation seats, while Nikkei reports the party should win 55 or more proportional representation seats (total: 176 seats). In total, the party should easily gain the singleparty majority (233), according to the two forecasts. LDP’s junior coalition partner, the Komeito, may gain as many as 34 seats and in total, the coalition should secure around 300 seats, according to Asahi and Nikkei. Yomiuri also reported that the ruling coalition may win 300 seats. Nikkei suggested the possibility of an even stronger outcome for the ruling coalition to achieve the super majority (310) again.”
“A new party created by Tokyo Governor Koike, the Party of Hope (PoH), is losing momentum, according to Nikkei. The party is expected to increase its seats from the latest 57 seats, but the upside should be limited for the party. Instead of the PoH, the Constitutional Democratic Party of Japan (CDPJ), a party created by the left-wing lawmakers of the DP, is expected to increase its seats from 15 to 30 or more.”
“Before the dissolution of the lower house, the LDP had about 285-290 seats. Thus, the party looks likely to lose some seats, according to their prediction. That said, Prime Minister Abe stated that he would step down when the coalition loses the majority, and analysis by local media suggests that the risk of this is now very slim. The LDP looks unlikely to lose its single-party majority status. We initially expected the LDP to easily gain a single-party majority. Two new parties were created quickly, but opposition parties’ actions have failed to change the political picture meaningfully. Nearly 300 seats by the ruling coalition is likely a better outcome than the market consensus.”
“The early resignation of PM Abe has been a downside tail risk for yen crosses, as the BOJ leadership nomination is awaiting us. Local media will update their forecasts next week and the politics are always uncertain. Nonetheless, we judge the tail risk is lower now. Stability in Japanese politics should encourage foreign investment by Japanese investors because of gradually improving risk sentiment, supporting yen crosses.”
"Public sector net borrowing (excluding public sector banks) decreased by £0.7 billion to £5.9 billion in September 2017, compared with September 2016; this is the lowest September net borrowing since 2007," the Office for National Statistics of the UK announced on Friday.
In a recent article, El Confidencial, a Spanish digital-newspaper, claimed that the Spanish government came to terms with the opposition PSOE to implement the Article 155 of the Constitution.
The process, which will start by replacing the Catalan leader Carles Puigdemont and replacing him with an appointed 'minister for Catalonia', is set to kick off in late October according to the newspaper.
"The scheme of measures will be approved this Saturday by the Council of Ministers at an extraordinary meeting. Sources familiar with the talks said that the "agreement" is that the elections would take place in just three months, " between mid-January and early February " of 2018," El Confidencial wrote.
Chief Analyst at Danske Bank Christin Tuxen believes that occasional dips in spot are expected to be short-lived and shallow.
“We maintain that any dips in EUR/USD should be shallow and short-lived as fundamentals still provide support and as notably a reversal in debt flows is a key source of upside risks for the cross”.
“We see EUR/USD around current levels on a 1-3M horizon but stress that risks are on the downside in the very near term with a key risk being the appointment of a more hawkish Fed Chair”.
“That said, we do not think EUR/USD has the potential to drop much further with 1.1660 (17 August low) a key support level. We continue to stress that a 2018 rebound towards 1.25 is on the cards and that upside risks dominate the longer-term outlook. We have lowered our 1M and 3M forecasts to 1.17 (1.19) and 1.18 (1.19), respectively, but keep our forecast for 6M unchanged at 1.22 and for 12M at 1.25”.
According to Senior Analyst at Commerzbank Axel Rudolph, the pair’s up move could struggle around the 0.9850/80 band.
“USD/CHF still pushes hard into the .9808/40 resistance area above which the .9850/85 zone can be spotted. The former is made up of the March low, late May high, current October high and the 200 day ma. The latter contains the January and April lows as well as the 50% retracement. This area represents tough resistance and we are alert to the idea that it will again hold the topside. A close above .9885 would really ignite upside interest and introduce scope to the .9952/56 May and July 2016 highs”.
“Only failure at the 55 day ma at .9670 would target the .9553 June 30 low and potentially the .9421 September low”.
“Failure at .9422 (September low) would open the way for the August 2015 low at .9260 to be reached”.
The greenback is appreciating further vs. its Canadian counterpart at the end of the week, lifting USD/CAD to fresh tops in the vicinity of the 1.2520 area.
USD/CAD now looks to data
The pair remains sidelined in recent familiar ranges, with gains clearly capped by recent tops in levels just shy of 1.2600 the figure (October 17) and the lower end located around the low-1.2400s.
Price action around spot has been mostly ruled by US-CA yield spread differentials, particularly in the shorter end of the curve, while crude oil dynamics have been relegated as a secondary role for the time being.
In addition, NAFTA headlines were the ‘new kid on the block’ and promise to weigh on CAD in the upcoming months, always under the permanent threats by President Trump to terminate it. In this regard, the fifth round of negotiations are expected to kick in in Mexico City in early November.
Looking ahead, Canadian inflation figures tracked by the CPI will be the salient point later today along with the publication of August’s retail sales. In the US docket, existing home sales are next on tap.
USD/CAD significant levels
As of writing the pair is up 0.24% at 1.2515 facing the next up barrier at 1.2592 (high Oct.17) followed by 1.2599 (high Oct.6) and finally 1.2664 (high Aug.31). On the other hand, a breach of 1.2460 (55-day sma) would aim for 1.2431 (low Oct.12) and then 1.2253 (low Sep.22).
The precious metal struggled to show resilience against the buck on Friday, forcing the XAU/USD pair to give back yesterday's gains. As of writing, the pair was trading at $1281, losing $8.5, or 0.66%, on the day.
Yesterday, Gold was able to find demand as a traditional safe-haven and gather strength amid a broad-based risk-off mood. After recording substantial losses on Thursday, major European equity indexes started the day firmer on Friday as the concerns over the political turmoil in Spain faded away. The Spanish government announced that it would meet on Saturday to discuss the triggering of Article 155 of the Spanish Constitution, which would block Catalonia's autonomy. At the moment, the Europe Stoxx 600 is up 0.3% while the German DAX and the UK's FTSE are gaining 0.45% and 0.25% respectively.
On the other hand, the US Dollar Index, which tested the 93 handle during the NA session on Thursday, started the day on a positive note on Friday after the US Senate approved a budget plan for the 2018 fiscal year, that would allow the Trump administration legislate the tax-reform without the support of the Democrats. “Great news on the 2018 budget @SenateMajLdr McConnell - first step toward delivering MASSIVE tax cuts for the American people!,” US President Donald Trump tweeted earlier today. At the moment, the DXY is at 93.40, gaining 0.45% on the day.
Later in the day, the risk perception of investors and the mood surrounding the greenback could continue to drive the pair's price action.
With today's drop, the CCI indicator on the daily graph turned south below the 0 mark and is moving closer to the -100 handle, suggesting that the bearish momentum is gaining strength. On the downside, the pair could encounter the first technical support at $1276 (Oct. 19 low) ahead of $1265 (200-DMA) and $1260 (Oct. 6 low). On the upside, resistances align at $1290 (daily high), $1300 (psychological level) and $1306 (Oct. 16 high).
Chief Analyst at Danske Bank Jens Sorensen assessed the recent moves around the Sterling.
“GBP underperformed in the G4 space and EUR/GBP broke above 0.90 yesterday as risk appetite and weak UK retail sales weighed on the currency”.
“Today, EU leaders will discuss Brexit negotiations at the EU Summit and are likely to conclude that more negotiation rounds are needed before the talks can proceed to the second phase (trade agreements)”.
“GBP has been quite sensitive to negative Brexit news recently, which may be explained by speculative accounts’ net long GBP positioning. From a risk/reward perspective, we would consider selling EUR/GBP if the cross breaks above last week’s high at 0.90331 today”.
In view of Axel Rudolph, Senior Analyst at Commerzbank, the pair could reach the 1.1880/1.1910 area in the near term.
“EUR/USD’s recent decline has taken it to this week’s low at 1.1730 before the cross began to rise again. Today it flirts with the 55 day ma at 1.1841 and over the coming days the 1.1880/1.1910 early August and current October highs may be reached. Around this area the currency pair should fail again. The 1.1910 level guards the 1.2092 September high”.
“Support below the recent low at 1.1730 can be seen at key support at 1.1669/62. Failure at these August and current October lows would push the late July low at 1.1613 to the fore and also confirm a top formation. Such a move would trigger a sell-off to the mid-June high at 1.1296 and the more important 1.1110 end of May low”.
“Above 1.2092 would target the 50% retracement from the move down from the 2014 high at 1.2168 and the 1.2383 200 month ma, but if seen, that is expected to hold”.
This Sunday the 22nd, Japanese voters will elect a new lower house after premier Abe called for snap elections a month ago, points out the research team at Rabobank.
“Abe himself called for the early elections, which take place one year earlier than officially required, because he wants to get the public’s support for a new set of tax and social welfare policies. But unofficial readings clearly point to other causes, for example improved approval ratings since the low July levels, a recent cabinet reshuffle, a firm stance regarding North Korea and some economic tailwind.”
“Furthermore, the opposition initially was regarded as weak and disorganized. Immediately after the elections, this expectation turned out to be more of a gamble after the Democratic Party (the largest opposition party) disbanded to merge with the Party of Hope (PoH), a new party created by Tokyo Governor Koike (note that Koike defeated Abe’s LDP party in the July Tokyo metropolitan elections). However, polls keep showing signs of weakness on the opposition side in recent weeks.”
“A poll by Asahi newspaper even indicated that Koike’s new PoH is now ranked as the third party, after the newly formed Constitutional Democratic Party. A survey conducted by Kyodo News additionally showed that Abe’s LDP and its coalition partner Komeito are even poised to retain about 310 seats — exactly two-thirds of the 465-seat chamber (and thus a super-majority) – which is of significant importance given the potential ability to change the constitution. Therefore the remaining question seems not to be if Abe will win, but by how much.”
“Abe’s victory would imply a continuation of Abenomics, implying flexible fiscal spending, structural reforms and monetary easing, although the latter is more depending on Bank of Japan’s policy changes. But picking the new BoJ governor in early 2018 might be easier when in a stable position.”
The ECB’s policy meeting next Thursday is shaping up as considerably more interesting for markets than the FOMC meeting a few days later, according to Sean Callow, Research Analyst at Westpac.
“At the Sep Governing Council meeting, President Draghi said that “Probably the bulk of these decisions will be taken in October”, when asked about the pace of quantitative easing.”
“To recap, the ECB is buying bonds with what is effectively printed money at a monthly pace of €60bn, a program “intended to run until the end of December 2017, or beyond, if necessary.” As of end-Sep, such purchases totalled €2.1 trillion. Many months ago, Draghi said he didn’t think there would be an “abrupt” end to the program. So the debate has been not over whether QE will continue in 2018 but at what pace.”
“Newswire ECB “source” stories claim an internal debate around a considerable slowdown in the pace of QE, from €60bn to €25-40bn from Jan 2018, perhaps tapering along the way to a provisional Sep 2018 conclusion. A decision along these lines should be largely factored in but still could undermine the euro, as the ECB confirms that policy will remain very loose deep into next year. Moreover, interest rates will not be raised until “well past the horizon of our net asset purchases.”
“So we may not see any increase in Eurozone official interest rates until at least 2019. Meanwhile, Fed officials continue to sound upbeat on growth and inclined to raise interest rates somewhat more than is priced into money markets. As the chart shows, the yield premium on a 2 year Treasury note over its German counterpart has risen steeply in recent weeks, arguing for EUR/USD to fall further from the ECB’s sensitive 1.20 area than it has so far. 1.15-1.16 would be no surprise.”
“The US dollar also seems to be finding some support from gradual progress on tax reform, with Republican senators looking more cohesive for now. This adds to the case for AUD/USD to keep struggling in the 0.79-0.80 area near term.”
The New Zealand dollar has tumbled, which largely reflects a combination of heightened uncertainty surrounding the policy mix of the incoming government coupled with fears that New Zealand First leader Winston Peters will push for a change in monetary policy settings such that a weaker NZD becomes a focus of policy, explains Stephen Toplis, Head of Research at BNZ.
“We had cautioned ahead of the election that this was a likely reaction to a change in Government. However, we also cautioned that there was a real risk that any such reaction would get overdone. We may well be reaching that point with the NZD stretching further below our fair value model estimate of USD 0.73.”
“But fixed interest markets unfazed . . .
The official final election results confirmed the clear victory of Sebastian Kurz’ ÖVP and even though Austria is probably too small to influence the European debate, the elections could leave their marks on German coaltion talks, according to Inga Fechner, Economist at ING.
“According to the final results, the ÖVP came in as largest party with 31.5%, followed by its former coalition partner, the Social Democrats with 26.9%, and the FPÖ coming in with 26%. As the Greens did not make it into parliament, the national council consists of five parties. Now, with the final result on the table, coalition talks will start.”
“Today, Austria’s President Van der Bellen will officially assign the most powerful party with the formation of the government. While an ÖVP/FPÖ coalition is still the most likely outcome, it is not yet set in stone. The two parties have major similarities when it comes to domestic politics such as taxes or migration policy, yet there are divergences on EU matters. Although previous talks about leaving the EU have calmed down markedly, the FPÖ still flirts with the anti-EU faction “Europe of Nations and Freedom” (ENF). According to the party’s economic programme, a common currency is only of use if economies are similarly structured. EU or Eurozone exit, however, did not make it into the party’s platform. The ÖVP and Kurz propagate a pro-European stance, though with a clear nationalistic touch.”
“With a possible ÖVP/FPÖ coalition, yet another core Eurozone country would take a very hesitant and cautious stance towards further Eurozone integration. Instead, such a government would try to refocus on the EU’s economic core competencies such as the completion of the Single Market or combating tax evasion. Also, according to such a coaliton, the restriction of access to the labour market, the reduction of welfare entitlements or family allowances for foreigners should not be a matter of the EU. While the Western Balkan‘s ambitions for EU membership should be accelerated, negotiations with Turkey are to be discontinued and sanctions on Russia slowly reduced.”
“Having said that, coalition talks have only started, leaving all options open. Also, Austria itself is too small to impact the future of Eurozone and EU discussions substantially. But if the next government will stick to its rigid stance on migration, foreign policy and the pursuit of its own interests, there surely will be enough emulators. The Bavarian CSU for example, the sister party of Merkel’s CDU, already gets some tailwinds from Kurz’ campaign regarding its call for refugee ceiling. Also let’s not forget that the country holds the EU’s presidency in the second half of 2018, a window of opportunity to push forward Austria’s interests on migration policy. No matter what, the next Austrian government will be no bed of roses for the EU.”
CNY has been trading on the weak side but overall stability is maintained according to Frances Cheung, Research Analyst at Westpac.
“While some market observers have the impression that President Xi is not aggressive on “market reform”, we note that this “market reform” term years back was referring more to merchandise trade and investment, rather than capital markets/FX as we understand currently. We suggest that investors do not read too much into it.”
“CSRC Liu said China would continue with capital market opening. Prior to the NPC, PBoC Governor Zhou mentioned further FX reform, while PBoC Deputy Governor Yi during the NPC said that the current FX formation mechanism is very close to a market-driven mechanism hence two-way fluctuation is normal. Combining these comments, if there is any further FX reform, we believe it is more likely to be facilitated via relaxation on capital flows, and/or a lighter weight on the counter-cyclical adjustment factor in CNY fixing, while a wider trading band is not particularly meaningful given the daily volatility.”
Investors increased their open interest positions in GBP futures markets by more than 2K contracts on Thursday vs. Wednesday’s final 183,446 contracts, according to CME Group. On the other hand, volume decreased by the second consecutive day, this time by around 11.4K contracts.
GBP/USD still targets 1.30
Cable’s weekly decline has been in tandem with somewhat rising open interest, which lends extra support to the bearish context and adds to the perspective of a potential test of the psychological handle at 1.30 the figure.
Of note, however, is the diminishing trend in volume, which removes some tailwinds from the probable continuation of the leg lower.
As usual, GBP should stay under the microscope regarding headlines from the UK-EU talks as well as the uncertainty surrounding the UK’s political arena.
The GBP/USD came under a new selling pressure in the Asian session and plummeted to a fresh 10-day low at 1.3087 before staging a modest recovery. As of writing, the pair was trading at 1.3135, still losing 0.18% on the day.
After the US Senate approved a budget blueprint, which would open the door for the Trump administration to go on with the tax-reform even if Democrats didn't support it, boosted the greenback, lifting the US Dollar Index to 93.40 and weighed on the pair. However, ahead of the European session start, the DXY started to consolidate its recent upsurge and allowed the pair to retrace a portion of its losses. The index was last seen at 93.25, up 0.26% on the day.
In the meantime, speaking on the sidelines at the EU summit, European Commission President Jean-Claude Juncker said that he was assuming that they wouldn't end up with a no-deal on Brexit. Later in the day, EU leaders will be discussing Article 50, which will be followed by a joint press conference by the President of the European Council and the President of the European Commission at 12 GMT. An optimistic tone over the Brexit discussions could allow the GBP to gather strength against its peers.
The economic calendar will be relatively quiet on Friday, leaving the pair at the mercy of Brexit headlines and DXY movements.
The immediate support for the pair aligns at 1.3100 (100-DMA/psychological level) before 1.3030 (Oct. 6 low) and 1.3000 (psychological level). On the flip side, resistances could be seen at 1.3215 (50-DMA/20-DMA), 1.3300 (psychological level) and 1.3340 (Oct. 12 high). The RSI indicator on the daily graph for the pair stays below the 30 mark, suggesting that sellers are still in control.
In light of CME Group’s flash data for EUR futures markets, open interest rose by almost 3.2K contracts on Thursday vs. Wednesday’s 446,222 contracts. In the same tone, volume rose by more than 23.5K contracts.
EUR/USD upside could re-test 1.1880
Yesterday’s ups tick in EUR/USD was accompanied by rising both volume and open interest, a bullish sign that fresh money was flowing into the market. The constructive outlook in the near term opens the door for a potential test of the key 1.1880 area, October’s tops.
Risks to this view come from the US political scenario following the recent approval of the budget by the Senate, while the appointment of a hawk Chairman at the Federal Reserve should also put spot under extra downside pressure.
Today's FX option expiries for the NY cut at 10:00ET, via DTCC, can be found below.
- EUR/USD: $1.1600(E475mn), $1.1650(E456mn), $1.1800(E1.48bn), $1.1850-55(E1.38n)
- USD/JPY: Y111.10($911mn), Y111.50-53($630mn), Y112.00($1.71bn), Y112.50($973mn), Y112.60-63($536mn), Y113.00($477mn), Y113.50($421mn), Y114.00($1.45bn)
- GBP/USD: $1.3225(Gbp668mn)
- AUD/USD: $0.7715(A$648mn), $0.7810(A$561mn), $0.7900(A$335mn)
- EUR/GBP: Gbp0.8775(E400mn), Gbp0.8940(E452mn), Gbp0.8950(E387mn)
- NZD/USD: $0.7200(N$353mn)
- USD/CAD: C$1.2345-50($366mn), C$1.2400($347mn), C$1.2545-50($473mn)
G3 currency pairs are locked into painfully tight ranges, with political developments in NAFTA, New Zealand and Turkey behind the biggest FX moves, according to Kit Juckes, Research Analyst at Societe Generale.
“Real yields on TIPS are also trapped in a range, and that is feeding the yield-hunting trend. Meanwhile, the ECB is set to announce an extension to its bond buying but at a slower pace. This will sow the seeds of the euro’s next leg higher but isn’t likely to propel it out of its range just yet.”
“Amid all the analysis of Black Monday (“crowds of young brokers swilled their beer from the bottle, their hands trembling from the day’s havoc but still cracking nervous jokes”, according to The Times), my first thought is that this was the day 10-year notes left 10% yields behind – never to return. As yields fell, the dollar had a two-day rally on risk aversion, before falling 10% by the end of the year. By Halloween, it was trading exactly where it is today. The other side of the fall in yields, of course, was the recovery of equity indices. The S&P has delivered a total return of 1,940% to anyone who bought it on the close on Black Monday and kept it ever since.”
“Falling yields fuelled the S&P rally, and more recently low real yields have underpinned risk assets more broadly. With 10-year TIPS yields stuck in a 20-70bp range, it’s hard to see, yet, what will cause the asset rally soufflé to deflate. As for the dollar, what matters is relative rates and, these days, relative long-dated real yields. It is no great surprise that while spikes and troughs in DXY match the highs and lows in TIPS yields, the two series don’t really correlate. In particular, there was a clear break in June when Mario Draghi talked about tapering bond purchases at the Sintra conference. But more recently, the correlation has recovered: 47bp for TIPS as I write and DXY stuck below 94.50, with significant support at 92.60 first and then 91.0 (which matches the EUR/USD 1.21 peak, when TIPS yields were threatening 20bp).”
“From here, I’m struggling to see the range break. If it’s just down to US yields, then it would be a huge surprise for the economy to soften enough to justify a break below 20bp for real yields any time soon (I’ll include all of 2018, for starters). So a break below that level requires a break in the correlation, and in turn, that probably requires a move higher in yields elsewhere and in particular in Europe.”
“Bund yields have been depressed by QE but not only by QE – negative rates and low inflation have played their part too. Next week sees the likely announcement of an extension to the ECB’s QE programme until September at a reduced pace of €25bn per month. Over time, however, the disconnect between real Bund yields and the strength of the eurozone economy will probably act as a magnet dragging the euro higher in due course.”
The greenback, tracked by the US Dollar Index (DXY) is trading on a firm fashion at the end of the week, managing to regain the 93.00 barrier and above following the opening bell in Euroland.
US Dollar bid on budget approval
The demand for the buck picked up pace after the US Senate approved late on Thursday the Republicans-backed budget, a big step towards the implementation of the promised tax reform.
The index thus managed to revert two consecutive daily pullbacks and retake the constructive outlook above the key 93.00 mark.
Additionally, USD remains well underpinned by expectations of further tightening by the Federal Reserve via rate hikes. In this regard, the probability of higher rates to be announced at the December meeting is above 90% according to CME Group’s FedWatch tool.
Further out, investors and the greenback remain anxious on the upcoming announcement by President D.Trump of the next Fed Chief, with (pro-USD) candidate J.Taylor as the current front-runner vs. FOMC’s J.Powell and former FOMC governor K.Warsh.
In today’s data space, the only release of note will be September’s existing home sales.
US Dollar relevant levels
As of writing the index is gaining 0.30% at 93.21 and a break above 93.80 (high Oct.16) would open the door to 94.03 (23.96% Fibo of the 2017 drop) and finally 94.16 (100-day sma). On the flip side, the immediate support aligns at 93.06 (low Oct.19) seconded by 92.93 (55-day sma) and then 92.75 (low Oct.13).
According to Robert Rennie, Research Analyst at Westpac, yield spreads continue arguing for further gains in USD/JPY; the same in terms of risk sentiment etc. too.
“The ongoing threat of risk aversion from e.g. North Korea/ Iran/ US politics etc. will likely continue capping the upside in and around the 113.50/114 area at least in the near term.”
“However, we remain of the view that there is ample room for the US$ to rally as we move into the end of the year.”
“Thus we stick with our medium term upside bias on assumption that US data momentum will build into end year, that we will see enough momentum on the budget/ tax bill to support the US$ yet further and that the Fed chair announcement adds a bit of weight to the above too. We shift our one week bias to up on the above too.”
James Knightley, Chief International Economist at ING, suggests that there are more polite overtures from PM Theresa May, but Europe holds the line as far as Brexit negotiations are concerned.
“Reports suggest that the EU leaders dinner last night in Brussels was fairly friendly, but there seems to be little sign of any progress. UK Prime Minister Theresa May continued with the conciliatory tone first heard in the Florence Speech last month and EU leaders responded in a similar style. Angela Merkel reportedly saying she was certain “there will be a good outcome” to the negotiations – although we don’t know if she meant that included the UK.”
“However, there is going to be no further progress on negotiations until the UK is willing to bend on the divorce payment. €20bn in payments for the two year transition period doesn’t cut it for the EU with reports suggests that an extra €20bn is likely to be needed (at least) before the EU is willing to talk future arrangements. With progress being made on citizens’ rights and (supposedly) the Irish border December is a realistic start point for those discussions assuming the UK is willing to be more flexible and stump up an extra bit of cash that amounts to less than 1% of annual GDP.”
According to Imre Speizer, Research Analyst at Westpac, NZD’s near term direction will largely be determined by the makeup of the new NZ government and left leaning will push NZD lower while right leaning will push it higher.
“Beyond that reaction, we remain of the view that NZD/USD will fall below 0.7000 by year end, driven by a continuing decline in NZ-US interest rate spreads.”
“In addition, there’s emerging evidence of a slippage in dairy prices, probably demand (rather than supply) driven. This slippage has capped the overall NZ commodity basket (mainly dairy, meat and wood). This is already priced into the NZD, judging by the chart across, but there is a risk that commodities slip further, particularly if China growth slows next year.”
Bank of Japan Governor Haruhiko Kuroda is crossing the news wires, with key quotes, via LiveSquawk, found below:
"In September 2017 the index of producer prices for industrial products rose by 3.1% compared with the corresponding month of the preceding year. In August 2017 the annual rate of change all over had been 2.6%," the Statistisches Bundesamt Deutschland announced on Friday.
After closing the previous day with a 30-pip loss around 112.70, the USD/JPY pair gained traction during the Asian trading hours and refreshed its highest level in two weeks at 113.32. As of writing, the pair is trading at 113.26, up 0.63% on the day.
The pair's upsurge seems to be fueled by a stronger greenback. On Thursday night, the US Senate approved a budget plan for the 2018 fiscal year that would allow them to advance with the tax overhaul without the support of Democrats. Following the 51-to-49 voting outcome, Senate Majority Leader Mitch McConnell said, "with this budget, we’re on a path to deliver much-needed relief to American individuals and families who have borne the burden of an unfair tax code.”
The US Dollar Index, which tested the 93 mark yesterday, retraced the majority of its recent losses and rose to 93.40. At the moment, the index is at 93.33, up 0.35% on the day. The pair could meet another buying wave and extend its daily gains when European traders hit their desks. Moreover, in case major European equity indexes recover from yesterday's sharp losses, the JPY could have a difficult time show resilience against the buck.
Later in the day, the only noteworthy data of the economic calendar will be the existing home sales from the U.S., which is unlikely to receive any significant reaction from investors.
The pair faces the immediate resistance at 113.45 (Oct. 10 high) ahead of 114 (psychological level) and 114.50 (Jul. 11 high). On the downside, supports align at 112.50 (20-DMA), 112 (psychological level) and 111.40 (200-DMA). With this latest rise, the RSI indicator on the daily graph turned north above the 50 mark, suggesting that the short-term bullish momentum is building up.
It is a familiar story for the Aussie – above fair value but not at extremes and without obvious catalyst for a correction, suggests Sean Callow, Research Analyst at Westpac.
“The domestic story remains broadly supportive, reinforced by another strong employment report in Sep, including a 4 ½ year low on unemployment, which should play well with consumers.”
“Yet core inflation in Q3 should be muted – our economists look for just 0.3% q/q – which would keep the RBA firmly on hold in November and prevent markets from more aggressive pricing for a 2018 hike.”
“Australia’s key commodity prices (WCFIAECI on Bloomberg) are flat over the past 4 weeks, while speculative positioning remains very long AUD, at least judging by CME data.”
“The US dollar was the main driver of AUD/USD over the past week, the greenback sliding after soft inflation data. If US$ can avoid similar data disappointment in the week ahead, AUD/USD should mostly trade sideways to a bit lower, trading either side of 0.78 rather than gyrating around 0.79.”
As Australian energy exports have risen and renewables policy has been adjusted, local energy prices have increased and higher electricity prices are expected to lift CPI inflation and constrain domestic growth, although may not weaken GDP, according to the analysis team at HSBC.
“Shifting relative prices
“More policy clarity is needed. Without a clear direction for energy and climate policy, increased uncertainty could weigh on local business investment.”
NZD/USD futures speculators significantly reduced their long positions in August and September, and are now in a near neutral state, notes Imre Speizer, Research Analyst at Westpac.
“The extreme long positioning at the end of July was a good signal that the NZD was vulnerable to a correction.”
“The unwind can be attributed mainly to a tentative recovery in the US dollar, as well as nervousness about a change of NZ government.”
Analysts at TDS point out that EU leaders conclude their summit today and will decide whether or not to advance Brexit negotiations to the trade-focused second phase.
“A leaked draft of the summit statement suggests this will not happen; instead the leaders will wait until December’s meeting after more progress has be made on talks. The draft does show that they are willing to start their own internal preparations to discuss the transitional agreement between now and December, though, with Tusk confirming that story. The government’s fiscal accounts are also released.”
According to Bill Evans, Research Analyst at Westpac, the key economic event next week will be the release of the Australia’s September quarter Consumer Price Index.
“The jump in the headline is largely driven by sharply rising electricity prices. They are expected to increase by 18% in Sydney; 5% in Melbourne; 12% in Brisbane; 10% in Perth and 20% in Adelaide. The more modest increase in Melbourne is due to the increases being spread over the September and March quarters while Perth is not on the national grid. In the other states energy prices are generally adjusted in the September quarter.”
The buying interest around the greenback has forced EUR/USD to retreat from earlier tops in the 1.1860 region to the current area of session lows near the 1.1800 handle.
EUR/USD offered on US budget
After two consecutive daily advances, the pair met a wave of downside pressure after the US Senate approved the Republican-supported budget late on Thursday, paving the way at the same time for the implementation of the long-waited tax reform promised by President Trump.
Still around USD, President Trump will likely announce the successor of Chief J.Yellen in the upcoming days, where according to market chatter, (hawkish) candidate J.Taylor remains the front-runner.
Adding to the weaker scenario around the European currency, the Spanish government could suspend Catalonia’s autonomy on Saturday in response to persistent threats of independence by the region led by C.Puigdemont.
In the data space, EMU’s current account figures for the month of August are only due today ahead of US existing home sales.
EUR/USD levels to watch
At the moment, the pair is losing 0.34% at 1.1812 facing the next support at 1.1730 (low Oct.18) seconded by 1.1686 (low Oct.6) and finally 1.1662 (low Aug.17). On the upside, a break above 1.1858 (high Oct.20) would target 1.1882 (high Oct.12) en route to 1.1911 (high Aug.2).
US Fed Chair Janet Yellen’s speech on monetary policy will be the likely focus this coming week as we head towards the November FOMC meeting, suggests the analysis team at ING.
“No policy change is expected at that meeting, but there could be more direct hints at the likelihood of a December hike in the accompanying statement.”
“Third quarter UK growth due next week looks set to come in just as sluggish as it was in the first and second quarters. Consumer spending has remained fragile, albeit perhaps not quite as woeful as last quarter, and persistent Brexit uncertainty means investment is unlikely to pick up the mantle.”
“In the Eurozone, the topic of the month will clearly be the ECB. We expect a dovish tapering with a reduction of the monthly QE purchases to €20-25bn until the end of 2018. Besides that, the PMIs and consumer confidence will give interesting insight into whether Eurozone optimism has carried over into 4Q17.”
“The German Ifo should give first insights in how German businesses have digested the outcome of the elections.”
Something interesting is going on in Japan as having tracked the yen very closely over the last ten years Japanese equities are surging higher even as USD/JPY has stayed weak and it looks like a regime shift is taking place, according to George Saravelos Strategist at Deutsche Bank.
“To start with it is useful to recognize that correlation breakdowns are important in FX. Acknowledging the regime shift in the FX-rates relationship was important in making us more bullish EUR/USD earlier this year for instance. What is going on in Japan? Our ﬁrst observation is that the direction of causality has historically run from the yen to stock prices: a higher USD/JPY drives stocks via rising earnings expectations rather than vice versa. In contrast, big yen moves have coincided with the broad dollar trend which the Nikkei is too small to inﬂuence. Our second observation is that foreign buying of Japanese stocks has recently jumped to nearly a record high. There is a wave of idiosyncratic demand emerging for Japanese stocks irrespective of where the yen is going. The global equity market rally may be “crowding in” foreign investors given that the Nikkei remains very cheap on many standard P/E metrics.”
“What does all of this mean for FX? At face value one can argue that the regime break is only relevant to equities given that the yen continues to track the dollar trend quite well. This conclusion may be premature. First, the breakdown in the FX-equity relationship suggests that there is no longer any incentive for foreign investors to hedge their purchases of Japan stocks. The marginal ﬂow story for the yen may therefore be becoming more supportive. Second, the breakdown in the equity-FX relationship is another warning shot that FX drivers are not stable. One of the strongest views in the market is that US yields will remain the most important driver of USD/JPY going forward. This may well be the case into year-end (we have a bullish USD/JPY end-17 forecast), but the relationship has been very weak over the medium term.”
“Consider a scenario where Japan equity ﬂows keep rising or the BoJ takes a hawkish turn next year. Either of these would support the currency irrespective of what is going on to US yields. Alternatively consider the scenario of a Trump appointment to the Fed chair that leads the central bank on an extended pause to defend the bank's inﬂation-targetting credentials. This is an environment where back-end yields would rise on higher inﬂation expectations but the dollar would most likely weaken. Rising long-end yields but material dollar weakness was exactly what happened in 1994-95. With the correlation between USD/ JPY and US 10-year yields close to record highs, hybrid derivative trades that look to beneﬁt from a combination of higher US yields but a weaker USD/ JPY next year oﬀer exceptionally good value.”
FX desks in Asia put a bid under the US dollar as the Senate's decision to approve a budget blueprint for the 2018 fiscal year has made way for the GOP to enact a tax-cut package without Democratic support. Tax cuts are widely seen as inflationary, thus the long duration treasury yields strengthened. The yield curve steepened to 80 basis points and the USD index rose to 93.50 levels. The other big news in Asia was the drop in the NZD/USD pair below 0.70 handle. Investors are unclear about the RBNZ's mandate under the new government, thus NZD is being offered across the board.
Main topics in Asia
US Senate adopts budget resolution, sets stage for tax reform
UK PM Theresa May urged EU to create 'new dynamic' in Brexit talks
A report from BBC says, "Theresa May has urged EU leaders to create a "dynamic" in Brexit talks that "enables us to move forward together", at a working dinner in Brussels."
USD/JPY clocks 2-week high of 113.19 as T-yields rise on the US tax reform news
The Dollar-Yen jumped to two-week high as the steepening of the treasury yield curve on US tax reform news boosting the demand for the greenback. Also worth noting that JPY tends to strengthen on Friday on fears of escalation of crisis in the Korean Peninsula over the weekend.
Kiwi bears eye 0.6908, 11th April low
NZD is being offered on uncertainty regarding the RBNZ's mandate under the new government.
European desks may keep the USD well bid on the tax reform news. EUR and GBP are likely to feel the heat of the political uncertainty (Catalonia crisis and Brexit deadlock). GBP/USD could slide to 100-DMA level of 1.3045 on speculation that EU leaders will express concerns regarding the lack of progress in Breit negotiations.
Political uncertainty is likely to overshadow data releases in Europe - EZ PPI (Sep) and Current Account (Aug). In the North American session, CAD retail sales and US existing home sales are due. Fed's Yellen speech may not move the markets today.
EUR/USD drops 0.30 percent as the yield differential widens
The US-German 10-yr yield spread is rising on US tax reform news. Thus, EUR/USD may remain on the back foot. EZ PPI unlikely move markets, focus on European Council Meeting.
ECB: Lower for longer 2.0 - ING
The Eurozone economy has not changed since the September ECB meeting and even though the results of the German elections have somewhat dampened the eu(ro)phoria of the summer months, survey indicators still point to a continuation of the recovery well into 2018.
New Zealand’s monthly net migration eased again in September to 5,190, down from 5,420 in August as this has seen the annual net inflow of migrants drop back to 71,000, notes Satish Ranchhod, Research Analyst at Westpac. While net migration remains elevated on an annual basis, the turn in the cycle that we have been predicting is occurring which reinforces Westpac’s expectations for softer GDP growth over the coming year, he further adds.
“September saw net immigration flows softening for a third consecutive month. The number of people entering the country on a permanent or long-term basis fell to 5,190. That was down from 5,420 last month, and well down on the levels of over 6,000 people per month that we were seeing this time last year.”
“On an annual basis, net migration remains high at 71,000. But the annual inflow is now off its peak, and a further slowdown looks to be on the cards.”
“Underlying the slowdown in net migration has been a pickup in departures of non-New Zealand citizens, which have risen from around 1,900/month last year to 2,500/month now. This group includes people who would have come over in recent years on temporary work and student visas. Typically those who come over on these programs stay for around three to four years. Given that the surge in foreign arrivals began in 2013, we have been expecting to see a corresponding surge in departures – that looks to have finally arrived, and we expect it to continue over the coming months.”
“On top of this, we are also seeing signs that new arrival numbers are declining. In September there was an inflow of 7,850 people – down noticeably from 8,600 just a few months ago.”
“Net departures of New Zealanders remain low.”
Phil Borkin, Senior Economist at ANZ, notes that in New Zealand, Labour and NZ First have announced their intention to enter a formal coalition, with support from the Greens on confidence and supply.
“Crucially, many policy details are still lacking, but they should become clearer over the coming days.”
“This announcement does create some additional uncertainty compared with the more status quo alternative, at a time when the economy was already facing some growth headwinds. However, that needs to be weighed against the prospects of fiscal policy set to turn more expansionary.”
“While the NZD has initially weakened on today’s announcement, whether this move extends will depend critically on policy details that we don’t yet have.”
“Once these details are known, we will assess whether any changes to our economic forecasts are necessary.”
Justin Smirk, Research Analyst at Westpac, suggests that their forecast for the headline Australian CPI is 0.7%qtr holding the annual pace flat at 1.9%yr.
“September is normally a seasonally strong quarter due to the post June 30 price resetting of many administered prices. The ABS seasonal factors moderate our estimate to a seasonally adjusted 0.4%.”
“Key factors in Q3 are: ongoing grocery competition holding back food prices; annual repricing of the tobacco excise; surging electricity prices and further gains in dwelling purchase costs (Sydney and Melbourne); almost flat rents; and, falling health, transport (including fuel) and communication prices.”
“There is a lot of interesting in energy prices and we have estimated a national average rise in electricity bills of 13% and a 12% rise in gas bills. Ex gas & electricity we are forecasting a 0.27% rise in the CPI.”
“Core inflation is forecast to print 0.3%qtr (0.29% at two decimal places) holding the annual rate flat at 1.8%yr. The trimmed mean is forecast to rise 0.27% while the weighted median forecast is 0.32%. The two quarter annualised pace of core inflation is forecast to decelerate to 1.7%yr from 2.1%yr – well below the bottom of the RBA’s target band.”
“Traded prices are forecast to be flat in the quarter and –0.6%yr, while non-traded prices are forecast to rise 1.0%qtr/3.2%yr driven by rising housing and energy costs.”
“This is a soft update as outside of electricity, gas and dwelling purchases it is hard to find any signs of broader inflationary pressure with many consumer goods captive to a competitive deflationary cycle. Ex housing (which includes energy bills) the CPI is forecast to rise 0.1%.”
“The upcoming re-weighting of the CPI is only going to increase the emphasis of the disinflationary sectors making it even harder to generate an acceleration in inflation as we move through 2018.”
The Eurozone economy has not changed since the September ECB meeting and even though the results of the German elections have somewhat dampened the eu(ro)phoria of the summer months, survey indicators still point to a continuation of the recovery well into 2018.
“As inflation (expectations) remain low and clearly below the ECB’s preferred 2% level, strong growth will be essential for the ECB to publicly announce details of its tapering of QE for 2018 next week.”
“What this means for markets?
FX market: One-off move in EUR/USD higher followed by range trading
We look for a knee jerk reaction in EUR/USD higher, potentially testing the 1.20 level in response to the expected cut in QE from €60bn to €25bn per month. Yet the lower for longer QE anchoring the scale of Bund sell-off and Italian elections in early 2018, suggest only ‘one-off’ EUR/USD upside. We look for the cross to range-trade in coming months and only spike higher in 2Q18 once Italian election risk passes.
Bond market: Controlled/muted sell-off and steeper curve
We look for Bund curve steeping (2s10s and 5s10s) as the front-end and, to a moderate extent, the belly will benefit more from the forward rate guidance vs 10yr. While long-end rates should go higher, the relatively non-negligible cut in monthly purchases from €60bn to €25bn should be partly offset by the commitment to a 12m buying period. Moreover, following ECB officials’ comments, the lower for longer QE should not come as a complete surprise, limiting the extent of any sell-off.”
“Ideally, the ECB would like to announce tapering as noiselessly as possible, limiting any upward movement of interest rates and the euro to a bare minimum. This is why we expect the ECB to announce a ‘lower for longer’ tapering (as in December 2016), reducing the monthly QE purchases to €25bn and extending them until the end of 2018 at its next meeting on 26 October.”
“In addition, we expect Draghi to emphasise ‘sequencing’, ie, the fact the ECB will not raise interest rates before the end of QE.”
Broad based USD rally in Asia pushed gold (XAU/USD) prices lower by 0.30 percent to $1282.60.
Higher low pattern still intact
Yesterday's solid rally from the low of $1276.57 to $1291 left a higher low on the daily chart. Only a break below $1276. 57 would signal a revival of the sell-off from Monday's high of $1306.
The data docket is light, hence the focus remains on the treasury yields and the US dollar. Both could remain well bid on Trump's tax reform plans. Escalation of tensions in Spain and/or Korean Peninsula may strengthen the demand for the yellow metal.
Gold Technical Levels
The metal was last seen trading around $1284 levels. A break below $1276.57 would open doors for a sell-off to $1266.38 (Oct 5 low) and $1264 (200-DMA). On the higher side, breach of hurdle at $1291 (10-DMA) would open up upside towards $1300 (psychological level) and $1303.50 (50-DMA).
Labour and New Zealand First have formed a minority coalition government, with a confidence and supply agreement from the Greens, notes Dominick Stephens, Chief Economist at Westpac.
“Policy details are thin on the ground, but the new Government is likely to be more interventionist in the economy, tougher on foreign investment, and more liberal on social spending than the last Government.”
“Policy details so far suggest some downside risk to our GDP forecast for 2018 and upside risk to our GDP forecasts for 2019 and 2020, but this could change as new information comes to light.”
“The impact that the new Government has on the economy, in both the short run and the long run, will depend on whether it addresses the distortions in New Zealand’s tax system that favour property and have skewed the economy.”
“Proposed changes to the RBNZ Act seem unlikely to have a large effect on the conduct of monetary policy.”
The US tax reform news and the resulting steepening of the yield curve pushed the dollar index higher to 93.50 levels in Asia.
The Greenback found love after news hit the wires that US Senate approved the Republican-backed budget. This is widely seen as a major step forward for the GOP to enact tax cuts. Thus, the yields on the long duration treasuries hardened.
Currently, the 10-year yield is up 3.3 basis points (bps). The 30-yr yield is up more than 4bps. Meanwhile, the 2-yr yield remains flat lined. The yield curve has steepened/spread between the 10-yr and the 2-yr yield has widened to 80 bps.
Looking ahead - the USD may remain bid on tax reform talks. Fed's Yellen will speak today, but not until markets close. Kathy Lien from BK Asset Management writes, "most of the day will be spent guessing whether she'll be hawkish or dovish. Chances are, there will be limited new position-taking ahead of her lecture on monetary policy since the financial crisis.
Dollar Index Technical Levels
The index clocked a high of 93.53 earlier today and currently trades at 93.46 levels. A break above 93.80 (Oct 18 high) would open up upside towards 94.00 (zero levels) and 94.27 (Oct 6 high). On the other hand, a breakdown of support at 93.12 (session low) would expose 92.95 (Supp. offered by rising trend line) and 92.87 (50-day moving average).
As per ForexLive reports, New Zealand PM Jacinda Ardern will drop National's tax package, allocated cabinet portfoliosover the weekend and shall emphasise on regional development.
EUR/USD fell more than 0.30 percent in Asia to low of 1.1807 as the US Senate approved budget in crucial step forward for Republican tax cuts.
The tax reform news pushed up the Treasury yields, resulting in widening of the US-German 10-year yield spread.
Ahead in the day, the USD may remain well bid on the back of the tax reform news. The Eurozone producer price index data and current account data are unlikely to move EUR pairs in a big way.
Kathy Lien from BK Asset Management writes, " Fed Chair Yellen will speak today, but not until markets close so most of the day will be spent guessing whether she will be more hawkish or dovish. Chances are there will be limited new position taking ahead of her lecture on monetary policy since the financial crisis."
EUR/USD Technical Levels
The spot was last seen trading around 1.1815 levels. James Chen from Forex.com shares his view on EUR/USD-
"EUR/USD is trading just under its 50-day moving average and between key price levels around the 1.1700 support area to the downside and the 1.1900 resistance area to the upside. The ECB decision next week will help dictate if and in what direction the euro may break this trading range. A likely scenario is that the central bank may advocate a more gradual tapering process over a longer period of time than expected, in part to avoid further euro strengthening. If this is the case, the euro could take a hit and EUR/USD could stumble, especially if Fed-driven dollar support resumes. In this event, a EUR/USD breakdown below 1.1700-area support could pressure the currency pair towards key downside targets around the 1.1600 and 1.1450 support areas."
GBP/USD fell to a 9-day low of 1.3102 after the US Senate's approval of the Republican-backed budget provided much needed momentum to Trump's tax overhaul plan.
The tax reform news has pushed the long duration treasury yields higher. At the time of writing, the 10-year yield is up 2.4 basis points and the 30-yr yield is up 3.2 basis points. The 2-yr yield remains flat lined.
Consequently, the US dollar is well bid across the board. The sell-off in cable could gather pace in Europe/US session if the EU leaders express concerns regarding the lack of progress in Brexit negotiations.
Currently, the GBP/USD pair is trading at 1.3120; down 0.27% on the day. The spread or difference between the US 10-year treasury yield and the 10-year UK gilt yield currently stands at 106 basis points; the highest level since September 7.
GBP/USD Technical Levels
FXStreet Chief Analyst Valeria Bednarik writes, " Renewed selling pressure below 1.3120, October 12th low should result in a 100% retracement to 1.3026. Resistances are now at 1.3180, the immediate Fibonacci resistance, followed by the 1.3220/30 area where moving averages and the next Fibonacci level stand."
The bid tone around the greenback strengthened, pushing the USD/JPY pair above 113.00 handle after news hit the wires that the US Senate has adopted a budget resolution, setting stage for Republican tax reform effort.
The market has welcomed the first step towards tax reform. The yield on the 10-year Treasury note is up 2 basis points. The 30-year has added 2.85 basis points. Meanwhile, the 2-year yield remains flat lined. Thus, yield curve has steepened to 79 basis points. A steeper yield curve is USD positive and vice versa.
The tax reform story is likely to keep the US stocks well bid on the last trading day of the week. Thus, JPY (being a funding currency) is likely to remain on weaker footing.
As far as Sunday's Japanese elections are concerned, the odds of a surprise (Kibo no To victory) are low. Nevertheless, caution is advised as JPY tends to strengthen on Friday on fears the tensions in Korean Peninsula might escalate over the weekend.
USD/JPY Technical Outlook
Jim Langlands from FXCharts writes, " On the topside, resistance will be seen at 113.00, above which, 113.20 would be decent resistance. Above there, unlikely today, 113.43 (6 Oct high), 114.00 and 114.49 (11 July high) would eventually beckon. The dailies rather uncertain of any potential upside momentum, and on the downside, support today should arrive at the session low at around 112.30, below which, the 18 Oct low was at 112.12. Back below 112.00, good support would be at 111.60/70. Buying dips is still preferred near 112.10/30 although further out, with the dailies looking less positive, further range trade near current levels may be in store."
News is crossing the wires via Reuters that US Senate has passed 2018 budget blueprint opening doors for Republican tax reform effort.
AUD/NZD rose to a 18-month high of 1.1254 this Friday morning as investors offered NZD on uncertainty around the RBNZ mandate under the new government.
A Bloomberg Quint report says, "Investors are concerned the economy will slow as the new government boosts social spending and changes the Reserve Bank of New Zealand’s mandate to seek full employment in addition to price stability, potentially eroding the kiwi’s interest-rate advantage over developed-nation peers."
However, analysts believe the long-run fundamentals are still attractive and the Kiwi would regain poise once there is more clarity about the monetary policy outlook.
At the time of writing, the currency pair is trading at 1.1240.
AUD/NZD Technical Levels
A break above 1.1271 (Apr 2016 high) would open up upside towards 1.13 (zero levels) and 1.1333 (Mar 2016 high). On the downside, breach of support at 1.1193 (support on 1-hour chart) could yield a pull back to 1.1144 (July high) and 1.11 (zero levels).
The People's Bank of China (PBOC) set the Yuan reference rate at 6.6092 vs. Thursday's fix of 6.6093
Currently, USD/JPY is trading at 112.64, up 0.09% on the day, having posted a daily high at 112.71 and low at 112.51.
USD/JPY fell from 113.13 to 112.30 on a flight to safe havens overnight. USD/JPY has since been correcting the drop.
Overnight, the US 10yr treasury yields fell from 2.34% to 2.30% but later rebounded to 2.33%, and 2yr yields fell from 1.56% to 1.53% before rebounding to 1.55%. The US dollar index was closing down 0.2% while the Fed fund futures yields slipped, now pricing the chance of a December rate hike at 87%.
For the US data, US jobless claims dropped to a 44-year low, to 222k vs 240k expected. Also, the Philadelphia Fed’s business survey rose from 23.8 to 27.9 vs 22.0 expected. Elsewhere, while the market tracks the odds for the who will be the next Fed chair, Fed's Powell holds onto a large lead on the betting sites - Yellen/Warsh/Taylor all around the same odds.
Analysts at Commerzbank noted that USD/JPY’s correction lower probably ended along the 200 day ma at 111.76, a fall through which would leave the 55 day ma at 110.87 exposed:
"While above here it will remain well placed for a recovery from a slightly longer term perspective. Above the 113.44 current October high will trigger further gains to the top of the range at 114.38/49. It is where the May and July highs were made."
Meanwhile, Jim Langlands at FX Charts explained that "on the topside, resistance will be seen at 113.00, above which, 113.20 would be decent resistance. Above there, unlikely today, 113.43 (6 Oct high), 114.00 and 114.49 (11 July high) would eventually beckon. The dailies rather uncertain of any potential upside momentum, and on the downside, support today should arrive at the session low at around 112.30, below which, the 18 Oct low was at 112.12. Back below 112.00, good support would be at 111.60/70. Buying dips is still preferred near 112.10/30 although further out, with the dailies looking less positive, further range trade near current levels may be in store."
News is crossing the wires via LiveSquawk that Trump advisers have zeroed-in on two candidates - Jerome Powell and James Taylor.
Analysts at Nomura offered their model projection for today's USD/CNY fix.
"Our model1 projects the fix to be 71 pips higher than the previous fix (6.6164 from 6.6093) and 113 pips lower than the previous official spot USD/CNY close of 6.6277. The basket implied change is 138 pips lower than the previous official spot USD/CNY close (6.6139 from 6.6277)."
A report from BBC says, "Theresa May has urged EU leaders to create a "dynamic" in Brexit talks that "enables us to move forward together", at a working dinner in Brussels."
Process is progressing "step by step"
I have absolutely no doubt that if we are all focused - and the speech in Florence made a contribution towards that - we can achieve a good result
From my side there are no indications at all that we won't succeed
The "urgent imperative must be that the dynamic you create enables us to move forward together".
Analysts at Westpac offered their outlook for the Aussie dollar.
"AUD/USD 1 day: Expected to continue consolidating in a 0.7800-0.7900 range if the USD does likewise, with perhaps a slight bias to the upside today.
AUD/USD 1-3 month: If the RBA remains firmly on hold, as we expect, and the US dollar rises on delivery of a Fed interest rate rise in December, then AUD/USD could fall to 0.76 by year end. (5 Oct)"
Germany Chancellor Merkel was hitting the wires and she said that UK PM May’s Brexit stance insufficient at this point
Analysts at Westpac explained that the key economic event next week will be the release of the September quarter Consumer Price Index.
"Westpac’s forecasts are: 0.74% for headline; 0.27% for Trimmed Mean; and 0.32% for weighted median.
The jump in the headline is largely driven by sharply rising electricity prices. They are expected to increase by 18% in Sydney; 5% in Melbourne; 12% in Brisbane; 10% in Perth and 20% in Adelaide.
The more modest increase in Melbourne is due to the increases being spread over the September and March quarters while Perth is not on the national grid. In the other states energy prices are generally adjusted in the September quarter."
Analysts at Nomura explained that the Philly Fed survey business conditions index rose to 27.9 in October from 23.8 in September.
"This appears consistent with strong incoming data on new orders and shipments in recent months. Moreover, manufacturing output excluding autos has been on the rise relative to a year ago."
"The Empire State survey’s topline index for October jumped earlier this week, also reflecting improvement in activity. Details of the Philly Fed survey remained strong, but moderated slightly. The new orders and shipments indexes remained positive but fell, decreasing 9.9pp and 13.4pp, respectively. Employment indicator improved."
"The number of employees index rose sharply to 30.6 from 6.6, and the average workweek rose to 19.4 from 11.9. The prices paid index increased 3.7pp to 38.1, suggesting continued pressure on input prices. Today’s report appears consistent with steady growth in the manufacturing sector."
Currently, NZD/USD is trading at 0.7031, up 0.01% on the day, having posted a daily high at 0.7039 and low at 0.7021.
New Zealand Visitor Arrivals (YoY): 3.1% (September) vs previous 5.8%
NZD/USD dropped yesterday and again today after the NZ Government announcement. "It should steady around the 0.7000 area, awaiting policy details," analysts at Westpac argued in respect to the NZ Government. NZ First will join the Labour Party, with support from the Green Party.
Forex today: on the more cautionary side following Hong Kong's sell-off, dollar down
NZD/USD 1-3 month:
Analysts at Westpac explained that if the RBNZ remains firmly on hold, as we expect, and the US dollar rises on delivery of a Fed interest rate rise in December, then NZD/USD could fall to 0.70 by year-end. (5 Oct)
With the psychological level at 0.7000 hit, bears will now look to target 0.6908, 11th April low, on daily closes below the aforementioned handle. On a correction/reversal, 0.7080 and 0.7120 are resistances. Meanwhile, the RSI (14) is into oversold territory on the 4hr sticks and heading that way on the daily charts at 33 while price trades well below the moving averages.
Analysts at Westpac offered their outlook for the Antipodean cross.
"AUD/NZD 1 day: The sharp break higher yesterday, catalysed by the AU jobs data plus the NZ Government announcement, targets 1.1265 next (April high), although iron ore’s 3% fall yesterday may weigh.
AUD/NZD 1-3 month: September’s downward correction should give way to a resumption of the trend rise which started in June, and test 1.12, contingent on AU commodity prices recovering and risk sentiment remaining elevated. (4 Oct)
AU swap yields 1 day: The 3yr should open around 2.15%, the 10yr around 2.92%.
AU swap yields 1-3 month: Our RBA outlook (on hold throughout 2018) is anchoring short-maturity interest rates and should keep 3yr swap rates in a 1.80% to 2.30% range, as long as core inflation remains below 2%. Longer maturity rates will largely follow US rates. (4 Oct).
NZ swap yields 1 day: NZ 2yr swap rates should open down 3bp at 2.18%, the 10yr down 2bp at 3.18%, in response to AU and US interest rates movement overnight, plus the NZ Government announcement.
NZ swap yields 1-3 month: Our RBNZ outlook (on hold throughout 2018) is anchoring short-maturity interest rates and should keep 2yr swap rates in a 2.10% to 2.50% range, as long as inflation remains below 2%. Longer maturity rates will largely follow US rates. (4 Oct)"
Catalan separatists ask supporters to pull cash from banks - Bloomberg with the headlines:
Forex today was on the more cautionary side on the back of investors backing away from Wall Street with a correction in the US benchmarks, following on from the sudden sell-off in Hong Kong.
US yields and the DXY were on the back foot, with the 10yr treasury yields dropping from 2.34% to 2.30% before closing around 2.33%. The 2yr yields also fell and from 1.56% to 1.53% and closed back at 1.55%. The greenback closed lower by -0.2%.
As far as data goes, US jobless claims dropped to a 44-year low, to 222k vs 240k expected. Also, the Philadelphia Fed’s business survey rose from 23.8 to 27.9 vs 22.0 expected. Elsewhere, while the market tracks the odds for the who will be the next Fed chair, Fed's Powell holds onto a large lead on the betting site - Yellen/Warsh/Taylor all around the same odds.
As far as the currencies go, the EUR rose from 1.1800 to 1.1858. GBP/USD was hit on the on UK Retail Sales miss, down to 1.3132 the low from 1.3229. USD/JPY fell from 113.13 to 112.30 on a flight to safe havens. AUD rose further to 0.7884, following the solid jobs data and RBA expectations. The Kiwi NZD was smashed after the new government was announced.announced, (NZ First will join the Labour Party, with support from the Green Party), down to 0.7009 from 0.7171 and copper was offered after the action in Chinese markets.
There are no scheduled key events in Asia:
Key notes from US session:
Data source: FX Street
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