The Reserve Bank of Australia has been quick to speak out against the markets at present and the current view point of market economists who think that the RBA could be forced to cut rates further in the face of economic pressure. The RBA governor Philip Lowe spoke today, and believes that at present interest rates are very low and that the economy is currently rebalancing and that with the recent boost in commodity prices the economy will bounce back sooner than many predict. While ever the optimist, commodities have been quite volatile in recent times and inflation is also still lagging at present as the AUD has lifted against the USD, affecting incomes for exports and the mining sector which has boosted the economy significantly in recent times. The recent trend though in the Australian economy has had some concerned though as unemployment has been falling, but at the same time underemployment has been rising which does not bode well for household incomes in the future.
For the AUDUSD it still finds itself in a bullish position as of late despite the recent drops. The weekly chart still shows a strong bullish trend which has sustained itself in the face of bearish sentiment at times about the economy. The trend line has seen some pressure in the last month, but the AUDUSD has bounced back. One of the interesting things to note is the 100 weekly average which has been acting also as dynamic resistance in the market adding pressure for the bears and stopping future higher highs. So we are starting to see consolidation in the long run, but in the short term we are seeing each wave being weaker and weaker and it's leading to some asking how much longer until we see the AUDUSD look to break lower and test support levels at 0.7460 and 0.7328. Fixed interest trades still make the AUD a popular option, but with the US looking likely to lift interest rates it's a matter of time before it finds itself under pressure and falling.
The New Zealand dollar on the other hand has seen a sharp jump as a I write this as CPI figures q/q showed a lift of 0.2% compared to most economists predictions of 0.0%. So far resistance at 0.7180 has stopped any further gains on the charts, and it's likely with the 20 day moving average sitting there as well it won't get much further without the bears taking a swipe. This is also much lower than the previous reading of 0.4%, so while positive that the economy is not as bad off as expected, it's likely to also show that inflation is certainly lacking. The drop in the NZDUSD is sustained will give inflation a light boost as well, and may be something that the Reserve Bank of New Zealand will touch on in an effort to force it lower. I still feel though that the NDZUSD will likely look to push through the 0.70 cent support barrier in the long run, and it's only a matter of time.
Sterling/Dollar staged an incredible rebound during early trading on Tuesday with prices lurching towards 1.2270 and this has nothing to do with an improved sentiment towards the Pound but Dollar weakness. With the Sterling repeatedly crashing to new lows amid the hard Brexit fears, the technical bounce displayed should be of no surprise and may even offer an opportunity for bears to install another round of selling. The persistent media reports of disagreements between the Chancellor and his cabinet over the Brexit scenario has sparked discussions of political risk while uncertainty over the health of the UK economy after the article 50 is triggered continues to weigh on sentiment.
Investors may direct their attention towards the inflation report for September which is expected to rise to a near two year high as a weaker pound post-Brexit bolsters import costs. In normal circumstances a healthy rise in inflation would be warmly welcomed with sentiment towards the UK economy receiving a welcome boost. It must be kept in mind that the Brexit fueled Sterling crash has not made these normal circumstances with fears already mounting over inflation reaching 2.6% in 2017. The GBPUSD could still be exposed to further punishment moving forward as the terrible cocktail of hard Brexit jitters, uncertainty, and rising Fed rate hike expectations entice sellers to attack.
It's a big day for the Australian markets as Chinese data is set to put pressure on the AUDUSD and also the NZDUSD, but the main focus will most certainly be around the AUDUSD and how it handles the data which is due out today. GDP y/y has always been the cornerstone of how the Chinese economy is performing and the market is looking for a flat result of 6.7%. In recent times the GDP has fallen but it is still one of the best forming in the modern world and a slowdown had been predicted for some time. We also have Industrial Production due out and the market is expecting a slight up lift here, despite recent worries that the industrial sector may be struggling. Regardless of it all Australia's largest trader partner is China, which in turn leads to the likelihood of a large amount of volatility for the AUDUSD and other minor AUD pairs. For me I think the market is looking for a positive result, as the US economy has been picking up and this will have a flow on effect to the Chinese economy. The jitters after the Brexit are also starting to subside and Chinese exporters will be looking optimist around this.
So for the charts the AUDUSD has been bullish in the long run, but has come under renewed pressure from the bears in recent times, as they look to punish the AUD on the back of its weak economy and underemployment issues which I noted yesterday. On the daily chart if we look at the high point from the 4th of August we can see a clear bearish trend in the market when it comes to previous highs and today's touch on the dynamic resistance was no different. We've failed to see sustained pressure on this level and to me it feels like the Chinese data may be the catalyst which finally sees a strong push through for the AUDUSD if we see a strong positive result. Certainly it would be a reversal of a trend which has been in play since August. If we do see a strong drop on the charts I would anticipate support around the 0.7532 region, but it would be hard going for it to break through completely given the long term bullish trend line which has been in play for some time.
Finally, with all the hype around the AUD and Chinese data the UK is also set to have a big day with the GBPUSD expected to move in the wake of retail data coming out. For me the GBPUSD has come under pressure and some are still saying it's overvalued. One thing is clear and that is any weak retail data will lead to heavy selling in the GBPUSD. While we might see a welcome boost and the GBPUSD even look to break the 20 day moving average, it feels like it may struggle to sustain that given the amount politicians are talking about Brexit and how easily the market is swaying at present.
Stocks advance ahead of Trump vs Clinton debate finale
Stock markets around the world have reacted positively to expectations that the Federal Reserve will maintain a very slow pace to future US interest rate increases, with investors appearing attracted towards riskier assets and the Dollar also retreating from its recent highs. Aside from the monetary policy outlook, the gains in the US markets are likely linked to the recent earnings reports with many beating estimates and this dispelling previous concerns that the current market valuations are overpriced.
Gains are also being seen throughout Europe and this will likely continue if ECB President Mario Draghi confirms on Thursday that the previous reports about a possible QE taper are premature, while the FTSE 100 in general is still benefiting from prolonged depression in the British Pound. The announcement earlier this morning that the China GDP reading met expectations at 6.7% should provide reassurance that the downturn in growth for the second largest economy in the world is stabilising and prevent further concerns over growth in China slowing down.
The biggest risk to the recent return of positive momentum for the stock markets could be if Donald Trump is declared the winner of the US Presidential debate finale tonight.
UK inflation data steals headlines
The major market news throughout yesterday was that inflation in the United Kingdom has increased by an annualised 1%, representing the strongest reading since November 2014. This coincides with the spectacular fall in the price of oil which led to a period of lower inflation readings. It is important to point out that while many were expecting a higher inflation reading due to the phenomenal fall in the value of the British Sterling since the EU referendum, this was not factored into yesterday’s inflation announcement and this provides another reason to expect even strong inflation numbers over the coming months.
The GBPUSD has rebounded as strongly as 1.23 on expectations that higher inflation will limit the probability of the Bank of England (BoE) easing monetary policy once again before the end of the year. The expectations for further falls in the British Pound are still strong and the recent rebound is likely being seen by investors as an opportunity to reload selling positions with the Brexit uncertainty sure to dominate headlines and weigh on investor sentiment for many months to come.
Dollar/Yen looking at risk
The Dollar/Yen has commenced the new trading week to two days of consecutive losses and dipped briefly below the 104 handle yesterday after reaching a two-month high late last week. The buying momentum in the Dollar/Yen is beginning to fade and potential sellers are likely in a wait-and-see mode. The USDJPY really needs to close above 104.50 soon to confirm any chances of a further bullish reversal, otherwise there is a risk of the pair reversing its gains seen earlier in the month.
Gold consolidates above $1250
After unexpectedly crashing through the psychological $1300 support level early in October and falling to its lowest level in two months marginally above $1240, Gold is now showing signs of consolidation above $1250. Gold should also be benefiting from the Dollar retreating and the markets expecting a slow pace of monetary tightening from the US Federal Reserve, meaning that it is possible that Gold could attempt a move towards $1270 and maintain the level around $1250 as its new support zone.
By Jameel Ahmad, VP of Corporate Development & Chief Market Analyst
It's been a surprising day today with the crude oil markets as they continue to find themselves facing a large amount of volatility in the wake of OPEC trying to cut a deal of production rates, but also the recent figures out from the US which paint an interesting picture. US crude oil inventories dipped to -5.25M on the back of a stronger demand for oil. This has cast the spotlight back on oil all together as it shows that the US despite showing some recent surpluses is back in the territory of seeing strong drawdown's again compared to more recent times. Coupled with the recovery of the US market and retail and labour markets looking much stronger it seems inevitable that we could see further drops in US oil reserves, which at one point were hitting record highs.
Technically speaking oil has been in a bearish uptrend for some time, but recently it had stalled as the USD looked to strengthen further and as markets were waiting on OPEC to produce tangible results that could affect the momentum of oil. Right now we are seeing oil sit around the weekly resistance level of 51.53 and it's likely we will continue to see strong pressure around this level as the market bulls are looking to break out after being contained for some time. After this major level the next long term resistance level could be found at 61.58. In the long run I would anticipate that these levels to certainly hold back momentum as they are weekly levels.
The Australian dollar managed to push higher today on the back of USD weakness, and as Chinese data came in around what was expected; bar industrial production y/y which came in at 6.1% (6.4% exp). The feeling is that the AUD can perform in the current marketplace and today's bullish lift is showing the way, despite the large amount of economic data and uncertainty at present. In the next few hours employment figures are due out and many are expecting to see a slight rise in unemployment levels, as underemployment coupled with a worsening economy continue to play havoc for the economy. A positive employment change in recent times has been categorised by a dip in full time work and a large rise in part time work, which has flow on effects for the economy in the long run.
Looking at the AUDUSD on the charts, the break out today was strong through the main level before touching resistance at 0.7733. The next level of resistance above this is 0.7754 and it's unlikely the AUDUSD can push through here unless we see a big change in the current employment figures and a drop in the unemployment rate. The real question will be if we see another wave lower, if so it's unlikely to be strongly bearish, as the most recent wave was quite bullish in nature.
Donald Trump failed to score points in final debate; ECB under the spotlight
With 19 days remaining to the U.S. presidential election, the republican nominee Donald Trump whose poll numbers have bottomed last week failed to score points against his opponent Hilary Clinton in the third and final debate, at least this is what the Mexican currency had declared. The Mexican Peso, widely seen as a proxy of the U.S. presidential debate rose slightly against the U.S. dollar in Asia trade and is up 6.8% since the first debate on September 26. If polls continue to show Clinton expanding her lead over Trump this will reduce market volatility ahead of the election day on November 8 and lead investors to focus mainly on the earning season which so far indicates a high possibility to exit five quarters of profit recession.
The Aussie was the biggest loser in foreign exchange markets, dropping 0.7% against the dollar to end a 6-day rally after data showed the Australian economy lost 9,800 jobs in September. The big surprise came from full-time jobs, or in other words “good quality jobs” which saw firms cutting 53,000 employees from their workforce, suggesting that the Reserve Bank of Australia should take some sort of action when they meet on November 1. The newly appointed governor Philip Lowe highlighted on Monday that there is a lot more slack in the labor market than what the unemployment rate suggests, so it will remain to be seen whether another interest rate cut is on the way.
Trader’s focus will shift into the European Central Bank meeting later today for any indication on whether the bank is considering tightening monetary policy soon. We don’t expect any action in today’s meeting but the Euro will be driven by forward guidance from Mr. Draghi who will be faced with questions related to a recent unofficial report indicating tapering asset purchases. If Mr. Draghi decides to turn hawkish on the slight improvement in recent Eurozone data, then we assume the Euro is currently trading on the lower range bound for the short run with the potential of recovering most of October’s losses. The recent rise in global bond yields will ease the pressure on the ECB to amend the rules on asset purchases, but any indication of amending those rules would suggest expanding the program beyond March 2017.
By Hussein Sayed, Chief Market Strategist (Gulf & MENA)
The US dollar has continued to find see strong support from the domestic markets as US housing prices lifted quite strongly to 5.5M (5.3M exp) showing continued confidence in the housing market from consumers. The Philly Fed Manufacturing Index also showed a strong result coming in at 9.7 (5.2 exp), it was however a dip on the previous months result, nonetheless it was still much better than expected and continues to add pressure to the USD bears who are betting against a US rate rise come December. For US data it really is the end of the week with mo more economic data due, but for the markets there is certainly one more day and one more trade that is looking very interesting.
The USDCAD for me is quite interesting at present as it continues to play of major levels and ignore trending all together at the best of times. However CPI data is due out for the Canadian economy on Friday evening, and many are expecting to see a slight boost to 0.2% (0.0% previous) and also retail sales to also lift as consumer confidence from the US crosses the border into Canada. The main catalyst for moves has also been oil which has been riding higher, however with the USD also riding higher it has caused a stagnation for the USDCAD is looks to range across the charts. While not providing a clear trend, traders are looking to take full of advantage of the levels.
USDCAD traders have so far struggled to cross the threshold at 1.3275 as it continues to hold out against any further movements higher. For many this level so far has been a line in the sand but the market is creeping back up towards it, but it will be a big what if, if it can breakthrough. Any touch here may see rejections and they are likely to find first level support at 1.3149, but also the 50 day moving average which has so far been acting as dynamic support for market movements lower. Beyond this the psychological level at 1.3001 also is a major sticking point, as the previous weeks movement saw a rush down towards it, but failed to crack through and then saw a hasty retreat back up the chart. In the long run it's likely the USD will take charge, but in the short term these key levels keep offering up plenty of pips for traders look to play of some very solid levels.
Lastly the USDJPY also has taken some of the spotlight recently after charging back up the charts, and yesterdays touch on support at 103.378 continues to show that markets are still somewhat bullish about the prospects of the USDJPY moving higher. The next major level above this is resistance at 104.657 and is likely to hold up large movements in the short term unless we see some major US economic news, as the USDJPY loves to range before breaking out sharply as we've seen time and time again in the past.
Stock markets were erratic on Thursday with most major arenas violently swinging between losses and gains as the messy combination of depressed oil prices, a resurgent Dollar and rising ECB stimulus hopes kept investors on edge. Asian stocks drifted lower during early trading on Friday pressured by falling oil prices which soured investor risk sentiment. Although European stocks displayed some resilience after European Central Bank President Draghi signalled that December could be the meeting to take action, Asia’s bearish domino could enforce downside pressures in Europe. U.S stocks were punished by weak earnings reports on Thursday with further losses expected as a strengthening Dollar and rising rate hike speculations repel investors from riskier assets.
Draghi dishes out the volatility
Euro/Dollar was chaotic on Thursday with prices crashing to four-month lows at 1.0915 after the ECB swiftly extinguished the persistent taper talk rumours. Although interest rates and the current 80 billion bond buying were left unchanged, markets were injected with volatility after Draghi stated that there were no discussions of extending the current Quantitative easing program beyond March 2017. With Draghi signalling that December will be key to take action, this almost mirrors the views of the Fed and reinforces the theme of central bank caution. Euro sensitivity may intensify in the coming weeks as investors re-evaluate the steps taken by the ECB in pending December meeting.
The EURUSD is under extreme pressure on the daily timeframe and could be poised for steeper declines once bears conquer 1.0900.
Dollar bulls return
The Greenback regained its dominance on Thursday with the Dollar Index lurching above 98.50 after Europe’s central bank rekindled expectations over further monetary stimulus in the future. Dollars upsurge was complimented by hawkish comments from Fed President William Dudley saying that the “Fed would move this year if the economy remains on track” which heightened optimism over a US interest rate increase in December. Sentiment is firmly bullish towards the Dollar with further inclines expected as speculators boost bets over the Fed breaking the trend of central bank caution this year.
The Dollar index is heavily bullish on the daily timeframe as there have been consistently higher highs and higher lows. A weekly close above 98.50 could encourage a further incline towards 99.50.
Currency spotlight – Sterling
Sterling was left vulnerable on Thursday after comments from Donald Tusk on how EU leaders will not engage in talks on Britain’s divorce from the single trading bloc at Theresa May’s first summit in Brussels simply revived hard Brexit fears. Additional remarks from French President Francois Hollande on how the UK should expect tough negotiations after the article 50 is triggered sparked further weakness in the currency. It is becoming clear that Sterling has been enveloped by political uncertainty with hard Brexit jitters ensuring prices remain depressed. Although UK data continues to point to some economic stability, Sterling may be destined for further declines as uncertainty entices bears to install repeated rounds of selling.
Earnings and Macro data to drive financial markets the week ahead
A pretty robust U.S. corporate announcements last week indicated that there’s a high chance for corporate America to get out of a profit recession which lasted for five consecutive quarters. According to factset, 78% of S&P 500 companies reported earnings that beat on the bottom-line and 65% beat on the top-line.
Upside earnings surprises is way above the historic average of 66%, which could be interpreted as good news for the overstretched equities valuations, however earning guidance is not showing the same trend with 10 out of 17 S&P 500 companies issuing a negative EPS guidance so far.
Another worrying signal is the level of cash sitting on the sidelines now. According to Blackrock, $50 trillion of worldwide holdings are in cash now, showing that many investors are concerned about the markets next move whether it’s in equities or fixed income.
The week ahead is very busy on the corporate front with more than third of S&P 500 companies reporting results. Many investors would like to know how many Iphones apple sold in the third quarter, while others are more interested in the Energy sector which was the main drag on earnings with companies such as Exxon Mobil and Chevron. General Motors, Alphabet, Caterpillar, P&G, Mylan, MasterCard, and Hershey are only a few among those reporting next week, so lot of data to digest.
On the macro front, third quarter GDP figures from UK and the US will be closely monitored by investors.
On Thursday, UK will offer a first glimpse into the performance of the economy after voting to leave the European Union. The flash Q3 GDP data is forecasted to show 0.3% growth compared to last year, less than half of second quarter’s 0.7%. Albeit growth is slowing, the immediate impact of the Brexit vote on the economy is far less than what had been expected, but this is likely to change if the divorce negotiations went the hard way, were a recession will be very hard to escape.
In the U.S. we’re looking for an opposite scenario, were economic activity likely picked up after a disappointing first half of 2016. Markets are looking for a 2.5% economic growth in Q3 from a 1.4% in Q2. Any figure below 2% will likely kill the idea of Fed raising rates in December, and thus pull back the dollar from its seven-month high.
By Hussein Sayed, Chief Market Strategist (Gulf & MENA)
Global stocks were resilient last week Friday with major arenas clawing back gains following the upbeat corporate earnings and stabilising oil prices which revived risk appetite. Asian shares floated into gains on Monday as the improving Japanese trade data propelled the Nikkei +0.29% higher. European markets have already commenced this week on a solid footing by borrowing Asia’s bullish momentum and this could influence Wall Street later today.
The looming event risk for stocks may be the upcoming US presidential election which may dish out extreme levels of volatility and uncertainty. Closer to the November 8th election date stocks may be vulnerable to heavy losses as the increasing uncertainty over who will claim the title of the 45th President of the United States encourages investors to scatter from riskier assets.
Dollar lurches to 8 months high
The Dollar sprung to fresh eight-month highs against a basket of currencies during early trading on Monday as expectations intensified over the Federal Reserve raising US interest rates this year. Hawkish comments from Fed President John Williams on how “it makes sense to get back to a pace of gradual rate increases” compounded to the basket of hawkish statements from Fed officials that heightened speculations of the central bank taking action in 2016. Investors may direct their attention towards key macro reports from the States this week such as consumer confidence and GDP which could offer further clarity on the health of the world’s largest economy. As of now, the sentiment is bullish towards the Dollar with bulls taking the front seat as speculators bolster bets over the Fed pulling the trigger in December.
Japan trade data displays resilience
Sentiment towards the Japanese economy was slightly uplifted during early trading on Monday following the stabilising trade data which quelled some concerns over slowing economic growth. It is common knowledge that Yen's resurgence amid risk aversion has heavily punished Japanese exports while soft global demand continues to add insult to injury. In September, Japanese exports tumbled 6.9% for the 12th consecutive month but the numbers were better than expected sparking discussions of a potential rebound in exports.
In light of this, Japanese manufacturing in October was an additional breath of fresh air as activity expanded at the fastest pace in almost nine months at 51.7 indicating that domestic demand could bolster economic growth. Although this flurry of economic data is somewhat encouraging, the major theme in Japan remains the lacklustre economic growth and tepid inflation levels which have pressured the Bank of Japan. The Yen could be poised for further gains as the looming presidential election sparks a risk of risk aversion consequently punishing Japan further.
Sterling under pressure
The toxic cocktail of political risk, persistent uncertainty and the lack of buying sentiment has made the Sterling a sellers dream. Economic data from the UK has become almost secondary with the major driver affecting the Pound revolving around hard Brexit talks. Sterling sensitivity to the downside remains a dominant theme with sellers exploiting the relief rally’s to send prices much lower. From a technical standpoint, the GBPUSD is bearish on the daily timeframe as there have been consistently lower lows and lower highs. A breakdown below 1.2200 could encourage a further decline lower towards 1.2000.
Commodity spotlight – Gold
Gold was pressured last week on Friday after hawkish comments from Fed President John Williams on how “it makes sense to get back to a pace of gradual rate increases” heightened optimism over a US interest rate increase in December. The zero yielding metal remains extremely sensitive to rate hike expectations with further losses expected if speculators boost bets over the Fed pulling the trigger this year. A resurgent Dollar could cap upside gains on Gold consequently providing an opportunity for bears to drag prices lower towards $1250.
From a technical standpoint, prices are trading below the daily 200 SMA. A daily close back below $1260 could encourage a steeper decline lower towards $1250.
