Risk appetite eased yesterday after a report said that China’s mood over a trade deal with the US is pessimistic. In the FX world, the pound was the main winner, aided by polls suggesting that the Conservative Party is heading towards a victory in the December elections. The Aussie was among the losers as the RBA minutes showed that officials discussed the case of easing at their latest meeting.
The dollar traded mixed against the other G10 currencies on Monday and during the Asian morning Tuesday. It gained against NOK, AUD and NZD, while it underperformed versus GBP, JPY, EUR and CAD. The greenback traded virtually unchanged against CHF and SEK.
The strengthening of the safe-haven yen combined with the weakening of the commodity-linked currencies AUD and NZD suggests that market sentiment took a hit at some point during the day. Indeed, most EU bourses closed in negative territory, following a CNBC report that China’s mood over a trade deal with the US is pessimistic. That said, US indices closed slightly positive, while today, Asian markets were mixed. What may have helped to counter the negative sentiment may have been a report saying that the US will extend the license allowing its firms to keep doing business with China’s Huawei, which keeps the prospect of signing a “phase one” deal alive.
Such a preliminary accord has been expected to be signed this month. Thus, although the recent optimism allowed US indices to hit record highs, as the time passes, investors could turn more cautious. They could still drive equities higher on positive narrative, but not at the same pace as before. On the other hand, headlines suggesting that there are even more obstacles towards signing an interim deal may provide reasons for participants to abandon equities more massively and seek safety in safe havens. In other words, although the outlook in equity markets remains positive, we believe the risk of a decent correction is increasing.
Nasdaq 100 continues to drift higher, trading above its short-term upside support line drawn from the low of October 10th. For now, the index is not really showing any possible signs which could lead the price to the downside. Looking at the cash index right now, we can see that there is still willingness among traders to push it a bit further north. But given that Nasdaq 100 seems to be slightly overstretched to the upside, there is a chance to see a small throwback. That said, as long as the price stays above the previously-mentioned upside line, we will class any throwback as a temporary correction before another leg of buying. We will stay somewhat bullish, at least for now.
If the price struggles to climb straight away above the 8358 barrier, marked near yesterday’s high, then we may see a small move lower towards the aforementioned upside line. If the line is able to provide some descent support and Nasdaq 100 rebounds from it, this could drive the index to the 8358 zone again for another test. If the bulls are stronger this time, a break of that area would confirm a forthcoming higher high and the price would enter an uncharted territory. One of the levels to consider there could be the 8400 mark.
Alternatively, if the above-discussed upside line fails to hold and the price slides below the 8273 hurdle, marked by yesterday’s low, this may trigger some more selling, as more bears might be joining in. We will then aim for the 8210 obstacle, a break of which my lead Nasdaq 100 to the 8156 level, marked by the low of November 6th.
Back to the currencies, the pound was the main gainer, keep climbing on the back of developments surrounding the UK political scene. Cable edged closer to the psychological zone of 1.3000 as more polls suggested that the Conservative Party is headed towards a victory at the elections on December 12th. What’s more, UK PM Johnson said that all 635 Tory candidates have pledged to support his Brexit deal. The latest poll gives Conservatives a 14-point lead, something that reduces the risk of another hung parliament and thereby more deadlock in the Brexit process.
Moving ahead, the driving force for the British currency is likely to continue being incoming polls and headlines surrounding the upcoming election. Anything suggesting that the Brexit riddle could be resolved by a Tory-majority in the UK Parliament could continue supporting the pound, helping Cable to decently bypass the 1.3000 zone. That said, we remain reluctant to trust a long-lasting recovery yet. Polls were proven wrong in estimating the support for Brexit back in 2016, and thus, we cannot put too much trust on them. If the elections result in another hung parliament, ratifying the deal Johnson agreed with the EU would be a very hard task, and thereby the risk of a disorderly exit could reemerge.
Flying from the UK to Australia, overnight, the RBA released the minutes of its latest policy gathering. Back then, the Bank decided to keep interest rates unchanged at 0.75% as was widely anticipated, and reiterated that they will continue to monitor developments, including in the labour market, and that they are prepared to ease monetary policy further if needed. However, they added a part saying that the easing in monetary policy since June is supporting employment and income growth, as well as a return of inflation to the medium-term target range. Back then, we interpreted this as message that officials are done cutting rates for now, unless something unexpected happens.
Having said all that though, the minutes showed that the Board agreed that a “case could be made” to ease monetary policy at this gathering, but decided that the most appropriate approach would be to maintain the current stance and make another full assessment once more evidence become available. In our view, the minutes painted a more dovish picture than the statement did, and they come after the nation’s disappointing employment report for October, which was released last week. Specifically, the unemployment rate ticked up to 5.3% from 5.2%, while the net chance in employment showed that the economy lost 19k jobs after gaining 14.7k in September. With the unemployment rate still distant from the 4.5% threshold, which the Bank believes it will start generating inflationary pressures, and the minutes showing that policymakers discussed the possibility of another rate decrease, traders may have remained unconvinced that the Bank will remain sidelined for long, and thereby pushed the Aussie lower. According to the ASX 30-day interbank cash rate futures implied yield curve, investors are now pricing in another 25bps rate decrease in May 2020.
Overall, GBP/UAD is still trading above its medium-term upwards moving trendline drawn from the low of July 30th. From the shorter-term perspective, the pair is balancing above its tentative upside support line taken from the low of November 8th. For now, everything is leaning towards the idea of a further move higher, but the rate is approaching its key resistance barrier, at 1.9093, which is the highest point of October. In order to get comfortable with higher areas, a break of that barrier is required, hence why we will remain cautiously bullish, for now.
If eventually GBP/AUD breaks the 1.9093 barrier, this would confirm a forthcoming higher high and more buyers could see it as a good opportunity to join in and drive the pair further north. This is when we will start examining the 1.9231 obstacle as our next potential resistance zone, marked by the low of June 10th, 2016. If the buying doesn’t stop there, a further push higher, beyond the 1.9231 obstacle, may lead the rate to the 1.9453 zone, marked by the low of June 23rd, 2016.
On the downside, if the previously-discussed upside support line fails to hold, breaks and GBP/AUD slides below the 1.8995 area, which is marked by an intraday swing low of yesterday, this could spook the bulls from the field for a while. We will then aim for the 1.8905 hurdle a break of which could send the rate to the 1.8815 zone, which acted as a good resistance level between November 11th and 13th. Now that area could play the role of support, from which the pair might rebound and move back up a bit. That said, if the rate struggles to move above the 1.9000 territory, we will continue looking south, at least for a while more. Another slide might push GBP/AUD below the 1.8815 hurdle and send it to the 1.8715 level, marked near the highs of November 6th, 7th and 8th. This is where the pair may also test its 200 EMA on the 4-hour chart.
During the European morning, we get Eurozone’s current account balance which is expected to show that the bloc’s surplus has declined somewhat to EUR 23.4bn from 25.7bn in August. In the UK, the CBI industrial trends orders index for November is forecast to have risen to -31 from -37.
From the US, we get building permits and housing starts for October. Building permits are expected to have stagnated after sliding 2.7% mom in September, while housing starts are forecast to have risen somewhat after falling -9.4% mom. We also get the API (American Petroleum Institute) weekly report on crude oil inventories, but as it is always the case, no forecast is available.
We also have two speakers on today’s agenda: New York Fed President John Williams and BoC Senior Deputy Governor Carolyn Wilkins.
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