The dollar and US equity indices gained yesterday after US President Trump noted that a deal with China may be reached sooner than people expect. Among the G10s, the pound was the main loser, perhaps as buyers of the currency were disappointed by the lack of any progress in the first day of the UK Parliament’s return to work after the Supreme Court’s decision to rule its suspension as unlawful.
After tumbling on Tuesday, the dollar rebounded yesterday, and today, it is found higher against all but one of the other G10 currencies. The greenback gained the most against GBP, SEK and CHF, while the currency against which it failed to eke out any gains was CAD, with USD/CAD trading virtually unchanged.
On Tuesday, the dollar’s tumble came alongside the slide in equities and this was due to US President Trump’s harsh comments against China at the United Nations, but most importantly, due to the impeachment call by Democrats of the House of Representatives. The negative sentiment continued during the Asian and EU sessions yesterday, but everything took a 180-degree spin during the US session, with the US indices finishing their session in the green and the US dollar outperforming almost all of its major peers.
What may have lifted investors’ appetite and made them forget about the impeachment inquiry may have been fresh comments by the US President, who noted that a deal for ending the trade dispute between the US and China could be found sooner than people expect. These comments came after Trump and Japan’s PM Abe reached a limited trade accord, another development in support of the broader market sentiment.
Looking ahead, our view has not changed much. We still don’t expect Trump to be removed from office and that’s because a two-third support in the Republican-controlled Senate is highly unlikely to be secured. The big question is whether this story will weigh on his chances of being re-elected next year, and how this may affect his policies. The dilemma we were in was whether Trump will soften his stance in the US-China saga in order to revive his election chances, or whether he would trigger another round of escalation, which may risk throwing the US economy into recession during a potential Democratic presidency.
His latest comments suggest that after the impeachment calls, he may have decided to proceed the first strategy. However, one word that surely does not describe the US President is “predictable” and thus, we would still stay cautious with regards to a long-lasting recovery in investors’ appetite. Until we see signatures and handshakes, we cannot rule out things falling apart again, even after the new round of negotiations that is scheduled for the beginnings of next month.
Looking at our DJIA cash index, we can see that the index is trading well above its short-term tentative upside line drawn from the low of August 6th. At the same time, the price continues to balance above its 200 EMA on a 4-hour chart and also is struggling to move below the 26700 area. That said, from around the middle of last week, DJIA keeps on forming lower highs, while running below a short-term downside line taken from the high of September 19th. Taking into account everything what was said above, for now, we will stay neutral and wait for a clear break through one of our key barriers, before we examine a further directional move.
If the index continues to respect the aforementioned downside line, moves lower and breaks the 200 EMA, together with the 26700 hurdle, this may invite more sellers into the game and increase the chances of seeing a further slide. We will then target the 26550 zone, marked by the high of August 30th, a break of which could send DJIA to the 26365 level. That level marks the high of September 2nd and an intraday swig high of September 4th.
Alternatively, if DJIA decides to break the downside line and push above yesterday’s high, at 27020, the short-term outlook may turn somewhat positive again. The next obstacle on the way up could be the 27115 hurdle, a break of which might lift the price to the high of last week, at 27265. Slightly above that, at around 27315, sits the current highest point of September. Both of those levels may provide good resistance and the index could retrace slightly lower from there. That said, if DJIA is unable to shift back below the 27000 mark, the buyers may take control again and send the index higher. A break of the 27315 barrier may set the stage for a re-test of the all-time high, at around the 27400 level, reached on July 15th.
Coming back to the FX sphere, after being among Tuesday’s main gainers due to the UK Supreme Court’s decision to rule Parliament’s suspension as unlawful, the pound was Wednesday’s main loser. Yesterday, UK lawmakers returned to work, with GBP-bulls perhaps awaiting new actions towards averting a disorderly Brexit on October 31st. That said, no concrete steps were taken, with Labour Leader Jeremy Corbyn saying that he would call for a no-confidence vote against Johnson only if he is certain a no-deal Brexit is not going to happen, and PM Johnson sticking to his guns that he would not seek a new extension.
With the clock ticking towards the October 31st deadline, this leaves us at the same spot we were ahead of the suspension, with the risk of a no-deal exit still on the table. Even if Johnson softens his stance and decides to ask for a new delay, still that risk will not totally vanish in our view. Yes, something like that could support the pound, but in order for a new extension to take flesh and the pound to sustain any gains, consent from all EU member states is needed, something that is far from a given.
With the British currency hostage to headlines surrounding Brexit saga, it is hard to arrive to any safe conclusions with regards to its forthcoming directional move. If we were to exploit any further weakness, we would prefer to do it against currencies which we expect to stand tall. One of them is the Canadian dollar. Yesterday, it was the main gainer among the G10s, despite the slide in oil prices. It seems that in an environment where most central banks are in an easing mode, the neutral stance of the BoC, which has not turned eyes to the cut button yet, could provide some support to the Loonie. Yes, the BoE maintained a hiking bias at its latest meeting, but the case for gradual rate increases is conditional upon a smooth Brexit, and up until we have clear signals on what form Brexit may take, we prefer to keep the BoE out of the equation.
GBP/CAD sold off heavily yesterday, where at one point, it was around 180 pips down. The pair started its slide from the early hours of the European morning and continued to do that throughout the day. The rate almost managed to reach its 200 EMA on the 4-hour chart, but fell shy of just a few pips from reaching it. GBP/CAD is now trading below its short-term tentative downside resistance line taken from the high of September 20th. At the same time, the pair remains above a short-term upside line drawn from the low of August 9th. But given the fact that the rate had distanced itself quite a bit from that upside line, there is a chance that it may continue drifting closer towards that line, hence why we will stay cautiously bearish for now.
A drop below yesterday’s low, near the 1.6368 hurdle, could push the rate a bit lower towards the 1.6333 zone. That zone marks the high of September 5th. Initially, it may stall the pair, or even allow it to correct back up a bit. But as long as GBP/CAD remains below the aforementioned downside line, the bears could quickly jump back into the driver’s seat and send the rate down towards the 1.6333 obstacle, a break of which could set the stage for a move towards the 1.6300 level, marked near the highs of September 9th and 11th.
On the upside, if GBP/CAD breaks the aforementioned downside line and pushes above the 1.6470 barrier again, this could invite more buyers back into the game and the rate may get lifted to the 1.6577 zone. That zone marks the high of September 24th. Initially, the pair could stall there for a bit, but if the buying interest remains, a break of that zone could open the door for a further move higher, possibly aiming for the 1.6617 territory, which is near the high of September 18th.
The final US GDP for Q2 is due to be released and it is expected to confirm its second estimate, namely that the economy slowed to +2.0% qoq SAAR from +3.1% in Q1. Having said that, we expect the release to pass largely unnoticed. We are running the final days of Q3 and there are models already pointing to how the economy may have performed during this quarter. The Atlanta Fed GDPNow model estimates that growth in Q3 is +1.9% qoq SAAR, while the New York Nowcast points to a 2.24% qoq SAAR growth rate. Pending home sales for August and initial jobless claims for last week are also coming out. Pending home sales are expected to have rebounded 0.9% mom after a 2.5% slide in July, while jobless claims are anticipated to have increased somewhat, to 212k from 208k.
As for tonight, during the Asian morning Friday, Japan’s Tokyo CPIs for September are due to be released. The headline rate is forecast to have increased to +0.8% from +0.6%, while the core one is anticipated to have ticked down to +0.6% yoy from +0.7%. This could raise speculation that the National rates for the month may move in a similar fashion.
At last week’s gathering, the BoJ decided to keep its ultra-loose policy and forward guidance unchanged, disappointing those who expected some form of easing, or at least a more dovish language. That said, the Bank added that it would pay closer attention to the possibility of losing its momentum towards hitting its inflation aim, and that they will reexamine developments at their next meeting. Thus, with inflation staying stubbornly well below the Bank’s objective of 2%, the probability for additional easing soon is likely to increase.
We also have eight speakers on today’s agenda: From the ECB, we will get to hear from President Mario Draghi and Governing Council member Jens Weidmann, while from the BoE, Governor Mark Carney will speak. In the US, we have Fed Vice Chair Richard Clarida, Dallas President Robert Kaplan, St. Louis President James Bullard, Minneapolis President Neel Kashkari and San Francisco President Mary Daly.
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