Yesterday, EU markets traded in the green, US indices slid, while today in Asia, risk appetite recovered again. It seems that investors are reluctant to assume a clear direction ahead of the high-level trade negotiations between US and Chinese officials on Thursday and Friday. In the UK, the pound stayed pressured, perhaps due to uncertainty surrounding the Brexit landscape. In the EM world, the Turkish lira slumped on fears of a Turkish invasion in Syria, as well as due to Trump’s threats against Turkey.
The dollar traded higher against most of the other G10 currencies on Monday and during the Asian morning Tuesday. It lost ground only against CAD and slightly versus NZD and CHF, while it gained the most versus SEK, JPY and NOK.
The performance in the FX world does not paint a clear picture with regards to the broader market sentiment, but the fact that the yen was among the main losers suggests that risk appetite may have been supported throughout most of the day. Indeed, major EU indices ended their session in the green, and although the US ones failed to follow through and slid, the Asian ones also closed positive today.
It seems that investors are reluctant to assume a clear direction ahead of the high-level trade negotiations between US and Chinese officials on Thursday and Friday. In Asian trading Monday, investors seemed to have returned to their desks with some cautiousness as a Bloomberg report said that Chinese officials are reluctant to agree to a broad trade deal with the US. That said, given that expectations around a final and sealed deal have been already low, risk appetite recovered during the EU trading. It deteriorated somewhat again during the US session, perhaps due to Washington’s decision to blacklist 28 Chinese companies, but recovered today in Asia.
China’s reluctance to pursue a final accord could mean that they may prefer to wait for a new US president before doing so, as this may result in more favorable terms for them. That said, they would also like to avoid new tariffs. US President Trump said that new tariffs will kick in if there is no progress in this round of talks. So, China may agree on a preliminary deal, or find common ground in the majority of differences, something that may prove supportive for the broader market sentiment. Now, if the two sides are unable to make any progressive steps, this could lead to more tit-for-tat tariffs and thereby, further slowdown in global economic activity.
After last week’s strong move to the downside, Nasdaq 100 managed to recover almost all of its losses made during that slide. Looking at the 4-hour chart, we can see that the index is now back, not only above its short-term tentative upside support line taken from the low of August 6th, but also above the 200 EMA. That said, given the current uncertainty in the markets, there is a possibility we could see a bit correction to the downside, before another potential move higher. This is why, although we would like to stay cautiously bullish, we would wait for a clear break through one of our levels, before examining a further directional move.
In order for us to start considering previous highs again we will wait for a clear break above the 7822 barrier, which is marked by the highs of September 26th and October 1st. This way, more buyers could see it as a good opportunity to join in and lift the price to the 7880 hurdle, which is the high of September 24th. Nasdaq 100 may stall around there initially, or even retrace slightly lower. That said, if it struggles to get back below the 7822 hurdle, this is when the buyers could re-enter and push the index back to the 7880 obstacle, a break of which could set the stage for a further move north to the 7950 level, marked near the high of September 19th.
In order to examine slightly lower areas again, a break of the 7671 hurdle and the aforementioned upside line is needed. This way, the buyers might get spooked from the arena and the sellers may send the index to the 7610 hurdle, a break of which could allow Nasdaq 100 to drift a bit lower, towards the 7577 zone. That zone is marked by an intraday swing high of October 2nd. But if that area is still no match for the sellers, its break may lead the price to the 7526 level, marked near an intraday swing low of October 3rd.
Back to the currencies, the pound was also among yesterday’s losers, perhaps staying pressured due to the uncertainty surrounding the Brexit sequel. Last week, UK PM Boris Johnson made a Brexit offer to the EU, proposing an all-island regulatory zone in Ireland to cover all traded goods, with comments from several EU officials suggesting that Johnson’s plan will hit a dead end. Johnson has been consistently holding the view that the UK will leave the EU by October 31st, with or without a deal, but also said that he will not break the law requiring him to ask for a new extension if a deal is not reached by October 19th.
Yesterday, a Scottish court rejected a plea to force Johnson to abide by that law, saying that he had given assurance he would do so. With the clock ticking towards the current deadline, it will be interesting to see how he could do that. One way is to find common ground with the EU by October 19th, something that appears to be a hard task at the moment. Another way, according to media reports, is to ask for a delay post-October 19th, but also pressure several EU members into refusing the extension.
In the emerging-market sphere, the Turkish lira was hurt the most among EM currencies due to concerns that Turkey will carry out an invasion against Syria’s Kurds after the US withdrawn its forces from northeastern Syria. Trump also said that he could destroy Turkey’s economy if it takes “off limits” actions. Remember that, following a diplomatic conflict between the US and Turkey last year, the lira fell off the cliff, dragging the nation’s economy into recession for the first time in a decade.
Currently, GBP/CAD seems to be stuck between the two lines, an upside and a downside one. Both of the lines are short-term and tentative. The upside one is taken from the low of September 3rd and the downside one is drawn from the high of September 20th. Overall, the pattern reminds us of a wide symmetrical triangle. For now, it seems that pair may move lower inside that formation, but there is a good chance to see a small correction higher, given that the pair is approaching a strong support area, at 1.6328. Then, if it struggles to move beyond all of its EMAs, this could result in another slide.
As mentioned above, if the rate gets a hold-up near the 1.6328 hurdle, this could push it back up a bit. That said, if the pair struggles to move past all of its EMAs, then this may result in another round of selling, possibly this time bringing GBP/CAD below the 1.6328 obstacle and targeting the aforementioned upside line, or the 1.6255 level, marked near the lows of September 27th and October 1st.
If the pair suddenly moves higher and breaks the previously-discussed downside line and climbs above the 1.6470 barrier, this could spook the bears from the field and more bulls could be joining in. GBP/CAD may then rise to the 1.6553 resistance area, marked by the high of October 3rd. The rate might stall there for a bit, or even correct back down slightly. That said, if the pair continues to trade above that downside line, we could see the bulls charging again and sending the rate beyond the 1.6553 obstacle and aiming for the 1.6580 hurdle, or the 1.6640 level, marked by the high of September 19th.
The US PPIs for September are due to be released. Both the headline and core rates are expected to have remained unchanged at +1.8% yoy and +2.3% yoy respectively, which could raise speculation that the CPIs, due out on Thursday, may have held steady as well. The NFIB Small Business Optimism index for September is also coming out, but no forecast is currently available.
As for the speakers, we have three on today’s agenda: BoE MPC members Andy Haldane and Silvana Tenreyro, Fed Chair Jerome Powell and Chicago Fed President Charles Evans. We will pay close attention to Powell’s remarks, as this will be his first speech after the disappointment in the ISM PMIs. Despite the latest projections of the FOMC suggesting no more cuts this year, the Committee was largely divided on that front, with investors staying convinced that officials will act again. According to the Fed funds futures, they see a 71% chance for another quarter-point cut to be delivered at the upcoming gathering. Thus, it would be interesting to see whether Powell believes that further easing may be appropriate.
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