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by Charalambos Pissouros

Risk-off on US-China Headlines, US NFPs and ISM Index in Focus

Risk appetite was hurt yesterday, following a report saying that China is doubting over whether a long-lasting trade deal with the US can be reached. That said, sentiment improved during the Asian trading today, after the rise in China’s Caixin manufacturing PMI for October. Now, the spotlight is likely to turn to the US employment report and the ISM manufacturing index, as investors try to figure out whether the Fed will cut rates again, despite signaling a halt on Wednesday.

China’s Doubts Dent Market Sentiment, US NFPs and ISM manuf. Enter the Spotlight

The dollar traded mixed against the other G10 currencies on Thursday and during the Asian morning Friday. It gained against AUD, NOK and SEK in that order, while it underperformed versus JPY, GBP, CHF, and NZD. The greenback was found virtually unchanged against EUR and CAD.

USD performance G10 currencies

The strengthening of the yen and the weakening of the Aussie suggest that market sentiment was hurt, at least during the most part of the day. Indeed, major EU and US indices closed their trading in the red, feeling the heat of a report saying that China is having doubts over reaching a finalized and long-lasting trade deal with the US, due to concerns that President Trump may back off even from the interim accord both sides already agreed to sign in coming weeks. Later in the day, Trump said that they would soon announce an new venue for doing so after Chile canceled the APEC (Asian Pacific Economic Cooperation) summit, but his comments were not enough to cheer investors up.

Major global stock indices performance

What managed to boost somewhat their appetite was China’s Caixin manufacturing PMI for October, which rose to 51.7 from 51.4, instead of sliding to 51.0 as was the consensus. Most Asian indices traded in the green, with China’s Shanghai Composite gaining 0.99%. Japan’s Nikkei 225 was among the exceptions, sliding 0.33%. The Caixin report came in contrast with the nation’s official manufacturing PMI, which was released yesterday and showed that the sector contracted further, suggesting that factory activity in China expanded at its fastest pace in more than two years.

As for today, investors are likely to turn their attention to the US employment report for October, as well as the ISM manufacturing PMI for the month. With regards to the employment data, the unemployment rate is expected to have ticked up to 3.6%, while nonfarm payrolls are anticipated to have slowed to 89k from 136k in September. Average hourly earnings are expected to have slowed to +0.3% mom from +0.4%, which barring any revisions to the prior monthly prints, would drive the yoy rate up to +3.0% from +2.9%. The ISM manufacturing index is expected to have risen somewhat, but to have remained below the 50 boom-or-bust zone. Specifically, it is expected to have increased to 48.9 from 47.8.

On Wednesday, the FOMC decided to cut its interest rates by another 25bps, but signaled that it planning to stay sidelined for now, unless things fall out of orbit. That said, investors remained largely unconvinced on whether the Fed has stopped cutting rates, especially after the core PCE index, which is the Fed’s favorite inflation metric, slid further below the 2% target. It ticked down to +1.7% yoy from +1.8%. According to the Fed funds futures, investors are now fully pricing in another quarter-point cut for April next year. So, having all this in mind, a slowdown in employment growth and another contraction in the manufacturing activity may prompt participants to bring that timing forth.

Fed funds futures market vs FOMC rate expectations

AUD/JPY – Technical Outlook

Overall, AUD/JPY continues to trade above its tentative upside support line drawn from the low of August 25th. But the pair had distanced itself quite a bit from that line recently. Yesterday, after finding strong resistance near the 75.30 hurdle, AUD/JPY sold off strongly and fell below its 21 EMA. Such a move increases the chances of another possible slide, at least in the near term. But let’s not forget that this move lower could still be part of a larger correction, as long as the pair remains above that upside line. This is why, from the short-term perspective, we will take a cautiously-bearish position and aim a bit lower.

A drop below yesterday’s low, at 74.31, would confirm a forthcoming lower low on a shorter timeframe and the rate might drift further south, possibly targeting the 73.95 hurdle. That hurdle is marked near the low of October 24th and 25th. Initially, the rate could stall around there, but if the selling continues, AUD/JPY might end up moving to the 73.68 area, which is marked by the high of October 15th and by an intraday swing low of October 17th. This is also where the rate could meet its 200 EMA on the 4-hour chart, which may provide additional support.

On the upside, a push back above the 74.82 barrier, which marks the high of October 22nd, would place the rate above the 21 EMA again and this could lead the pair towards the high of this week, at 75.30 for another test. AUD/JPY might initially stall around there, but if the bulls are feeling more comfortable than the bears, a break of that obstacle would confirm a forthcoming higher high and the pair may drift to the 75.81 level, marked by an inside swing low of July 19th.

AUD/JPY 4-hour chart technical analysis

NZD/USD – Technical Outlook

After a calm start this week, it was unclear which way NZD/USD might end up going. But on Wednesday the pair exploded to the upside and continued to move higher yesterday. This move got the rate close to its key barrier, at 0.6435, which finally got tested during the early hours of today. Once again, the 0.6435 hurdle kept NZD/USD down. But this could just be a temporary occurrence, as the pair may go for a small correction down, before another leg of buying. That said, before getting comfortable with higher areas, a break of that hurdle is needed, hence why we will stay side-lined, for now.

If we get another push above the 0.6435 barrier, which marks the high of October 22nd, this may invite more buyers into the game and the rate could accelerate further up, possibly bypassing the 0.6450 obstacle and aiming for the 0.6474 zone, marked by the high of August 12th. The pair might stall around there, or even correct back down a bit. But if NZD/USD remains above the 0.6435 area, we will stay positive, at least over the short-term period. Another boost by the bulls could bring the rate above the 0.6474 obstacle and target the psychological 0.6500 level, marked near the high of August 9th.

Alternatively, if the rate slides back below the 0.6392 hurdle, marked by yesterday’s low, this would also place the pair below its 21 EMA on the 4-hour chart and we may abandon the upside scenario, at least for a while. Such a move may increase NZD/USD’s chances of drifting lower, as the buyers might get spooked temporarily. This could allow the rate to move further down towards the 0.6375 obstacle, a break of which might send the pair to the 0.6333 level, which is the low of this week.

NZD/USD 4-hour chart technical analysis

As for the Rest of Today’s Events

Apart from the US employment report and the ISM manufacturing index, we also get the UK manufacturing PMI for October, which is expected to have slid to 48.1 from 48.3, and the US final Markit PMI for the month, which is expected to confirm its preliminary estimate of 51.5.

We also have three Fed speakers on today’s agenda: Fed Vice Chair Richard Clarida, New York Fed President John Williams, and Fed Board Governor Randal Quarles.

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