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by Charalambos Pissouros

Risk Supported on US-China Headlines, RBA Stands Pat, NZ Jobs Data

Yesterday, the dollar and equities got boosted by headlines suggesting that the interim trade agreement between the US and China could be signed soon. That said, for today, focus may turn on the ISM non-manufacturing PMI for October. Overnight, the RBA stood pat and hinted that it is done cutting for now. As for tonight, during the early Asian morning Wednesday, New Zealand’s jobs report is due to be released.

USD and Equities Gain on Trade Optimism, ISM Non-manufacturing PMI in Focus

The dollar traded higher against all the other G10 currencies on Monday and during the Asian morning Tuesday. It gained the most versus NZD, SEK, NOK, and JPY in that order, while the currencies against which it gained the least were CAD, AUD and CHF.

USD performance G10 currencies

The driver behind the dollar’s strength may have been the same with that behind the rally in equities, and that’s optimism surrounding the US-China trade sequel. On Friday, White House Economic Advisor Larry Kudlow said that there has been “enormous progress” in the first phase of a trade deal, with China’s Commerce Ministry sharing the same view. What’s more, on Sunday, US Commerce Secretary Wilbur Ross said that the interim deal could be signed this month, and also added that US tariffs on imports of European and Asian cars could be suspended. Investors’ morale got another boost overnight following a report that the US is considering rolling back tariffs on Chinese goods, which were introduced on September 1st.

major global stock indices performance

More headlines suggesting that the world’s two largest economies are getting closer into resolving their prolonged trade conflict, could allow market participants to increase their risk exposure and perhaps push equities further north. However, for today, attention is likely to fall to the US ISM non-manufacturing PMI for October, which in September, fell to a three-year low of 52.6. Now the index is forecast to have risen somewhat, to 53.5.

On Friday, the ISM manufacturing PMI rebounded from its ten-year low, but stayed within contractionary territory, which, even after the better than expected employment report, may have allowed investors to maintain bets with regards to further easing by the Fed. According to the Fed funds futures, they are still pricing another cut to be delivered in July next year, despite the Fed signaling that it is planning to take the sidelines. In our view, a small rise in the non-manufacturing print is unlikely to vanish cut expectations, but it could allow market participants to push their timing back.

Fed funds futures Market vs FOMC interest rate expectations

USD/CAD – Technical Outlook

Although USD/CAD is currently trading slightly below the 200 EMA on the 4-hour chart, it is forming somewhat of a bullish flag pattern, which, according to the TA textbooks tends to break out to the upside. This pattern is supported by a sharp uprise, which was recorded on October 30th. That said, some additional confirmation breaks are needed before we could get comfortable with the upside. Until then, we will remain neutral and continue observing the price action.

In order to get comfortable with the upside, we need to see a break of the upper side of the flag and a push above the 1.3180 barrier, marked by an intraday swing low of October 11th and by an intraday swing high of October 30th. This way, the pair would be placed above its aforementioned 200 EMA and more buyers could be joining in. The rate might then rise to the 1.3208 obstacle, a break of which could send USD/CAD further north, potentially targeting the 1.3240 level. That level marks the high of October 15th.

Alternatively, if the break of the upper side of the flag never happens and the pair drifts below the 1.3100 zone, marked by the inside swing high of October 29th, this might spook even more bulls from the field and the rate may slide further. We will then aim for the 1.3075 hurdle, a break of which could set the stage for a test of the 1.3050 level, marked by the low of October 28th.

USD/CAD 4-hour chart technical analysis

RBA Hints a Cut Pause, New Zealand’s Jobs Data to be Released

Apart from headlines surrounding the US-China sequel, overnight, we also had an RBA policy decision. The Bank decided to stand pat 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, this time, 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. In our view, this is a signal that officials are done cutting rates for now, unless something unexpected happens.

The Aussie gained after the decision, suggesting that market participants interpreted the statement the same way we did. Indeed, according to the ASX 30-day interbank cash rate futures implied yield curve, ahead of the release, there was a 90% chance for another quarter-point cut to be delivered in June next year. Now that percentage has dropped to 60%.

ASX 30-day interbank cash rate futures yield curve

Flying from Australia to New Zealand, tonight, during the early Asian morning Wednesday, we get the nation’s employment data for Q3. The unemployment rate is expected to have edged up to 4.1% from 3.9%, while the employment change is anticipated to have slowed to +0.3% qoq from +0.8%. The Labor Costs index is also expected to have slowed, to +0.6% qoq form +0.8%.

New Zealand unemployment rate

The RBNZ’s latest meeting was held on the September 25th. Back then, officials decided to keep interest rates unchanged at +1.00%, maintained their easing bias, but did not provide hints that a November cut is a done deal, despite elevated expectations by the market. The Committee agreed that new information since August did not warrant a significant change in the policy outlook and added that there is still scope for more fiscal and monetary stimulus “if necessary”. The latest CPI data showed that the yoy rate slowed to +1.5% yoy from +1.7%, but still above the RBNZ’s latest projection for the quarter, which is at +1.3%. Yet, market participants remained more convinced than not that the Bank will cut rates at its upcoming meeting, assigning a 58% chance for such an action. Thus, a weak employment report is likely to drive that percentage higher.

With investors getting more convinced that the RBA will remain sidelined for an extended period, and that the RBNZ would still cut more, the AUD/NZD exchange rate may be poised to continue drifting north. Unless we get a surprisingly stellar jobs report from New Zealand tonight, which could prompt market participants to reduce their November-cut bets.

AUD/NZD – Technical Outlook

In the beginning of the day yesterday, AUD/NZD was on a steep downslide, which looked like it could continue for a bit more. That said, the pair found some decent support slightly above the 1.0700 zone, at the 1.0707 hurdle, from which it rebounded and pushed back to the upside. With such activity, AUD/NZD is now trading above its newly-established short-term tentative upside support line drawn from the low of October 23rd. Even if the pair decides to retrace back down again, as long as it remains above that line, we will stay cautiously bullish, at least for a while more.

A small push higher could help the rate test the 1.0787 barrier, marked by an intraday swing low of October 30th and an intraday swing high of October 31st, which may help keep the pair down for a bit. If so, AUD/NZD could correct back down, but if it remains above the 1.0746 hurdle, marked by an intraday swing low of yesterday, this could attract the buyers and we may see the pair rising again. Another test of the 1.0787 obstacle, and this time its break, could open the door for a further move higher. The next potential resistance area to consider might be the 1.0825 level, marked near the highs of September 16th and October 30th.

On the other hand, if the aforementioned upside line breaks and the rate slides below the 1.0707 hurdle, marked by yesterday’s low, this could increase the pair’s chances of drifting lower, as it would confirm a forthcoming lower low. This is when we will target the 1.0675 obstacle, a break of which could send the rate to the 1.0659 level, marked by the lowest point of October.

AUD/NZD 4-hour chart technical analysis

As for the Rest of Today’s Events

During the European morning, we get the UK services PMI for October, which is expected to have risen slightly, to 49.7 from 49.5. Later in the day, apart from the US ISM non-manufacturing index for October, we also get final Markit services and composite PMIs for the month, as well as the nation’s trade balance and the JOLTs Job Openings, both for September. We get trade balance data for September from Canada as well. With regards to the energy market, the API (American Petroleum Institute) weekly report on crude oil inventories is coming out.

As for the speakers, we have only one on today’s agenda: Dallas Fed President Robert Kaplan.

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