The US dollar rallied yesterday and equities took a U-turn on Trump halting the Stimulus package talks. Later on today, investors will keep their eyes on the FOMC minutes from the previous meeting.
The US dollar outperformed all but one of the other G10 currencies on Tuesday and during the Asian morning Wednesday it gained the most against NOK, AUD, NZD, and GBP in that order, while it was found virtually unchanged versus JPY.
The strengthening of the dollar and the yen, combined with the weakening of the risk-linked Aussie and Kiwi, suggests that markets took a 180-degree at some point, with investors’ appetite deteriorating. Indeed, turning our gaze to the equity world, we see that, even though major EU indices traded in the green, the US ones tumbled, losing on average 1.44% each. During the Asian session today, sentiment was more mixed, with Japan’s Nikkei 225 sliding 0.24% and Hong Kong’s Hang Seng gaining 0.52%. Chinese markets remained closed in celebration of the National Day.
It seems that during the EU session, investors continued to cheer President Trump’s return to the White House, as well as the positive headlines over a fresh US stimulus package. However, the party was stopped by Trump himself, who, using his twitter account, said he is calling off negotiations over a new coronavirus-aid bill until after the election. “Immediately after I win, we will pass a major Stimulus Bill that focuses on hardworking Americans and Small Business”, he added. On top of that, Fed Chair Jerome Powell warned that the US economy could slip into a downward spiral if the pandemic is not controlled and called for more economic support.
Yesterday’s market reaction adds credence to the view we’ve been expressing recently, namely, not to trust a long-lasting boost in investors’ appetite. Apart from the fact that the US President is unpredictable, coronavirus cases continue to rise at a fast pace around the globe, while another source of uncertainty may be the US election. As we get closer to the election day, investors may start getting more nervous.
As for today thought, the main item on the agenda may be the minutes from the latest FOMC gathering. At that meeting, the Committee kept its policy unchanged, but changed its inflation language noting that they “will aim to achieve inflation moderately above 2% for some time so that inflation averages 2% over time”. With regards to the new economic projections, officials revised up their GDP and inflation forecasts, and downgraded the unemployment rate ones, while the new dot plot suggested that interest rates are likely to stay at present levels at least through 2023. That said, looking at the details, we see that one member was in favor of a hike in 2022, and four saw rates higher in 2023. Combined with the inflation forecast of 2023, which is at 2%, this shows that some members may not be willing to tolerate inflation above target for long as pointed in the decision statement. Thus, we will dig into the minutes to see whether this is the case or not. If the minutes reveal that there are several members against tolerating inflation above 2% for some time, equities and risk-linked assets are likely to come under selling interest, while safe-havens are likely to gain. The opposite may be true in case the minutes reveal that the decision was unanimous, something we see as the least likely scenario based on the dot plot.
Yesterday, USD/CHF rebounded strongly from its support area between the 0.9133 and 0.9137 levels. The steep uprise also led to a break of a short-term tentative downside resistance line taken from the high of September 28th. Today, we can see that the pair is finding resistance near the 0.9183 area. Although the downside line was broken, in order to aim for further advances, a strong push above that barrier, at 0.9183, would be needed.
If the rate does manage to climb above the 0.9183 hurdle, that may open the door for a move towards the next possible resistance zone, at 0.9218, marked near the high of October 2nd, which is also the current highest point of this month. USD/CHF could stall there for a bit, or even correct back down. However, if the pair is able to remain above the previously mentioned 0.9183 zone, that might keep the bulls active for a while. They could even take advantage of the lower rate and lift USD/CHF higher. If this time the 0.9218 obstacle fails to provide resistance and breaks, the next potential resistance area may be between the 0.9245 and 0.9250 levels, marked by the high of September 30th and the low September 25th respectively.
Alternatively, if USD/CHF moves back below the aforementioned downside line and then falls below the previously-discussed support area between the 0.9133 and 0.9137 levels, that may attract more sellers into the game. Such a move would confirm a forthcoming lower low and increase the pair’s chances of drifting further south. That’s when we will aim for the 0.9115 obstacle, a break of which could clear the path to the 0.9087 zone, marked by the low of September 21st.
Nasdaq 100 took a dive, yesterday, together with the rest of the US indices. The technical picture on our 4-hour chart suggests that there could be a small head-and-shoulders pattern forming, with a neckline near the 11234 hurdle. However, although there might be some more downside to come in the short-run, let’s not forget that overall, the index is still balancing above a medium-term tentative upside support line drawn from the low of March 23rd.
If, eventually, the 11234 area breaks and the price moves lower, that would confirm the head-and-shoulders pattern idea, potentially opening the way towards the next possible support zone, at 11028, marked by the inside swing high of September 24th. Slightly below it runs the aforementioned upside line, which may provide additional support. If so, a rebound from that area could drive Nasdaq 100 back to the 11234 hurdle, a break of which might set the stage for a push towards a short-term tentative downside resistance line taken from the high of October 1st. The price may get halted there for a while.
Alternatively, if the previously mentioned upside line breaks and the price slides below the 10830 hurdle, marked by the low of September 25th, that may signal a change in the medium-term trend, possibly clearing the path towards lower areas. More bulls could start fleeing the field, allowing the bears to push Nasdaq 100 further south. The index could then drift to the 10676 obstacle, a break of which could send the price to the 10513 level, marked near the lows of July 28th, 29th and 30th.
Canada will deliver its Ivey PMI number for September. So far, no expectation for that reading is available, at the moment, but the previous figure was at 67.8, which is good, given that the number back in May was only at 22.8.
We will also get the weekly crude oil inventory number from the US, which is expected to have risen from -1.980mln to 0.294mln barrels. If so, that could have a negative effect on the price of oil. However, let’s not forget that last week we had a similar forecast, but the reading came out even lower than the previous figure.
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