The US dollar is perched near the final support levels in a number of USD pairs ahead of Fed Chair testimony later this week and a busy economic calendar through the Friday payrolls and employment data. But global animal spirits are likely the more important drive in determining whether the US bear trend is set to deepen here.
Exchange rates are awfully quiet these days, but the directional move lower in the US dollar has finally extended enough in recent days to take the greenback to key levels that tell us whether a proper trend is unfolding here.
Most interesting scenario to challenge the weaker US dollar would be strong economic data that inspires higher US yields , range bound or lower yields with strong risk sentiment keep USD bears comfortable.
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The second economic crisis in just 12 years, coming as the wound from the first crisis has healed, has pushed policy to the event horizon of the macro. Never in history have global interest rates been pushed so hard towards zero. Moreover, there are massive increases in fiscal deficits on top of historically high debt levels.
Aggressive policy action in the first half of 2020 by central banks and governments has engineered a strong rebound in equity markets. The general belief is that humankind will overcome the Covid crisis with less damage than from the financial crisis in 2008. Global equities have fully succeeded to recover their losses during the pandemic’s first wave. However, the global corporate earnings collapsing by 56% – catapulting the P/E ratio to 27.7x at current price levels.
Expectations are high. Estimates suggest a 106% jump in quarterly earnings, which will then continue to climb until reaching a new all-time high in the fourth quarter of next year. If the corporate sector delivers this rebound in earnings, the global equity market will be valued at 19.3x earnings in 2021. Not an unreasonable valuation provided the alternatives in bonds.
Will the US economy be back into growth?
The New York Fed Weekly Activity Index, a real-time tracker of US economic growth, has revealed a V-shaped recovery since late April: although it is still at -5% as of mid-September. At the current trajectory, the US economy will be back into growth territory before the year-end.
The number of permanent job losses has jumped from 1.2 million before Covid to 3.41 million in August 2020. This is high but still, nothing compared to 2008. The number of job losses then jumped from 1.49 million to 6.82 million (and that was from a lower labor market size than today). According to CPB, world trade volume rebounded 7.6% m/m in June and is on track to continue the rebound. This indicates that things are normalizing, even though global trade is in its worst period since the GFC.
All eyes on inflation and volatility
According to our analysis, there is the probability of a rebound of corporate earnings to pre-Covid levels within the next 18 months, but the long-term growth rate from that point on is much more uncertain. In both financial markets and the economy, the two most important factors for investors over the coming decade will be inflation and volatility.
US equities may start the week on hopes that a stimulus deal will be forthcoming and as US earnings season is set to get underway in earnest this week with the large financials in the spotlight. Most Fibonacci retracements have fallen on this latest rally as the focus will soon shift to the all-time highs for the major indices – for the Nasdaq 100 at 12,423 and the S&P 500 at 3,576.
Still watching and waiting here as this is a currency pair the expectation that the global economy can begin to eventually look beyond Covid-19 (and effectively already can now for much of Asia) and that fiscal stimulus will drive inflation and commodity prices higher. The AUDUSD has traded in a very narrow range for over two weeks now as bulls wait for the signal that a 0.7400+ break is unfolding that can shift the focus perhaps all the way to 0.8000+ if the USD is set for a major weakening move. On the flip-side – declining US long yields are a confusing factor here and if this represents a concern on the growth outlook, the reflation trade may yet falter. Still, a breakdown in AUDUSD only looks a threat if the price action retreats below 0.7200.
Our information/charts are NOT buy/sell recommendations. Are strictly provided for educational purposes only. As always ,trade at your own risk and analysis.
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Nasdaq 100 (USNAS100.I) : Friday’s session saw notable contrast in the closing levels for the tech-heavy Nasdaq 100, which closed near the lows of the day. The S&P 500 generally clawed back of the lost territory from early in the session.
The Nasdaq 100 technicals look more precarious as the attempt at new local highs above 11,540 was beaten back in Friday’s session. Both indices are settled near the key 21-day and 55-day moving averages (11,240 for Nasdaq-100 and 3,340 for the S&P500). The shorter moving average is crossing below the longer one in today’s pre-market.
AUD/USD - an RBA meeting on Monday night is not generating widespread anticipation of any policy shift. There had been some noise recently on the prospects of a small additional cut to the current 0.25% policy rate. Governor Lowe has said that he would like the Australian dollar lower. However, he didn’t seem to indicate any urgency to do anything about it. Some commodity prices prominent in Australia’s export mix have suffered weakness recently. The AUD/USD has held above 0.7000 and is now likely to reach the key 0.7200-50 area. With a rally and close above this level indicate that the downside threat has likely been averted for now.
WTI Crude Oil
WTI Crude Oil (OILUSNOV20) - have bounced following the weekly drop since June as the market focus on an apparent improvement in the health of Donald Trump than the rising supply from Libya and concerns about the sustained recovery in consumption. The current range-bound trading behavior reveals a market that remains torn between short-term weakness against the expectations for growth, the timing of which, however, continues to be delayed. The essential area of resistance in Brent remains the band from $42.5/b to $43.25/b. The support continues to be found towards $39/b.
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The reaction of markets last week to Pfizer’s announcement that its vaccine has proved 90% effective in trials gave investors a taste of the potential recovery to come. UK stocks – which have dramatically underperformed their US counterparts delivered their best week since April, with the FTSE 100 gaining 6.9% and the FTSE 250 up 7.6%.
Brexit: if last week wasn’t the week, will this finally be the week we know more? The supposed November 15 deadline for an agreement on the post-Brexit landscape came and went and now this week is being billed as the crunch week for negotiations, although some sources suggest the talks could stretch out longer still. UK Prime Minister Boris Johnson has been distracted with the exit of key advisors and had to self-isolate this weekend due to exposure to someone who later tested positive for Covid-19. GBP doesn’t seem to mind the latest extension of the uncertainty as EURGBP remains below the key 0.9000 level, but it is time for a breakthrough soon.
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The GBP went from strength to weakness and then partially back to strength again yesterday on the crossfire of conflicting news stories. The recent bounce in sterling was on the softening tone domestically on Boris Johnson’s Brexit Bill. Then a sterling sell-off materialized in the wake of the Bank of England meeting recently, when the bank made it clear that was conferring with regulators on the practical requirements for the implementation of negative rates, even if it signaled that it was happy with where rates are at present. The news saw a 2-year swaps price as much as 5 basis points lower and the forward expectations are now for a BoE policy rate of -0.1%. Likely more important for sterling than negative rates is whether the UK can hammer out a post-Brexit transition trade deal on reasonable terms with the EU, and on that front, we suddenly saw the first set of positive headlines in a long while.
The UK side called the latest informal talks “useful” and the EU’s Von Der Leyen told the FT that she is convinced a deal can be done. NIRP is only profoundly negative if the immediate trigger is hard Brexit terms, while less so if it is because the UK economy is merely following other economies into a new phase of weak Crude oil found a bid following the recent sharp correction and break below the trend that had prevailed since June. Driving the recovery has been upbeat economic data from China and the U.S., the world's biggest consumers, along with a general improvement in the risk appetite after U.S. mega-cap stocks found support.
Most important last week was the strong verbal intervention given by Saudi Energy Minister Prince Abdulaziz bin Salman, following the OPEC+ meeting. He opened the meeting with a forceful condemnation of members that try to get away with pumping too much crude.
Potentially a sign of frustration that OPEC+ production cuts have yet to deliver a strong recovery. The minister was probably also trying to prevent increased short selling amid what the IEA, OPEC, and BP call a fragile demand recovery at a time of very high spare capacity and inventories. Since July when fundamentals, but not the price, started to weaken the gross short held by hedge funds in WTI and Brent crude oil has more than doubled to 235 million barrels.
While short-sellers may move the market for a short period, fundamentals will always be the main driver. While the recent 15% correction in Brent crude oil helped to bring the price more in line with current fundamentals, a recovery from here needs more than verbal intervention, despite it coming from the world’s biggest producer on second-round virus risks.
Gold and Silver were traded slightly higher last week, despite some midweek softness after the FOMC delivered nothing new and U.S. stocks challenged support. The Fed has promised rock-bottom rates for longer than three years. The initial cross-market reaction with lower stocks and a stronger dollar raised some concerns that the Fed’s toolbox has started to look empty, with the element of surprise no longer there.
The lack of fresh input from bonds and the dollar has meant that algorithmic trading systems, often trading correlations between markets, have moved to the driving seat, thereby creating an unusually positive correlation between gold and stocks. Correlations work as a trading strategy to a point. The very short-term direction may be dictated by the stock market.
The combination of inflation protection attracting demand, the positive views on when a vaccine against Covid-19, and the outlook for a weaker dollar will become available are all too optimistic. With these developments in mind and the potential for a very difficult U.S. election period ahead, we see a long-term bullish outlook for gold. Meanwhile, in the short term, the performance of U.S. mega-caps and the dollar hold the key to the direction. As a result, it is likely to see the two-month consolidation period being extended further.
According to US Election Projections, more than 80 million ballots have already been cast, which is 58% of the total 2016 turnout. As a result of these early ballots and mail-in ballots, election day may turn into election week or even election month! The election day is Tuesday. If there is a decisive winner in the swing states, it may be over quickly. However, the loser of the election may bring the results to the Supreme Court citing anything from mail fraud to international interference.
If the US elections are uncertain and drag-on, that may be the only factor driving the markets next week. However, there still are other topics to watch. Most importantly is the reemergence of the coronavirus in Europe and the US. Some countries in Europe, such as Germany, Spain, and France have gone under national lockdown. Other countries have imposed additional national restrictions and curfews, such as Italy and Ireland. The UK currently has localized lockdowns and restrictions. Some speculate national lockdowns may be ahead. Last Thursday, over 500,000 positive cases were reported worldwide for the day, a new daily record. In the US, up until this point, states impose their restrictions on restaurants, schooling, and curfews. However, if Joe Biden wins the Presidential elections, he has said he will implement national restrictions. Which brings us to another issue: the next President doesn’t get sworn in until January 20th. Many hoped for a new fiscal stimulus deal by the time election day arrived. If Trump loses, the US may not see one until February. To make matter worse, if Joe Biden wins the election, but Republicans maintain the Senate, it may take even longer for package to get done.
Mid-November is the goal to have a deal in place. However, the BOE cannot wait any longer. The Central Bank will provide more stimulus due to the expected fallout from the new round of coronavirus cases.The central bank currently has rates set at 10bps.
There is speculation the BOE may cut to 0 bps while setting the table for negative rates.The commodity sector has seen a sharp reversal from the strong gains recorded during the past couple of months. Faced with a renewed surge in Covid-19 cases in Europe and the U.S. as well as next week’s ultimate risk event, the U.S. presidential election, it is perhaps not that surprising to see investors turn more defensive.
Brent crude oil tumbled below $39/b support in response to a bigger-than-expected jump in U.S. stockpiles and renewed lockdowns being introduced in France and Germany with other European countries set to follow suit during the coming week. Overall, however, we suspect that a combination of long liquidation having run its course and vocal intervention from OPEC+ ahead of $35/b may prevent the price from falling much further.
The commodities most at risk being the ones where speculators are holding large and mostly long positions as the focus switches from a long-term bullish outlook to a short-term and more defensive attitude.
Tech stocks and energy names dragged all three major US stock indices into the red last week. The Nasdaq Composite fell hardest, losing 4.1%. Moreover, the slump took the Nasdaq into correction territory on Tuesday, as the index has fallen more than 10% from its record high set less than a week earlier. Tesla closed the week 10% lower, Amazon fell 5.4%, and Apple was down 7.4%, as investors questioned the fragility of the tech sector’s recent runup and opted to take profits. The price of crude oil dropping below $40 once more was also another source of pain in the financial markets. Chevron and Exxon Mobil also lost more than 5% over the week, while exploration names such as Occidental and Apache fell by double-digits.
London-listed stocks recorded gains last week. The significant tensions between the United Kingdom and the European Union over Brexit sent the value of the pound tumbling. Sterling fell from close to $1.33 on Monday to $1.28 by the weekend. Any movement for sterling tends to lead to a positive result for UK share prices, given the high percentage of revenues that large listed British stocks make overseas in different currencies. The FTSE 100 added 4% over the week. On the other hand, the FTSE 250 – which has more of a domestic-overseas balance – added 1.2%. Several FTSE 100 names gained more than 10% last week, including miner Rio Tinto, insurer Aviva, and JD Sports Fashion. It was a good week for miners in general, with Glencore and Anglo American both posting gains of close to 10%. At the other end of the spectrum, British Airways parent International Consolidated Airlines Group suffered another tough week, falling by more than 10%, with its year-to-date loss standing at 68.9%.
Last week the ECB kept policy unchanged at its monthly meeting and did not push back against EURUSD strength.
The Band of Canada kept policy unchanged, as well as its GoC bond purchase commitment of a minimum C$5bn per week.
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The Australian Dollar seems to be pulledin two directions simultaneously. On the negative side is the dovish RBA Governor Lowe speech last week that appears to be a setup for a full QE programme announcement at the November 3rd meeting. On the positive side are the solid bounce-back in risk sentiment and the strong Chinese data overnight, with the weak Q3 GDP numbers off-set by strong September Industrial Production and Retail Sales data. Moreover, the Chinese yuan is trading back toward the cycle highs despite the recent apparent attempt to slow its rise. A move lower in AUD/USD pair here below 0.7000 and AUDJPY below 74.00 may be more up to US stimulus prospects and risk sentiment supporting safe havens rather than any isolated AUD weakness.
Australian Dollar is in danger to sink
Governor Lowe said last week: “As the economy opens up…it is reasonable to expect that further monetary easing would get more traction than was the case earlier”. In our opinion, the speech suggests a readiness to ease further as the economy continues upon the reopening trajectory with restrictions being wound back gradually and state borders beginning to reopen.
The Governor did flag the potential drawbacks to further policy easing centered around financial stability concerns but went on to emphasize the near term risks to financial stability posed by labor market conditions and private sector balance sheets over the longer-dated concerns surrounding inflated asset prices and speculation. In many ways, echoing recent Fed communique indicating the trade-off between jobs and incentivizing speculation in housing and financial markets. In that trade-off, the labor market alongside progress toward long-term objectives of full employment and meeting inflation targets wins for central banks. With the macroeconomic stability concerns perhaps a job for the likes of APRA.
The Governor also signaled larger central bank balance sheet increases in other countries and the ACGB 10yr yield remaining high on a relative basis. Reasonably a nod to their trans-Tasman fellows at the RBNZ who have been more proactive in their policy responses. Besides, a recognition of the role a weaker currency could play in policy transmission. In our opinion, evidence of a shift toward outright QE with the intent of lowering longer-dated yields. Although the timing of this movement less certain that the lowering of the cash rate, YCC target, and TFF rate in November.
The final dovish pivot was again a nod to a recent communique from the Fed centered around enhancing dovish forward guidance and committing “big” to inflation. The Governor signaled a shift toward “putting a greater weight on actual, not forecast, inflation”, in our view committing to not raise the cash rate until actual inflation is within the 2-3% target range. A shift that mirrors the Fed’s recent pivot toward average inflation targeting (AIT). Validating that the Australian economy will be left to run hot before the board raises the cash rate.
Taken together the commentary signals a readiness to continue to support the revival via additional easing of monetary policy, with little reason to wait. As such, we expect at the next board meeting in November a 15bp cut in the cash rate, YCC target, and TFF rate to 10bps. However, the timing of an outright QE package could possibly be extended into 2021.
The RBA may hold fire on the outright QE package, monitoring the evolution of household and business spending throughout the December quarter as government assistance becomes more targeted. Perhaps holding back on the launch of an outright QE package until Q1 of 2021 in a bid to cushion the fiscal cliff set to emerge as support rules are wound back.
More US stimulus?
The US stimulus question may finally be nearing a
near-term resolution as the weekend saw US House Speaker Nancy Pelosi issuing a 48-hour deadline (apparently Tuesday night) for a stimulus deal if anyone expects something to pass before the election. Some Republicans are willing to burn bridges to Trump due to the Democrats’ commanding lead in the polls and at odds with the president on whether a big stimulus package is advisable. The headlines suggest that stimulus prospects are still strong. Even when they appeared less strongly recently, the narrative seemed to be that the rising odds of a Democratic clean sweep of Congress and the presidency at the election will mean a far bigger package will be coming by spring either way. The market feels somewhat complacent here, and there is room for a mishap on the stimulus front that sees another modest leg higher in the US dollar, but confidence in reading the market here is low.
The EUR/JPY pair might fall in the medium term. According to the daily chart, the RSI oscillator is near the overbought level (72). The MACD indicator continues for the moment the positive trend but soon will become negative. The Fibonacci level has already reached 76% on the daily chart. Moreover, on the weekly chart, the Stochastic oscillator remains near the top level, and the RSI oscillator stays at 65, near the overbought level.
The most important data of this week:
Japan GDP YoY (-27.2% expectation); (-2.2% previous)
QoQ (-7.6% expectation); (-0.6% previous)
Eurozone inflation YoY (1.2% expectation); (0.8% previous)
MoM (-0.5% expectation); (0.3% previous)
Japan inflation YoY (0.1% expectation); (0.00% previous)
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