18 / 10 / 2017 | Technical Analysis

Technical Analysis 18.10.2017 - EUR/JPY: Ichimoku clouds

Let's look at the four-hour chart. Tenkan-sen line is below Kijun-sen, the red line is directed upwards, while the blue one remains horizontal. Confirmative line Chikou Span has crossed the price chart from above, current cloud is descending. The instrument has been corrected to the Tenkan-sen line. One of the previous minimums of Chikou Span line is expected to be a support level (131.86). The closest resistance level is Tenkan-sen line (132.09).



On the daily chart Tenkan-sen line is above Kijun-sen, the lines are horizontal . Confirmative line Chikou Span is approaching the price chart from above, current cloud is ascending. The instrument has broken down Tenkan-sen and Kijun-sen lines. One of the previous minimums of Chikou Span line is expected to be a support level (131.28). The closest resistance level is Kijun-sen line (132.49).



This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.

 
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18 / 10 / 2017 | Market News

Fundamental Analysis 18.10.2017 - Market Outlook

There are several big speakers taking the stage today at an ECB conference on structural reforms in the euro area. ECB President Draghi gives the opening speech, while ECB Chief Economist Praet chairs a panel discussion on the political economy of reforms and Executive Board Member Coeure chairs a panel on reforms and governance. I don’t expect anything market moving to come out of these panels.

Aside from that, the European morning will be focused again on Britain as the UK labor market data is released. The figures show the same split between employment and wages  that many countries are puzzling over.

The unemployment rate is expected to remain unchanged at 4.3%, the lowest it’s been since 1975, while the number of new jobs is forecast to increase substantially – not as many as last month, but still well above trend. 



However, there’s no sign of an acceleration in wages – average earnings total is expected to rise at the same year-on-year rate as in the previous month, while growth in base wages excluding bonuses is forecast to slow a bit.

Nonetheless, I expect the figures would be modestly beneficial for sterling, because many people still expect that as the labor market remains tight, eventually wages will have to go up and drag prices up with them.

US housing starts and building permits for September 2017 were expected to be down slightly from the previous month. That stands to reason, given that there were massive hurricanes in Texas and Florida that would interrupt building. However, any decline should be only temporary – there’s likely to be a surge in Q4 as people start rebuilding their destroyed homes (although the labor shortage in the building industry will mean only a limited increase). That’s why I don’t think anyone will care about a decline now.



Canadian manufacturing sales are forecast to be down for the third consecutive month, which could be a negative for CAD. However, the pace of decline has slowed notably, so it might not have that big an impact.



The Fed releases the “Summary of Commentary on Current Economic Conditions”, also known as the Beige Book, as always two weeks before the next FOMC meeting. The book doesn’t have any number attached to it, but many research firms do calculate a “Beige Book index” by counting how many times various words appear, such as “uncertain.” In any case, the book is largely anecdotal so you’ll just have to watch the headlines as they come out.







This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.


 

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17 / 10 / 2017 | Technical Analysis

Technical Analysis 17.10.2017 - CAD/CHF: Ichimoku clouds

Let's look at the four-hour chart. Tenkan-sen and Kijun-sen lines have merged, the lines are horizontal . Confirmative line Chikou Span is below the price chart, current cloud is descending. The instrument has entered the cloud. The closest support level is the lower border of the cloud (0.77793). The closest resistance level is the upper border of the cloud (0.78028).



On the daily chart Tenkan-sen line is below Kijun-sen, the lines are horizontal . Confirmative line Chikou Span is crossing the price chart from above, current cloud is ascending. The instrument has broken down Tenkan-sen and Kijun-sen lines. The closest support level is the upper border of the cloud (0.77460). The closest resistance level is Kijun-sen line (0.78400).




This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.

 
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17 / 10 / 2017 | Market News

Fundamental Analysis 17.10.2017 - Market Outlook

USD gained on two main factors: 

1) an incredible surge in the Empire State manufacturing index, and

2) Trump meeting with and being impressed by John Taylor, inventor of the eponymious Taylor Rule for calculating an appropriate level for a central bank’s main rate.

Taylor is probably the most hawkish of all the candidates for Fed chair. If his rule were applied nowadays, the Fed funds rate would be about 250 bps higher than it currently is, and indeed even higher than most of the FOMC members think is the appropriate “long term” rate where Fed funds should settle once things are back to normal (3%). Taylor thinks that long-term level should be closer to 4%, which is higher than anyone currently on the FOMC thinks (the highest estimate is 3.5%). He did say last week though that he did not think "rules should be used as a way to tie central bankers' hands,” even though that’s exactly what a lot of Republican members of Congress would like to see. 



Trump is expected to interview current Fed Chair Yellen on Thursday 19th October 2017.

On the other hand, CAD was the weakest G10 currency. Over the weekend, Bank of Canada Gov. Poloz said that Canada’s economy may be entering a point in the business cycle where growth can accelerate without triggering inflation. He said investment could fuel growth while expanding production capacity at the same time, thereby preventing inflation. This view, coupled with a disappointing result from the BoC’s survey of managers Monday, pushed the odds of a rate hike this year down to 45.8% from 53.4% on Friday 13th October 2017 and caused CAD to weaken.

I think there could be further reconsideration of the Canadian interest rate story ahead of next week’s BoC meeting, which could push CAD lower still. Watch for Friday 20th October 2017’s Canadian inflation numbers, which could change the story again.

EUR was only vaguely affected by the rising tensions in Spain, while GBP was only mildly affected by further headlines about looming disaster in the Brexit talks.

Today’s market

The focus during the European day will be squarely on the UK as Bank of England Gov. Carney and two of his colleagues from the Monetary Policy Committee (MPC), Silvana Tenreyro and David Ramsden, appear before the UK Parliament’s Treasury Committee. This is the first time since the June election that Carney has spoken here. Tenreyro and Ramsden are the newest members of the MPC and this is their first appearance.

Carney appeared on CNBC on Friday 13th October 2017 and repeated his view that the BoE is “running out’ of spare capacity and it therefore may be “appropriate” to raise rates “in coming months.” He declined to say when more specifically or to be drawn on whether this would be a one-off hike or the start of a tightening cycle. 

The graph below shows how the market has interpreted the MPC’s changing views. The green line shows the market’s estimate of the likelihood of a rise in rates at or before the November 2017 MPC meeting. Note how those odds fell after the August 2017 meeting, when Carney warned about the uncertainties caused by Brexit, and then soared after the last MPC meeting in September 2017, when the statement added the fateful words that “some withdrawal of monetary stimulus is likely to be appropriate over the coming months.” 



At the same time as those three are elucidating their positions to the Right Honorable Members of Parliament, the UK CPI will be announced. It’s expected to show a further acceleration in inflation, which would probably seal the deal on a rate hike in November 2017. It could also propel GBP higher, at least temporarily – assuming no bad news on Brexit during the day. 



Germany’s ZEW survey is expected to move ever higher. This is a survey of analysts and investors, not people who really do something, and so is more of an indicator of sentiment than of activity. Given that Germany’s DAX stock market index is at a record high, I’d say investor sentiment is pretty good, which suggests that expectations of a further rise in the index are reasonable. The current situation index is forecast to hit 88.5, not far off the record high of 91.5 set in May 2011. EUR-positive.



Then we wait until the US day begins.

The US indicators start with import prices, a second-tier index that is somewhat important for its theoretical implications for the CPI. But imported goods are only part of total goods, and in any event some 40% of the CPI is comprised of housing costs, which aren’t influenced at all by imports. Nonetheless, the index does seem to have a significant impact on EUR/USD over the 1-hour horizon. The forecast is for a modest acceleration in price increases, so it may be positive for the dollar.

However notice how much more slowly import prices excluding petroleum (the green line) are rising – only 1% yoy, vs the forecast 2.6% for overall import prices. Moreover, based on the consensus forecast for the mom change in that index, it’s expected to stay at +1.0% yoy this month, showing no acceleration. Given that the Fed targets core inflation, not headline inflation, that should be negative for the dollar. But it probably won’t be, because people don’t look that hard at this one. 



US industrial production is probably more important for the market. The figure is forecast to show a month-on-month rise slightly higher than the six-month moving average, which would be excellent considering that it includes the effects of the two hurricanes during the month. I think a positive figure would show the resilience of the US economy and be positive for the dollar. 


 

The National Association of Home Builders (NAHB) housing market index is expected to be unchanged. The index peaked in March 2017 at almost a 12-year high, so the fact that it’s stuck at a slightly lower level now is nothing to be alarmed at. USD-neutral

Overnight in Australia we get the Westpac-Melbourne Institute leading index. No forecast is available, but it does seem to affect AUD significantly in the hour following the release. The index seems to be on a downward trend; a further decline could be expected to be negative for AUD.



The main event overnight though will be President Xi’s opening speech to the 19th Conference of the Communist Party of China (CPC). These congresses take place every five years to elect the people and approve the policies for the next five years. This congress marks the start of Xi’s second and presumably final term. China experts say Xi is likely to use the event to further solidify his position. As for what he’s likely to do when he’s even more solidly in charge…well, we’ll have to wait to hear what he has to say. My guess is that he’s likely to promise wonderful things, which could give AUD and NZD a temporary boost.  







This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.


 

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16 / 10 / 2017 | Technical Analysis

Technical Analysis 16.10.2017 - EUR/JPY: Ichimoku clouds

Let's look at the four-hour chart. Tenkan-sen line is below Kijun-sen, the red line is directed downwards, while the blue one remains horizontal. Confirmative line Chikou Span is below the price chart, current cloud is descending. The instrument has broken down the cloud and is still falling. One of the previous minimums of Chikou Span line is expected to be a support level (131.211). The closest resistance level is the upper border of the cloud (132.311).



On the daily chart Tenkan-sen line is above Kijun-sen, the blue line is directed upwards, while the red one remains horizontal. Confirmative line Chikou Span is above the price chart, current cloud is ascending. The instrument has broken down Tenkan-sen and Kijun-sen lines. The closest support level is the upper border of the cloud (130.074). The closest resistance level is Kijun-sen line (132.157).



This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.
 
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16 / 10 / 2017 | Market News

Fundamental Analysis 16.10.2017 - Market Outlook

EUR was the biggest loser since last Friday 13th October 2017, although the movement wasn’t that great. The drop could be just a reaction to USD strength after Fed Chair Janet Yellen on Sunday 15th October 2017 reiterated her long-standing view that inflation will eventually accelerate and the Fed intends to keep raising rates gradually. (Just FYI, ECB’s Draghi and Bank of England’s Carney agreed with her on inflation.) Why anyone would think she would say anything different is beyond me; perhaps they were worried that Friday 13th October 2017’s slightly lower-than-expected US CPI might have changed her view.

I wonder though if the EUR weakness also reflects the return of political concerns to Europe. There were two significant elections in Europe on Sunday 15th October 2017, and both didn’t go the way the markets would have preferred.

The Austrian center-right People’s Party came in first in the election for the Austrian National Council, with the far-right Freedom Party coming in second. The ruling Social Democrats came in third. The two right-wing parties will now form a government. Austria is now likely to align itself more with the eastern European countries that have clashed with Brussels over some EU policies, notably migration. Secondly, in Germany, PM Merkel’s CDU party posted its worst result in the state of Lower Saxony since 1959. The result may weaken Merkel’s hand in talks that begin on Wednesday 18th October to form a national coalition.

Political uncertainty has faded recently in Europe, especially since the CDU won the national ballot three weeks ago, but these elections together with the tensions in Spain (see below) may bring back a political risk premium to the euro.

Speaking of political risk premium, NZD was the biggest gainer even though the politicians failed to achieve a breakthrough over the weekend. Acting PM English said it could take until the end of the week to confirm the country’s next government. Nonetheless NZD and AUD both held onto much of their gains from Friday 13th October, when the disappointing US CPI came out.

Today’s market

The main indicators for the day are over already – China’s CPI came out as expected at 1.6% yoy (down from 1.8%), while PPI rose more than expected to 6.9% yoy from 6.3%. The PPI is what’s important for global inflation, since China exports so much. The jump in Chinese PPI inflation does make it marginally more likely that Western countries will hit their inflation targets.   

We’re now waiting to see how Catalonia clarifies its declaration of suspended independence from last week – when Catalan President Puigdemont said the vote gave the region the right to be “an independent state,” but that the state had been “suspended” for a few weeks pending talks.

Spanish PM Rajoy has given Puigdemont until 10 AM local time today to state whether they actually declared independence. If he says they didn’t, then fine. If he says they did, then he will have three days to reconsider, after which Rajoy will seek official approval to defenestrate the Catalan government and govern the region from Madrid. That would be almost sure to involve huge demonstrations, which could rebound against the euro.

The developments in Catalan haven’t had that much of an impact on the Euro yet, as the EU authorities have stayed totally out of the picture. The graph shows that as the spread of 10yr Spanish bonds widened out relative to German bonds, the green line, EUR/USD, the purple line, was pretty steady. That may be because the EU and other regional authorities have been careful to stay out of the crisis. But if the situation worsens, I think we can expect some contagion and a knock-on effect on the euro.


 

In the US, the Empire State manufacturing index is expected to fall slightly, as is the Philadelphia index, which will be released on Thursday. The decline in the Empire State index is nothing to be concerned about, seeing as it was recently at the highest level in three years anyway (and second highest since 2010). It stands to reason given the diminishing prospects for tax reform or any kind of fiscal stimulus. USD-neutral.

While it’s not usually given on most FX calendars, the sub-index for new orders is closely watched by economists as a leading index of manufacturing strength. In September it hit the highest level since Oct. 2009. Even if the headline number falls more than expected, we could see USD gain if the new orders figure rises further. 



After that, it’s all quiet until Tuesday morning in New Zealand, when the Q3 CPI will be released. The market expects it to hit 1.9% yoy, above the Reserve Bank of New Zealand’s forecast for the quarter and close to their 2% target.



Faster NZ inflation could be positive for NZD and see AUD/NZD fall further. Right now there’s slightly less tightening priced into NZD (the green line below) than AUD (the purple line). An acceleration in NZ inflation could narrow that gap and push AUD/NZD down.



The minutes of the 3 October meeting of the Reserve Bank of Australia (RBA) will be released. We should get more clarity on their views about such key issues as housing, consumers and the labor market. However, the statement and the decision didn’t have a lasting impact when they were released – AUD/USD fell 30 pips immediately following the announcement, but had regained it all four hours later and was higher by the end of the (European) day. Thus it’s unlikely that the minutes will reveal anything to dramatically change people’s view of the RBA, particularly since the twice-yearly Financial Stability Review was recently published. AUD-neutral.







This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.


 

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16 / 10 / 2017 | Market Outlook

Marshall Gittler's Market Outlook 16.10.2017-20.10.2017

Themes of the week: Catalonia, NAFTA talks, US tax reforms, Brexit negotiations

 
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13 / 10 / 2017 | Market News

Fundamental Analysis 13.10.2017 - Market Outlook

The EU’s chief Brexit negotiator, Michel Barnier, sent GBP plunging and then soaring. He said there was a “deadlock” in the talks over the question of how much the UK would pay the EU to leave. But later, the German newspaper Handelsblatt cited him as saying that the EU could offer Britain a two-year transition period during which Britain would stay in the EU’s single market if Britain agreed to settle its financial obligations with the EU. That would mean additional time to hammer out the details of the separation and reduce the odds of a “hard Brexit,” where Britain just crashes out of the EU without any agreement.

Reports that the ECB is considering cutting its monthly bond purchases in half from January while keeping it going for at least nine months didn’t have much impact when they first surfaced, but since then EUR has weakened further. Since the ECB has said it won’t start raising rates until it has ended the bond purchases, the long delay until then means rates will remain lower for longer, which is negative for EUR.

NZD rose as the market anticipated that New Zealand First Party would complete talks on a coalition government over the weekend. It also benefited from some pressure on AUD/NZD from the Reserve Bank of Australia (RBA) Financial Stability Report, which said regulatory measures are constraining some borrowers, meaning there’s less need for interest rates to rise to control borrowing.
CAD on the other hand fell as the US proposed a “sunset clause” for NAFTA deal, meaning NAFTA would expire every five years unless all three parties agreed to keep it going. This would be a disaster for anyone considering an investment that needs NAFTA to continue. Lower oil prices and a fall in new house prices didn’t help the currency, either.

Today’s market
Once again, nothing major during the European day. The final German CPI will be coming out, but it usually isn’t any different than the preliminary version.

The US CPI on the other hand is a big, big deal. It’s expected to accelerate both at the headline level and the core level. Energy prices will play a big role in pushing prices up as gasoline prices rose in the wake of Hurricane Harvey in Texas, whereas the seasonal adjustment assumes prices fall during this period.

Although this isn’t the inflation measure that the Fed officially targets, it seems that people pay more attention to this one than to the official target (which is the core personal consumption expenditure deflator). With the headline figure leaping over 2% and core inflation accelerating as well, it would seem to confirm all the prognostications from various Fed officials that inflation is likely to hit their target level.



At the same time, US retail sales are expected to soar, at least at the headline level. The figure there is temporarily inflated by soaring gasoline prices (and therefore gasoline sales) as a result of the hurricanes. Auto sales also rose as people started to replace some of the 300k autos damaged in the Houston flooding. And even after excluding autos and gasoline, they’re forecast to rise at an above-trend rate owing to sales of building materials. The increase in retail sales should also prove positive for the dollar.



Consumer confidence is expected to be more or less unchanged. In combination with the other solid reports from the US, it would probably confirm to the market the resilience of the US economy and would therefore be dollar positive. 



There are a number of speakers in the US afternoon. ECB Governing Council Vice President Vitor Constancio will participate in a panel discussion on “The European Spring?”.

Two of the FOMC’s doves – both voters -- speak today, but since both have spoken recently anyway, I don’t expect their comments to be market-moving. Chicago Fed President Charles Evans discusses current economic conditions and monetary policy in Wisconsin. He spoke on Wednesday and said, “I’m thinking it’s going to take a little bit longer to get up to 2% than many people. We might need a continued accommodative stance…”  Dallas Fed President Robert Kaplan will appear in a moderated Q&A session in Boston. He was at a similar event on Tuesday, when he said he wanted to see more signs that inflation was accelerating before raising rates.

Fed Governor Jerome Powell was scheduled to be the keynote speaker at the Boston Fed’s annual economic conference, but cancelled a few days before. Fed spokesmen said that the cancellation is routine, but there’s bound to be some speculation, because Powell is thought to be one of the front runners for head of the Fed when Janet Yellen’s term finishes next February.

On Sunday, the Group of 30 holds two high-powered events in Washington. Unlike the G7, G10, or G20, the G30 is a public and private-sector organization that brings together central bankers, the heads of various financial institutions, and some academics to discuss financial and systemic issues. First there’s a panel discussion on “The Global Economy: Prospects for Broad-Based Growth,” featuring Fed Chair Yellen, PBOC Gov.  Zhou, BoJ Gov. Kuroda, and ECB VP Constâncio, After that there’s a panel discussion on “Financial Regulation and Economic Policies to Avoid the Next Crisis,” featuring US NEC Director Cohn, RBI Gov. Patel, and Bundesbank President Weidmann, and Banco de Mexico Gov. Carstens.







This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.

 
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13 / 10 / 2017 | Technical Analysis

Technical Analysis 13.10.2017 - CAD/CHF: Ichimoku clouds

Let's look at the four-hour chart. Tenkan-sen line has crossed Kijun-sen from below, the red line is directed upwards, while the blue one remains horizontal. Confirmative line Chikou Span is crossing the price chart from below, current cloud is ascending. The instrument has broken through the cloud and slowed down its growth. The closest support level is the upper border of the cloud (0.7813). One of the previous maximums of Chikou Span line is expected to be a resistance level (0.7871).



On the daily chart Tenkan-sen line is below Kijun-sen, the red line is directed upwards, while the blue one remains horizontal. Confirmative line Chikou Span is approaching the price chart from above, current cloud is ascending. The instrument is trading between Tenkan-sen and Kijun-sen lines. The closest support level is the upper border of the cloud (0.7813). The closest resistance level is Kijun-sen line (0.7842).




This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.

 
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12 / 10 / 2017 | Technical Analysis

Technical Analysis 12.10.2017 - EUR/JPY: Ichimoku clouds

Let's look at the four-hour chart. Tenkan-sen line is above Kijun-sen, the blue line is directed upwards, while the red one remains horizontal. Confirmative line Chikou Span is above the price chart, current cloud is ascending. The instrument is trading above Tenkan-sen and Kijun-sen lines; the Bullish trend is still strong. The closest support level is the upper border of the cloud (132.982). One of the previous maximums of Chikou Span line is expected to be a resistance level (133.720).



On the daily chart Tenkan-sen line is above Kijun-sen, the lines are horizontal . Confirmative line Chikou Span is above the price chart, current cloud is ascending. The instrument is trading above Tenkan-sen and Kijun-sen lines; the Bullish trend is still strong. The closest support level is Tenkan-sen line (132.523). One of the previous maximums of Chikou Span line is expected to be a resistance level (134.305).



This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.
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