Daily Analysis | 31 October 2017
Equities dropped a little yesterday alongside USD/JPY, while gold rose, following news that the investigators probing the Russian interference in the 2016 US election charged Trump’s ex-campaign manager Paul Manafort with 12 charges, including money laundering. Even though these charges relate to issues prior to 2016 and thus are not related to Trump’s presidential campaign, the increase in political uncertainty was likely a key driver for the aforementioned market moves.
Besides any further news we may get on the Russian investigation this week, the White House announced yesterday that it will introduce an initial tax reform bill on Wednesday, while media reports suggest Trump will declare his choice for Fed Chair on Thursday. Considering that this week also includes an FOMC decision on Wednesday and the US employment report on Friday, USD traders will probably have their hands full for the next days.
Overall, we view the risks surrounding the dollar from all these events as likely tilted to the downside. In terms of tax cuts, media reports yesterday suggested that the highly-anticipated reduction in the corporate tax rate may not take full effect until 2022, something likely to weigh on markets if confirmed. Meanwhile, although we expect the Fed to keep the door wide open for a December hike, with market pricing for such action already at 97%, any hints that this is not entirely a done deal could well hurt the greenback. With regards to the next Fed Chair, Powell is seen as the clear favorite by betting markets. Given his usually cautious stance on policy, his nomination could confirm expectations that the current ultra-slow approach to raising rates may continue.
USD/JPY traded lower on Monday, breaking two support (now turned into resistance) barriers in a row. Bearing in mind that the latest slide came after the rate tested the important barrier of 114.30 (R3), we would expect the bears to stay in the driver’s seat for a while. The 114.30 (R3) hurdle is the upper bound of the wide sideways range that has been containing the price action since the 15th of March. We believe that the dip below 113.25 (R1) may have opened the way for the 112.25 (S1) support territory, marked by the low of the 19th of October. Our short-term oscillators enhance the case for the rate to continue trading south for a bit more. The RSI fell below its 50 line and looks to be headed towards 30, while the MACD stands below both its zero and trigger lines, pointing down.
BoJ stands pat, trims inflation forecasts
Overnight, the Bank of Japan kept its ultra-loose policy framework unchanged, as was widely anticipated. The Bank revised up its GDP growth projections but trimmed somewhat its inflation forecasts. Overall, policymakers provided absolutely no hints they may alter their QQE with yield curve control framework anytime soon. If seen in isolation, the fact that the BoJ remains committed to ultra-expansionary policy should work against JPY over time, in an environment where other major central banks are either raising rates or showing signs they could do so soon. Having said that, the yen’s broader direction will also depend to a large extent on risk appetite in the markets, which as we noted is currently subdued, something supporting the currency for now.
- Support: 112.25 (S1), 111.70 (S2), 111.10 (S3)
- Resistance: 113.25 (R1), 113.60 (R2), 114.30 (R3)
Gold traded higher yesterday to break above the resistance (now turned into support) of 1274 (S1). Although the price structure on the 4-hour chart remains lower peaks and lower troughs, the fact that we have positive divergence between both our short-term oscillators and the price action makes us believe that the yellow metal may be poised to continue trading higher in the short run. The bulls could challenge the 1283 (R1) resistance soon, where a decisive break may open the way for our next obstacle of 1290 (R2). Having said that though, even if gold continues to trade north for a bit more, as long as it remains below the key zone of 1300 (R3), we would maintain our flat stance with regards to the bigger picture, as the metal is still within the broader sideways range between that psychological hurdle and the other important territory of 1200.
- Support: 1274 (S1), 1267 (S2), 1260 (S3)
- Resistance: 1283 (R1), 1290 (R2), 1300 (R3)
During the European day, the main event will likely be the release of Eurozone’s CPI prints for October. The forecast is for both the headline and the core rates to have tumbled from previously, something that could justify the ECB’s latest choice to refrain from setting an end-date to its QE programme and thereby, it may extend the euro’s latest losses. We also get the bloc’s preliminary GDP data for Q3, as well as the unemployment rate for September, though these are likely to be overshadowed by the inflation data.
In the US, a lot of tier-two indicators are coming out. We get the employment costs index for Q3, as well as the Chicago PMI and CB consumer confidence index, both for October. In Canada, GDP data for August are due out.
We have only one speaker on the schedule: BoC Governor Stephen Poloz. Any comments that echo the cautious stance the BoC adopted at the latest meeting could cause CAD to continue correcting lower.
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