Daily Analysis | 06 November 2017
During the Asian day Tuesday, the RBA will announce its interest rate decision. The Bank is forecast to remain on hold once again, something we agree with. When they last met, RBA officials kept policy unchanged, and although they were relatively optimistic on the economy as a whole, they reiterated their concerns over the exchange rate. Since that gathering, economic developments have been mixed. The labor market tightened further in September, with the unemployment rate unexpectedly dropping, while the NAB business survey showed increased optimism during the month. However, headline inflation for Q3 slowed, while the trimmed mean rate remained unchanged. What’s more, retail sales stagnated in September and were soft throughout Q3.
Bearing the above in mind, we see the case for the Bank to maintain its overall neutral tone on policy, with risks tilted towards a more cautious narrative. As for the Aussie, even though it declined since the last meeting, its drop was probably not significant enough to calm policymakers, in our view. We believe that the Bank could retain its exchange rate concerns in the statement, something that could weigh on AUD, at least on the news.
AUD/USD edged down on Friday, breaking below the support now turned into resistance of 0.7690 (R1). Nevertheless, the decline was stopped near the 0.7635 (S1) support barrier. Given that the pair continues to trade within the short-term downside channel that has been containing the price action since mid-September, we believe that the short-term outlook remains negative. A decisive dip below 0.7635 (S1) could pave the way for our next support of 0.7570 (S2).
As for the bigger picture, following the completion of a double top on the daily chart, the pair tumbled notably. Nevertheless, the rate is still trading above the upside support line drawn from the lows of January. Therefore, as soon as the rate reaches that line, we will switch to flat, as there is the likelihood for a decent rebound from there.
- Support: 0.7635 (S1), 0.7570 (S2), 0.7535 (S3)
- Resistance: 0.7690 (R1), 0.7730 (R2), 0.7770 (R3)
USD traders undecided after employment report
Nonfarm payrolls rose 261k in October, lower than the 310k forecast, but still a strong number overall. Last month’s figure was revised higher to 18k, from a negative 33k previously. The unemployment rate dropped, but that was probably owed to a sizeable decline in the labor force participation rate. The major disappointment was earnings, which came in at 0.0% mom, missing their forecast for a milder slowdown to +0.2% mom. The reaction in the greenback was negative on the news, but the currency quickly reversed its losses to trade even higher in the following hours, aided by a stronger-than-expected ISM non-manufacturing print. Going forward, given the absence of any major economic data releases on the US calendar this week, we expect the dollar’s near-term direction to hinge upon any comments or developments around the likelihood for tax reform, a topic which is likely to gather even more market attention as the debate in Congress begins to intensify.
EUR/USD edged north as soon as the US jobs data were out to trade above the key territory of 1.1660 (R1) for a while. However, the pair was quick to give back its gains and trade even lower a few minutes thereafter. The rate came back below 1.1660 (R1) to stop fractionally above the support of 1.1585 (S1). In our view, bearing in mind that the rate continues to trade below the important territory of 1.1660 (S1), the short-term outlook remains cautiously negative. A clear dip below 1.1585 (S1) would confirm a forthcoming lower low on the 4-hour chart and may open the way for our next support of 1.1490 (S2).
Switching to the daily chart, we see that the dip below 1.1660 (R1) on the 26th of October may have signaled the completion of a head and shoulders formation, something that enhances further our view that the pair may be poised to trade lower for a while.
- Support: 1.1585 (S1), 1.1490 (S2), 1.1380 (S3)
- Resistance: 1.1660 (R1), 1.1730 (R2), 1.1795 (R3)
We only get the final Markit services PMI for October from several European nations and the Eurozone as a whole. However, as the final prints are expected to confirm the preliminary estimates, any market reaction is likely to remain muted. As for the speakers, we will hear from New York Fed President William Dudley and ECB Executive Board member Peter Praet.
As for the rest of the week:
On Tuesday, as we already noted, the focus will be on the RBA policy meeting. Then on Wednesday, the RBNZ will announce its own rate decision, while China will release its trade balance data for October. On Thursday, we will get China’s CPI and PPI data for October, and finally, on Friday, Norway’s CPIs for the same month will be in the spotlight.