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Earlier today the euro fell around 0.2% against its counterparts and 0.6% against the US dollar, following the German election. Angela Merkel remains in the driver's seat but the far right AfD party gained much more support than anticipated in recent surveys, though the formation of a coalition still remains to be seen. Weakened support for Markel's conservative alliance with only 33% of the vote and the rise in popularity of anti-immigration nationalist party makes it hard to consider it as a victory, at least for the financial markets. The President of European Central Bank, Mario Draghi, is due to speak later today and analysts will be looking for any clues on what to expect at the ECB's October policy meeting.

New Zealand's recent economic growth has surpassed all of the major countries except Canada, with special thanks to the high level of consumer confidence which has boosted the economy. It is widely anticipated that the general election result, where no party has succeeded in gaining a clear victory, may overshadow this week's economic data releases and central bank interest rate decision on Wednesday.

Top Chinese bankers called last week's S&P sovereign rating downgrade simply biased and unfair in their press conference earlier today. According to the chief economist of a top industry representative, China's debt is expected to increase but at slower pace in the foreseeable future, mostly due to decreases in GDP growth. Corporate profits in the nation are at a 5 year high and economic growth has been better than expected this year, while the top China banks' average non performing loan ratio has stabilized.

GBPUSD:

GBPUSD recorded lower tops and lower bottoms in the last trading day. The pair is trading between the high and low of September 22nd. 1.3595 is a key resistance level and 1.3448 is a key support level. The pair is expected to trade with a bearish outlook and downward momentum is further reinforced by the declining of both the 50 period moving average and the 20 day moving average. As long as the price remains below 1.3595, the pair is expected to hit 1.3448 (Sept 22 low) and after that 1.3400. Alternatively if the price moves above 1.3595 (Sept 22 high) expect an upward target at 1.3655 (last week's high).

EURUSD:

EURUSD is under pressure and in the earlier session declined almost 0.2% against major currencies. The downside movement is supported by the declining trend line; also the bearish cross between the 50 day moving average and the 20 day moving average has been identified. The relative strength index is also heading downward. To conclude, as long as price is below 1.20039 (yesterday's high), expect a downside movement towards 1.1820 and 1.1775. Alternatively, if the price moves above 1.20039, expect further upside movement towards 1.20697 (last month's high) and 1.20922 (this year's high).

NZDUSD:

NZDUSD is also expected to trade in a lower range. The pair retreated from 0.7343 (Sept 22 low) and is expected to continue its downside movement. The pair broke below the lower boundary of the Bollinger Band™ which confirms the bearish movement, with 20 day moving average also turning down. So, as long as pair is trading below 0.7343 (Sept 22 low), look for further declines to 0.7246 (last week's low) and 0.7200. Alternatively, if it moves above 0.7343, expect a rebound toward 0.7385 (minor resistance) and 0.7433 (last week's high).

The British pound has dropped lower in the Monday session. In North American trade, GBP/USD is trading at 1.3452, down 0.34% on the day. On the release front, the Bank of England released the Financial Policy Committee statement. There are no US economic releases, but there are three FOMC members holding speaking engagements – William Dudley, Charles Evans and Neel Kashkari. On Tuesday, the US releases CB Consumer Confidence and New Home Sales. Federal Chair Janet Yellen will speak at an event in Cleveland.

The Bank of England remains worried about the British economy, and the FPC statement took aim at the British consumer, specifically credit levels. The BoE warned that unsecured consumer lending was growing at close to 10 percent each year, far outstripping income, and called on British banks to carry an extra GBP 10 billion to protect against consumer loan defaults. Although defaults were not currently a problem, the FPC statement expressed concern that in an economic downturn, defaults could spiral and hurt the banking sector. In August, the BoE forecast that the economy would slow down in 2018, with Brexit one of the contributing factors. At the BoE policy meeting earlier this month, the Bank hinted that it would raise interest rates, sending the pound sharply higher. The markets are taking the bank at its word – the odds for a November rate hike have jumped to 42%, up from just 18% just prior to the September rate statement, while the likelihood of a December increase is at 54%.

Federal Reserve policymakers have been divided over a rate hike in December, which would mark a third rate increase in 2017. With no clear message from the Fed, the markets really don't know what to expect, and fed futures have priced in a December hike at 55%. On Monday, New York Fed President William Dudley made a strong case to raise rates. Dudley cited a soft US dollar and strong global growth as reasons why inflation would increase and also translate into stronger wage growth. Dudley said he expects inflation to reach the Fed's target of 2% in the "medium term", and predicted that the Fed would continue to gradually remove monetary accommodation. In last week's rate statement, the Fed announced that it would reduce its $4.2 trillion balance sheet by $50 billion/mth, starting in October.

3 positions were entered last week with total loss of 5 points and the positions are listed below.

14 Sep : USD/CAD - Short at 1.2240, exited at 1.2240 ( 0 point)
20 Sep : GBP/JPY - Short at 151.00, exited at 151.05 (- 5 points)
22 Sep : USD/CAD - Long at 1.2285, 

|                 AUD          EUR/JPY           EUR/GBP         CAD          GBP         GBPJPY
Jan             - 15             -275                - 35              -120
Feb           + 140            -17                  - 40              +11
Mar            - 20            +115                +132            - 19
Apr             + 30                                  - 40             +120                              + 45
May                             - 55                  +100             - 6               -65             -60         
Jun            + 81           +150                - 10             +185           -120           +205
Jul                                                       - 40                                                   - 60
Aug           +155          +200                 + 100           + 195           -45            - 50
Sep                               -50                                                                          + 5   
Oct           
Nov         
Dec                                                                                                                                               
Y-T-D        + 371           + 68               +167            +658             -230            +85

USD/JPY has started the week quietly. In Monday's North American session, the pair is trading at 111.75, down 0.22% on the day. On the release front, Japanese Flash Manufacturing PMI edged lower to 52.6, short of the forecast of 53.4 points. Later in the day, the BoJ releases the minutes of its monetary policy meeting, and Japan publishes the Services Producer Price Index, which is expected to improve to 0.7%. There are no US economic releases, but there are three FOMC members holding speaking engagements – William Dudley, Charles Evans and Neel Kashkari. On Tuesday, the US releases CB Consumer Confidence and New Home Sales. Federal Chair Janet Yellen will speak at an event in Cleveland.

Japanese Prime Minister Shinzo Abe called a snap general election on Monday, which will be held on October 22. The announcement was a poorly held secret, with news outlets reporting last week that Abe would make the announcement on Monday. Abe has seen his ratings improve over the North Korean crisis and hopes to take advantage of a divided opposition and an improved economy. Japan's GDP expanded 2.5% in the second quarter, and the economy has now expanded for six consecutive quarters, as stronger global demand has boosted the manufacturing and export sectors. However, the country's radical stimulus program, known as 'Abenomics', has failed to improve inflation, which remains well the BoJ's target of just below 2.0%.

Federal Reserve policymakers have been divided over a rate hike in December, which would mark a third rate increase in 2017. With no clear message from the Fed, the markets really don't know what to expect, and fed futures have priced in a December hike at 55%. On Monday, New York Fed President William Dudley made a strong case to raise rates. Dudley cited a soft US dollar and strong global growth as reasons why inflation would increase and also translate into stronger wage growth. Dudley said he expects inflation to reach the Fed's target of 2% in the "medium term", and predicted that the Fed would continue to gradually remove monetary accommodation. In last week's rate statement, the Fed announced that it would reduce its $4.2 trillion balance sheet by $50 billion/mth, starting in October.

4 positions were entered among all 4 currency pairs with total profit of 55 points and the positions are listed below:

19 Sep : EUR/USD - Long at 1.1970, exited at 1.1950 (- 20 points)
19 Sep : USD/CHF - Short at 0.9625, exited at 0.9650 (- 25 points)
22 Sep : USD/JPY - Long at 111.70, exited at
22 Sep : EUR/USD - Short at 1.1970, exited at 1.1870 (+ 100 points)

|                 JPY             EUR             CHF            GBP

Jan          + 167             - 85              - 10            + 50
Feb          + 200            +150             +93            - 59
Mar              -23              -70               -23            - 35
Apr             + 65            + 93             + 50            - 40
May            - 65             - 35             + 100          -175
Jun            -100               -10                - 10          +175
Jul             + 85             - 35                   - 8
Aug           + 35            +210                + 35          +65        
Sep           +109            +210              +175           - 35         
Oct         
Nov        
Dec                                                                                               
Y-T-D       + 472            +423               +402           - 44     

USD/CHF - 0.9700

Most recent candlesticks pattern : N/A

Trend                                    : Near term up

Tenkan-Sen level                  : 0.9717

Kijun-Sen level                    : 0.9713

Ichimoku cloud top                 : 0.9696

Ichimoku cloud bottom              : 0.9669

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

Although the greenback has edged higher after rebound from Friday’s low of 0.9668 and marginal gain from here cannot be ruled out, break of last week’s high at 0.9748 is needed to signal recent rise from 0.9421 low has resumed and extend gain to 0.9761-66 (50% Fibonacci retracement of 1.0100-0.9421 and previous resistance), then test of another previous resistance at 0.9773.

On the downside, below said support at 0.9668 would extend weakness to previous minor resistance at 0.9649 but break there is needed to signal top has been formed, bring further fall to 0.9620, however, price should stay well above indicated support at 0.9589, bring rebound later. As near term outlook is still mixed, would be prudent to stand aside for now.

GBP/USD - 1.3505

Most recent candlesticks pattern   : N/A

Trend                                 : Up

Tenkan-Sen level                 : 1.3523

Kijun-Sen level                    : 1.3511

Ichimoku cloud top              : 1.3556

Ichimoku cloud bottom        : 1.3540

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

Despite falling to 1.3450 late Friday, lack of follow through selling on break of previous support at 1.3452 and the subsequent rebound suggest further consolidation would take place and recovery to 1.3585-90 cannot be ruled out, however, still reckon upside would be limited to 1.3615-20 and price should falter below last week’s high at 1.3658, bring another retreat later.

On the downside, below 1.3475 would bring another fall towards 1.3450 support but a firm break below there is needed to retain bearishness and signal top has been formed at 1.3658, bring retracement of recent rise towards 1.3400-05 (50% Fibonacci retracement of 1.3153-1.3658). As near term outlook is still mixed, would be prudent to stand aside for now.

EUR/USD - 1.1879

Most recent candlesticks pattern   : N/A

Trend                      : Sideways

Tenkan-Sen level              : 1.1897

Kijun-Sen level                  : 1.1923

Ichimoku cloud top             : 1.1966

Ichimoku cloud bottom      : 1.1948

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

The single currency has fallen again after opening lower today, adding credence to our bearish view (our short position entered at 1.1970 met our target at 1.1870 with 100 points profit), although this anticipated decline suggests test of previous support at 1.1861 cannot be ruled out, a sustained breach below this support is needed to extend the fall from 1.2035 to previous support at 1.1838, then towards 1.1800 which is likely to hold on first testing.

In view of this, would not chase this fall here and would be prudent to stand aside for now. Above the Tenkan-Sen (now at 1.1897) would bring recovery to the Kijun-Sen (now at 1.1923) but reckon upside would be limited to 1.1940-50 and 1.1980-85 should hold. 

USD/JPY - 112.19

Most recent candlesticks pattern   : N/A

Trend                      : Up

Tenkan-Sen level              : 112.14

Kijun-Sen level                  : 112.19

Ichimoku cloud top             : 112.06

Ichimoku cloud bottom      : 111.92

Original strategy  :

Bought at 111.70, Target: 112.70, Stop: 111.90

Position :  - Long at 111.70

Target :  - 112.70

Stop : - 111.90

New strategy  :

Hold long entered at 111.70, Target: 112.70, Stop: 111.90

Position :  - Long at 111.70

Target :  - 112.70

Stop : - 111.90

Although the greenback retreated after meeting resistance at 112.52 and further consolidation below last week’s high at 112.72 would be seen, reckon downside would be limited to 111.90-95 and bring another rise, above 112.52 would bring retest of said resistance at 112.72, break there would confirm recent upmove has resumed and extend further gain to 112.90-00, then towards 113.25-30 (1.236 times projection of 107.32-111.04 measuring from 109.55), having said that, previous chart resistance at 113.58 would hold from here, bring correction later.

In view of this, we are holding on to our long position entered at 111.70. Only below indicated support at 111.65 would abort and risk weakness to 111.40-45 but break there is needed to signal a temporary top has been formed at 112.72, bring retracement of recent rise towards support at 111.11 first.

• European equities showed a mixed picture, but losses/gains remain small with Spain underperforming ahead of the Catalan referendum.
• The German right-wing nationalist Alternative for Germany suffered its first split after its stunning success in elections, as leader Petry said she would not sit with the party in the Bundestag. Horst Seehofer, the CSU leader has thrown the party's alliance with Merkel's CDU into doubt, questioning the formation of a joint parliamentary group.
• German FDP frontman Lindner showed his hawkish feathers regarding E(M)U. The FDP doesn't accept automatic transfers in the EMU. He asks for insolvency rules to strengthen liability of private investors and says a change of direction is needed on Greek policy.
• ECB Mersch didn't unveil any secrets by saying that the ECB will "prudently" adjust its tool box when warranted. Lithuanian ECB member Vasiliauskas was more outspoken when he said that he prefers to have a concrete date or complete term as to how long the central bank can be buying bonds.
• Speaking at a press conference in his official residence, Japanese PM Abe said he would dissolve parliament on September 28th and go to the public (snap elections). He said the security threat from North Korea could not be allowed to prevent a democratic election. He promised to raise the consumption tax from 8 to 10% in 2019.
• Brent crude oil jumped towards $58 a barrel on Monday – its highest level since January – and was on course to close at the highest level since 2015. Oil has been boosted by signs that the massive crude glut built-up since mid-2014 is slowly being drawn down, as producers cut supplies and robust demand eats into the surplus.
• Greece has taken another step towards ending nearly a decade of bailouts and outside economic surveillance, after the EU confirmed that Athens was no longer in breach of euro area budget rules.
• Sentiment among German business executives dipped in September for the second month in a row, nudging mildly further away from the record logged this summer, a closely-watched IFO survey showed.

Rates

Bonds little affected by German election surprises

The German election surprise didn't trigger safe haven flows on core bond markets and peripheral spreads barely widened. European equities traded stable while the decline of EUR/USD was technically irrelevant. ECB and Fed talk also failed to give distinct direction. At the time of writing, US yields are to 1 bp higher, while German yields drop between 0.7 bps (30-yr) and 2.5 bps (5-yr). On intra-EMU bond markets, 10-yr yield spreads versus Germany widen 2 bps (Spain/Italy) to 3/5 bps (Portugal/Greece).

German Bunds and (US Treasuries) opened little changed after the German election outcome which inject some uncertainty about the government formation and about the country's future policy versus E(M)U. Peripheral yield spreads, vulnerable for EMU negative news, hardly widened. The Bund rallied on a slightly weaker-than-expected German IFO business confidence, but peripheral spreads remained little changed. The CSU chairman questioned the formation of a joint parliamentary group with the CDU sister party. The FDP leader, a potential coalition party leader, was very critical towards the E(M)U and a front woman of the AfD refused to take her seat (see headlines). These comments show that Germany may become less politically stable and less willing to help EMU, even as these comments shall not represent future policy guidelines. However, interestingly, these comments again didn't impact core bonds or peripheral bonds. The Bund rally ran out of steam and turned south when US traders joined the fray. Gains largely evaporated. US Treasuries showed a similar, but less outspoken price profile. NY Fed Dudley, a dove, is firmly in the majority group inside the FOMC. He more or less repeated Yellen's reasoning why rates will continue to be gradually raised.

Currencies

EUR/USD declines modestly after German election

Last week, the dollar remained in the defensive even as the Fed reiterated its commitment to normalize policy. Today, the focus turned to the euro. The German election outcome might have some negative consequences for intra-EMU cooperation. EUR/USD was captured in a gradual intraday downtrend. EUR/USD dropped below 1.19. However, the first support at 1.1823 still stays out of reach. USD/JPY hovered in a tight range mostly slightly north of 112.

There were several stories to guide trading at the start of the new week in Asia. Japanese equities outperformed as markets look out for new pro-growth measures as PM Abe considered (later confirmed) snap elections for next month. USD/JPY returned well north of 112, but the rally was hampered as global sentiment turned cautiously risk-off. EUR/USD dropped temporary to the 1.19 area on the outcome of the German election at the start of trading, but Asian investors were looking for more guidance from Europe.

The reaction in Europe to the German election was modest and a bit diffuse across markets. European equities soon reversed initial losses. German government yields declined slightly and peripheral spreads widened a few basis points. EUR/USD started a gradual intraday downtrend. The German IFO business sentiment was weaker than expected. There was no immediate market reaction, but the euro slide continued. The decline accelerated as the pair dropped below the Asian lows in the 1.19 area. German FDP leader advocated more financial orthodoxy on intra-EMU transfers and regarding Greece (see headlines). Once again, there was no one-to-one link between comments and the intraday decline of the euro. However, the headlines suggest that the debate on the financing of Europe might become difficult. EUR/USD traded in the 1.1875 area at the start of the US trading session. Even so, the 1.1823 support again wasn't reached.

There were few eco data in the US. The impact of German elections on US markets was negligible. US markets in the first place focus whether the government can make progress on key policy issues including tax reduction. EUR/USD trades in the 1.0880 area. USD/JPY has returned to the 112.20 area. To conclude: euro softness and maybe a pinch of dollar strength.

EUR/GBP nears recent lows

Sterling trading was mostly driven by global markets reaction to the German election results. The euro opened substantially lower compared to Friday's close and remained under pressure in early European dealings. EUR/GBP declined to the 0.8785 area. The rise of sterling temporary also propelled cable. However, finally the dollar outperformed the euro and sterling. The German election outcome at some point might also complicate the Brexit negotiations as it hasn't become easier for Merkel to make concessions. EUR/GBP still trades near the intraday lows in the 0.8785 area. Cable trades off the intraday top in the 1.3510 area. The formal negotiations between the UK and the EU restart later today.