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Weekly Focus: Riksbank May be Next to Join ‘Exit Camp’
Market Movers ahead
We look for the FOMC to announce "quantitative tightening" and signal one more rate hike this year when it meets on Wednesday.
We expect EUR manufacturing PMI to show a slight drop from the current strong level as the stronger euro is likely to weigh a bit on euro exports. We also look for a small decline in the German ZEW index.
Chinese house price inflation for August is likely to show a further moderation as tightening measures are starting to dampen home sales and prices.
Bank of Japan: we expect it to keep its policy stance unchanged.
In Scandinavia, the Riksbank's minutes should give more insight into how close the bank is to joining the 'exit' camp. We don't expect any rate change or change to the rate path from Norges Bank at its meeting on Thursday.
Global macro and market themes
Central bankers look increasingly divided into those in the 'exit' camp (Fed, BoE, ECB), those in the 'no exit camp' (BoJ, SNB), and those in between (Riksbank, Norges Bank).
While the Fed looks determined to hike in December, it is unlikely to drive a major selloff in EUR/USD.
Dollar Extends Losses; BOE Vlieghe Pushes Pound Above $1.36
The dollar could not find support on the closely watched US retail sales figures released during the European session as the numbers came in lower than forecast, while risk-off sentiment continued weighing on the currency. Among major currencies, though, the pound was the best performer as it managed to reach post-Brexit levels after BOE's Gertjan Vlieghe signalled that a rate hike might emerge in next months.
While investors anticipated US retail sales to grow by 0.1% m/m in August, the actual change was negative at -0.2% affected mainly by the impact of Hurricane Harvey on motor vehicle purchases. This was the biggest decline recorded in six months, pointing that consumption would likely moderate in the third quarter. The previous post of a growth of 0.6% was also revised downwards to 0.3%. Excluding automobiles, core retail sales increased by 0.2%, falling short of the 0.5% expected and 0.4% (revised downwardly from 0.5%) observed in July.
US industrial production also missed forecasts, falling by 0.9% m/m and reaching the biggest drop since April 2016. Projections were for industrial output to climb by 0.1%, below the 0.4 posted in July (upwardly revised from 0.2%).
The index pertaining to the University of Michigan's preliminary survey on consumer sentiment for the month of September, released during afternoon European trading hours, surprised to the upside. Specifically, the reading came in at 95.3. Expectations were for it to stand at 95.1, while the final reading for August stood at 96.8.
Next up, markets will look forward to the FOMC meeting on Wednesday, where Fed voting members would have to decide whether to raise interest rates given better than expected inflation numbers, a low unemployment rate but a sluggish wage growth. Moreover, Fed policymakers would keep in mind the financial impact of the two tropical storms Harvey and Irma as the New York President William Dudley said a week ago that the damage caused by those storms might influence the timing of the next rate hike.
The dollar index was under pressure during the European session, touching an intra-day low of 91.54 after today's data out of the US reduced optimism about the strength of the economy. Moreover, North Korea's latest missile test earlier today made investors look for less risky assets.
The safe-haven yen was up by 0.54% on the day with dollar/yen touching an intra-day low of 110.60 before it jumps to 110.82. Recall that the Bank of Japan will launch its policy meeting on Thursday with markets projecting the bank to maintain its ultra-easy monetary strategy.
A day after the Bank of England (BOE) held interest rates steady at record low of 0.25% and hinted through its statement a potential rate hike in the coming months, BOE Monetary Policy Committee (MPC) member, Gertjan Vlieghe, added more weight on the latter, clarifying that the central bank should raise rates "as early as in the coming months". Vlieghe, considered as one of the dovish MPC members, said that with the unemployment rate receding and wage growth expected to rise, pushing inflation further above the BOE's target rate, monetary policy should be tightened. This convinced markets that the BOE might deliver a rate hike for the first time in a decade as soon as November.
In other news out of the UK, several people were injured after an explosion in Parsons Green Underground Station in west London. This is currently suspected as a terrorist action. Despite this incident, the pound peaked at a post-Brexithigh of $1.3615 before slipping to 1.3577, up by 1.36% on the day and by 3.30% during this week, gaining by the hawkish message of Vlieghe.
In the Eurozone, wage growth (not seasonally adjusted) came in higher in the second quarter, rising by 2.0% y/y compared to the 1.3% seen in the first quarter, increasing the odds that the ECB will announce an outline of its stimulus reduction in October. However, on Monday, the central bank will analyze the block's CPI readings for the month of August to see whether higher wages drove prices towards the bank's 2% target.
In another report, the euro area's trade surplus came in at 23.2bn euros, better than the 21.4bn euros that was expected but below the previous mark of 26.6bn euros.
The euro hit an intra-day high of $1.1986 following the disappointing US retail sales figures, before later falling to $1.1977, reversing the losses made over the last two days relative to the US currency. Against the pound, the euro ticked up to 0.8812 after reaching a two-month low of 0.8773 earlier in the session. Euro/pound was still significantly down on the day.
Regarding commodities, oil prices recovered during European trading, while gold continued its downtrend. WTI crude edged up to $49.91 per barrel while Brent jumped to $55.74. Gold was trading lower at $1,321.7 per ounce.
Dollar Losing Ground Amid Weak Retail Sales
The greenback is losing positions on the background of profit taking by traders after its recent appreciation. Other events that put the USD under pressure were comments by European politicians regarding monetary tightening in the UK and cutting of the asset purchasing program in the Eurozone in 2018. The possibility of a quarter percent interest rate hike in the UK, to bring the rate to 0.50% in November, is just shy of 50% after a hawkish statement by the Bank of England. At the same time, inflation in the Eurozone, according to ECB's officials is likely to approach the target level of 2.0% and plans to cut quantitative easing in the euro area are likely to be announced at the end of October after the ECB meeting.
The US dollar also took a hit today from weak retail sales that fell 0.2% in August against forecasted growth of 0.1%. The Empire State manufacturing index in September, which declined to 24.4 against the forecasted fall to 18.2, could not change traders' mood. By the end of the trading session today we may see the typical fixing of positions ahead of the weekend.
The New Zealand dollar demonstrates positive dynamics that was caused by a number of factors, including the growth of Business NZ manufacturing index to 57.9 in August against 55.5 in July and the growth of new loans amount in China to 1090 billion against the expected increase to only 933 billion in August. Keep in mind that China is the key trade partner for New Zealand.
EUR/USD
The EUR/USD accelerated the upward dynamics after it was able to overcome resistance at 1.1925. Now the price is close to 1.2000 and its breaking may open the way for continued increases up to 1.2070 and 1.2200. The RSI on the 15-minute chart is in the overbought zone that may be judged as a reason for a descending correction soon.
GBP/USD
The GBP/USD is soaring after it left the limits of the rising channel. Currently the quotes are consolidating under the important 1.3600 mark, and breaking through that may become a trigger for a continued increase to 1.3800. In case of a rollback, quotes may return to SMA100 on the 15-minute chart or the support lines at 1.3500 and 1.3400.
NZD/USD
Within the rising impulse, the quotes of NZD/USD reached the inclined resistance line and horizontal obstacle at 0.7300. Approaching this level, and the RSI on the 15-minute chart being near the overbought area, increases the chances of a pullback of NZD/USD happening soon with the first goals at 0.7250 and 0.7200.
Trade Idea Wrap-up: USD/CHF – Stand aside
USD/CHF - 0.9603
Most recent candlesticks pattern : N/A
Trend : Near term up
Tenkan-Sen level : 0.9607
Kijun-Sen level : 0.9621
Ichimoku cloud top : 0.9653
Ichimoku cloud bottom : 0.9635
New strategy :
Stand aside
Position : -
Target : -
Stop : -
As the greenback slipped again after meeting renewed selling interest at 0.9648 earlier today, justifying out view that top has been formed at 0.9705 yesterday and our short position entered at 0.9680 just met our downside target at 0.9580 (with 100 points profit) in NY morning, this anticipated decline signals the rise from 0.9421 low has ended at 0.9705 yesterday and mild downside bias remains for weakness to 0.9560-63 (50% Fibonacci retracement of 0.9421-0.9705) but reckon 0.9525-30 (61.8% Fibonacci retracement) would hold.
As we have taken profit on our short position entered at 0.9680, would not chase this fall here and would be prudent to stand aside in the meantime. Above the Kijun-Sen (now at 0.9621) would bring another bounce to 0.9648 but break there is needed to signal an intra-day low is formed, bring test of 0.9670-75 later.
Trade Idea Wrap-up: GBP/USD – Buy at 1.3490
GBP/USD - 1.3588
Most recent candlesticks pattern : N/A
Trend : Near term up
Tenkan-Sen level : 1.3507
Kijun-Sen level : 1.3481
Ichimoku cloud top : 1.3263
Ichimoku cloud bottom : 1.3263
Original strategy :
Buy at 1.3490, Target: 1.3600, Stop: 1.3455
Position : -
Target : -
Stop : -
New strategy :
Buy at 1.3490, Target: 1.3600, Stop: 1.3455
Position : -
Target : -
Stop : -
Although cable has eased after intra-day rally to 1.3617 and minor consolidation below this level would be seen and pullback to 1.3510-20 is likely, reckon 1.3490 would limit downside and bring another rise later, above said resistance at 1.3617 would extend recent upmove to 1.3650 and possibly towards 1.3675 but upside should be limited to 1.3700-10, bring retreat later.
In view of this, would not chase this rise here and would be prudent to buy cable on pullback as the Kijun-Sen (now at 1.3481) should limit downside. Below 1.3450-60 would defer and suggest an intra-day top is formed instead, risk correction to 1.3420, then 1.3400.
Trade Idea Wrap-up: EUR/USD – Stand aside
EUR/USD - 1.1969
Most recent candlesticks pattern : N/A
Trend : Near term down
Tenkan-Sen level : 1.1947
Kijun-Sen level : 1.1928
Ichimoku cloud top : 1.1917
Ichimoku cloud bottom : 1.1894
New strategy :
Stand aside
Position : -
Target : -
Stop : -
As the single currency found support at 1.1838 yesterday and has staged the anticipated rebound, our long position entered at 1.1855 met target at 1.1955 (with 100 points profit) and mild upside bias remains for gain to 1.1995-00 (previous resistance and 61.8% Fibonacci retracement of 1.2093-1.1838), however, break there is needed to signal the fall from 1.2093 has ended, bring subsequent rise to 1.2030-35 but overbought condition should cap price below 1.2050.
As we have taken profit on our long position entered at 1.1855, would not chase this rise here and would be prudent to stand aside for now. Below 1.1920-25 would signal an intra-day top is formed instead, bring weakness to 1.1900 but break there is needed to confirm, then fall to 1.1870-75 would follow.
Trade Idea Wrap-up: USD/JPY – Stand aside
USD/JPY - 110.99
Most recent candlesticks pattern : N/A
Trend : Up
Tenkan-Sen level : 110.89
Kijun-Sen level : 110.45
Ichimoku cloud top : 110.59
Ichimoku cloud bottom : 110.35
New strategy :
Stand aside
Position : -
Target : -
Stop : -
The greenback found renewed buying interest at 109.55 yesterday and has resumed recent upmove as price broke above resistance at 111.04 on active cross-selling in yen, however, loss of upward momentum should prevent sharp move beyond 111.40-45 (50% projection of 107.32-111.04 measuring from 109.55) and price should falter well below 111.85-90 (61.8% projection), bring correction later.
In view of this, would not chase this move here and would be prudent to stand aside for now. Below the Kijun-Sen (now at 110.45) would bring correction to 110.10-15 but only break there would signal an intra-day top is formed, weakness to 109.80 would follow but said support at 109.55 should remain intact.
Trade Idea: EUR/GBP – Sell at 0.8900
EUR/GBP - 0.8809
Original strategy :
Sell at 0.8980, Target: 0.8850, Stop: 0.9020
Position : -
Target : -
Stop : -
New strategy :
Sell at 0.8900, Target: 0.8780, Stop: 0.8940
Position : -
Target : -
Stop : -
The single currency extended yesterday selloff and dropped to as low as 0.8774, suggesting the reversal from 0.9307 top is still in progress and bearishness remains for this fall to extend weakness towards 0.8737-43 (61.8% Fibonacci retracement of 0.8384-0.9307 and previous support), however, near term oversold condition should limit downside to 0.8719 support and reckon another previous chart support at 0.8652 would hold, bring rebound later.
In view of this, would not chase this fall here and we are looking to sell euro on recovery as resistance at 0.8907 would limit upside and bring another decline later. Above 0.8940-50 would defer and risk a stronger rebound to 0.8975-80 but price should falter below 0.9000 and bring another selloff next week.
Our preferred count is that, after forming a major top at 0.9805 (wave V), (A)-(B)-(C) correction is unfolding with (A) leg ended at 0.8400 (A: 0.8637, B: 0.9491 and 5-waver C ended at 0.8400. Wave (B) has ended at 0.9413 and impulsive wave (C) has either ended at 0.8067 or may extend one more fall to 0.8000 before prospect of another rally. Current breach of indicated resistance at 0.9043 confirms our view that the (C) leg has ended and bring stronger rebound towards 0.9150/54, then towards 0.9240/50.
AUD/USD Stays in the Green Zone
AUD/USD is trading in the green and resumes the yesterday's bullish candle. It seems poised to climb much higher as the USDX drops again. Unfortunately, the USDX has found strong resistance at the 92.49 static resistance and now is going down again. USDX dropped also below the 91.92 static and could hit another dynamic support very soon. The dollar index could move in range on the short term and a failure to close below the 91.02 previous low will signal a rebound.
We'll see what will happen because the dollar index is very heavy on the short term, but this could be only a retest of the dynamic support levels.
An accumulation will signal a reversal on the short term, but we have to wait for a fresh signal because right now we don't have any reversal signs.
The Aussie was helped by the Chinese New Loans, which have increased unexpectedly higher, from 826B to 1090B, beating the 933B estimate.
You can see that the price is trading in the green after the retest of the lower median line (lml) of the minor ascending pitchfork. Is still trapped within the median line and the lower median line (lml) of the minor ascending pitchfork.
The failure to reach and retest the median line (ML) of the major ascending pitchfork signaled that it could come higher to retest the 0.8065 static resistance and the upper median line (uml) of the descending pitchfork.
Brent Oil Targeting New Highs
The Brent has managed to reach fresh new highs in the yesterday's trading session, where has found temporary resistance. I've already shown you that the next major upside target will be at the median line (ML) of the major ascending pitchfork. We'll see how will react when will hit it, a valid breakout will signal that the upward movement will continue, while a rejection or a failure to reach this level will confirm a sharp drop.
