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Markets

This week was amassed with high profile political and monetary event risk potentially providing one (or more) gamechangers for global trading. A congestion of central bank decisions including the Fed, the Bank of England and a long list of smaller central banks, were supposed to give some guidance on where they position themselves on the path of policy easing. The Banco of Brazil (a trendsetter) already switched sides raising the interest rate further. However the monetary policy setup, this time evidently was overshadowed by the outcome of the US Presidential and Congress elections. Especially if one had known the outcome in advance, one probably would have predicted a landslide on global markets. On top of that an (un?)expected break-up of the German government coalition also foreshadowed a regime change. Let’s overlook the market outcome of this historic week (compared last Friday’s close). Admittedly, the starting point of such an of exercise has some arbitrary character. Nevertheless this the result.

The biggest reaction occurred on (US) equity markets. US major indices added about 4.0% to 5.5% to touch record levels on an expected growth-friendly policy of the Trump administration. European equities (Eurostoxx50) over the same period lost about 1.25%. Moves in yields were far less spectacular and maybe in the end a bit contra-intuitive compared to the high profile (political) story. US yields declined between 4 bps (2-y) and 10 bps (10-y). Admittedly, this outcome masks a sharp rise annex correction in two session after the US elections. Even so, it remains striking that what is seen as a potential aggressive shift to a reflationary US policy (both in terms of growth and inflation) only yields this modest result. Maybe markets took a bit of a similar attitude as did the Fed yesterday. Powell and Co when cutted interest rates (25 bps ), indicated that they saw little impact from the election outcome short-term. No concrete measures are yet available and they will be executed in a very complex and unpredictable context. In this respect, political event risk probably still is more ahead of us than behind us. German yields moved between 4.0 bps (2-y) and +0.4 bps (30-y). For now, markets don’t draw firm conclusions from budget orthodox German Fin Min Lindner being fired by Chancellor Scholz, potentially opening the way for a more stimulative fiscal policy, too. EMU interest rate markets in a first reaction to the US election outcome even positioned from more ECB easing to counterbalance the impact of US trade tariffs on EMU growth. Maybe, fiscal policy also has a bigger role to play than markets currently contemplate. Again, (positive) budgetary event risk might still be ahead of us. In the UK, the BOE acknowledged the reflationary impact of the Labour budget, but it didn’t derail the process of cautious removal of policy restriction yet. Finally, FX markets also didn’t draw any unequivocal conclusion. The dollar initially followed the spike higher in US yields, but in a weekly perspective gains are modest (DXY +0.5%, EUR/USD -0.75%). If EMU fiscal policy also turns more growth-friendly, the euro over time might also be (a bit) less vulnerable in the Trump era than markets feared up until now.

News & Views

Czech National Bank governor Michl said that monetary policy must stay restrictive: “the policy mix for the future should be, firstly, keeping interest rates higher than before Covid for the next 10 years and secondly, which is also important, governments must balance their budgets. Because if they don’t do it, there could be the risk of a second wave of inflation.” Core inflation should remain “slightly below” the central bank’s 2% target, Michl said. After yesterday’s 25 bps rate cut, the CNB is discussing when to bring rate cuts to halt, since that (core CPI) goal hasn’t been met, the central bank chief added. He declined to provide a timeframe for a potential policy shift. The Czech koruna extends gains after yesterday’s hawkish cut with EUR/CZK currently changing hands at 25.20 after testing the 25.40 resistance area earlier this week.

Canadian payrolls showed 14.5 net job growth in October, coming in below 27.2k consensus. Details however showed that net lay-offs in part-time jobs (-11.2k) pulled the full time employment change number (+25.6k) down. The unemployment rate stabilized at 6.5%, but the participation rate ticked down from 64.9% to 64.8%. That’s the fourth consecutive decline and the lowest since December 1997 (excluding the Covid-years 2020 & 2021). Total hours worked rose 0.3% M/M and 1.6% Y/Y. Average hourly wages among employees increased 4.9% Y/Y in October, following growth of 4.6% in September. The Canadian dollar didn’t respond to the labour market data. USD/CAD is trading at 1.3912, staying close to YTD resistance levels around 1.3950.

The Canadian labour market gained 14.5k positions in October, with full-time employment up 25.6k and part-time employment down 11.2k.

The unemployment rate was unchanged at 6.5% and the participation rate declined 0.1 percentage point to 64.8%.

Employment by sector showed gains in business, building and other support services (+29k), while losses were seen in finance, insurance, real estate, rental and leasing (-13k) and public administration (-8.7k).

Lastly, total hours worked jumped 0.3% month-on-month, while wages were up 4.9% year-on-year (from 4.6% in September).

Key Implications

Another solid jobs report in October. Job gains were concentrated in full-time positions, with the cyclically sensitive private sector pulling the weight. Employees were working more hours and saw wage growth increase. Not to mention, we are seeing employment for youth starting to bounce back. All told, this report speaks of a labour market that continues to exude decent strength.

To cut by 50 bps or 25 bps? That's the question for the Bank of Canada. It recently accelerated the pace of rate cuts, with inflation stabilizing around the 2% target. Yet the labour market hasn't been forcing the BoC's hand. Today's report should encourage the bank to revert back to a 25 bp cut in December (our call), even if it means eating some crow on its one off 50 bp move previously. That said, if it is dead-set on getting its policy rate back into its neutral range (2.25% to 3.25%) by year-end, a 50 bp move would be the choice. Investors are uncertain which way the BoC will go, and given recent rhetoric from the central bank, it too doesn't seems to know which way it will go either.

Daily Pivots: (S1) 0.8698; (P) 0.8736; (R1) 0.8762; More…

Intraday bias in USD/CHF remains neutral fro consolidations below 0.9773 temporary top. Further rally is still expected as long as 0.8614 support holds. Above 0.8773 will resume the rise from 0.8374 for 61.8% retracement of 0.9223 to 0.8374 at 0.8899 next.

In the bigger picture, price actions from 0.8332 (2023 low) are currently seen as a medium term corrective pattern. Rise from 0.8374 is seen as the third leg. Overall outlook will continue to stay bearish as long as 0.9223 resistance holds. Break of 0.8332 low is in favor at a later stage when the consolidation completes.

Daily Pivots: (S1) 152.16; (P) 153.44; (R1) 154.17; More...

Intraday bias in USD/JPY remains neutral and more consolidations could be seen below 154.70. But further rally is expected as long as 151.27 support holds. On the upside, break of 154.70 will resume the rally from 139.57 towards 161.94 high.

In the bigger picture, price actions from 161.94 are seen as a corrective pattern to rise from 102.58 (2021 low). The range of medium term consolidation should be set between 38.2% retracement of 102.58 to 161.94 at 139.26 and 161.94. Nevertheless, sustained break of 139.26 would open up deeper medium term decline to 61.8% retracement at 125.25.

Daily Pivots: (S1) 1.2903; (P) 1.2956; (R1) 1.3040; More...

Range trading continues in GBP/USD and intraday bias stays neutral. With 1.3047 resistance intact, further decline is still expected. Firm break of 1.2842 will resume the fall from 1.3433 to 61.8% retracement of 1.2298 to 1.3433 at 1.2732. However, considering bullish convergence condition in 4H MACD, firm break of 1.3047 will indicate short term bottoming, and turn bias back to the upside.

In the bigger picture, considering mildly bearish divergence condition in D MACD, a medium term top is likely in place at 1.3433 already. Price actions from there are seen as correction to whole up trend from 1.0351 (2022 low). Deeper decline would be seen to 38.2% retracement of 1.0351 to 1.3433 at 1.2256, which is close to 1.2298 structural support. Strong support should be seen there to bring rebound.

Daily Pivots: (S1) 1.0736; (P) 1.0780; (R1) 1.0848; More...

EUR/USD retreats after initial rejection by 55 4H EMA. Intraday bias remains neutral and more consolidations could still be seen above 1..0681 temporary low. But further decline is expected as long as 1.0936 resistance holds. On the downside, sustained break of 61.8% projection of 1.1213 to 1.0760 from 1.0936 at 1.0656 will pave the way to 100% projection at 1.0483.

In the bigger picture, price actions from 1.1274 (2023 high) are seen as a consolidation pattern to up trend from 0.9534 (2022 low), with fall from 1.1213 as the third leg. Downside should be contained by 50% retracement of 0.9534 (2022 low) to 1.1274 at 1.0404, to bring up trend resumption at a later stage.

Dollar regained some strength in early US session, after a volatile week marked by high-profile events, including the US presidential election and Fed’s rate decision. The greenback's pullback from its post-election spike now appears to be more of a consolidation rather than reversal of its bullish momentum. However, Dollar bulls may need to wait until next week’s US CPI report to see if inflation data can provide the next catalyst for a decisive move.

Commodity currencies continue to top the weekly performance charts for now. However, there is uncertainty about whether they can maintain these gains as the trading week concludes, as Aussie appears to be leading a reversal.

Euro is currently the weakest performer of the week, with Swiss Franc also under pressure while Sterling is mixed. Yen also positions in the middle with help from today's strong rebound.

In Europe, at the time of writing, FTSE is down -0.62%. DAX is down -0.66%. CAC Is down -0.81%. UK 10-year yield is down -0.0490 at 4.455. Germany 10-year yield is down -0.046 at 2.402. Earlier in Asia, Nikkei rose 0.30%. Hong Kong HSI fell -1.07%. China Shanghai SSE fell -0.53%. Singapore Strait Times rose 1.39%. Japan 10-year yield fell -0.0006 to 1.006.

Canada's unemployment rate unchanged at 6.5%, wages growth picks up

Canada’s employment data for October revealed modest job growth, with 15k increase in jobs, falling short of the anticipated 33k. Employment rate slipped by -0.1% to 60.6%, marking its sixth consecutive monthly decline, while the unemployment rate remained steady at 6.5%. Labor force participation also declined, slipping by -0.1% to 64.8%, indicating a contraction in the active workforce.

On the positive side, total hours worked rose by 0.3% over the month and were up 1.6% yoy. Additionally, wage growth picked up, with average hourly wages rising 4.9% yoy, increase from September’s 4.6% yoy rise. This uptick in wages could signal pickup pressure on labor costs, potentially impacting inflation.

BoE's Pill emphasizes focus on long-term inflation amid temporary budget impact

In a briefing today, BoE Chief Economist Huw Pill emphasized that while the recent budget is expected to give inflation a temporary boost, the primary focus will remain on underlying, longer-term inflationary pressures.

Pill is more more concerned with structural inflation trends than short-term fluctuations triggered by fiscal policies.

"To a large extent, we will have to look through and interpret in a way that allows us to have a good sight of these underlying and more persistent components of inflation that really have to be the focus of what's driving our policy decisions," Pill said

According to BoE estimates, the budget is expected to add about 0.5% to inflation at its peak, which is anticipated to occur within the next two years. Governor Andrew Bailey expressed that this increase is unlikely to significantly alter BoE’s anticipated path of interest rate cuts.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.0736; (P) 1.0780; (R1) 1.0848; More...

EUR/USD retreats after initial rejection by 55 4H EMA. Intraday bias remains neutral and more consolidations could still be seen above 1..0681 temporary low. But further decline is expected as long as 1.0936 resistance holds. On the downside, sustained break of 61.8% projection of 1.1213 to 1.0760 from 1.0936 at 1.0656 will pave the way to 100% projection at 1.0483.

In the bigger picture, price actions from 1.1274 (2023 high) are seen as a consolidation pattern to up trend from 0.9534 (2022 low), with fall from 1.1213 as the third leg. Downside should be contained by 50% retracement of 0.9534 (2022 low) to 1.1274 at 1.0404, to bring up trend resumption at a later stage.

In a briefing today, BoE Chief Economist Huw Pill emphasized that while the recent budget is expected to give inflation a temporary boost, the primary focus will remain on underlying, longer-term inflationary pressures.

Pill is more more concerned with structural inflation trends than short-term fluctuations triggered by fiscal policies.

"To a large extent, we will have to look through and interpret in a way that allows us to have a good sight of these underlying and more persistent components of inflation that really have to be the focus of what's driving our policy decisions," Pill said

According to BoE estimates, the budget is expected to add about 0.5% to inflation at its peak, which is anticipated to occur within the next two years. Governor Andrew Bailey expressed that this increase is unlikely to significantly alter BoE’s anticipated path of interest rate cuts.

Canada’s employment data for October revealed modest job growth, with 15k increase in jobs, falling short of the anticipated 33k. Employment rate slipped by -0.1% to 60.6%, marking its sixth consecutive monthly decline, while the unemployment rate remained steady at 6.5%. Labor force participation also declined, slipping by -0.1% to 64.8%, indicating a contraction in the active workforce.

On the positive side, total hours worked rose by 0.3% over the month and were up 1.6% yoy. Additionally, wage growth picked up, with average hourly wages rising 4.9% yoy, increase from September’s 4.6% yoy rise. This uptick in wages could signal pickup pressure on labor costs, potentially impacting inflation.

Full Canada's employment release here.

EUR/USD is settling around 1.0785, assessing the market impact of this week's events. With Donald Trump’s return as US President, the market is recalibrating expectations around inflation and economic policies that his administration may reintroduce.

Trump’s protectionist stance could stir inflationary pressures, prompting the Federal Reserve to maintain higher interest rates than anticipated. This potential for elevated rates is boosting the dollar’s appeal.

Yesterday, the Federal Reserve cut interest rates by 25 basis points to 4.75% in line with market predictions. The Fed’s commentary suggested no deviations from its planned rate trajectory, hinting at continued easing.

Looking ahead, another rate reduction of 25 basis points is expected at the Fed’s December meeting, continuing its cautious but steady approach to monetary easing.

Technical analysis of EUR/USD

The EUR/USD pair has completed a bullish move towards 1.0820, as part of an ongoing upward impulse. Current market behaviour suggests a retracement to 1.0758 before resuming its ascent towards 1.0833. This outlook is supported by the MACD indicator, which, although below zero, is trending upwards, signalling a potential bullish continuation.

The hourly frame shows EUR/USD undergoing a corrective phase to 1.0758. Upon reaching this level, a rebound to 1.0833 is expected, followed by another potential pullback to 1.0758. The stochastic oscillator supports this outlook, with its signal line poised to rise towards 80, suggesting increasing bullish momentum.