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Political Malaise

While the USD dollar remains tentatively poised for a breakout, lingering political uncertainty still hangs heavy in the air which has left G10 FX rangebound for the most part on Monday.

Despite taking a knock in late US trade after an afternoon US equity market swoon, JPY is expected to weaken over time as an extension of Abenomics should mean further stimulus for Japan. But in the early stages of any currency move, there’s seldom a ” take-it-to-the-bank-trade ” more so in this current scenario given the extending long USD positions, very frothy equity markets and the omnipresent level of uncertainty when it comes to The House passing any substantive US administration policy. Even if Abe served up weaker JPY on a silver platter, there are many hurdles on the way to an eventual payday.

US equities finally came up for air after the Dow snapped a six days winning streak as investors get set to dissect the deluge of corporate earnings this week. In general, earings should remain a significant boost to equity prices, but markets were spooked when GE shares cratered 6.3 percent causing analysts to hit the panic button warning of possible dividend cuts.

On the Fed chair watch, the highlight of the day was stale reports that President Trump is “very, very close” to deciding on the next US Federal Reserve chief. Jerome Powell and John Taylor are getting markets nod while Janet Yellen is relegated to the sidelines.

The Euro

While political concerns are likely weighing on the common currency, the central focus is the ECB meeting on Thursday where the master of central bank voodoo, Mario Draghi, will take centre stage. Caught between a hawk and a dove nest, Draghi will have to be at his more eloquent self to not only satisfy both sides of the council but to ensure markets are not spooked. But given the Euro markets have been trending sideways in a happy place for the past month it would be improbable the ECB announces anything other than what was leaked to the markets, an apparent ECB consensus of buying €20-€40 billion in monthly asset purchasing with the program running for another 9-12 months.

Even approaching some significant technical levels trade remains exceptionally lacklustre perhaps due to reduced EUR positioning as any constructive bias has likely evaporated in a sea of frustration the past month.

Japanese Yen

With the election in the rearview mirror and no challenges to Abenomics, the markets are free to focus on other wave makers. The disconnect with the Nikkei remains a key focus and should this correlation move back towards historical levels it will underpin USDJPY. But in the meantime, the markets have their hands full with reactant price movements from developments around tax reform while gauging USD concerted momentum over the FED chair appointment.

Mind you, New York traders were not dazzled with the USDJPY’s 113.95 NY open and went into hit the bid mode from the get-go. But at the start of APAC trade, there is sizable support at 113.30-113levels, but on a break of the psychological 113, things will get messy quick given the market is generally long USD in this space.

Australian Dollar

The main event this week is AUS CPI on Wednesday, and RBA Debelle will speak on Uncertainty on Thursday.

AUD does feel like the intransigent of G-10 trade unable to break out on the bottom or the top of current ranges. AUD lower story will be a US rates higher storyline, full stop.

Other than that, for traders looking to get short, Wednesdays CPI could present such an opportunity. In this positive USD environment fading the Aussie remains the name of the game.

The New Zealand Dollar

Is Patience a virtue? Not sure about that one with regards to the Kiwi trade.But so far this week the political landscape has shown signs of stabilising, and the onslaught has abated. Political risk usually has a way of evaporating quickly, and with little pressure from the greenback this week we could see a relief rally which would provide an opportunity to unwind some nervous nellie long Kiwi positions.

The long NZD trade remains fraught with peril given the absolute political uncertainties. Be nimble

The Canadian dollar is softer on Monday after last week’s events boosted the USD against the loonie. Tax reform optimism and a message from the Trump administration that a Fed Chair candidate will be announced shortly put US yields higher. The three people short-list includes: Federal Reserve Governor Jerome Powell, economist John Taylor and current Fed Chair Janet Yellen

The Canadian economy is showing further signs of a slowdown from the impressive growth pace of the first half of the year. Wholesale sales were 0.5 percent. Last month the leading indicator of consumer spending had risen by 1.5 percent (revised today to 1.7 percent). The disappointing data echoed the retail sales data released on Friday which caused the CAD to break through the 1.25 price level.

The Bank of Canada (BoC) will announce its benchmark short term interest on Wednesday, October 25 at 10:00 am EDT. The central bank is anticipated to keep rates unchanged after an earlier unexpected rate hike in September that put the benchmark rate at 1.00 percent. A press conference by Governor Stephen Poloz will take place at 11:15 am EDT.

Meetings between Canada, Mexico and the United States continue as legislators from the three nations will meet in Mexico and Washington. JPMorgan is advising its clients to short Mexican stocks as the chances of a no deal scenario have increased. Mexico and the US were pushing initially for the renegotiation of the trade deal to be done before 2018 to avoid the political cycle ahead of Presidential elections in Mexico and the primaries in the US. The demands by the Trump administration have derailed that timeline and now the deal is in jeopardy as it appears the deal will be negotiated with a highly politicized background in 2018 making its future even more uncertain.

The USD/CAD rose 0.18 percent on Monday. The currency pair is trading at 1.2645 after the USD got an early boost against the loonie with the release of Canadian wholesale sales. Total sales at the wholesale level came in lower than expected at 0.5 percent putting more downside pressure to the Canadian currency as more signs of an economic slowdown accumulate.

On Friday retail sales fell –0.3%. Market expectations were looking for a strong +0.5% gain. The miss in retail sales was a big blow to the loonie. After the surprise rate hike in September by the Bank of Canada (BoC) and various calls for a GDP slowdown the currency is more sensitive to underperforming indicators.

Stronger headline numbers would have improved the odds of the Bank of Canada (BoC) raising rates before the end of 2017. Retail and wholesale sales data could take the BoC out of the rate hike equation for the time being. The BoC meet next Wednesday, October 25 at 10:00 am EDT.

The price of West Texas Intermediate is trading near 5.162 in the last 24 hours. Crude price levels have been stable as threats for disruption of supplies in Iraq and a drop in US drilling. Iraq is the largest producer in the Organization of the Petroleum Exporting Countries (OPEC), but an independence referendum by the oil producing Kurdish region prompted the central government to dispatch the military to intervene. Exports from the Kirkuk fields are starting to pick up and are now in 288,000 barrels per day in the Turkish pipeline, this is down from 600,000 before the conflict.

Market events to watch this week:

Tuesday, October 24
8:30pm AUD CPI q/q
Wednesday, October 25
4:30am GBP Prelim GDP q/q
8:30am USD Core Durable Goods Orders m/m
10:00am CAD BOC Monetary Policy Report
10:00am CAD BOC Rate Statement
10:00am CAD Overnight Rate
10:30am USD Crude Oil Inventories
11:15am CAD BOC Press Conference
Thursday, October 26
7:45am EUR Minimum Bid Rate
8:30am EUR ECB Press Conference
8:30am USD Unemployment Claims
Friday, October 27
8:30am USD Advance GDP q/q

Gold is showing little movement in the Monday session. In the North American session, the spot price for an ounce of gold is $1279.12, down 0.10% on the day. On the release front, there are no US events on the schedule.

The Federal Reserve is in the spotlight, as Janet Yellen’s term as head of the powerful central bank expires in February 2018. President Trump has said he will nominate a new Fed head shortly, and the front runners are economist John Taylor and Federal Reserve Governor Jerome Powell. Taylor advocates a rule in which rates which be as high as 3 percent, given current economic conditions. Powell is more closely aligned to Fed Chair Janet Yellen’s monetary stance which advocates an incremental increase in rates. With the two candidates representing sharply differing views on interest rate levels, Trump’s choice for the new Fed chair could have a significant effect on monetary policy and the strength of the US dollar.

Some rare good news for President Trump translated into losses for gold on Friday. On Thursday, the US Senate passed a $4 trillion budget measure. The bill barely squeaked through, as the vote was 51-49. Still, this is represents a crucial victory for President Trump, who was desperately in need of a legislative victory. The budget measure clears the way for an overhaul reform to the tax code, one of Trump’s key campaign promises. The Republicans are hopeful of passing a new tax code by the New Year, but that could prove overly optimistic, as the Democrats are expected to resist Trump’s tax proposal.

4 positions were entered last week with total profit of 135 points and the positions are listed below.

13 Oct : GBP/USD - Short at 1.3315, exited at 1.3115 (+ 200 points)
16 Oct : AUD/USD - Short at 0.7875,
18 Oct : USD/CAD - Long at 1.2515, exited at 1.2490   (- 25 points)
19 Oct : EUR/GBP - Short at 0.8975, exited at 0.9015  (- 40 points)

|                 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                                   + 165                            + 5   
Oct                                - 60                   - 80             - 25            +20         +200
Nov         
Dec                                                                                                                                               
Y-T-D        + 371           + 8               + 87            +798             - 30            +285

6 positions were entered among all 4 currency pairs with total loss of 93 points and the positions are listed below:

12 Oct : USD/CHF - Short at 0.9755, exited at 0.9775 (- 20 points)
13 Oct : USD/JPY - Short at 112.25, exited at 112.25 ( 0 point)
13 Oct : GBP/USD - Long at 1.3250, exited at 1.3245 (- 5 points)
19 Oct : USD/CHF - Long at 0.9790, exited at 0.9755 (- 35 points)
19 Oct : USD/JPY - Long at 112.70, exited at 112.35 (- 35 points)
19 Oct : EUR/USD - Short at 1.1850, exited at 1.1848 (+ 2 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           +129            +210              +200           - 70         
Oct            - 35               +2                 - 90            - 30
Nov        
Dec                                                                                               
Y-T-D       + 457            +425               +337           -109     

USD/CHF - 0.9865

Most recent candlesticks pattern : N/A

Trend                                    : Up

Tenkan-Sen level                  : 0.9862

Kijun-Sen level                    : 0.9854

Ichimoku cloud top                 : 0.9807

Ichimoku cloud bottom              : 0.9793

Original strategy :

Buy at 0.9795, Target: 0.9895, Stop: 0.9760

Position : -

Target :  -

Stop : -

New strategy  :

Buy at 0.9795, Target: 0.9895, Stop: 0.9760

Position : -

Target :  -

Stop : -

As the greenback rallied after finding renewed buying interest at 0.9737 late last week, adding credence to our view that recent upmove has resumed and bullishness remains for the rise from 0.9421 low to extend headway to 0.9870 and possibly towards 0.9900, however, near term overbought condition should limit upside and price should falter below 0.9940-50, bring retreat later.

In view of this, we are looking to buy dollar again on pullback as support at 0.9796 should limit downside and bring another rise. Below 0.9765-70 would defer and suggest top is possibly formed, risk test of indicated support at 0.9730-37, however, break there is needed to provide confirmation, then further fall to previous support at 0.9705 would follow.

GBP/USD - 1.3183

Most recent candlesticks pattern   : N/A

Trend                                 : Near term down

Tenkan-Sen level                 : 1.3183

Kijun-Sen level                    : 1.3193

Ichimoku cloud top              : 1.3160

Ichimoku cloud bottom        : 1.3150

Original strategy :

Sell at 1.3285, Target: 1.3155, Stop: 1.3320

Position : -

Target :  -

Stop : -

New strategy  :

Sell at 1.3285, Target: 1.3155, Stop: 1.3320

Position : -

Target :  -

Stop : -

As cable found good support at 1.3088 late last week and has staged a strong rebound, suggesting consolidation with initial upside bias would be seen for recovery to 1.3240-45 (61.8% Fibonacci retracement of 1.3338-1.3088), however, price should falter below indicated resistance at 1.3287 and bring retreat later, below 1.3130-35 would bring test of said support at 1.3088 but break there is needed to extend the fall from 1.3338 to 1.3050, then towards recent low at 1.3027.

In view of this, wee are looking to sell cable on further subsequent recovery as resistance at 1.3287 should limit upside and bring another decline later. Only above 1.3312 resistance would abort and extend further gain to said recent high at 1.3338 which is likely to hold from here.

EUR/USD - 1.1747

Most recent candlesticks pattern   : N/A

Trend                      : Sideways

Tenkan-Sen level              : 1.1748

Kijun-Sen level                  : 1.1762

Ichimoku cloud top             : 1.1812

Ichimoku cloud bottom      : 1.1801

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

Despite last week’s strong rebound to 1.1858, lack of follow through  buying and the subsequent sharp retreat suggest further choppy trading within recent established range would be seen and weakness to 1.1730 support cannot be ruled out, however, break there is needed to retain bearishness and signal another leg of decline from 1.1880 is underway for weakness to 1.1700 and possibly towards said support at 1.1669.

In view of this, would not chase this fall here and would be prudent to stand aside for now. Above 1.1780-90 would bring recovery to 1.1820-25, however, said resistance at 1.1858 should limit upside and price should falter well below said resistance at 1.1880. Only a break above there would signal another leg of erratic upmove from 1.1669 low is underway for gain to 1.1900-10, then towards 1.1940-50 later. As near term outlook is mixed, would be prudent to stand aside for now.

1. The Liberal Democratic Party won the early parliamentary elections in Japan.
2. "Abenomics" will remain the priority for the Japanese government.
3. Due to this, the Japanese Yen will tend to continue weakening.

"Abenomics" will continue. The Liberal Democratic Party led by the current Japanese Prime Minster, Shinzō Abe, secured a victory during the elections that took place last weekend. However, such results were expected: frankly speaking, the Opposition has nothing to offer instead of the current fiscal and monetary policy. Hardly anybody is ready to take responsibility for the weak inflation and the gradual increase of the national debt, but Abe, for example, is staying in power and continues being responsible for country's financial and economic system together with the Bank of Japan.

It is quite possible that there will be a new coalition in the parliament including liberal democrats and Buddhists. In this case, they will have 310 seats out of 465. It will be enough to continue promoting their financial and economic ideas programs with no hassle.

What is "Abenomics"? It's quite new market term, which includes all key aspects of the monetary policy carried out by the Japanese Cabinet of Ministers lead by Abe. This program is 5 years old and its primary goals are to make the country's economy improve steadily, stabilize the inflation numbers, and weaken the Yen. "Abenomics" was criticized on many occasions, for example, for a "side effect" resulting in the national debt increase. However, there weren't any other ideas that might be good enough for improving the country's economy and the GDP without wasting decades.

For the Yen, Abe's winning the elections means that the previous monetary policy carried out by the BoJ will remain the same. In general, it's not good for the Japanese currency, which has updated its four months' lows. On Monday morning, the USD/JPY pair was breaking the high at 114.00 it reached on July 11th, but a bit later the instrument moved a little lower. In the meantime, there are enough reasons for the pair to grow, because the currency market is not in need of "safe haven" assets right now.

From the point of view of the technical analysis, the long-term trend of the USD/JOPY pair is bearish. At the moment, the pair is expected to test the upside border of the current descending channel. If it succeeds and breaks the border, the price may try to resume the uptrend.

If we take a look at the previous rising impulse inside the descending channel, we can see that it has been corrected by 61.8%, which means that the correction is over and the pair may start a new ascending impulse. The closest target of this impulse may be inside the post-correctional extension area between the retracements of 138.2% and 161.8% at 122.960 and 125.650 respectively. However, to confirm this scenario the instrument has to break the resistance level at 114.700 and the local high at 118.600. We should note that 125.650 is the multi years' high and breaking it will be a serious test for investors.

In the short-term, the pair may grow quite steadily. Breaking 115.250 may result in reaching 117.300.

USD/JPY - 113.75

Most recent candlesticks pattern   : N/A

Trend                      : Near term up

Tenkan-Sen level              : 113.81

Kijun-Sen level                  : 112.68

Ichimoku cloud top             : 113.11

Ichimoku cloud bottom      : 112.91

Original strategy  :

Buy at 113.20, Target: 114.20, Stop: 112.85

Position :  -

Target :  -

Stop : -

New strategy  :

Buy at 113.20, Target: 114.20, Stop: 112.85

Position :  -

Target :  -

Stop : -

Although the greenback opened higher and rose to 114.10, current retreat suggests consolidation below this level would be seen and pullback to 113.40-45 (38.2% Fibonacci retracement of 112.30-114.10) cannot be ruled out, however, reckon 113.15-20 (previous resistance and 50% Fibonacci retracement) would hold and bring another rise later, above said resistance at 114.10 would extend recent rise from 111.65 to 114.40-50 but reckon 114.75-80 would hold from here due to oversold condition. 

In view of this, we are looking to buy dollar again on pullback as 113.15-20 should limit downside and bring another rise. Below the lower Kumo (now at 112.72) would defer and suggest top is possibly formed instead, risk test of indicated support at 112.30 which is likely to hold from here.