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Strong data, Fed comments pushing USD higher

The US dollar is trading near seven week highs as economic data has been solid, the central bank is still pushing for a third rate hike and the tax reform proposal is moving forward. Leading manufacturing and non manufacturing indicators have improved and rising exports have shrunk the trade deficit to a yearly low but questions remain on the effect the tropical storms will have on the biggest economic indicator in the market.

The U.S. Bureau of Labor Statistics will release the non farm payrolls (NFP) report on Friday, October 6 at 8:30 am EDT. The economy is forecasted to have added 82,000 positions in September. The impact of hurricanes Harvey and Irma is to blame for the underperformance but given the resilience of the economy the possibility of the final figure beating expectations is not far fetched.

The ADP private payrolls report came in close to the forecast with 135,000 jobs and unemployment claims rose by 260,000 when a 266,000 gain was anticipated. Fed FOMC voting members were in full force this week and today’s comments from Philadelphia Fed chief Patrick Harker that while the 2 percent inflation target will remain untouched he still believes there should be another rate hike. The CME FedWatch tool shows a 86.7 percent probability of the interest rate moving higher to a 125 to 150 basis points range.

The EUR/USD fell 0.45 percent on Thursday. The single currency is trading at 1.17050 in a tight range awaiting the release of the September U.S. non farm payrolls (NFP) report. The US dollar has traded higher versus the euro as the US economy has shown resilience after two hurricanes.

The release of the European Central Bank (ECB) monetary policy meeting minutes showed there is still an ongoing debate on how exactly to pull back stimulus. Fearing a taper tantrum ECB policy makers are still discussing the size of the taper and a mix of extending the duration. There is even the possibility of changing the name of the process to recalibration to avoid the negative connotation of a tapering.

The situation in Catalonia is far from resolved and Separatists will meet on Monday defying a Spanish court order, but the market has been alerted that they will not declare independence.

The USD/CAD gained 0.74 percent in the last 24 hours. The currency pair is trading at 1.25688 after trade data in the US surprised to the upside with rising exports while a different story played out in Canadian figures. The Canadian trade deficit widened in August with exports falling for a third month in a row.

Economists have warned that the Canadian economy is cooling down after an impressive first half of 2017. Two rate hikes and impressive growth took the loonie to appreciate versus a struggling USD. A third rate hike is losing ground in the eyes of the market. The Bank of Canada (BoC) cut rates by 50 basis points in 2015 and it wasn’t until their assessment of the economy improved in 2017 that they have hiked twice to leave the benchmark rate at 1.00 percent.

Tomorrow’s job releases in Canada and the US will be telling on how the two economies are acting in tandem or breaking apart. The tropical storms in the US could obfuscate the jobs situation in the US while in Canada there are growing concerns about the rate of full time job losses. The headline number in Canada has been steady, but thanks to part time positions. Jobs in Canada are expected to have gained 13,900 positions in September.

Market events to watch this week:

Friday, October 6
8:30 am CAD Employment Change
8:30 am CAD Unemployment Rate
8:30 am USD Average Hourly Earnings m/m
8:30 am USD Non-Farm Employment Change
8:30 am USD Unemployment Rate

The main issue for the European markets remains the political situation in Spain where we may see an announcement regarding Catalonia's independence come through on Monday. A vote for independence may see the euro continue to lose ground against its major trading partners. On the other hand, after the release of the ECB monetary policy meeting minutes it has become clear that the reduction of stimulus measures in the Eurozone in 2018 is highly likely. Positive news from the Eurozone's retail PMI growth in September to 52.3 against 50.8 in August was not able to offset the negative effects from Spain. Some support for the US dollar came from positive data on the trade balance deficit in the US that in August was only 42.4 billion - this is 0.3 better than forecasted. At the same time, factory orders in the US increased by 1.2% in August against the 1.0% increase expected. Investors are waiting for tomorrow's labor market data in the US that is likely to result in increased volatility. Strong numbers on non-farm payrolls and unemployment are likely to increase confidence in another rate hike by the Fed in December.

The sterling remains in the bearish trend amid uncertainty linked with the Brexit talks. Statistics on the decline in the number of registered autos by 9.3% to 426,170 in September also strengthened concerns about the prospects of British economic growth.

The WTI price demonstrated positive dynamics following the news about crude oil inventories reduction in the US by 6.0 million barrels compared to an expected decline of only 0.5 million barrels. This news however, didn't help the Canadian dollar that felt the pinch due to the trade deficit increase in August to 3.4 billion, which is 0.8 billion worse than the average prediction.

EUR/USD

The EUR/USD price resumed declining after some consolidation above 1.1750 and in case of passing through the support at 1.1700, the next targets will be 1.1620 and 1.1550. In order to resume positive dynamics, it will be necessary to overcome the 1.1800-1.1825 range and in this case the next goals will be 1.1925 and 1.2000. The RSI on the 15-minute chart is near the oversold zone, which points to an increased chance of upward correction.

GBP/USD

The GBP/USD has shown a sharp descending movement and approached the lower limit of the descending channel. Breaking through the support at 1.3150 may become the basis for continued price drops to the 1.3000-1.3050 range. We do not exclude an upward rebound to 1.3250 as the RSI on the 15-minute chart is signalling that the pair is oversold.

USD/CAD

The USD/CAD is growing confidently after a long consolidation near 1.2470. Currently the quotes reached resistance at 1.2550 and gaining a foothold above it may be a reason for further increases with immediate goals at 1.2665 and 1.2800. On the other hand, the trend may change to negative in the case of the price fixing below 1.2450.

Daily Pivots: (S1) 148.96; (P) 149.43; (R1) 149.83; More

GBP/JPY's decline from 152.82 accelerates lower and breaks 38.2% retracement of 141.17 to 152.82 at 148.36 firmly. The development argues that whole rise from 139.29 is completed. Intraday bias stays on the downside for 55 day EMA (now at 146.27). Sustained trading below there will bring retest of 139.29 key support level. On the upside, break of 149.92 minor resistance is needed to indicate completion of the fall. Otherwise, deeper decline will now remain in favor.

In the bigger picture, medium term rebound from 122.36 is in progress. Firm break of 38.2% retracement of 196.85 to 122.36 at 150.43 will carry long term bullish implications. In that case, GBP/JPY could target 61.8% retracement at 167.78. For now, the bullish scenario is preferred as long as 139.29 support holds.

Daily Pivots: (S1) 1.2449; (P) 1.2474; (R1) 1.2499; More....

Break of 1.2537 suggests that rebound form 1.2061 has resumed. Intraday bias is back on the upside for 1.2777 resistance next. Decisive break there will target key medium term fibonacci level at target 38.2% retracement of 1.4689 to 1.2061 at 1.3065. On the downside, below 1.2448 minor support will turn intraday bias neutral again.

In the bigger picture, current development argues that USD/CAD has defended 50% retracement of 0.9406 (2011 low) to 1.4869 (2016 high) at 1.2048. And with 1.2048 intact, we'd favor the case that fall from 1.4689 is a correction. Break of 1.2777 will further affirm this bullish case. That is, larger up trend from 0.9406 is not completed. However, on the other hand, firm break of 1.2048 will indicate that fall from 1.4689 is at least a medium term down trend and should target 61.8% retracement at 1.1424 and below.

The pound was the worst performing major currency in Thursday's European session as speculation mounted about whether the UK prime minister would resign. The euro also underperformed as the European Central Bank's September meeting minutes showed policymakers wanted to maintain a "highly accommodative" monetary policy once tightening gets underway. The US dollar meanwhile was broadly firmer after another batch of solid US data.

Fears about the possible resignation of British Prime Minister Theresa May were heightened today following a party conference speech on Wednesday that was marred by a series of mishaps. In what was meant to be a keynote speech aimed at uniting her party that has been gripped by infighting over Brexit and leadership, May's annual address to the Conservatives only contributed to talk of her departure. Also weighing on the pound were growing concerns that the UK is headed for a 'hard' Brexit amid lack of progress in the negotiations with the EU.

The pound fell to a near 4-week low of $1.3126, to stand 0.9% lower on the day in late European session. It was also sharply down against the euro and the yen. The single currency gained 0.6% versus sterling and was last up at 0.8926, while against the yen, the pound tumbled by more than 1% to a three-week low of 147.66.

The euro wasn't having a much better day either as dovish signals from the ECB and renewed threat of political instability dragged on the currency. The ECB's account of the September policy meeting indicated there was growing concern by Governing Council members about the appreciating exchange rate, which was creating "a source of uncertainty" and requires "close monitoring". The minutes confirmed policymakers had begun discussions on reducing the size of the asset purchases and that the bulk of the decisions will be made at the October meeting.

Governing Council member Ewald Nowotny further reinforced expectations of tighter policy in the coming months. In an interview for an Austrian magazine, Nowotny said "I assume that we will transition to a cautious deceleration at the start of the coming year".

Meanwhile in Spain, the situation in Catalonia showed no sign of deescalating. Spain's Constitutional Court today suspended the Catalan parliamentary session scheduled for Monday when the regional government was due to meet to decide on declaring independence.

The euro slid by about 0.4% to a session low of 1.1711 against the dollar and was down by 0.5% against the yen at 131.84.

The US dollar was stuck in a tight range against the yen today and saw only muted reaction to economic data out of the United States. Initial jobless claims fell from 272k to 260k in the week ending September 30, beating estimates of 265k. August trade data also surprised to the upside, with the deficit shrinking to $42.40 billion from $43.60 billion. It compares with forecasts of a deficit of $42.70 billion. Factory orders completed the hat trick as they rose by 1.2% month-on-month in August, surpassing expectations of a 1.0% increase and follows a 3.3% drop in the prior month.

The greenback was slightly down versus the yen at 112.62 at the start of US trading, but it's broader measure, the dollar index was firmer, climbing 0.4% to 93.83. The dollar index was lifted by hawkish comments from Fed officials.

Speaking to CNBC, Philadelphia Fed President Patrick Harker today repeated that he expects one more rate rise this year and three in 2018. This view on the rate hike path was shared by San Francisco Fed President John Williams, who said he still expects low unemployment to drive up wages, which should push up inflation.

In other currencies, the Australian and Canadian dollars were both lower against their US counterpart on Thursday. The aussie extended its Asian session losses to drop below the 0.78 handle following worse-than-expected retail sales figures out of Australia earlier in the day. It was last down 0.8% at $0.7798.

The Canadian dollar touched a five-week low as expectations of further rate hikes by the Bank of Canada this year continued to recede. Canada posted a much larger-than-forecast trade deficit in August of C$3.41 billion, further dampening sentiment on the loonie. The greenback was last up 0.5% at C$1.2538, with a jump in oil prices providing little boost for the loonie.

Oil prices surged by around 2% today after Russia and Saudi Arabia suggested that the current deal between OPEC/non-OPEC countries to cap output could be extended until the end of 2018. WTI crude rose was last trading at $50.91 a barrel, while Brent crude was at $56.89 a barrel.

USD is rallying on better than expected Jobless Claims. We can see some sharp moves against the AUD and CAD in the last few hours, with Aussie trading close to Oct 03rd low that can be out soon if we consider that flat correction in wave 4 can be finished. There is room for a fifth wave fall to complete red wave 3) near 0.7750/0.7720 region.

AUDUSD, 1H

E-mini S&P500 remains trading at new all-time highs, now still in wave 3 which can be nearing a completion at current 261.8% Fib. level of wave 1 from 2, and with an ending diagonal at the top. Market may also slow down ahead of tomorrows NFP figures, so we think fourth wave set-back may show up in the near-term; in normal circumstances that would be back to 2528.

S&P500, 1H

Highlights:

• Canada's nominal merchandise trade deficit widened to $3.4 billion in August from $3.0 billion in July.
• Export volumes declined for a third-consecutive month, led for a third-consecutive time by lower non-energy exports.
• Imports continue to outperform, suggesting that domestic demand remains strong.

Our Take:

Exports fell 1.0% in nominal terms and 1.5% controlling for price changes. The August pullback marks a third consecutive monthly export volumes drop with non-energy exports once again leading the way lower. The international trade data is notoriously volatile and much of the recent pullback looks to be just a retracement from four consecutive quarters of gains, culminating in a 10% jump in overall export volumes in Q2 that was clearly not sustainable. We continue to expect that a pickup in trade growth globally in recent quarters and signs of life in the U.S. industrial sector will ultimately support a return to a gradual uptrend in Canadian exports going forward, although attention will also be paid to any signs that the (broadly-based) appreciation in the Canadian dollar since early June is eating into Canada's share of foreign demand. The import data continues to look more encouraging. Import volumes inched up 0.3% in August and were still up 3.1% from a year ago. Imports of industrial equipment - a key indicator of domestic business investment spending - inched lower in volume terms in August but were still up 13% from a year ago and a whopping 18% (annualized rate) Q3 to-date relative to Q2. The relative strength in imports is a negative for the trade balance but argues that domestic demand remains strong.

On balance, today's data adds to the evidence that the outsized outperformance of the economy over the last year is coming to an end. It also, however, does not alter our expectation that growth will still remain at an 'above-potential' pace and - with the economy probably already quite close to capacity limits - that further gradual Bank of Canada interest rate hikes will be warranted.

• European equities trade modestly higher in a calm session. Madrid profits from the easing of tensions to outperform (+1.6%). US equities opened slightly higher.
• The ECB policymakers are keen to press ahead with plans to end their bond-buying spree next year, despite some reservations on wage inflation and the strength of the euro. Governing council members were increasingly confident that the recovery would last. Market developments were favourable, while there were "nascent" signs of reflationary forces
• Sterling took a fall, slipping against both the dollar and the euro, after a calamitous speech by PM May boosted political uncertainty. The move brings sterling to a one-month low against the dollar. A critical speech by Mrs May on Wednesday was overshadowed by issues, including a prankster handing the prime minister a P45 redundancy slip.
• Switzerland's return to inflation seems to be taking hold, with the Y/Y pace of price rises reaching 0.7% in September, the highest since March 2011. August's rate was 0.5%. Deflation reached its most severe point in August 2015 when inflation was down 1.4% Y/Y.
• Swedish industrial production fell more than economists expected in August, with July's figures revised down. Industrial production fell 1.7% M/M. The SEK (EUR/SEK 9.52) held on to the big gains of the last three days.
• Saudi Arabia will continue working with Russia to stabilise global oil markets, the country's King said during talks with Russian President Putin in Moscow, where the two leaders discussed the war in Syria and other issues.
• US initial claims dropped a slightly bigger than expected 12K to 260K in the most recent week, gradually unwinding the surge after the passage of the hurricanes. The US trade deficit was marginally lower than expected at $42.3B in August. It was an 11 month low and follows a $43.6B deficit in July. Exports rose 0.4% M/M, imports fell 0.1% M/M. It suggests the global economy is doing well and the US profits from a weaker dollar.
• Philly Fed Harker said he (together with 9 other governors) projects three rate hikes in 2017, suggesting that he will vote for such an increase at the December meeting. He admits there are some issues with inflation but also calls the economy "incredibly resilient."

Rates

Slight outperformance longer end of the German curve

Ahead of the key US payrolls tomorrow, core bonds had an uneventful session. The Bund had a difficult start, but rebounded at a snail's pace from mid-morning onwards. The morning session was devoid of market moving economic reports and comments of ECB's Praet about the need for sufficient convergence before euro adoption had understandably no impact. We saw already a few days a mild tendency to buy German bonds on dips and that might also have been the case today. The Minutes of the last ECB meeting, published in early afternoon, were interesting suggesting that the ECB might recalibrate its purchases by buying less, but compensate by buying for longer. The ECB should also use the forward guidance on rates to keep expectations for a rate hike at bay for longer. Of course, decisions still need to be taken and many details remain unknown. Anyway, the Bund went down for a brief moment after the release, but erased the losses soon.

The US Treasuries kept a sideways trading mode throughout the session, unmoved by the eco releases, which were close to expectations. Philly Fed Harker sees another rate hike this year and Fed Williams said that inflation will rise to 2%, enabling the Fed to raise rates. The remarks of Williams might have triggered some modest (temporary) selling, but not enough to give US Treasuries firm direction. After closure of our report, the factory orders report will be published followed later on by speeches of Fed governors Dudley and Bullard. However, with the payrolls looming, we expect trading to remain quiet and technical uneventful.

At time of writing, German yields are up 0.8/1 bp in the 2-to-5-yr sector and were nearly flat in the 10-30-yr sector. US yields rose up to 2 bps across the curve. On intra-EMU markets, tensions surrounding the Spanish political situation eased a bit, allowing a modest narrowing of the 10-yr yield spreads. Spain and Italy outperformed with a 6 bps narrowing.

The Minutes of the September ECB meeting were interesting and showed that governors were keen to press ahead with plans to end the bond buying programme next year despite some reservations about the (weak) wage inflation and the euro strength. They were increasingly confident the recovery would last and saw "nascent" signs of reflationary forces. The Minutes indicate that the ECB is unlikely to follow the Fed's method of gradually slow the pace of bond purchases. The focus of the debate is on two issues: the degree to which they will slow the pace of purchases and for how long they will keep buying (the recalibration). The benefits from a longer intended purchase horizon combined with a greater reduction in the amount were compared to a shorter period of purchases and larger monthly volumes. The accounts suggest some governors prefer a slower-for longer approach. It also suggest that the council will use the forward guidance on rates to keep monetary policy loose.

Currencies

EUR/USD drifting lower in the 1.17 big figure

Today, there was again no clear story to guide USD trading. There were only second tier eco data in the US and Europe. Tensions on the Spanish markets eased, but didn't cause a sustained euro rebound. In the afternoon, some 'hawkish' Fed comments caused modest dollar gain of the dollar. However, EUR/USD (1.1720 area) and USD/JPY 112.60 area trade still are range-bound.

Overnight, Asian markets showed a mixed picture. Japanese indices were little changed and so was USD/JPY (112.75 area). Australia August retails sales were very weak. AUD/USD declined 0.7865 to the 0.7830 area. EUR/USD held a very tight sideways range in the 1.1760 area.

As was the case yesterday, there was again no clear story to guided trading in EUR/USD or USD/JPY during European trading. The tensions on Spain eased with equities rebounding and Spanish spreads narrowing. EUR/USD tried to go higher early in Europe, but soon settled in a tight sideways range roughly between 1.1750/80. The Minutes of the September ECB meeting suggested that the Bank could reduce bond buying by a substantial amount, but keep the buying for longer. The impact on European bonds or the euro was limited. If anything, the euro felt some modest selling pressure.

The dollar gradually received a better bid as US investors joined trading. Fed's Harker and Fed Williams defended another rate increase in 2017. The comments reinforced the USD bid. EUR/USD trades currently in the 1.1720 area. USD/JPY also rebounded off the intraday lows; but at 112.60 the pair trades in negative territory compared to yesterday's close. In a broader perspective, the dollar is still in consolidation modus, awaiting more higher profile news before starting a new directional trend. Maybe tomorrow's payrolls can do the job.

EUR/GBP squeezed back above 0.89

Sterling came under pressure from the start of trading in Europe. There were no UK eco data releases. In the (financial) press there were extensive analyses of the 'failed' key note speech of UK PM May at the annual meeting of the Conservative congress. The 'event' only raised more questions whether May is the right person to lead the Conservative party and the UK throughout the tumultuous Brexit period. This additional uncertainty on the political support for PM May weighed on sterling. The EUR/GBP short-squeeze accelerated as the pair broke the 0.8900/07 resistance area. After the initial break higher, EUR/GBP settled in a tight range around 0.8925. The currency lost also ground against the dollar. Cable trades currently below the 1.3150 handle. The down-leg in the currency pair even looks like accelerating. Later today ,BoE McCafferty and Chief economist Haldane are still scheduled to speak. If monetary policy issues are addressed, they will probably defend the scenario of a (limited) tightening in the near future.

Daily Pivots: (S1) 1.1702; (P) 1.1738 (R1) 1.1780; More...

As long as 1.1832 resistance holds, fall from 1.2091 is expected to extend lower. Such decline is correcting whole rise from 1.0569. Deeper fall should be seen to 38.2% retracement of 1.0569 to 1.2091 at 1.1510, where we're expecting support to bring rebound. On the upside, break of 1.1832 minor resistance will suggest that the corrective fall is completed and turn bias back to the upside.

In the bigger picture, rise from medium term bottom at 1.0339 is not finished yet. It's expected to continue after pull back from 1.2091 completes. And, next target will be 38.2% retracement of 1.6039 (2008 high) to 1.0339 (2017 low) at 1.2516. However, it should be noted that there is no confirmation of trend reversal yet. That is, such rebound from 1.0399 could be a correction. And the long term fall from 1.6039 (2008 high) could resume. Hence, we'd be cautious on strong resistance from 1.2516 to limit upside.

Daily Pivots: (S1) 0.9714; (P) 0.9749; (R1) 0.9771; More....

USD/CHF is trying to break 0.9772 resistance again and there is not follow through buying yet. Intraday bias remains neutral first. On the upside, decisive break of 0.9772 key resistance will suggest that whole down trend form 1.0342 has completed. In that case, near term outlook will be turned bullish for 0.9860/1.0099 resistance zone. However, break of 09669 minor support will suggest rejection from 09772 and turn bias back to the downside for 0.9587 support. Break will target retesting 0.9420 low.

In the bigger picture, focus remains on whether 0.9443 key support (2016 low) could be taken out firmly as down trend from 1.0342 extends. There are various interpretation of the price actions. But in any case, medium term outlook will stay bearish as long as 0.9772 resistance holds. Current down trend could extend to 38.2% retracement of 0.7065 (2011 low) to 1.0342 (2016 high) at 0.9090. However, break of 0.9772 will indicate that USD/CHF has successfully defended 0.9443 again and turn outlook bullish for 1.0099 resistance.