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Markets

It was a slow start of the week. The eco calendar contained no meaningful data and with some event risk looming, including the US midterms tomorrow, investors chose the sidelines today. US yields at the front end recoup most of the 5-6 basis points it lost following Friday’s payrolls release while the longer end is trading virtually flat. We see a similar underperformance at the front in Germany with the 2y yield adding 4.5 bps vs losing up to 2 bps at the longest tenors. This slight flattening follows French ECB governor Villeroy in an interview with the Irish times saying the central bank should keep raising rates until underlying inflation (ex. energy and food) starts to ease. He expects headline inflation to ease somewhere in the first half of 2023. Villeroy said the current policy rate is not far from the neutral one, adding that the central bank could shift to a slower tightening pace beyond that level without giving an estimate for the so-called terminal rate. The UK gilt curve’s wings underperform the belly. Investors brace for four consecutive days of supply for the first time ever at a time the Bank of England is conducting longer-term bond sales from its portfolio (up to £750 million of 7-20y bonds today). Stocks catch a breather with the sharpest edges of the core bond yield surge blunted for the time being. The EuroStoxx50 trades with minor gains of about half a percent in lackluster trading. Wall Street opens 0.2% in the green, building only very modestly on Friday’s post-payrolls boost. Some in the market saw the first signs of the labour market having peaked, allowing the Fed to tone down its aggressive stance. We think that’s premature to conclude and Thursday’s US CPI reading may already serve as a reality check.

The currency market is trading similar to Friday with broad dollar weakness as the key feature. The greenback on a trade-weighted basis (DXY) loses first support at 110.78 (September interim high) and changes hands at 110.35 currently. EUR/USD surpasses 0.995 to test parity. USD/JPY edges further south to 146.18. Unlike what early morning trading suggested, sterling turned out to be one of the better performers in the G10 landscape. EUR/GBP pared gains to trade lower in the 0.871 area. GBP/USD is nearing the 1.15 handle.

News Headlines

The September Czech trade deficit narrowed from CZK 29.7 bln to 13.9 bln. The trade balance was still negatively impacted by a sharp rise in the deficit of crude oil and natural gas (CZK 10.9 bln shortfall) and to a lesser extent in ‘computer, electronic and optical products and pharmaceutical products’. This was counterbalanced by an improvement in the surplus of motor vehicles and electricity. The trade balance ended in the red for eight months in a row which last happened in February 2009. Other data showed a real rise in industrial production of 8.3% Y/Y, but a 0.2% monthly decline as the y/y rise mirrors last year’s steep decline in motor vehicle production. The value of new orders at current prices increased 21.9% Y/Y. The number of employees in industry decreased by 0.3% Y/Y. Their average gross monthly nominal wage increased 9.0% Y/Y. The data come as the Czech national Bank (CNB) paused its rate hike cycle at 7.0%.CNB governor Michl today said rates will have to stay relatively high for some time and that a cut cannot be expected yet. He also earmarked a reduction in the budget deficit as important to slow inflation.

The value of the Swiss National Bank’s foreign currency reserves at the end of October rose to CHF 817.16 bln from CHF 806.11 bln end September. However, the reason for the rise is difficult to pinpoint. The move probably is at least partially due to a decline in the value of the Swiss franc, raising the value of reserves assets denominated in foreign currency. At the same time, markets are still trying to find out whether the SNB at the same time intervened in the FX market to support the currency as it indicated it is prepared to intervene on both sides if necessary. After rebounding from a cycle low in the EUR/CHF 0.941 area late September, the CHF weakened to stabilize in the EUR/CHF 0.98/99 area over the previous two weeks.

The commodity market efficiently reflected the improvement of the general situation. A Brent barrel on Monday is stabilising near 97.60 USD.

The main trigger for buying became an unexpected improvement in the forecasts on the global recession, which is a positive factor for the crude oil sector; also, there is a possibility that China will give up the zero tolerance regime in fighting with the coronavirus.

If these forecasts come true somehow, the commodity market will get serious support.

However, there are too few real reasons for softening the quarantine measures in China, and this understanding make commodity markets correct on Monday.

On H4, Brent has completed a wave of growth to 100.00. Today the market is forming a consolidation range under this level. Next, we expect a link of correction to 96.00. After it is over, a new wave of growth to 104.30 should start. The goal is local. Technically, this scenario is confirmed by the MACD. Its signal line is above zero in the histogram area, aimed strictly upwards.

On H1, Brent has formed a consolidation range around 96.50. With an escape upwards, the market has reached the goal of 100.00. This whole wave of growth is interpreted as the third one by the trend. Then we expect a link of correcting decline to 96.50. When this correction is over, another wave of growth to 100.00 should start. And when this level is broken away, a pathway for growth to 104.30 will open. Technically, this scenario is confirmed by the Stochastic oscillator. Its signal line is under 50. Further decline to 20 is expected.

Daily Pivots: (S1) 0.9868; (P) 1.0006; (R1) 1.0081; More...

USD/CHF is still bounded in range of 0.9840/1.0146 and intraday bias remains neutral. Consolidation from 1.0146 could extend further, but further rally is expected as long as 0.9840 support holds. Break of 1.0146 will resume larger up trend to 1.0283 projection level. However, sustained break of 0.9840 will now complete a double top pattern, and turn bias back to the downside for 0.9478 support instead.

In the bigger picture, up trend from 0.8756 (2021 low) is still in progress. Next target is 100% projection of 0.9149 to 1.0063 from 0.9369 at 1.0283, and then 1.0342 (2016 high). For now, this will remain the favored case as long as 0.9779 support holds, even in case of deep pull back.

Daily Pivots: (S1) 146.02; (P) 147.21; (R1) 147.86; More...

USD/JPY is staying in consolidation from 151.93 and intraday bias remains neutral. In case of deeper fall, downside should be contained by 38.2% retracement of 130.38 to 151.93 at 143.69 to bring rebound. On the upside, above 149.69 minor resistance will bring stronger rebound back towards 151.93 high. But upside should be limited there to continue the corrective pattern.

In the bigger picture, up trend from 101.18 is still in progress, as part of the whole up trend from 75.56 (2011 low). 147.68 (1998 high) was already met and there is no clearly sign of topping yet. In any case, break of 140.33 support is needed to be the first sign of medium term topping. Otherwise, further rise is in favor to next target at 160.16 (1990 high).

Daily Pivots: (S1) 0.9812; (P) 0.9890; (R1) 1.0036; More...

EUR/USD's rebound from 0.9729 extends higher but stays well below 1.0092 resistance. Intraday bias remains neutral first. On the upside, firm break of 1.0092 will resume the rebound from 0.9534. Next target is 1.0368 resistance. On the downside, break of 0.9729 will reaffirm the case the corrective rise from 0.9534 has completed at 1.0092. Deeper fall would then be seen to retest 0.9534 low next.

In the bigger picture, medium term outlook stays bearish with trading inside the falling channel. That is larger down trend from 1.2348 (2021 high) is still in progress. Firm break of 0.9534 low will confirm this bearish case. However, break of 1.0092 will add to the case of medium term bottoming, on bullish convergence condition in daily MACD, and bring further rally towards 55 week EMA (now at 1.0583).

Daily Pivots: (S1) 1.1223; (P) 1.1302; (R1) 1.1455; More...

GBP/USD's rebound from 1.1145 extends higher today but stays well below 1.1644 resistance. Intraday bias remains neutral first. On the upside, break of 1.1644 will resume the whole rise from 1.0351 and target 1.1759/2292 resistance zone. On the downside, break of 1.1145 will reaffirm the case that corrective rise from 1.0351 has completed at 1.1644. Deeper fall would then be seen back to 1.0922 support and below.

In the bigger picture, fall from 1.4248 (2018 high) is part of the long term down trend from 2.1161 (2007 high). Outlook will stay bearish as long as 1.1759 support turned resistance holds. Parity would be the next target on resumption. Nevertheless, firm break of 1.1759 will confirm medium term bottoming, and open up stronger rise back to 55 week EMA (now at 1.2357).

European majors are the stronger ones for today, with help from better than expected investor confidence data. Sterling is leading the way, followed by Swiss Franc and Euro. While risk sentiment appears to be mildly positive, there is no clear buying in commodity currencies. Instead, they are the softer ones overall. Dollar and Yen are mixed for now.

Technically, as European majors are gaining against Dollar, focus is back to respective pair. In particular, firm break of 0.9840 support in USD/CHF will complete a double top pattern, which is rather near term bearish. That would also complete with decisive break of 55 day EMA, and open up deeper fall to 0.9478 support.

In Europe, at the time of writing, FTSE is down -0.23%. DAX is up 0.80%. CAC is up 0.11%. Germany 10-year yield is down -0.0336 at 2.268. Earlier in Asia, Nikkei rose 1.21%. Hong Kong HSI rose 2.69%. China Shanghai SSE rose 0.23%. Singapore Strait times rose 0.36%. Japan 10-year JGB yield rose 0.0015 to 0.258.

Eurozone Sentix investor confidence rose to -30.9, concerns of catastrophic gas shortage fading

Eurozone Sentix Investor Confidence rose from -38.3 to -30.9 in November, above expectation of -35. Current situation index rose from -35.5 to -29.5. Expectations index rose from -41.0 to -32.3, highest since June this year.

Sentix said: "At the beginning of November, the sentix economic indices in Euroland surprise on the positive side. The overall index rises by 7.4 points to -30.9, which is still not a trend reversal signal. But the rise in situation and expectation values shows how sensitively investors react in their economic expectations to signals from the energy market.

"For this is the cause of the hopeful changes. October showed higher temperatures than usual and this means that gas storage facilities in Germany, for example, are full to the brim, more than expected for November. Spot market gas prices collapsed in response. Concerns about a catastrophic gas shortage are fading."

ECB Villeroy: Hiking pace more flexible, possibly slower beyond neutral rate

ECB Governing Council member Francois Villeroy de Galhau said in an interview, "as long as underlying inflation has not clearly peaked, we shouldn't stop on rates."

"It's too early to tell where the end point in interest rates, or the so-called terminal rate, could be," Villeroy said. "That said we are not far from the neutral rate, beyond which our hiking pace could be more flexible and possibly slower."

"We can raise interest rates without provoking significant unemployment," Villeroy said. "To determine the level of growth next year, energy is more important than monetary policy. Our aim is not to provoke a recession but to tame inflation."

China exports dropped -0.3% yoy in Oct, imports down -0.7% yoy

In USD term, China's exports dropped -0.3% yoy to USD 298.37B in October, well below expectation of 4.3% yoy. That's the worst performance since May 2020.

Imports dropped -0.7% yoy to USD 213.22B, below expectation of 0.1% yoy. That's the the worst since August 2020.

The simultaneous contraction in both exports and imports was the first since May 2020.

Trade surplus widened slightly from USD 84.74B to USD 85.15B, short of expectation of USD 95.95.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.1223; (P) 1.1302; (R1) 1.1455; More...

GBP/USD's rebound from 1.1145 extends higher today but stays well below 1.1644 resistance. Intraday bias remains neutral first. On the upside, break of 1.1644 will resume the whole rise from 1.0351 and target 1.1759/2292 resistance zone. On the downside, break of 1.1145 will reaffirm the case that corrective rise from 1.0351 has completed at 1.1644. Deeper fall would then be seen back to 1.0922 support and below.

In the bigger picture, fall from 1.4248 (2018 high) is part of the long term down trend from 2.1161 (2007 high). Outlook will stay bearish as long as 1.1759 support turned resistance holds. Parity would be the next target on resumption. Nevertheless, firm break of 1.1759 will confirm medium term bottoming, and open up stronger rise back to 55 week EMA (now at 1.2357).

Economic Indicators Update

• Nasdaq 100 reversed from pivotal support 10650.00
• Likely to rise to resistance level 11585.00

Nasdaq 100 index recently reversed up from the pivotal support 10650.00 (which stopped wave 5 in the middle of October) – standing near the lower daily Bollinger Band.

Upward reversal from the key support 10650.00 created the daily candlesticks reversal pattern Piercing Line, which stopped the earlier impulse waves 3 and (3).

Given the strength of the support 10650.00 ,Nasdaq 100 can be expected to rise further toward the next resistance level 11585.00.

• EURCAD reversed from key support 1.3280
• Likely to rise to resistance level 1.3520

EURCAD under the bullish pressure after the earlier upward reversal from the key support 1.3280 (former strong resistance from July and August) – standing near the lower daily Bollinger Band.

Upward reversal from the key support 1.3280 created the daily Hammer, which started the active short-term impulse wave 3- which belongs to wave (C) from September.

Given the strong euro gains, EURCAD can be expected to rise further toward the next resistance level 1.3520.

China’s exports contracted by 0.4% YoY in October, while imports lost 0.7% YoY in dollar terms. The foreign trade surplus rose to $85.7bn, lower than expected at $96bn.

Most observers saw these figures as a signal of a slowdown in the second-world economy. At the same time, it is worth bearing in mind that the dollar has appreciated by 18% against the DXY index (a basket of the six popular currencies) over the past year and by more than 12% against the CNY.

The renminbi has weakened in two waves this year: in April-May and from August until the end of October. In the first wave, we saw the USDCNY gain 5%; in the second wave, the renminbi weakened by around 7.5%. The second wave of weakening has a chance to reinvigorate foreign trade.

China is facing a relatively indirect impact from the energy crisis. It is more affected by the slump in the global economy than by the energy price hikes that Europe and Japan are facing. A relatively measured weakening of the national currency would probably work to maintain the competitiveness of Chinese goods on global markets.

If we are correct, the Chinese economy is now close to its lows for a coming couple of quarters, as production and consumer activity will pick up further. Added to this is the recovery in the Chinese markets, which has been evident since the start of the month. At current levels, global investors may be taking a closer look at Chinese assets, which would also help the renminbi in addition to the work that the PBC is doing to contain the weakening of its currency.