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Dollar support by jobs, manufacturing data

The US dollar has found the going tough this week, but positive US data gave it some Fed taper legs overnight, lifting the dollar index 0.17% higher to 93.75. US Initial Jobless Claims dropped under 300,000 jobs overnight to 290,000. Existing Home Sales soared to 6.29 million and while the Philly Fed Manufacturing Index for October slowed to 23.80, the other sub-indexes such as Business Conditions, Employment, Prices Paid and New Orders all recorded strong gains.

The US earnings season will continue to dominate proceedings in the short term, which means that the dollar index will struggle to recapture the 94.00 region, assuming earnings stay stellar. Another driver appears to be rising rate expectations among some trading partners, offsetting the boost from the Fed taper trade. The Evergrande payment has had no noticeable impact on forex markets this morning. The dollar index looks set to continue trading in a 93.50 to 94.00 range with a spike lower to 93.00 entirely possible.

EUR/USD has edged lower to 1.1630, but the technical picture suggests a move above 1.1670 could extend gains to 1.1800. It likely has a binary outcome on the performance of the pan-Europe PMIs this afternoon. GBP/USD fell 0.20% to 1.3795 but the Bank of England hike trade is alive and well if now looking a little crowded. A soft PMI could spark some profit-taking. Otherwise, a close above the nearby triple top at 1.3830 should allow a test of 1.3900 next week. AUD/USD and NZD/USD both fell by 0.65% to 0.7465 and 0.7155 overnight, where they remain today. A rise in Fed taper risk sentiment post the US data was behind the fall and if anything, else, highlights that international risk sentiment is the primary directional driver for both still.

In Asia, the PBOC said that the yuan is fairly priced, leaving USD/CNY trading almost unchanged at 6.3970 in Asia having traced out support at 6.3800 Wednesday. That continues to support the broader Asia FX space and the Evergrande news appears to be giving Asian currencies a very modest boost today as financial contagion fears ease.

Investors cheer as Evergrande makes bond payment

Evergrande’s offshore coupon payment, just ahead of the default deadline, has boosted Asian equity markets today, sending the China financial contagion story off the front pages for now and removing a key weekend risk. That has helped the northern Asia heavyweights fend of the sharp fall in Nasdaq futures in Asia after poor results from Snap post the US close.

Overnight, the return of Fed taper nerves after positive US data took the edge of the intra-day rally in New York. The S&P 500 closed 0.30% higher, the Nasdaq finished 0.64% higher, while the Dow Jones sank to a loss of 0.02%. The snap result has caused a mini tech-tantrum, with Nasdaq futures falling by 0.44%, wiping almost all of its overnight gains out, with Dow futures rising 0.15% and S&P minis unchanged.

Asia is sailing on an Evergrande tailwind though. The Nikkei 225 is 0.67% higher after a torrid day yesterday for reasons I am still at a loss to explain. The Kospi has risen by 0.30%, with Nasdaq nerves capping gains while Taipei is suffering a similar fate, rising just 0.05% today.

Mainland China is performing strongly though, the Shanghai Composite has risen by just 0.10%, but the narrower financial-heavy Shanghai 50 has jumped by 1.20%. The CSI 300 is also enjoying a good day, rising by 0.90%. Hong Kong, meanwhile, has risen by 0.30%.

Singapore is 0.30% higher along with Bangkok, but Kuala Lumpur and Manila have fallen by 0.45% with Jakarta unchanged. All three may be suffering some negative pressures as commodity prices continued to ease overnight, notably coal and gas. Australian markets seem content to run the week out on a quiet note, with the Melbourne reopening today probably thinning the ranks of traders there. The pubs are busy though. The ASX 200 and All Ordinaries are unchanged on the day.

European equities would likely have risen this afternoon on the Wall Street lead, and the Evergrande payment may modestly support sentiment. However, with an avalanche of PMIs due and with Nasdaq futures being heavily sold in Asia, European investors may hit the pause button.

Eurozone PMI Manufacturing dropped slightly to 58.5 in October, down from September's 58.6, above expectation of 57.3. But that's still the lowest level in 8 months. PMI Services dropped to 54.7, down from 56.4, below expectation of 55.4, and a 6-month low. PMI Composite dropped to 54.3, down from 56.2, a 6-month low.

Chris Williamson, Chief Business Economist at IHS Markit said: "A sharp slowdown in October means the eurozone starts the fourth quarter with the weakest growth momentum since April... The ongoing pandemic means supply chain delays remain a major concern, constraining production and driving prices ever higher, both in manufacturing and in the services sector. Average selling prices for goods and services are rising at a rate unprecedented in over two decades, which will inevitably feed through to higher consumer prices in the coming months.

"While the overall rate of economic growth remains above the long-run average for now, risks seem tilted to the downside for the near-term as the pandemic continues to disrupt economies and push prices higher. After strong second and third quarter expansions, GDP growth is looking much weaker by comparison in the fourth quarter."

Full release here.

Evergande makes first payment ahead of deadline

China state-backed media is reporting that Evergrande has wired its USD 83.52 million overdue offshore bond coupon payment today, just ahead of the end of the 30-day grace period tomorrow. Given that it is state media, who don’t say anything without government approval, I am inclined to believe it. That should give a temporary reprieve to the China financial system contagion fears although I note that Evergrande has another grace period payment due on the 29th of October of USD 45.17 million. Still, if they’ve managed to scrape together the funds for this one, it is reasonable to surmise that next weeks will also be met. That should provide some relief to China equities, especially Hong Kong, into the end of the week.

Elsewhere, Nasdaq futures are falling in Asia this morning after Snap sank 24% in aftermarket trading on the back of poor earnings. The blame was laid squarely at Apple’s door and their new privacy rules stopping advertisers from following you around the internet and slurping up your data. My heart bleeds. Snap’s results have seen investors mark down fellow Caligula’s of privacy, Facebook, or as the new “holding company” may be known, Faceplant, and Twitter amongst others. Intel also produced less than stellar results. Shorting big-tech has been a good way to lose money in the past two years, and I expect only a temporary aberration. Still, it may lead to a sombre mood into the end of the week in New York.

US Initial Jobless Claims fell under 300,000 jobs overnight to 290,000 overnight. Existing Home Sales soared to 6.29 million and while the Philly Fed Manufacturing Index for October fell to 23.80, the other sub-indexes such as Business Conditions, Employment, Prices Paid and New Orders all recorded strong gains. When taken in totality, the US data was quite positive and bought the Fed-taper trade back out of cold storage. The US dollar unwound some losses, US yields rose, and stocks tempered gains.

The change in direction was more a gentle drive around the roundabout, as opposed to a handbrake turn in a cloud of smoke. Although I believe the Fed taper will define Q4 once we get earnings out of the way, US earnings season will continue to dominate sentiment and rightly so. Thus, the overnight moves do not represent a shift in momentum; yet. President Biden continues to make progress on his spending plans allegedly, and this will also be supportive of equities, particularly the inhabitants of the Dow Jones. US equities in general will like that a vicious corporate tax hike appears to be no longer on the table.

Possibly the easiest trade of 2021, short Turkish lira, got another boost overnight. Under the auspices of Erdogan-omics, i.e., cut rates or be unemployed, the Turkish Central Bank cut rates by 2.0% overnight, despite rocketing inflation. The USD/TRY-my-patience rose by 3.30% to 9.5250 and a 10.0000 handle seems only a matter of time. The strongman leader (it’s always a man) is alive and well in the world and I feel sad for Turkey, one of the most wonderful countries I have visited. Still, like the Firestarter in Brazil, he was voted in, and you reap the marginally democratic populist seeds you sow.

In Asia, Japan markets will be boosted by the Jibun Bank flash PMIs for October. Manufacturing and Services PMIs climbed to 53.0 and 50.7, expansionary territory. Even official Inflation and Core-Inflation rose into positive territory to 0.20% and 0.10% respectively. Not bad for 30-years work, or is it 20 years? What’s a decade between friends? However, a reality check is given but inflation ex-food and energy prices, which came in at -0.50%. Don’t break out the end of deflation champagne yet. Still, it should put a smile on Japan equities after the Nikkei experienced a mysteriously torrid session yesterday.

Later today, Malaysian inflation should remain a benign 2.0% as the country reopens. The Thailand Balance of Trade and Philippines Budget Balance won’t make pretty reading. A Malaysian official said today that the country could reopen to international tourism next month. I believe that the reopening story will continue to dominate ASEAN short-term sentiment with a slew of similar announcements over the past two weeks. Thailand will be a major beneficiary, especially if the Northern hemisphere winter is a really cold one. Malaysia and Indonesia will also continue to find support from the commodity space.

The United Kingdom (sort of) will release Retail Sales and PMI data this afternoon. A soft retail sales print might take the heat out of the Bank of England hiking trade. There seems to be a feeding frenzy developing in this space and the street might be getting ahead of itself on this one. Australia’s RBA delivered a similar dose of reality to markets this morning by intervening to cap the rise in 3-year bond rates. Softness in the UK data might see some long-covering in the sterling which has become a crowded trade.

European countries and the US also release Markit Manufacturing, Services and Composite PMIs. With the Fed taper trade rearing its head again last night, higher PMI prints may temporarily give the tightening trade more momentum into the end of the week, especially as US earnings today features a B-list of celebrities. I expect the earnings story to regain its hold on markets next week, but there may be more two-way volatility in the buy-everything reactions, especially if giants such as Facebook report similar difficulties like Snap and Apple stuck in its throat.

I was going to talk about Bitcoin, but Elon Musk has tweeted overnight. The primary driver of the emperor’s new clothes, mainstream financial asset, institutional money is pouring in, inflation hedge, deflation hedge, stagflation hedge, store of value, insert perpetually bullish comment here ……, digital coin has spoken. I’m still looking for USD 80,000 of US taxpayer-backed fiat currency, though.

EUR/USD

Current level - 1.1626

The bulls failed to gain enough momentum and the upward move was limited at the 1.1668 resistance zone. At the time of writing, the currency pair is just above the support level of 1.1623, and this time, the bears could gain enough strength for a successful breach of that level. An unsuccessful breach, on the other hand, could form a short-term range between 1.1632 - 1.1668. Today, the data on the preliminary manufacturing PMI for the euro area (08:00 GMT) could affect the volatility of the market.

USD/JPY

Current level - 113.98

The situation for the Ninja remains unchanged, with positive sentiment prevailing at the moment. At the time of writing, the currency pair is trading under the support level of 114.42. A withdrawal from the local high at the mentioned resistance and a possible bear predominance can still be expected. The latter, however, should remain limited above the support of 112.98, at which point investors could find better levels for market entry. If the positive sentiment of the investors is confirmed, the first significant resistance after the mentioned local high would be the level of 115.50.

GBP/USD

Current level - 1.3788

In the last few trading sessions, we have noticed a slowdown in the rally as, at the time of writing the analysis, the currency pair is trading above the support level of 1.3762. The main resistance of 1.3829 has so far managed to withstand the pressure of the bulls twice already, but the expected third attempt may be successful and we may witness the resumption of the trade in the range between 1.3800 - 1.4000. The retail sales data for the UK (today; 06:00 GMT), as well as the preliminary manufacturing PMI and the preliminary PMI services for the UK (08:00 GMT), could be the main factors leading to an increased volatility for the currency pair today.

The Euro started a fresh recovery from the 1.1580 zone against the US Dollar. The EUR/USD pair traded above the 1.1620 resistance zone to move into a short-term positive zone.

However, the pair struggled to clear the 1.1665 resistance zone. It started a fresh decline below the 1.1640 level and the 50 hourly simple moving average. There was a break below a key bullish trend line with support near 1.1635 on the hourly chart.

The pair is now consolidating and an immediate resistance near the 1.1635 level. A break above the 1.1635 and 1.1640 resistance levels could lead the pair towards the 1.1665 zone.

On the downside, an initial support is near the 1.1625 level. The key support is near 1.1620 on FXOpen, below which there is a risk of a larger decline. The next major support is near the 1.1580 level.

The S&P 500 flies high supported by better-than-expected third-quarter earnings. The index has reached the previous all-time high at 4550.

A breakout may trigger a runaway rally. Nonetheless, a repeatedly overbought RSI may cause a limited pullback as buyers take profit.

A drop below the immediate support at 4515 would pull the trigger. 4445 would be next as it coincides with the 38.2% Fibonacci retracement level of the October rally. The bulls are likely to buy the dips though after sentiment turns optimistic.

Silver stalls as the greenback reclaims some lost ground. The break above the round number of 24.00 indicates strong commitment from the buy-side.

The bulls are looking at the major resistance at 24.80 from the daily timeframe, as a breakout would end a five-month-long correction and pave the way for a bullish reversal.

However, an overbought RSI coupled with a bearish divergence suggests possible exhaustion in the run-up. 23.60 would be the first level to watch for if the price pulls lower in search of support.

The US dollar steadies over lower-than-expected initial jobless claims.

Sentiment remains upbeat, however, the pair is struggling to climb past the psychological level of 115.00, probably due to overextension. The RSI’s double top in the overbought area and bearish divergence suggests that the rally could be losing steam.

A breach below 113.90 would prompt weaker hands to exit, leading to a pullback towards 113.00. A rebound past the said resistance would send the price to March 2017’s high of 115.40.

Germany PMI Manufacturing dropped slightly to 58.2, down from 58.4, better than expectation of 56.8. That's still a 9-month low. PMI Services dropped notably to 52.4, down from 56.2, below expectation of 55.2, a 6-month low. PMI Composite dropped to 52.0, down from 55.5, an 8-month low.

Phil Smith, Associate Director at IHS Markit said: "October's flash PMI data point to economic activity in Germany beginning to plateau at the start of the fourth quarter. Growth has slowed to a modest pace, with supply bottlenecks holding back manufacturing production and the rebound in services activity continuing to lose momentum, in part due to supply issues spilling over to the sector."

Full release here.