Market Wrap (Oct 25, 2017)
GBP up post-GDP, AUD down on soft CPI
By Ipek Ozkardeskaya, Senior Market Analyst LCG
The US stocks gained in New York, the Nikkei 225 ended its record sixteen-day winning strike in Tokyo. The USDJPY didn’t get the chance to test Monday’s post-election high of 114.10 yet. The US dollar gained, the US treasury yields edged higher. Gold fell as the opportunity cost of holding the precious metal increased with better US yields. The Aussie tanked on softer-than-expected 3Q inflation.
The Catalan crisis remains on the European headlines, but traders can’t seem to make heads or tails of what is going on in Spain. IBEX is up by 0.22%.
The pound gained on the back of a better-than-expected GDP data. The preliminary data showed that the UK’s GDP may have grown by 0.4% in the third quarter; the year-on-year growth remained unchanged at 1.5%.
The GBPUSD is rangebound between the 50 and 100-day moving averages (1.3240/1.3110). The encouraging GDP boosted the GBP-bulls, yet today’s data will certainly not be enough for building a stronger case for a Bank of England(BoE) rate hike beyond a one-off action. A rate hike before the end of the year is mostly priced in, which could cap the topside before the 100-day moving average against the greenback. The probability for a November or a December rate hike stands at 81.7% and 84.3% respectively.
AUD dives as soft inflation revives RBA-doves
The Australian dollar dived on the back of a softer-than-expected inflation read. The inflation in Australia rose by 0.6% in the third quarter, slower than 0.8% expected by analysts. As a result, the consumer price inflation unexpectedly decelerated from 1.9% to 1.8% year-on-year, versus 2.0% expected. Soft inflation gives more time to the Reserve Bank of Australia (RBA) for keeping the interest rates at the low levels and low interest rates are less appetizing for the carry traders. The AUDUSD (-0.84%) cleared the October support of 0.7726 (which stands for Fibonacci 50% retracement on April – September rise). The weakness could extend toward the 200-day moving average (0.7702) and 0.7632 (major 61.8% retrace).
The EURAUD gained two big figures in two days. A part of the rise could be explained by declining AU/EZ yield spreads. Still the 2-year spread stands at the highest levels since March. Opportunity cost of holding the single currency versus the Australian dollar could temper the appetite approaching 1.5227 (year-to-date high).
Euro traders quiet before the ECB meeting
The EURUSD fluctuates around its 100-day moving average (1.1750). The direction is unclear before Thursday’s European Central Bank (ECB) meeting. According to some sources, the ECB could reduce the size of its monthly purchases program by half to 30 billion euro. Some think that the ECB would rather opt for a gradual Quantitative Easing (QE) unwind.
The truth is nobody really knows what to expect.
President Mario Draghi will more likely than not disappoint the hawks, given that a sharp QE unwind would cause a sharp appreciation in the euro and weigh on the already-low inflation. This is an outcome that the ECB would not like and could not afford.
Traders will likely lie in wait until they have more clarity on the ECB’s policy outlook. The 50-day moving average (1.1850) should cap the upside attempts. Buyers are touted within the 1.1700/1.1750 range. Decent put options trail below 1.17 level as a hedge against an eventual sell-the-fact move.
US stocks, dollar gain with optimism on tax reforms
The US stocks and the dollar remain well bid as optimism is building on Donald Trump’s tax reform approval. The probability of a Federal Reserve (Fed) December rate hike stands at a solid 83.6% with or without an approval for Trump’s expensive fiscal plans. Though we know that the simple fact of dreaming of tax cuts is enough to wet investors’ appetite.
The US 10-year yield broke above the 2.40% level, as capital flew into the US stock markets on Tuesday. Good earnings from major names as Caterpillar, GM helped. The Dow Jones (+0.72%) renewed record, the S&P500 (+0.16%) and NASDAQ (+0.18%) gained as the VIX index bounced back to 11% after having eased to 10.39% in the first half of the US trading session.
Nasdaq, Citrix, Coca Cola, Visa are among companies releasing results today.
Gold cheapens on improved US yields
Appetite for risk assets and the improved US yields weigh on gold prices. The short-term negative trend strengthens. The 100-day moving average ($1’274) is cleared and the price pullback could continue toward $1’260 (October low). Resistance is eyed at $1’280/1’285 (minor 23.6% and major 38.2% retracement on Oct 16 – Oct 23 pullback). Gold miners (Randgold and Fresnillo) will likely remain under pressure on cheaper gold.
Will BoC statement revive hawkish expectations?
The Bank of Canada (BoC) will announce its rate decision today. The BoC is expected to maintain the overnight lending rate unchanged at 1.00% after having raised rates in the past two meetings. The bank will certainly keep the possibility of a year-end hike on the table. Any hawkish sign from the BoC should halt the USDCAD’s surge before the 1.2723 (major 38.2% retracement on May – September decline) and encourage a pullback below the 1.25 mark.