The New Zealand dollar, and most recently the British pound are the two currencies outperforming the rest of the G8 FX, with the USD following closely behind. Can these trends be sustained? The fundamental data in New Zealand keeps backing the NZD trend for now, while it's all about the UK general election for the GBP. Find out the latest headlines and G8 FX ebbs and flows in today's report.
Quick Take
Monday’s limited ebbs and flows keep proving that the GBP, emboldened by UK polls, and the NZD, catapulted by the local data and lingering RBNZ outcomes effects, remain the darlings of FX. On the other side of the spectrum, we have the Aussie, depressed near its monthly lows at an index level as the market has rolled back expectations of a neutral RBA. If you are trading the Aussie, today’s speech by RBA Lowe on ‘Unconventional Monetary Policy” should definitely be on your radar as a must-follow event since it has the potential to inject decent vol. The USD keeps grinding higher but at a rate of change that is far from encouraging, even if that’s been sufficient to make good progress against the Euro, which remains on a weak path for the last 2 days as the 1.10 round number gets retested once again. The Canadian dollar, the Japanese yen and the Swissy saw modest flows, primarily sell-side dominant, with the exception of the latter, which found better buying conviction as the North American session came online. If one understand where the Swissy index trades at, you would not be surprised (more on the charts section).
Narratives In Financial Markets
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
Optimism in the US-China trade deal returns: The market is back to pricing in a near-term resolution in the US-China Phase One trade deal after the Global Times notes “China and US are very close to sealing the Phase One deal. The tweet read:
“Contrary to negative media reports, China and the US are very close to the phase one trade deal, and China remains committed to continuing talks for a phase two or even a phase three deal with the US, on equal footing, experts close to the Chinese govt told GT."
US-China Phase One around the corner? China’s Global Times reports that both countries have basically reached a broad consensus on phase one deal, citing experts close to the talks.
"The two sides have basically reached broad consensus for the phase one agreement," Gao Lingyun, an expert at the Chinese Academy of Social Sciences in Beijing who is close to the trade talks, told the Global Times on Monday, noting that the two sides are still moving closer to reaching a phase one deal soon, unlike the "contradictory information" in the media reports.
China makes the right noises: As a reminder, over the weekend, China made a positive move in the negotiations by extending a good-will gesture by which the government attempts to address one of the main sticking points in the trade talks, that is, IP rights/thefts. China announced that it will increase the penalties for those that violate intellectual property rights, while also looking to lower the thresholds for criminal punishments related to IP thefts.
US stocks keep thriving: The US equity market continues to thrive with the S&P 500 up 23 points to a new record close of 3133, with the NASDAQ and Dow Jones following suit. Meanwhile, the appetite towards fixed-income doesn’t recede, sending conflicting signals. The expanding divergence between the S&P 500 (rising) and the US 30-year bond yield (falling) communicates a market not convinced that the reflationary environment (higher growth, higher inflation) can materialize. When that’s the premise the market telegraphs through yields, the carry trade won’t thrive unless the rising of stocks is accompanied by a sell-off in bonds that leads to an adjustment higher in yields.
German IFO stabilizes at very low levels: The much-awaited Germany November Ifo business climate index came flat-lined at 95.0, which was bang on expectations, even if the readings remain very low in line with the recessionary environment. It’s difficult to have a relevant takeaway when there is no divergence in the data. If anything, it reinforces the notion that while the German economy remains stuck, there is tentative evidence of some stability in sentiment.
GBP demand after the weekend polls: The latest weekend opinion polls show the Conservatives gaining further ground vs Labour ahead of the Dec 12 General Election, which would translate into an 80-seat overall majority for the Tories. The Pound saw major gains for the day on the back of the news. However, there is reason not to be overly excited as the latest UK election poll by ICM/Reuters released on Monday led to a quick intraday setback off the highs in the Pound as the Labour lead narrowed down to just 7 points. Conservatives at 41% and Labour at 34%.
ECB’s Lane hints CB can still be creative: ECB's Chief Economist Lane spoke in London, noting that all the Central Bank instruments can be adjusted if outlook worsens. The policy maker said that the ECB is going to be in the bond market for a long time. When asked what the ECB would do if inflation outlook worsens, said “the best guide might be what they did is September, a little bit of everything.” Lane admitted that the Asset Purchase Programme (APP), broadly known as QE, has constituted an effective tool worth roughly 100bp through the lowering of the sovereign ten-year yield.
RBA Lowe speech major focus for AUD traders: RBA Governor Lowe is due to speak on ‘Unconventional Monetary Policy: Some Lessons from Overseas” at the annual ABE Dinner. The speech by Lowe will follow an early one by Deputy Governor Guy Debelle, who is speaking on “Employment and Wages”. As the NAB Strategy Team notes: “Dr Lowe’s speech will provide an opportunity to outline the RBA’s view on various unconventional policy options and, perhaps, at what point the RBA thinks such a programme would be warranted. The Governor's comments to date suggests his preference is for QE in the form of buying government bonds, and not – unlike what the RBNZ has said to date on the topic – negative rates, described as being ‘very unlikely’.”
NZ retail sales for Q3 overwhelmed expectations: New Zealand retail sales ex inflation for Q3 came much better than expected at 1.6% vs 0.5%, which only reaffirms the outperformance of the Kiwi as the lingering positive sentiment on the back of the RBNZ holding rates extends further. For those trading the Kiwi, RBNZ Governor Orr will hold a press conference about the financial stability report on Wed morning.
Recent Economic Indicators & Events Ahead
Source: Forexfactory
Professional Insights Into FX Charts
Amid the relatively slow movements in G8 FX, today’s analysis will be centered around the G8 FX indices as to understand where we stand in the overall ebbs and flows.
The EUR index has recently been under the cosh, rejected away from the 50% retracement or midpoint of its broad range with potential to move lower from here for a retest of support.
The GBP index keeps pressing higher towards the top end of its range. The breakout into marginal new highs mid Nov has been followed by dip buying activity yesterday, reinforcing the notion that the last bullish leg formed has drawn enough buy-side interest to keep extending.
The USD index has stalled at a previous horizontal level of support turned resistance, with a second retest of the level currently underway. A decision for a fresh directional bias at this point is expected, either is sellers regaining the upper hand or an extension into weekly supply.
The CAD index continues to be technically challenged by the successful rotation to the downside see earlier last week, which implies that any rebound into the resistance line as seen, or as the pricing goes deeper, will see the threat of trend traders looking to jump in for a resumption of the bearish tendencies. There are two clear areas of supply on the daily to take note.
The NZD index keeps heading higher but a warning must be given. The currency is now entering what back in Sept constituted a strong supply area based on the departure we saw. Caution is warranted as the impulsive sell-off back then is no met with the same type of strong flows. If the NZD were to suffer from a setback in its momentum, this is an ideal area to sell into.
The AUD index has stalled its descend at the origin of a demand area in the daily, resulting in a week-long distribution of prices ahead of the next fundamental catalyst. Today’s RBA Lowe speech on unconventional policies could be the mover we’ve been waiting for.
The JPY index failed for a second time in a row at the same equal high, an event that could unleash further sell-side pressure for a retest of the previous low, which as a reminder, should keep seeing buy-side pressure as it intersects with a weekly demand.
The CHF index sold quite aggressively from its fresh month highs, currently retesting its previous swing low, an area that is likely to attract buying interest as it gets tested for the first time after the very successful rotation we saw in price 2 weeks ago. The level also coincides with an area of weekly demand, further reinforces the potential buy-side opportunity.
Important Footnotes
- Cycles: Markets evolve in cycles followed by a period of distribution and/or accumulation.
- Horizontal Support/Resistance: Unlike levels of dynamic support or resistance or more subjective measurements such as Fibonacci retracements, pivot points, trendlines, or other forms of reactive areas, the horizontal lines of support and resistance are universal concepts used by the majority of market participants. It, therefore, makes the areas the most widely followed and relevant to monitor.
- Trendlines: Besides the horizontal lines, trendlines are helpful as a visual representation of the trend. The trendlines are drawn respecting a series of rules that determine the validation of a new cycle being created. Therefore, these trendlines drawn in the chart hinge to a certain interpretation of market structures.
- Fundamentals: It’s important to highlight that the daily market outlook provided in this report is subject to the impact of the fundamental news. Any unexpected news may cause the price to behave erratically in the short term.
- Projection Targets: The usefulness of the 100% projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100% projection, you can anticipate the area in the chart where some type of pause and potential reversals in price is likely to occur, due to 1. The side in control of the cycle takes profits 2. Counter-trend positions are added by contrarian players 3. These are price points where limit orders are set by market-makers.