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Is the EURUSD Poised to Gain More?

The dollar finally went into defense on Wednesday, the USD index broke through 96 points, the lowest since the start of June. Breaking down the index into components, it can be seen that the move was driven predominantly by strengthening of euro:

EURUSD

In the trade-weighted USD index euro has the biggest weight which also contributed to the magnitude of decline.

On Monday, we discussed a trading setup on EURUSD, I recommend that you carefully read my arguments why the common currency can easily discount July ECB meeting and why the long positions in the pair were (and most likely remain) justified.

The attention of the markets (including mine) was drawn by speeches of Fed’s “talking heads” yesterday. In short, officials continue to lament over “shrouded in a thick layer of fog” economic outlook while key stimulus programs expiring in a month. The head of the Federal Reserve Bank of St. Louis Bullard “expects” that Congress won’t stop halfway and approve at the end of this month a new “substantial” program to support firms and households. Depending on the size of the package, the Fed may need to step in with some asset-purchase program to prevent disruptions from the oversupply shock in the Treasury market. We know where that leads.

Of course, one can argue that the Fed and Congress should be constrained by inflation in their stimulus plans, however, Central Bank officials continue to insist that factors of strong disinflation have arisen and at work in the economy. Robert Kaplan cites the resulting excess of production capacities (the so-called overcapacity) as an argument. Let me explain what he means. When a consumption shock occurs, the demand curve quickly shifts to the left, which reduces the equilibrium prices in the economy (deflationary effect). However, the adjustment of the supply curve (reduction in production) takes longer (sometimes significantly), since the shock reveals excess capacity of manufacturers (+ oversupply of inventory) that cannot be quickly eliminated. This increases the time of adjustment. This leads to the situation where economy continues to produce more than can be sold and consumed for some time. And this is, of course, disinflationary.

As we see, Fed officials have both a desire and a sense of “impunity”, which is why new measures to support the economy are actively discussed, which have already shown how they can actively depreciate the dollar. Hence the market’s tendency to expect further weakening of the dollar, which, as we see, is gradually being realized. These expectations are also fueled by the deterioration of epidemiological situation in the United States, which objectively slows down the economy and dampens recovery, because individual states are careful in lifting lockdowns. The need for new stimulus and corresponding pressure on the US government is growing, which cannot be said, for example, about the EU, where the epidemic remains under control. This is an additional argument in favor of the strength of the euro against the dollar (i.e. underlying imbalance in stimulus expectations and recovery outlook).

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 76% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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EURUSD: Next Stop at 1.15?

EURUSD Analysis.

This week focus in the US earnings season shifts from banks to the tech sector, but stock markets remains relatively resilient to headwinds of various intensity, whether it be the smoldering US-Sino conflict or far more serious accelerating daily gain in Covid-19 cases. Nonetheless, market sentiment and demand for USD are sensitive to the data that shed light on how quickly economies recover. In this context, weekly data on US mortgage applications on Wednesday and production PMI on Friday will be of particular interest.

Markets will be also sensitive to news related to extension of the government’s coronavirus relief measures which are set to expire at the end of July. Without them, the US economy which showed signs of takeoff, will likely to experience quick loss of altitude and hard landing. The reason for this is that states reopening in the US clearly went wrong – due to accelerating increase in the new cases, states which represent 80% of the population, paused or began to return lockdowns:

EURUSD

In the chart above, it can be seen that as of June 24, the states, where more than 90% of the population live, in one way or another were lifting restrictions (width of the blue area is 90%). With acceleration of the incidence of Covid-19, the situation has changed dramatically – the states, which represent 40% of the US nation, have paused lifting lockdowns (gray zone), in the states where the other 40% live, restrictions are increasing (red zone). Of course, this setback increases odds that removing fiscal support will unwind all recent achievements in the labor market and especially in protection of consumer confidence. Democrats leading in polls ahead of the presidential election put Republicans in a less favorable position so they may be more inclined to make concessions to approve new stimulus bill.

EURUSD continues to move upward thanks to the progress in negotiations on the Eurozone Recovery Fund. If member states manage to agree, for the first time in the history of the EU, Eurozone bonds (mutualized debt) will be issued, which will become a source of financing for the stimulus project.

Expectations of the issuance of “palatable debt” are drawing investors in the euro, and the closer the negotiations are to success, the more EURUSD strengthening can be expected. Nevertheless, some EU leaders warned that despite the compromises made, the negotiations could fail.

The Eurozone consolidated debt topic sets the euro apart from other dollar peers and is likely to allow the pair to test the important 1.15 level this week:

EURUSD

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 76% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Flip Side of Strong July Payrolls

The US economy created more than expected jobs in July, a report showed on Friday. Despite small positive deviation with consensus estimate it was a big surprise since several alternative data sources (Homebase data, ADP report) indicated the risk of downside surprise. The solid report had material impact on USD position, highlighting case for broad DXY consolidation, but it wasn’t a game-changer since the Fed made it clear major changes in policy should be expected in September. It is unlikely that positive July reading can prompt serious revisions in the track of recovery.

USD attempts to develop last week’s momentum on Monday, targeting the upper bound of the current range (92.50-94.00) buoyed by optimism related to positive expectations on retail sales report which is due on August 14.

1-15-1024x695.png

Jobs count increased by 1.763M compared with consensus estimate of 1.48M while official unemployment rate declined to 10.2%. Wages grew by 4.8% YoY, but growth estimates are naturally skewed to the upside as proportion of high-skilled workers relative to low-skilled workers increased because of higher rate of layoffs among unqualified labor in this recession. Service sector posted predictably faster pace of recovery, adding 592 thousand jobs.

Despite declining official unemployment rate, the government continues to support an army of unemployed which is somewhat higher than official estimates. This can be seen from “alternative” unemployment benefits data. Although official estimate of unemployed is approximately 16M, about 13M people receive payments under PUA (Pandemic Unemployment Assistance), i.e. the number of people receiving unemployment benefits is more than 31M:

2e-1-1024x271.png

Excerpt from the latest report on unemployment benefits. Release date: August 6

In light of these figures, we can conjecture the negative side of strong July payrolls: Republicans and Democrats can now extend tug-of-war process in the negotiation of terms of the next fiscal deal thanks to easing pressure from improving incoming data. This extends duration of the dip in incomes since extended unemployment benefits program expired a week ago.

Having found support in the 92.50-92.60 zone, the dollar index entered a period of consolidation, which is likely to remain until the Republicans and Democrats agree on the terms of a new package of fiscal support for the economy.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 76% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Flip Side of Strong July Payrolls

The US economy created more than expected jobs in July, a report showed on Friday. Despite small positive deviation with consensus estimate it was a big surprise since several alternative data sources (Homebase data, ADP report) indicated the risk of downside surprise. The solid report had material impact on USD position, highlighting case for broad DXY consolidation, but it wasn’t a game-changer since the Fed made it clear major changes in policy should be expected in September. It is unlikely that positive July reading can prompt serious revisions in the track of recovery.

USD attempts to develop last week’s momentum on Monday, targeting the upper bound of the current range (92.50-94.00) buoyed by optimism related to positive expectations on retail sales report which is due on August 14.

1-15-1024x695.png

Jobs count increased by 1.763M compared with consensus estimate of 1.48M while official unemployment rate declined to 10.2%. Wages grew by 4.8% YoY, but growth estimates are naturally skewed to the upside as proportion of high-skilled workers relative to low-skilled workers increased because of higher rate of layoffs among unqualified labor in this recession. Service sector posted predictably faster pace of recovery, adding 592 thousand jobs.

Despite declining official unemployment rate, the government continues to support an army of unemployed which is somewhat higher than official estimates. This can be seen from “alternative” unemployment benefits data. Although official estimate of unemployed is approximately 16M, about 13M people receive payments under PUA (Pandemic Unemployment Assistance), i.e. the number of people receiving unemployment benefits is more than 31M:

2e-1-1024x271.png

Excerpt from the latest report on unemployment benefits. Release date: August 6

In light of these figures, we can conjecture the negative side of strong July payrolls: Republicans and Democrats can now extend tug-of-war process in the negotiation of terms of the next fiscal deal thanks to easing pressure from improving incoming data. This extends duration of the dip in incomes since extended unemployment benefits program expired a week ago.

Having found support in the 92.50-92.60 zone, the dollar index entered a period of consolidation, which is likely to remain until the Republicans and Democrats agree on the terms of a new package of fiscal support for the economy.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 76% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Euro Demand Remains at 5-year High but Technical Picture Calls for Caution

The European currency posted record-high appeal among speculators for several years, showed the latest CFTC report. Net long speculative position rose to a 5-year high in the week ending Aug 4:

1-16-1024x297.png

Extreme speculative bias calls for caution in assessing prospects of further Euro rise and played itself as a corrective factor:

2-11-1024x694.png

Classic “double top” in the pair significantly slowed down the upward trend from a technical point of view, however, failed breakthrough of the trend line at 1.1710 level prevented early transfer of control to the sellers’ hands. Thus, the pair confirmed plans to remain in consolidation, probably until the terms of a new fiscal deal in the US are announced.

Expectations related to new round fiscal stimulus in the US offer solid support to the oil market. The European benchmark Brent rose 1.3% to nearly $45 per barrel. Drilling activity data from Baker Hughes released last Friday showed that rig count declined by 4 to 176 units, down nearly 75% from mid-March, hitting the lowest level since 2005.

This week we will have a lot of reports related to the oil market. These are API and EIA reports that are released on a weekly basis and are expected to show a decline by another 3.7 million barrels in commercial inventories. Today, the release of a short-term energy outlook by the EIA is expected, which will contain updated forecasts for growth of US oil output in 2020 and 2021. OPEC is to release its monthly report for July on Wednesday that will shed light on what was the cartel’s output in July and what dynamics of demand they expect in the coming months. On Thursday, monthly bulletin from the IEA is expected, in which the agency will assess the potential for market rebalancing in light of OPEC’s gradual lifting of production curbs. 

An outcome of the US-China talks on Saturday, during which the parties will take stock of implementation of the first phase of the trade deal, may also have a positive effect on the markets. Despite a number of reports and measures pointing to escalating tensions between the two countries, the latest US export data indicated an increase in agricultural exports to China. In the week ending August 6, corn exports to China increased to 264 kt. There is a positive trend in the export of soybeans to China. USDA data showed that the share of quality crops in the United States increased compared to last year (from ~ 54% to ~ 70%). This is one of the market factors that China referred to when describing which suppliers would be preferred, which indicates a high likelihood of a positive outcome for the market from Saturday negotiations.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

 High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 76% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Quick Reminder from the Fed that it is not Done with Stimulus

S&P 500 braces for renewing all-time peak deliberately ignoring three major factors of risk: uncertainty over fiscal deal in the US, Covid-19 data and US-China tensions.

The growth of US equities was fueled on Wednesday by the speech of Eric Rosengren, the head of the Federal Reserve Bank of Boston. In full accordance with opinion of his peers from the Fed, he delivered shock dose of bullish comments. Below are the most notable ones:

  • Fiscal and monetary measures are now “critical” for the economy;
  • Some signals that recovery moves to plateau;
  • Not worried about inflation acceleration.

Looks like a call to get ready for a new leg of monetary easing. The first two comments address concerns about why more stimulus is needed while the third explains why it is still safe. 

Note that Rosengren is traditional hawk – he tends to speak and vote for curtailing stimulus rather than increasing it. It is unusual to hear about stimulus from him and this fact lends more weight to his comments.

Data on Wednesday showed that core inflation rose 1.6% on an annualized basis:

1-19-1024x458.png

The monthly growth in consumer prices also beat expectations – 0.6% against the forecast of 0.2%. This was hinted at by a surprise in PPI, which rose by 0.5% in monthly terms against the 0.1% forecast. However, the impulse in inflation, as in other indicators, is quite natural and reflects lifting of quarantine restrictions, i.e. there is a risk that it will soon fizzle out with recovery getting in plateau phase. Therefore, markets’ response on the release of positive data was muted. 

The EURUSD pair climbed above the 1.18 level, but the gain was mainly driven by USD weakness. The euro could lag behind its G10 counterparts if US-EU relations begin to escalate again, which might be suspected from an escalating tariff war. USTR has introduced tariffs on German and French goods that are linked to EU subsidies to Airbus.

As for the GBP, the baseline scenario for the end of this week is consolidation above 1.30 level, as a number of positive UK macro data released this week strengthened position of GBP. USD remains weak and the key driver for rally of the pair is trade negotiations with the EU, which are now on pause.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 76% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Gold: All Signs of a Profit-booking Move

Since mid-July, bullish bets on Gold started to resemble mania or hasty shift to safe haven in anticipation of some disaster. The rally seemed well-founded, but more recently, an irrational buying spree was also felt. For example, from July 17 to August 6, only one daily candle was down and the past high from 2013 (~ $ 1920) was overcome relatively easily.

Gold crossing through $2000 level at ease created impression that it targets $2,500, $3,000 and even $ 4,000 per troy ounce. Bearing that in mind, it was difficult to trade countertrend. For the same reason, it was difficult to estimate the level from which correction would begin. Now, after the pullback has occurred, we have the opportunity to discuss whether it is an interim correction or the signal of global U-turn which in my view is a better trading opportunity.

Among potential factors explaining 5% downside move in gold was a surge in Treasury yields (direct rivals of Gold in investment portfolios), increased optimism related to the development of Covid-19 vaccine, economic news, new details on the US fiscal deal, etc. Let’s go through the points.

The yield on 10-year bonds hit 0.5% on August 6, from which it began to rise and reached 0.67% on Wednesday. Around the same moment, the decline in gold began which suggests that gold’s decline is related to Treasuries’ move. However, as we can see from recent history, there were larger in amplitude fluctuations in treasury yields which caused smaller decline in gold:

1-17-1024x692.png

It is fair to say that the liquidation of gold positions in March was also exacerbated by liquidity crunch. But if we consider June spike in yields which is larger than current one, gold’s reaction was relatively muted.

We can look at the connection between gold and the Treasury market from a slightly different angle. Gold has high correlation with TIPS (inflation-indexed Treasury bonds) – both are hedges against inflation, only for different time horizons. So, if we assume that some shift in inflation expectations was a factor in the correction, then TIPS should have corrected as well – however, the move in TIPS yield was much weaker:

2-12-1024x420.png

It turns out that with such a sluggish move in the “peer” asset, the fall in gold can be explained either by the fact that mainly long-term inflation expectations were sharply revised or a shift in inflationary expectations was not the main explanatory factor.

There are absolutely no signs of U-turn in Fed’s accommodative policy, since the Central Bank made it clear that until 2022 there won’t be any steps towards normalization (famous “we don’t even think about thinking of raising rates”) and if there will be changes, then only in the direction of further policy easing & balance sheet expansion.

On August 7, the NFP was released, which posted modest surprise in jobs count however, the effect of the report on the market quickly fizzled out. It’s unlikely that jobs report could cause some profound shift in expectations.

As a result, one likely explanation of the sharp decline in gold is a technical correction (profit taking move) which, taking into account gold’s position at historical peak, turned into avalanche of sales, exacerbated by momentum selling from algos. Fundamentally, expectations for Gold remain the same, since as we can see, key factors of the rally remain in place.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 76% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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US Retail Sales and U. Michigan Consumer Data may Drive USD lower

Commodity markets started Friday on a weaker footing. There is a noticeable tilt to the downside in silver as high volatility should persist after falling almost 16% on Tuesday. Gold futures are also under slight pressure, but buying interest is expected to remain strong. Sales in commodity markets are occurring despite USD scratching intention to move out of the range, testing resistance near 94 level on Wednesday, as there were no strong disturbances in the news background on the night from Thursday to Friday.

It is important to point out that the risk of failure of US fiscal deal looms on the horizon although it is still low. Despite that there is perception that markets may be greatly unprepared to that outcome. Although the news background is full of reports that talks are under way, it has been two weeks since the expiration of major federal aid programs, and there are still no concrete details.

The data on claims for unemployment benefits indicated a sharp decline in the inflow of unemployed – minus 263K compared to the previous week. This is a direct consequence of the cut in weekly unemployment payments from $600 to $200 per week, which made unemployment so “unpopular”.

The data on industrial production in China indicated continuing struggle – YoY rebound in July came at 4.8% against the forecast of 5.1%. This is the “Chinese signal” that the recovery is slowing down. Retail sales continued their slide which is even more frustrating since lots of hope is pinned to its rebound. Retail sales decreased by 1.1% YoY in July. Weak data on the largest Asian economy has sobered the markets today.

Another piece of highly important economic release is the US July retail sales. They are important because fiscal negotiations are likely to be sensitive to the data clarifying recovery path. The data on job creation and unemployment rate released last week signaled that fiscal&post-lockdown economic impetus in the US was likely extended to July. Retail sales are expected to confirm this assumption. In my view, retail sales below consensus will strengthen market risk-on and press USD lower as strong confirmation of fading upturn will increase pressure on Republicans and Democrats and help to find a middle ground faster. At the same time, positive surprise will allow the process to be delayed further. However, the odds of a negative deviation in the retail sales report, in my opinion, is somewhat less than 50%.

The report on consumer confidence and inflation expectations from U. Michigan can hit US Dollar.

1-21-1024x376.png

Why the data is on the market radar? The point is that if the report indicates an acceleration of inflation expectations above 3.0%, given the Fed’s stance, which does not even think about raising rates, real yields in the US will again be under pressure. For stocks, this will mean more upside, sales for USD and, of course, renewed interest for gold.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 76% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Positive Eco Data Extends State of Suspense

It’s a relatively calm Monday for the FX market. Yield on 10-year T-Note which caught the markets’ attention last week saw reduced pressure on Monday, trimming gains. Treasuries were under great pressure last week causing yields to rise from 0.5% to 0.7%, the highest level since the end of June. Gold exhibited some weakness last week as well but saw renewed interest on Monday, rising half a percent.

The context of the new trading week, namely continued state of suspense, has been determined to some extent by positive US reports released last Friday. US consumer spending continued to rise strongly in July, showed July retail sales report. Sales exceeded the level of February, the last “healthy” month before coronacrisis hit world economy. Consumer sentiment also remained consistently high.

However, this is not good enough. It is clear that both Republicans and Democrats have a goal of maximizing political gain from the new round of fiscal aid ahead of the elections. This goal ensures long negotiations and intense search of trade-offs. It is the positive data on the US economy that allows negotiators to gain precious time and necessary economic stability. The latter does not allow politicians to be accused of inaction, since the data continues to indicate an ongoing recovery.

On a monthly basis, retail sales rose 1.2% in July against the forecasted 2.1%. Monthly growth in June was revised upwards from 7.5% to 8.4%. In monetary terms, the volume of sales in July exceeded the level of February by 1.6%, i.e. climbed out of the crisis pit. Sales in the “control group” of goods (which excludes goods with volatile prices, allows better identification of consumer trends by excluding goods with low elasticity of income), rose 1.4%. This is more than the 0.8% forecast.

However, there is hardening perception that next phase of recovery will be full of pain without proper action. Consumer confidence began to decline in July which is in line with stalling recovery in consumer spending which hit a plateau. In early August, consumer spending began to decline, clearly reflecting the end of the income insurance program

Screenshot-2020-08-17-at-15.53.11-1024x4

Source:tracktherecovery.org

There are also more solid signals of slowing recovery. Shifts in oil’s futures curve hints that world stockpiles are not declining as quickly as we would like. The difference in price (spread) between the nearest contract and the contract of the next month reached 50 cents a barrel, the highest level since May. Recall that we had a deep contango (i.e. widening positive timespreads) in May which was associated with surplus of reserves.  As we see that spreads started to widen again this indicates that oil demand is not recovering as quickly as previously thought. This was also reflected in the IEA and OPEC reports released last week, according to which the agencies revised down their forecasts for oil demand for 2020 and 2021. With the rise in prices, US oil production is growing which is reflected in the latest US data.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 76% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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USD: Extreme Shorts are not the Reason for U-turn

The main trading theme in the FX market on Tuesday became the wake-up of dormant USD sell-off, which was a foreseeable development due to the presence of medium to long-term bearish USD macro factors. The only question was when the downward trend would resume. As it turned out, the pause in talks on new fiscal package failed to support greenback.

Basically, when we talk about fresh round of fiscal support, less uncertainty in negotiations on the new fiscal deal also means less uncertainty in the plans of government borrowing, i.e. growth of supply on the Treasuries market and possibly money supply (if the Fed resumes purchases to absorb the supply). For now, it seems that the risk of negotiations put on hold would increase uncertainty about bond supply and cause steeper pullback in T-bonds seems premature.

Accordingly, contrary to my expectations, short positions in Gold were routed earlier and the precious metal went into offensive. Demand returned to the Treasuries market as well. The 10-year Treasury yield appears to have completed its pullback from the last week (after hitting key support at 0.5%) and the trend resumption seems to be finding support and appeal among investors. This allows us to assume that the momentum in assets-safe heavens may be extended to the rest of this week. The rise in risk-free assets, coupled with lull in the stock market (i.e. risky assets), means that roots of the current trend are in the expectations for a new round of borrowing of the US government and corresponding expansionary policy of the Fed.

The CFTC data on USD from August 11 (the latest report) showed that bearish sentiment on USD is one the rise despite extreme positioning. On the contrary, the main opponent, the euro, saw increasing long positions. The net speculative positioning in euro reached 28% of open interest, which is slightly below the previous peak of 30%, which was observed in April 2018. EURUSD was 1.24-1.25 back then, but then turned into a nosedive, which lasted until March of this year.

Weighted by G-10 currencies, the net position on USD declined to -15% of open interest, below October 2017 and is moving to the lows of 2012-2013:

1-24-1024x619.png

So, from historical perspective USD is significantly oversold, but now, as we understand, there are completely different expectations for the path of expansion of the money supply in the US, therefore, it will hardly be possible to break the trend due to the presence of some extreme positioning.

USD positions were also shaken by mortgage and manufacturing data from the US, released earlier. Negative surprises prepare for a weak August and possible Fed interventions in the fall.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 76% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

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US Fiscal Talks Steer Towards Frugality Risking to cap T-bond Gains

So, here we go. Some Democrats and GOP members are no longer convinced that the economy needs a large fiscal aid package, a senior White House official told Reuters on Tuesday.

According to the official, there are signs of growing bipartisan bias towards frugality, both in the House of Representatives and in Congress, when it comes to discussing the size of the aid. It can be now reduced to $500 billion which is at least twice less than discussed before. The way how the government will spend may be less stimulating in terms of consumer spending boost since the funds are expected to be directed to financing US Postal Service and payroll loans for small and medium-sized businesses. It means that stimulus checks and extended unemployment benefits, which significantly spurred consumer spending in May-July, may not be included in the new package.

As we discussed earlier, stalling progress in fiscal talks increase the risk of markets being wrong in pricing in the final size and timing of the deal. With new details from the US administration official, the likelihood of this outcome increased.

Why should investors be bothered about that? Let’s explore the chain of the effects.

Firstly, size of the fiscal package has a direct bearing on how much the government would need to borrow. It is clear that more spending means more borrowing and vice versa. The level and intensity of borrowing will determine the flow of a large portion of bond supply to the Treasury market and it is not known whether the market will be able to absorb it without the help of the Fed.

Therefore, bond-buying plans of the Fed may depend on how actively the government would need to tap the Treasury market. Open market operations of the Fed have direct impact on the flow of liquidity in the banking system (bank reserves) and increase of money stock. Expectations of aggressive bond-buying (in case of large fiscal package) may ignite concerns about expansionary monetary policy what means rising pressure on real yield as well as supply of USD which have direct implications for risk assets (bonds vs. stocks story) and USD exchange rate (greenback supply/demand story).

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 76% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Fed’s “Revision of monetary policy strategy” – what is this?

The biggest piece of market moving data released on Wednesday was the Minutes of the July Fed meeting, which included some surprising points. For example, committee members were concerned about the side effects of yield curve targeting, thus significantly reducing probability that the Fed starts to control medium and long-term rates in September. Equity sell-off and some gains in USD that we saw on Wednesday are basically revision of the odds of this outcome towards zero.

According to the Minutes, FOMC members felt it necessary to provide more clarity on the path of Federal Funds rate. Of course, this is a reference to the so-called “Revision of monetary policy strategy”, which the Fed has been talking about for several months. As part of the current strategy, the Fed communicates its intentions in such a way that it retains some degree of uncertainty. If we think about underlying principles of this strategy, we can draw some interesting conclusions about propagation of policy changes in markets and economy.

Suppose the Fed, based on all available information about the current and future state of economy, decides that it makes sense to raise interest rate at the next meeting. At the same time, it communicates this intention to the public at the current meeting. Clearly, market players will price in the future hike immediately possibly causing divergence of the markets (and economy) from the state expected by the Fed during the next meeting. At the time when the Fed actually hikes the rate, it affects the economy which may be in completely different state and impact of the rate hike may be completely different from expectations of the Fed. In other words, “full openness” policy leads to systematic bias in the Fed expectations about the impact from policy decisions. It seems that the Fed needs to “systematically mislead market participants” but do it smartly to make policy changes effective in boosting output and make correct expectations about the impact of its decisions.

However, due to lack of success of the current policy framework in stimulating inflation, the Fed wants to revise its policy in such a way as to tie its decisions to specific economic outcomes – raising inflation to n%, lowering unemployment to t%, or upon reaching some combination of inflation and unemployment. … In other words, markets can be confident that policy changes will not occur, at least until the economic outcome is realized. In this case, the Fed will still retain uncertainty in its decisions but only after the economic parameters reach some predetermined values.

Lack of enthusiasm in the plans for YCC disappointed the markets a little since after the last meeting and bearish comments from the officials the markets had been actively pricing in this outcome in September.

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EURUSD: Weak August PMIs Increase Chances of a Sell-off

Minutes of the ECB July meeting, released on Thursday, showed that the central bank has little understanding of what lies ahead for the European economy. The word uncertainty (i.e. unquantifiable likelihood of future events) were mentioned in the minutes as many as 20 times. Perhaps this is a record.

It is no coincidence that the ECB tried to speak about why it is important to distinguish between recovery and rebound. EU economy is experiencing some kind of pickup and the central bank wants to make sure that market participants and economic agents understand its characteristics. A rebound can gain momentum, but it is natural to expect that the rebound sooner or later runs out of steam.  In contrast, economic recovery is self-sustained process which can be interrupted only by a shock of some kind. To put it in another way, the ECB doubts that the economic growth we saw in the summer is the beginning of a new expansionary phase of the cycle.

And indeed, it didn’t take long to see first confirmations of these concerns.  On Friday we’ve got first signs of a slack in ongoing rebound on the side of mfg./non-mfg. PMIs:

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Manufacturing and combined manufacturing/non-manufacturing activity in the Eurozone came lower than expected in August. Euro was sold aggressively on the news, which gives us a useful insight – slowing EU recovery may be heavily underpriced in EURUSD because of excessive focus on USD side:

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The minutes also showed that positive economic projections from July were based on the fact that strong support from the monetary policy will remain in place. According to the ECB, normalizing policy too early would be like pulling out a lifeline for drowning, which indicates a reluctance to move the rate in the next year or two.

There were also hawkish moments in the protocol. For example, ECB mentioned that the size of asset buybacks under the pandemic asset buyback program (PEPP) should be viewed as an upper bound, not a target. In addition, according to the ECB, economic reports in recent months have been more surprising in a positive way than in a negative one, and some of the risks that the ECB was concerned about in June have lost their urgency.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 76% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Two Big Rules of the Bearish USD Trend

Fatigue is growing in the upward trend of EURUSD, which became rather apparent on Friday, when the release of PMI data provoked sustained sell-off in the pair. The index of activity in the EU non-manufacturing sector showed that almost “mechanical” post-lockdown recovery is losing steam and at best enters plateau.

In the analysis of PMI data, it may be helpful to focus on how deviation of actual reading from the forecast changed in time to see how it corresponds with the story of consumer spending impulse. For example, in the August report, we see that PMI reading in the services sector lagged far behind the forecast (50.1 points against the forecast of 54.5 points).

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In May and June, it was the other way around – the actual values were significantly ahead of the forecasts. This dynamic suggests there is a rise and fading of some impulse (most likely in consumption), which is reflected in respective acceleration and subsequent slowdown in the services sector activity.

Sustained economic momentum in the EU in the first months after lockdown period mixed with less dovish (compared to the Fed) ECB served as a driver for euro advance for some time, but now this factor is gradually fading away.

On Monday, USD came under strong pressure on news that Trump is interested in accelerated approval of vaccines, including foreign-made ones. Such a move, undoubtedly, has a political motive, but this does not negate the fact that it may approach the date of vaccination in the US. However, exploring new lows in USD, in my opinion, will be possible if two conditions are met:

  1. US data will continue to point on sustained economic momentum
  2. The Fed will retain dovish tone or sound more bearish.

If we look closely at the conditions under which the dollar declined in June-July, we can notice that positive economic surprises (i.e. momentum) were combined with expectations of aggressive easing by the Fed. However, in August, the minutes of the Fed meeting in July showed that the central bank, if it continues easing, will be less aggressive than expected. On the data side, we started to see some signs of weakness in the US economic data. Therefore, in my opinion, it becomes much more difficult for USD to make its way to new lows, as the factor of declining real yield weakens. The Jackson Hole symposium, which will take place as an online conference on Thursday, at which Jeremy Powell will have to outline the updated guidelines of the Fed in shaping monetary policy, will clarify a lot in this sense.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 76% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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A Few Remarks on Yesterday’s Powell Speech

Well, yesterday the Fed, represented by its head Jeremy Powell, formally confirmed that it adjusts reaction function to changes in inflation. Whereas previously the Fed used to target specific rate of inflation (2%), new framework implies average inflation targeting.

The decision was widely expected, but I would like to make a few remarks about why that was necessary and how it could affect expectations on tentative dates of policy normalization.

According to the Fed’s report entitled “Review of The Monetary Policy “, the decision is based on the fact that the US is entering a “new normal”, which is characterized by the following observations:

  • Productivity (output per worker) continues to decline, and the population is aging.
  • The hypothetical neutral interest rate (at which GDP and inflation grow at a stable rate) is decreasing which implies that you need less interest rate hikes to get to the desired level.
  • Increasing the workforce (i.e. the level of labor force participation) should become a priority. By the way, the last decade of monetary stimulus was able to inflate many nominal indicators and raise some real indicators, but it was the LFPR that mysteriously remained at low levels, and drifted even lower during the pandemic:

1-34-1024x381.png

The crucial importance of LFPR in driving inflation can be demonstrated with the following hypothetical example: Suppose unemployment level is 0% which is associated with extreme economy overheating and thus inflation. If LFPR is low, for example 30%, only 30% of the working population will get paid and feed inflation through spending. In this case, contrary of our expectation of high inflation, we may barely see its move towards a target level.

  • A related issue with point 3 is that jobless rate sufficient to generate desired level of inflation decreases over time. Unemployment of 4% now and 10 years ago are clearly different in terms of potential to create inflation pressures.

Now let’s discuss the Powell speech.

The first thing that sticks out is extremely vague definitions. “Moderate” inflation overshoot over 2%, “period” during which inflation will average 2% … What does “moderate” mean in quantitative terms? When this very “period” will start, when it should end – all this remained unclear. According to Powell himself, there won’t be “mathematical formula”, everything will be very flexible (i.e. at the discretion of the Fed). The new framework is clearly a progress towards greater flexibility. We didn’t get nothing concrete except for the strong feeling that in the next 6+ years the rates will be likely near zero. But why? Firstly, from June FOMC projections we know that for the next three years, Central Bank officials expect the interest rate to stay at current level, and Core PCE below 2%:

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Second, if we recall how long inflation stayed above 2% in the last decade after massive easing and fiscal stimulus…

3-9-1024x422.png

… we can conjecture that pursuing average inflation of 2% without additional stimulus may require quite wide period which extends beyond 2030.

Hence, the bond market reaction to the Powell speech was mainly concentrated at the far end of the yield curve – the yield on long bonds rose, as the risks of increased inflation in the longer term increased. In the closer parts of the yield curve, there was less news from the speech, so the reaction wasn’t so strong.

The main conclusion from Powell’s speech is that rates will remain at a low level for a longer time. It is a key ingredient in further, sustained declines in US real yields, a powerful driver of USD depreciation and Gold gains that have already shown its potential this year.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 76% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Fed’s Mester: Rising Corporate Profits in 3Q Doesn’t Mean Recession is Behind

Economic activity and hiring have been constrained during coronavirus outbreak, confirming that the recovery will be slow and economy will need more support from monetary and fiscal authorities, Cleveland Federal Reserve Bank chief Loretta Mester said on Friday.

“I really think the recovery will be slow,” Mester told CNBC.

The economic data is likely to point to third-quarter growth after companies resume operations, but that doesn’t mean the economy is no longer in danger, Mester said.

“I actually think there are more challenges ahead and we will have to support the economy to overcome them,” she added.

Powell speech on Thursday indicated that the Fed becomes increasingly inclined to hold rates near zero bound for a very long time to generate inflation above 2% for some time. This inflation risk spooked investors in long-term bonds as well as fuelled speculations that the Fed will make additional easing of monetary conditions in the coming months. USD is expected to remain under pressure next week because of these expectations.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 76% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Long-term bond yields rise. Will the Fed conduct “Operation Twist 2”?

Following Jerome Powell’s speech at Jackson Hole last week, 30-year bond yields advanced to the highest level for two months on Friday. There are signs that the market expects consumer inflation to accelerate, and these expectations hit the far end of the yield curve hardest due to longer maturity.

As the Fed needs to keep borrowing costs under control, including long-term rates, the outflow of investors from long-term bonds started to gradually shape expectations that this demand will be replaced by the Fed purchases on the open market, i.e. increased QE. However, it is not clear how much the yields should rise, that the Central Bank started to worry.

Since the start of the pandemic, the Fed has bought nearly $2 tn in government bonds from the open market bringing its Treasury holdings to $4.36 tn. Short bonds prevailed in the composition of purchases.

In a similar situation after the GFC, when the yields of long-term bonds began to rise faster than short ones (steepening of the yield curve), the Fed resorted to a technique, which consisted in changing the composition of treasuries on the balance sheet – selling short and using proceeds to buy long-term bonds (so-called operation twist). The Fed began to do this in September 2011, curiously, it coincided with gold making a U-turn after it reached the then all-time high of $1900:

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Perhaps this happened because investors tried to front-run purchases of the Fed, dumping safe gold and increasing demand for long-term bonds anticipating large buyer would soon appear on the market. If the Fed hints in September that it is interested in conducting “Operation Twist 2” there is a risk that the market reaction may be similar. It is necessary to closely monitor how the Central Bank will comment/react to the rally of long-term yields.

Consumer inflation in the US (Core PCE metric) accelerated in July, which was the expected development amid data on unemployment and retail sales. Consistent with the volatility in economic data in the post-pandemic period, consumer spending also exceeded expectations (1.9% monthly growth, 1.5% forecast), so the effect was small. Much more interesting and unexpected was the report from U. Michigan on consumer sentiment and expectations for August. It is August that is the hypothetical starting point for the second phase of the US economic recovery – the phase of deceleration, so the data for August may pave the way for risk appetite in the market. In August, the sentiment index rose slightly – from 72.5 to 74.1 points, remaining in the same depressive range after it plunged in April.

The more important point of the report was inflation expectations. They rose to 3.1% in August, up from 3.0% in July, the report showed on Friday. Market metric of inflation expectations – the difference between the yield on unprotected and inflation-protected bonds reacted immediately, strengthening to 1.77%, the highest since mid-January 2020:

2-22-1024x379.png

Since the Fed decided to play openly, announcing its readiness to keep rates low for a long time and tolerate inflation, the risk of a further decline in the dollar increases due to increasing risk of acceleration of inflation expectations including due to the Fed commitment.

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  • 2 weeks later...

Bears in SPX Still Struggle to Make Downside a Base Case

US stock futures declined on Wednesday, followed by European indices, promising a tough day for those who are betting on extension of Wednesday bounce. S&P 500 futures slipped below 3400 points, but moderate selling indicates that the acute phase of the correction had passed and a period of “healthy” consolidation in the 3250-3400 range is coming.

Short-term tests below the range are possible, however, there are no fundamental catalysts in sight nor U-turn in market sentiments for consolidation below the lower bound.

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On September 4, when the S&P500 dropped below 3,400, Goldman Sachs maintained its year-end projection of 3,600. The presidential election now poses the greatest risk as Trump is again betting on anti-Chinese rhetoric and “bring back manufacturing jobs in the US.” This adds uncertainty to the political and economic course of the next US leader. It is unknown how far he can go in his campaign pledges. So far, the incumbent has threatened to strip firms from federal contracts which try to save on labor by moving jobs to China.

Corporate reporting of the US firms included in the S&P 500 for the second quarter beat forecasts in 23.1% of cases (data from Lord Abbett), which is a way higher than 4.7%, the average for the previous 5 years. In the context of yield suppression in alternative asset classes better-than-expected 2Q performance may give some justification to their market valuations.

The US Senate, controlled by Republicans, is going to vote on a fiscal package, the proposed volume of which is significantly thinner compared to previous proposals and amounts to only $300 billion. This is much less than what the Democrats want to pass ($2 tn). Approval of a fiscal package worth at least $1tn would be a powerful shot of optimism for risk assets, but time shows that the GOP wants to approve less and less, increasing uncertainty about the final size date of approval.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 76% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Stalemate in Fiscal Talks, Growing Slack in eco Data put a dent in Equities Rally

US equities were unable to develop positive start of Thursday session and bulls ceded ground to sellers later. There may be growing conviction in the market that US lawmakers (both the Fed and Congress) will not be able to enact monetary or fiscal support before the US presidential elections. This is a negative scenario for equity markets which reinforces the case for consolidation.

Yesterday I wrote that the GOP wanted to adopt skinny fiscal package – in the amount of only $300 billion. The vote on it was scheduled for Thursday. The vote failed and it looks like that the talks headed for a dead end.

A break below 3300 points in SPX early in the session today may set persistent corrective tone for risky assets extending for the rest of the session. However, rising US index futures indicate that breaking support won’t be an easy task.

In the economic calendar, the focus is on the US CPI release for August. Core inflation is expected at 1.6%, and the market will be more sensitive to negative deviations from the forecast than positive ones. Market response to accelerating inflation is limited by the Fed’s new “patient” inflationary stance (FAIT). Slowing inflation in the US is critical for sentiment, since nothing can be opposed to it yet due to the stalemate in fiscal negotiations. Yesterday’s PPI release which beat estimates indicates that inflation pressure could rise in the prices of consumer goods as well.

The report on unemployment claims in the US released on Thursday was a blow to market optimism. The number of unemployed increased for the fourth consecutive week. This is a subtle signal that slack in economic activity is growing in the US.

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Key points from the September ECB meeting

Earlier in this week I wrote that the chance for the resumption of EURUSD rally is high, since the ECB cannot stop the growth of the Euro with any specific measures. This statement can be strengthened by considering key meeting takeaways:

  • The ECB’s response to the Fed’s new inflation targeting concept is in the works, so the euro could not get anything out of it;
  • Inflation forecasts for 2020, 2021 are unexpectedly revised upwards – the ECB’s bias to ease policy becomes lower;
  • The ECB is closely monitoring the exchange rate of the euro and believes that the expensive euro slows inflation. However, targeting of Euro exchange rate is not included in monetary policy objectives. This is the verbal intervention that we talked about, and which did not make an impression on the euro. The base scenario for EURUSD, despite the growing chances of the dollar bullish pullback in the next two weeks, is continue rally towards 1.25 level.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 76% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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  • 2 weeks later...

The RBA left cash rate unchanged on Tuesday but gave clear-cut indications that it wants to float additional easing measures at the next meeting to stimulate hiring.

“The Board continues to consider how additional monetary easing could support jobs as the economy opens up further”, the policy statement said.

Three out of four major Australian banks - Westpac, NAB and ANZ expect the central bank to cut the cash rate in November.

The implicit pledge of the RBA to reduce borrowing costs was made just before the release of the government's budget for 2020/21. The government is expected to ramp up borrowing, but accommodative policy of the RBA should help the government bond market to absorb increased supply.

We can also notice a subtle shift in emphasis in the policy statement towards employment goals (instead of routine discussion of inflation targets) which is reminiscent of the Fed’s shift toward flexible average inflation targeting policy.If it’s true, then the RBA may be willing to tolerate higher inflation as well in exchange for lower future unemployment. Of course, this development bodes ill for the national currency, AUD.

From the technical perspective the RBA’s dovish bias helped AUDUSD to complete formation of the double-top reversal pattern in the pullback that started on September 28, which in turn was part of the bearish trend initiated in September:

picture2.png

A breakthrough of the local minimum at 0.7130 should allow us to consider targets at 0.7080 and 0.70 levels.

The AUDUSD decline of more than 5% in September and the episode of "resistance" since September 28 were consistent with waves of correction and rally in equity markets, indicating a link between the events. Then a further decline in AUDUSD suggests a nix in the stock markets, which is very likely to happen due to upcoming pre-election volatility. Earlier, retail brokers in the US (such as IB) announced an increase in initial and maintenance margins for some instruments, mentioning the risks of "elevated volatility" ahead of the elections.

The trade balance of Australia in August was almost half of the forecast (2.64 billion against 5.15 billion Australian dollars), which indicates a reduction in exports. Business activity in Australia is especially sensitive to the dynamics of foreign trade, therefore, the weakening of exports is an additional blow to Australian assets and hence the demand for AUD.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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  • 3 weeks later...

Last Chance for Trump to Narrow the gap

 

Biden’s lead in polls declined last week, albeit slightly, which still kept markets under pressure. The event which jumps into the foreground this week is the second presidential debate. It is Trump's last big chance before the election to leap forward and narrow the lead. In my opinion, if Trump manages to weaken Biden’s advantage, it will be a risk-off event since this outcome increases the chance of contested elections (which is a great source of uncertainty). Extension of Biden’s lead should be a boon for the markets helping them to extend the rally.

Important data on the US economy this week will be new home sales, the Fed's Beige Book and, of course, the initial jobless claims, which will receive a little more attention as the jobs market exhibited some weakness last week. The rest of the calendar for America is not particularly remarkable.

On Monday, the USD index began to decline aggressively, continuing the downward trend from September 25. Recall that at the same time the probability of Biden's victory and the probability of a complete victory for the Democrats began to rise:

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The Covid situation in the United States was generally calm in September, but became alarming in early October:

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The numbers are not so critical yet to tighten measures (and crash the market), but let’s keep the finger on the pulse.

In my opinion, there are little grounds to expect some surprise in Trump performance on the debates and expectations that Biden will extend or retain its lead should drive USD decline this week. The target for USD index is 93.00 level and 1.1830 - 1.1850 in EURUSD.

The data on Chinese economy left a mixed impression. GDP in the third quarter increased by 4.9% (forecast 5.2%), but the growth of industrial production in September (which is tied to external demand) beat expectations - 6.9% against the forecast of 5.8%. Retail sales jumped 3.3% YoY last month, against a more modest forecast of 1.8%. Unemployment has dropped.

Today, a meeting of the OPEC + joint monitoring commission is scheduled, at which it will be discussed how responsibly the participants are approaching production cuts. Europe has tightened measures due to rising incidence of Covid-19, which curbs fuel demand and OPEC is increasingly aware of the need to adjust supply. Specific decisions, however, may happen at the full OPEC+ meeting due on November 30 - December 1, but today's meeting should contribute to the discussion about what OPEC + will do at the full meeting.

COT data showed that long positions of Brent speculators increased by 37,531 lots in the last reporting week. The net position increased to 120,108 lots. Most of the changes occurred in short covering - 28K out of 37K (~ 75%). It looks like speculators were unwilling to stay short ahead of news from OPEC + this week which creates opportunity for prices to test some monthly resistance levels:

3-1603107197.png
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SPX and USD Index: What to Expect in the Second Half of the Week?

 

Looking at recent volatility, especially vigorous move to the upside, stock markets could rally on hopes that fiscal deal will be approved before the elections. But on Tuesday, much hoped talks fell through once again. House Speaker Pelosi and Mnuchin still “hold hope” and continue tense negotiations almost 24/7, but rumors suggest that there is no progress on key differences. Reuters reported that the GOP’s head in the Senate Mitch McConnell would not want to approved aid before the elections.

The SPX was unable to sustain gains, bouncing down from the level of 3500 last week, without much upside impulses this week. The slide was accompanied by a sharp decline of the odds of Democratic sweep outcome:

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On the hourly chart we see that 200-day SMA test failed, but on October 19 the market gave up important support:

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Now the battle unfolds for the horizontal level of 3420. It has sustained multiple tests so far due to weak sellers’ indecision, but chances are good that we will go lower with 50-day MA on the daily chart (the next important support at 3400) as the next target. Depending on the struggle at the level it will be seen whether the prospects remain to switch quickly to the growth. Accordingly, there is an opportunity for a near-term short trade, and a pause is assumed for buyers, since they can wait for more discount.

The dollar sold heavily in line with the ideas set forth in my Monday post. The tests of 93.00 and 92.76 levels have been successfully complete and, in my view, it is time to correct upwards with potential entries in the 92.70 - 92.45 area. For EURUSD, this should be the zone 1.1890 - 1.19160:

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The reason is potential downside in the US stock market.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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