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Central banks sketch out digital currency as China forges ahead By Reuters

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© Reuters. FILE PHOTO: A small toy figure is seen on representations of the virtual currency on a displayed European Union flag and the Facebook Libra logo in this illustration picture

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By Huw Jones and Tom Wilson

LONDON (Reuters) – A group of seven major central banks including the U.S. Federal Reserve set out on Friday how a digital currency could look like to help catch up with China’s “trail blazing” and leapfrog private projects like Facebook Inc (NASDAQ:)’s Libra stablecoin.

The central banks and the Bank for International Settlements (BIS), said core features should include resilience, availability at low or no cost, appropriate standards and clear legal framework, and an appropriate role for the private sector.

Bank of England (BoE) Deputy Governor and chair of a BIS committee on payments Jon Cunliffe said the rise in cashless payments since lockdowns to fight the pandemic has accelerated how technology is changing forms of money.

Central banks began looking closely at digital currencies after Facebook last year announced its yet-to-be-launched digital token Libra that would be backed by a mixture of major currencies and government debt. The body behind Libra has since tweaked plans and now hopes to launch several “stablecoins” backed by individual currencies.

Central banks need to keep up to avoid the private sector plugging payments gaps in unsuitable ways, Cunliffe said.

Besides the Fed and the BoE, the seven central banks that have teamed up with the BIS include the European Central Bank, the Swiss National Bank and Bank of Japan, but not the People’s Bank of China.

China is already piloting a digital renminbi, with the PBOC saying it would boost the yuan’s reach in a world currently dominated by the dollar.

Japan’s top financial diplomat, Kenji Okamura, said on Thursday that China was seeking to win a first-mover advantage in building its own digital currency, warning it was “something we should be afraid of”.

“I don’t think this is a race between central banks,” Cunliffe said, adding that no one central bank digital currency (CBDC) answer was going to dominate the whole world.

Benoit Coeure, head of innovation at the BIS, said there was no international race, but there was an advantage for central banks to quickly catch up with the private sector and get ahead of the curve to shape the future.

The International Monetary Fund could play an important role in dealing with any cross-border “spillovers” from a national CBDC, Coeure said.

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S&P 500 Index to Track Progress on US Stimulus Ahead of Deadline

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S&P 500 Index, US Fiscal Aid Talks, US Presidential Elections, Coronavirus – Talking Points:

  • Equity markets climbed higher during the Asian trading session as investors digested the progress in US fiscal aid talks.
  • House Speaker Pelosi’s 48-hour deadline on bipartisan negotiations threatens to trigger a period of risk aversion.
  • S&P 500 index poised to move higher as price carves out a Bull Flag continuation pattern.

Asia-Pacific Recap

Equity markets moved broadly higher during Asia-Pacific trade, with Australia’s ASX 200 index climbing 0.85% and Japan’s Nikkei 225 index climbing over 1.2%.

Mixed economic data out of China took some of the wind out of the sails of the cyclically-sensitive Australian Dollar, as it retreated from session-highs after the announcement.

Gold clamber back above the $1,900/oz mark and silver stormed 1.7% higher, as the haven-associated US Dollar slid lower.

Looking ahead, speeches from European Central Bank President Christine Lagarde and Federal Reserve Chair Jerome Powell headline the economic docket.

S&P 500 Index to Track Progress on US Stimulus Ahead of Deadline

Market reaction chart created using TradingView

48-Hour Deadline on Stimulus Talks Could Haunt US Benchmark Indices

The ongoing battle between Republicans and Democrats on the specifics of a much-needed, and long overdue, fiscal aid package is likely to dictate the near-term outlook for US benchmark equity indices, as House Speaker Nancy Pelosi announces that she and Treasury Secretary Steven Mnuchin must reach an agreement within 48 hours “if we want to get it done before the election, which we do”.

Given that the US is currently averaging more than 50,000 new coronavirus infections a day and initial jobless claims rose by 898,000 (est. 825,000) in the week ended October 10, the need for additional fiscal support is becoming increasingly urgent.

Moreover, Federal Reserve Chairman Jerome Powell warned that the absence of “an additional pandemic-related fiscal package” could see growth “decelerate at a faster-than-expected pace in the fourth quarter”, while his Vice Chair Richard Clarida also stressed the need for “additional support from fiscal policy” given that “it will take some time to return to the levels of economic activity and employment that prevailed at the business cycle peak in February”.

S&P 500 Index to Track Progress on US Stimulus Ahead of Deadline

Source – Worldometer

However, with Mnuchin stating that although he and Pelosi “continue to make progress on certain issues, we continue to be far apart on others” and adding that “getting something done before the election and executing on that would be difficult”, it seems relatively unlikely that a deal will be passed before the US presidential elections on November 3.

Furthermore, in the off-chance that a bill is agreed upon there is a distinct possibility that it will be voted-down in the Senate, given Senate Majority Leader Mitch McConnell favours a significantly narrower aid package that will cost roughly $500 billion and has stated that “the speaker insists on an outrageous amount of money”.

Therefore, a resurgence of risk aversion may be at hand if US policymakers are unable to successfully get a deal across the line before Speaker Pelosi’s deadline in two days.

‘Blue Wave’ Hopes Underpinning Equity Prices

Having said all that, recent price action suggests that the market may be looking beyond the lack of fiscal aid and could be beginning to price in a Biden presidency, which is expected to bring with it a substantial injection of stimulus if the Senate flips to a Democratic majority.

With only 14 days until the election and with Mr Biden holding a commanding lead over the incumbent President Donald Trump in the national polls, a Democratic administration certainly seems to be a likely possibility.

However, the rate of change in the RealClearPolitics Betting Average index suggests that Mr Trump could narrow the gap substantially in the coming days, if this trend were to continue.

S&P 500 Index to Track Progress on US Stimulus Ahead of Deadline

Source – RealClearPolitics

To that end, although the absence of much-needed fiscal aid may weigh on US asset prices in the near term, the growing likelihood of a Biden win in November could see market participants begin to price in a more extensive government support package and in turn direct capital flows into risk-associated assets.

Conversely, further losses could be in the offing if incumbent President Donald Trump begins to claw back lost ground against his Democratic challenger, as is reflected in the S&P 500 index’s recent 4-day slide lower on the back of Trump’s nudge higher in the national polls.

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S&P 500 Index Daily Chart – Bull Flag in Play?

S&P 500 Index to Track Progress on US Stimulus Ahead of Deadline

S&P 500 index daily chart created using TradingView

As expected, the US benchmark S&P 500 index’s inability to break above psychological resistance at the 3550 mark resulted in price sliding just over 3% and back towards support at the 50% Fibonacci (3424.25).

This retreat from the monthly high however, may prove to be a mere short-term pullback as price scurries away from the 50% Fibonacci and the RSI eyes a cross back above 60 and into bullish territory.

Moreover, with the MACD indicator tracking firmly above its neutral midpoint and the slope of the 21-day moving average (3384) notably steepening, the path of least resistance seems higher.

A break back above the August high (3524.50) would likely signal the resumption of the primary uptrend and carve a path for price to test the record high set on September 2 (3587).

Conversely, a breach of confluent support at the trend-defining 50-DMA (3396) and February high (3397.50) could ignite a more extended pullback and bring the 38.2% Fibonacci (3306) into focus.

S&P 500 4-Hour Chart – 50-MA Guiding Price Higher

S&P 500 Index to Track Progress on US Stimulus Ahead of Deadline

S&P 500 index daily chart created using TradingView

Zooming into a 4-hour chart reinforces the bullish outlook depicted on the daily timeframe, as price carves out a Bull Flag continuation pattern and continues to scale the uptrend extending from the September low (3198).

Moreover, the development of the RSI and MACD indicators hint at swelling bullish momentum, as both oscillators continue to travel firmly above their respective midpoints.

A break above the October 16 high (3508.50) is needed to validate the bullish continuation pattern, with the implied measured move (3702) suggesting price could push to fresh record highs and test the psychologically imposing 3700 level.

On the other hand, a break and close below the 23.6% Fibonacci (3458.50) would probably encourage further selling pressure and generate a push to test the February high (3397.5).

S&P 500 Index IG Client Sentiment

S&P 500 Index to Track Progress on US Stimulus Ahead of Deadline

Retail trader data shows 38.27% of traders are net-long with the ratio of traders short to long at 1.61 to 1. The number of traders net-long is 7.97% higher than yesterday and 19.48% higher from last week, while the number of traders net-short is 0.50% higher than yesterday and 10.79% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests US 500 prices may continue to rise.

Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current US 500 price trend may soon reverse lower despite the fact traders remain net-short.

— Written by Daniel Moss, Analyst for DailyFX

Follow me on Twitter @DanielGMoss

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US Dollar, Euro, S&P 500, Oil, China GDP, Global PMIs, Brexit

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The Australian Dollar was the worst performing major currency last week. AUD price action weakened sharply in response to increasingly dovish rhetoric from the Reserve Bank of Australia. Reports that China has suspended coal imports from their Australian neighbors likely contributed to the move lower by the pro-risk Aussie against top safe-haven currencies like the US Dollar and Japanese Yen.

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US Dollar turbulence continued with the Greenback getting whipsawed by fiscal stimulus talks and political uncertainty. This theme might linger in the days ahead with investor angst and speculation swirling around potential outcomes for the fast-approaching presidential election. Investor expectations for a comprehensive coronavirus aid package before the November election were down-throttled as President Donald Trump and House Speaker Nancy Pelosi struggle to strike a stimulus deal, which looks due to political gambits.

In turn, the broad-based DXY Index edged higher on balance over the last five trading sessions and now trades flat month-to-date. Meanwhile, anti-fiat gold prices dropped about 1% this past week as the US Dollar strengthened against key FX peers. EUR/USD faced considerable selling pressure with spot prices falling 115-pips, or -1%. The move lower by EUR/USD price action also looks driven partly by deteriorating Eurozone economic prospects. This follows mounting restrictions on business activity aimed at curbing coronavirus second wave risk, which could bring crude oil prices into alignment with trader crosshairs.

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Pound Sterling volatility remains heightened in the midst of back-and-forth Brexit negotiations. Recent Brexit developments have highlighted stark differences between the UK and EU on trade, which could lead to a breakdown in talks and rekindle no-deal Brexit risk as key deadlines grow nearer. These aforementioned macro drivers look likely to persist in the week ahead and continue weighing materially on market sentiment. Notable shifts in trader risk appetite around these key themes could correspond with big swings in the direction of major stock indices like the S&P 500 or DAX.

Furthermore, the DailyFX Economic Calendar details several high-impact data releases and scheduled event risk this coming week. Third-quarter China GDP is slated to cross market wires on Monday, 19 October at 02:00 GMT and looks postured to set the tone for broader sentiment. The GBP, CAD, and NZD could get a jolt from the latest inflation figures due out of the UK, Canada, and New Zealand.

Expected commentary from top central bankers such as European Central Bank President Christine Lagarde, Federal Reserve Chair Jerome Powell, and Bank of England Governor Andrew Bailey littered throughout the week will likely be on the radar of traders as well. That said, global PMI reports on tap for release later in the week could steal the limelight and strongarm the direction of markets. What other critical themes and financial market developments are traders watching out for in the week ahead?

Trading Forex News: The Strategy

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Fundamental Forecasts:

Euro Forecast: EUR/USD Outlook Bearish as Second Wave of Covid-19 Hits Europe

For a while now, the economic damage caused by the coronavirus pandemic has been expected to be less in Europe than in the US. Now, though, that may have to be re-assessed.

Gold to Retain Inverse Relationship to USD on Dovish Fed Guidance

The price of gold may continue to exhibit an inverse relationship with the US Dollar as the Federal Reserve retains a dovish forward guidance for monetary policy.

S&P 500 May Eye Higher Levels on Upbeat Earnings, Stimulus Hopes

The S&P 500 index may shrug off a technical correction and aim for higher levels, buoyed by strong corporate earnings and stimulus hopes. Election and growth risks to be watched.

Crude Oil Prices in Jeopardy Ahead of OPEC JMMC Meeting

Crude oil prices are at risk of breaking lower ahead of the OPEC JMMC meeting on October 19 after the IEA revised down its global demand estimates.

Mexican Peso Fundamental Forecast: Dependent on Presidential Election Outcome

USD/MXN tries to consolidate a bearish breakthrough as uncertainty grows around the US presidential election.

US Dollar (DXY) Forecast – Picking Up a Bid as Stimulus Deal Hopes Fade

The US dollar continues to nudge higher as markets remain on edge ahead of the US election, while US stimulus talks seem to be going nowhere.

GBP/USD Weekly Forecast: GBP/USD, EUR/GBP Eyes Brexit Latest

GBP caught in the crossfires of back and forth Brexit headlines. Choppy trading conditions to persist.

Australian Dollar Eyes China Q3 GDP Data, Earnings Rising Covid-19 Cases

The Australian Dollar will be closely watching Chinese Q3 GDP data amid a cascade of earnings data with growing concern about the impact of growing Covid-19 cases on the global economy.

Technical Forecasts:

EUR/USD Technical Outlook: Euro Enters Week with Uncertainty

The Euro is leaning lower at the moment, but that could change; week ahead may help decide a direction or just leave us with more sideways chop – what to watch.

British Pound Technical Forecast: GBP/USD, GBP/JPY, EUR/GBP

The British Pound threatened a downside break on Friday but quickly pulled back. What might be in store for next week as the UK moves closer to a no-deal Brexit?

Nasdaq 100, Dow Jones, DAX 30 Forecasts for the Week Ahead

A week of back and forth trading saw the Nasdaq 100 close slightly in the green, notching a third consecutive week of gains. With earnings season in full swing, here are the technical levels to watch.

Gold Price Forecast: Precious Metals Seeking Bullish Catalyst

Gold price action dropped by 1% this past week as precious metals struggled to maintain altitude in the absence of a needed bullish catalyst. Will the broader trend prevail or is more pain ahead for gold?

US DOLLAR WEEKLY PERFORMANCE AGAINST CURRENCIES AND GOLD:

Markets Week Ahead: US Dollar, Euro, S&P 500, Oil, China GDP, Global PMIs, Brexit





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Funding the Recovery Plan, Budget Speech in Focus

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South African Rand Analysis:

  • The ZAR regained all of its lost ground after the announcement of the recovery plan
  • USD/ZAR continues to oscillate around the 16.50 mark
  • Focus shifts to the delayed Medium-Term Budget statement later this month which is set to reveal how the economic recovery plan is to be financed

ZAR Regains Lost Ground in the Wake of the Recovery Plan Announcement

The USD/ZAR pair has continued to trade within the broader range, between the 38.2% and 61.8% retracements drawn from the January low and April high. The longer term descending trendline remains intact as price action reverted back toward the 16.5000 level after attempting a move higher. The Rand managed to claw back all of the ground lost against the USD in the lead up to the recovery plan, even trading below 16.5000.

USD/ZAR daily chart

USD/ZAR daily chart

Chart prepared by Richard Snow, IG

The recent reluctance to trade away from 16.5000 for extended periods of time may be symptomatic of a market needing a catalyst.

Main Risk Events for the ZAR

  • SA Unemployment Data Q3 (October 27): Q2 unemployment data showed an improvement from 30.1% to 23.3% due to many discouraged work seekers falling outside of the calculation. The recovery plan looks to target unemployment however, the plan has not yet been implemented yet and most likely won’t have a significant effect on Q3 unemployment data.
  • Medium-Term Budget Speech (October 28th): Minister of finance Tito Mboweni has a mammoth task of reporting on the current budget as well as making allowance for the funding requirements for the recovery plan even though the plan seeks outside investment in conjunction with public funding.

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  • S&P Credit Rating Review (November 20th): South Africa had its credit rating demoted into sub-investment grade by S&P Fitch and lastly, Moody’s in March this year and the November review may present greater ZAR volatility as nation continues to struggle with growth and unemployment.
  • US Presidential Elections (November 3rd): Any shocks or delays in the lead up to the presidential election is likely to have an impact on the ZAR and other emerging market currencies.

For all market-moving data releases and events see the DailyFX Economic Calendar

Key Technical Levels for USD/ZAR

In the lead up to the recovery plan, the Rand weakened against the USD only to regain all that lost ground and actually trade lower – at similar levels witnessed before the announcement.

Continued ZAR strength may test 16.4450 as initial support and presents a litmus test for a potential move lower. A close below 16.4450 brings the next zone of resistance (16.3000 – 16.3550) into play.

Should 16.4450 hold, this may then see price action revert towards 16.5000 once more. 16.5500 becomes the next level of resistance and further upward momentum would bring the 16.7700 level into focus.

USD/ZAR 4 Hour Chart

USD/ZAR 4 hour chart

Chart prepared by Richard Snow, IG

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President Cyril Ramaphosa revealed the economic reconstruction and recovery plan last Thursday and now the focus shifts to the Medium-Term Budget Speech which has been delayed to the 28th of this month in order to make provision for the initiatives mentioned in the president’s plan.

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX





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