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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?

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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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Canadian Dollar Poised to Fall Ahead of Bank of Canada Rate Decision

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Canadian Dollar, CAD/JPY, USD/CAD, Bank of Canada, Covid-19 Second Wave – Talking Points:

  • A mixed day of trade during the APAC session saw the Australian and New Zealand Dollars outperform their major counterparts.
  • The Canadian Dollar could come under pressure as global market sentiment sours, ahead of the BoC interest rate decision.
  • USD/CAD eyeing a push back towards the monthly high.
  • CAD/JPY rates at risk of extended declines after snapping below key support.

Asia-Pacific Recap

It proved to be a relatively mixed Asia-Pacific trading session, with risk-associated assets pegging back lost ground late into the close after tumbling in early trade.

The Australian and New Zealand Dollars were the best performing currencies, as investors seemed to put a premium on assets from countries with a lower Covid-19 case count.

Australia’s ASX 200 index nudged 0.1% higher, while China’s CSI 300 index rose 1.1%.

The Euro lost ground against all of its major counterparts, as a record surge in coronavirus cases forced several European governments to tighten restrictive measures.

Gold and silver nudged marginally higher, while yields on US 10-year Treasuries remained unchanged at 0.76%.

Looking ahead, the Bank of Canada’s interest rate decision headlines the economic docket alongside EIA crude oil inventories for the week ending October 23.

Canadian Dollar Poised to Fall Ahead of Bank of Canada Rate Decision

Market reaction chart created using TradingView

Souring Sentiment May Hamper CAD Ahead of BoC

The cyclically-sensitive Canadian Dollar is at risk of further losses against the Japanese Yen and US Dollar, as souring market sentiment weighs on the performance of risk-associated assets.

A record surge of Covid-19 infections has forced governments across Europe to impose growth-hampering restrictions, while the number of active coronavirus cases in Canada has more than doubled in the last 30 days.

In fact, Canada’s chief public health officer Theresa Tam has warned that “as hospitalizations and deaths tend to lag behind increased disease activity by one to several weeks, the concern is that we have yet to see the extent of severe impacts associated with the ongoing increase in Covid-19 disease activity”.

Canadian Dollar Poised to Fall Ahead of Bank of Canada Rate Decision

Source – Apple Mobility Data

The tightening of restrictions in several Canadian provinces is likely to fuel regional investors’ concerns that the nation’s economic recovery is at risk of stagnating, or perhaps even reversing, as high-frequency mobility data shows all three mobility trends continuing to trend lower after peaking in early September.

However, deteriorating health outcomes may not be enough to force the Bank of Canada to adjust its monetary policy settings at its upcoming meeting, given Governor Tiff Macklem and his colleagues are expected to release upward revisions to their economic growth projections.

Moreover, Macklem has previously stated that “as much as bold policy response as needed, it will inevitably make the economy and financial system more vulnerable to economic shocks down the road”, adding that “the bottom line is that the private and public sectors together need to acutely aware of financial system risk and vulnerabilities as the economy recovers”.

Canadian Dollar Poised to Fall Ahead of Bank of Canada Rate Decision

USD/CAD comparison chart created using TradingView

This could indicate that Canadian policymakers are becoming more sensitive to the potential impact of alternative policy measures and may hesitate to do more unless it is absolutely necessary.

Nevertheless, the lack of action from the BoC may fail to underpin the Loonie in the near-term, as pre-election jitters and Covid-19 second wave concerns gnaw at market sentiment.

Therefore, the Canadian Dollar may come under pressure against its anti-risk counterparts, should the current risk-off dynamic continue to fuel haven inflows.

CAD/JPY Daily Chart – Trend Break Hints at Further Losses

Canadian Dollar Poised to Fall Ahead of Bank of Canada Rate Decision

CAD/JPY daily chart created using TradingView

From a technical perspective, the CAD/JPY exchange rate is at risk of extending its losses, after slicing through the uptrend extending from the May low (74.79).

With the RSI and MACD indicators tracking below their respective neutral midpoints, the path of least resistance seems skewed to the downside.

A daily close below the psychologically imposing 79.00 mark would probably ignite a push to test the 78.6% Fibonacci (78.46), with a break below the 50% Fibonacci (77.87) needed to bring the May low (74.79) into focus.

Conversely, if psychological support holds firm a retest of the 100-day moving average (79.56) is hardly out of the question.

USD/CAD Daily Chart – Short-Term Rebound at Hand?

Canadian Dollar Poised to Fall Ahead of Bank of Canada Rate Decision

USD/CAD daily chart created using TradingView

USD/CAD rates could be poised to rebound back towards the September 9 high (1.3260) and Descending Channel resistance, after surging away from the monthly low set on October 21 (1.3081).

A bullish crossover on the MACD indicator, in tandem with the RSI holding above 40, suggests that the path of least resistance could be higher.

A daily close above confluent resistance at the trend-defining 50-day moving average (1.3236) could signal a potential shift in sentiment and generate a push back towards the June low (1.3316), with a break and close above the 100-DMA (1.3328) needed to invalidate the bearish continuation pattern.

Having said that, with price tracking below all four moving averages, a topside push may prove to be a mere short-term correction.

With that in mind, continuation of the primary downtrend looks likely if price fails to breach the 38.2% Fibonacci (1.3328), with a daily close below the 1.3100 mark needed to carve a path to test the yearly low (1.2994).

Canadian Dollar Poised to Fall Ahead of Bank of Canada Rate Decision

Retail trader data shows 70.49% of traders are net-long with the ratio of traders long to short at 2.39 to 1. The number of traders net-long is 6.45% higher than yesterday and 3.92% higher from last week, while the number of traders net-short is 17.51% lower than yesterday and 26.94% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USD/CAD prices may continue to fall.

Positioning is more net-long than yesterday but less net-long from last week. The combination of current sentiment and recent changes gives us a further mixed USD/CAD trading bias.

— Written by Daniel Moss, Analyst for DailyFX

Follow me on Twitter @DanielGMoss

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Gold Price Coils Up in Tight Range. Will US Election Trigger Breakout?

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GOLD PRICE OUTLOOK:

  • Gold prices ranged above a key support level at US$ 1,900 amid souring sentiment
  • The US election may serve as a catalyst for gold trading next week
  • 79% of the retail gold traders (within IG)are in long positions, slightly higher than a week before

Gold prices consolidated at above US$ 1,900 this week amid souring market sentiment due to a resurgence in coronavirus cases around the globe. The absence of geopolitical catalysts and a relatively muted US Dollar index have led gold prices to consolidate within a tight range between US$ 1,900 – 1,910. Some traders may prefer to sit on the sidelines until the political skies are cleared after the US election, which is only one week from now.

Although Democratic presidential candidate Joe Biden appears to have a comfortable lead in national polls, the potential tail risk of a Trump-win scenario can’t be neglected. This renders the risk-averse US Dollar susceptible to a strong haven bid should the election outcome derails from the poll forecasts. A strengthening US Dollar is likely to weigh on precious metal prices, especially when ‘risk off’ sentiment is prevailing.



of clients are net long.



of clients are net short.

Change in Longs Shorts OI
Daily -1% 4% 0%
Weekly 5% -4% 3%

The medium-term outlook, however, appeared biased towards the upside as the Fed continued to expand its balance sheet, albeit at a much slower pace compared to earlier this year (chart below). The Federal Reserve balance sheet hit an all-time high of 7.177 trillion in October, surpassing the previous record seen in early June. Ample liquidity and ultra-low interest rates may buoy the medium-term outlook for precious metal prices, albeit short-term pressure remains.

Gold Price Coils Up in Tight Range. Will US Election Trigger Breakout?

Source: Bloomberg, DailyFX

Technically, gold prices came off the all-time high (US$ 2,075) in early August and have since entered a three-month consolidation. Prices attempted to stabilize since end September after finding a strong support at US$ 1,870 (the 76.4% Fibonacci retracement).

Gold prices have also formed a few bearish harmonic pullbacks (highlighted in black straight lines) before entering into an “Ascending Channel” in October. Immediate support levels can be found at US$ 1,900 (50-Day SMA), followed by US$ 1,883 (lower Bollinger Band). A narrowing Bollinger Band width suggests that tight range-trading may continue.

Gold PriceDaily Chart

Gold Price Coils Up in Tight Range. Will US Election Trigger Breakout?

IG Client Sentiment indicates that retail gold traders are heavily leaning towards the long side, with 79% of positions net long, while 21% are net short (chart below). As gold prices consolidate, retail traders have trimmed long (-1%) positions and added short (+7%) bets overnight. Compared to a week ago, traders have added to both long (+4%) and short (+1%) exposure.

Gold Price Coils Up in Tight Range. Will US Election Trigger Breakout?

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Can Stock Markets Predict Presidential Elections?

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How Can Stock Markets Impact US Presidential Elections?

  • How can returns in the Dow Jones, S&P 500 influence voters at the polls?
  • This study analyzes the indices 1 year and 3 months before elections
  • Do voters respond to stock performance as an election nears?

Introduction

Many factors can impact the outcome of US presidential elections, such as the shape of the economy, a voter’s background, turnout, outcomes in swing states and more. But what about returns in the stock market?

This is a special report that will analyze the performance of the S&P 500 and Dow Jones leading up to the 22 presidential elections since 1932. I will examine how the two indices performed on average one year and 3 months before an election, comparing their returns against whether or not the incumbent party won.

Background

First, let us consider how might the performance in stocks influence elections in the first place? The price of a stock represents ownership of a fraction of a corporation, and is influenced by supply and demand forces reflecting the given firm’s expected fortunes. Some stocks will pay you a dividend and grant you voting access in shareholder meetings. But most importantly, you gain the right to sell the stock in the future.

If the price of a stock rises in value, the holder can make a profit by selling at a higher price than where they entered. If investors think that a business can make more returns in the future, boosting demand for their shares, then the price will often rise. There can be both specific and systematic forces that determine which way a stock can go. This piece focuses on the latter, or how the shape of the US economy as a whole drives stocks.

The S&P 500 and Dow Jones are stock indices that weight key sectors in the economy differently, such as information technology, real estate and energy. If their returns are positive heading into an election, this could be because investors expect the underlying businesses to generate more profits in the future. This could be due to a rosy outlook for economic growth, perhaps raising the odds of the incumbent party maintaining its grip on power.

Conversely, if stock returns are negative heading into an election, it could be due to a more pessimistic outlook for growth. If this is the case, then one might reasonably assume that the party running for reelection could be at a higher risk of losing its position. That is only the case, of course, if voters generally value the performance of stock markets. This is a limitation in this study, discussed in further detail at the end.

S&P 500, Dow Jones Returns 1 Year Before Presidential Election

Of the 22 elections since 1932, there were 18 instances when returns in the S&P 500 and Dow Jones one year before a presidential election averaged positive. Of those 18 occurrences, the incumbent party won 11 times, or about 61.11%. Returns in the stock market were negative the other 4 times. Of those, the incumbent party lost 3 times, or about 75% – see table below.

S&P 500, Dow Jones: Can Stock Markets Predict Presidential Elections?

S&P 500, Dow Jones Returns 3 Months Before Presidential Election

What happens in this study when the time frame changes from 1 year to 3 months before an election? In this case, of the 22 occurrences, there were 13 when stock returns were positive. Of those instances, 11 times, or 84.62%, the incumbent party won. Meanwhile, there were 8 instances when stock returns were negative. The incumbent party lost 7 times in this case, for about an 88.89% failure rate.



of clients are net long.



of clients are net short.

Change in Longs Shorts OI
Daily 7% 1% 4%
Weekly 18% -7% 3%

S&P 500, Dow Jones: Can Stock Markets Predict Presidential Elections?

Conclusion

In short, the 3-month data seems to offer more consistent outcomes compared to 1-year out. More often than not, the performance of the stock market closer towards an election seems to correlate with whether or not an incumbent party wins. It should be noted that correlation does not imply causation. It could be that voters place greater emphasis on stocks 3 months before an election as they pay more attention to current events in preparation for casting ballots. There are some limitations to this study.

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Study Limitations

The election sample space is limited to 22, more observations tend to increase the accuracy of results.

This data does not take into account how much voters value stock returns around elections. According to Gallup, as of June 4 2020, about 55% of Americans reported owning stock.

This data does not take into account the depth of gains versus losses in stocks around election years. That is, do higher stock returns increase the likelihood of an incumbent party winning and vice versa?

— Written by Daniel Dubrovsky, Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter





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