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Vulnerable to Further Losses on Muted Inflation

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EUR/USD, European Central Bank, Euro-zone Inflation, Covid-19 – Talking Points:

  • Equity markets drifted lower during Asian trade as the lack of progress in US fiscal talks continues to gnaw at market sentiment.
  • Upcoming inflation data could dictate the near-term outlook for the growth-sensitive Euro.
  • EUR/USD poised to extend its decline after failing to break above key resistance.

Asia-Pacific Recap

Equity markets moved lower during the Asia-Pacific trading session, with Australia’s ASX 200 index falling 0.54% and Japan’s Nikkei 225 index sliding 1.4%.

The haven-associated US Dollar and Japanese Yen continued to push higher against their major counterparts, as the prolonged gridlock in US fiscal stimulus negotiations appeared to sour market sentiment.

Gold slipped lower and silver slid over 0.5%, as yields on US 10-year Treasuries nudged marginally lower.

Looking ahead, US retail sales and industrial production numbers for the month of September headline the economic docket alongside inflation data out of the Euro-area.

EUR/USD Outlook: Vulnerable to Further Losses on Muted Inflation

Upcoming Inflation Data Could Sway ECB

The growth-sensitive Euro has been under fire in recent days, as several European nations move to tighten restrictive measures amid a record surge in coronavirus infections.

This selling may intensify in the coming days should upcoming Euro-area inflation data continue to show sluggish consumer price growth, with headline inflation expected to sink to -0.3% and the core inflation rate to drop to a record low of 0.2%.

Of course, some of the recent weakness in consumer prices can be attributed to the delay in summer sales and marked depreciation in energy prices.

Nevertheless, a notable stagnation in inflation may fuel bets that the European Central Bank will ease its monetary policy settings further.

In fact, several members of the Governing Council have made the case “for keeping a “free hand” in view of the elevated uncertainty, underpinning the need to carefully assess all incoming information, including the euro exchange rate, and to maintain the flexibility in taking appropriate policy action if and when needed”.

Therefore, disappointing headline and core inflation prints may intensify the need for additional support from the ECB and in turn lead to a marked discounting of the Euro against its major counterparts.

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EUR/USD Daily Chart – Head and Shoulders Top Playing Out

EUR/USD Outlook: Vulnerable to Further Losses on Muted Inflation

EUR/USD daily chart created using TradingView

From a technical perspective, the EUR/USD exchange rate seems poised to extend its retreat from the monthly high (1.1831) after failing to hold above the trend-defining 50-day moving average (1.1727).

The RSI’s dive back below its neutral midpoint, in tandem with the MACD indicator tracking firmly in negative territory, hints at swelling bearish momentum and may ultimately inspire a more extensive downside push, if psychological support at the 1-17 mark.

With that in mind, a daily close back below the August low (1.1696) would probably signal a continuation of the downtrend extending from the yearly high (1.2011) and carve a path to test the March high (1.1495), if sellers can overcome support at the 38.2% Fibonacci (1.1626).

Conversely, a break and close above the 21-DMA (1.1752) could inspire a rebound back towards the October 9 swing-high (1.1831), with a daily close above the 1.1850 mark needed to bring the yearly high (1.2011) into focus.

EUR/USD 4-Hour Chart – Rising Wedge Break Hints at Further Losses

EUR/USD Outlook: Vulnerable to Further Losses on Muted Inflation

EUR/USD 4-hour chart created using TradingView

Zooming into a 4-hour chart reinforces the bearish outlook depicted on the daily timeframe, as price carves out a Bear Flag pattern above key support at the August low (1.1696).

However, the development of the MACD hints at building bullish momentum as it eyes a cross above it slower signal line counterpart.

That being said, an impulsive push to the downside looks on the cards, with a break back below the 1.17 mark probably validating the bearish continuation pattern and carving a path to test the September low (1.1612).

On the other hand, should psychological support at the 1.17 mark remain intact, a rebound back towards the sentiment-defining 200-MA (1.1756).

EUR/USD IG Client Sentiment

EUR/USD Outlook: Vulnerable to Further Losses on Muted Inflation

Retail trader data shows 41.56% of traders are net-long with the ratio of traders short to long at 1.41 to 1. The number of traders net-long is 8.50% higher than yesterday and 16.73% higher from last week, while the number of traders net-short is 9.45% lower than yesterday and 13.00% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/USD 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 EUR/USD 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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Move over bonds, FX taking over as investors’ new favourite playbook By Reuters

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© Reuters. FILE PHOTO: A U.S. dollar note is seen in front of a stock graph in this picture illustration

By Tommy Wilkes and Saikat Chatterjee

LONDON (Reuters) – A dearth of action in fixed income markets is prompting bond investors to focus more on currencies to spot market trends, marking a turning point for the gigantic but generally murky foreign exchange markets.

Buying bonds at the rate of roughly $2 billion per hour in the wake of the COVID-19 pandemic, central banks have crushed volatility and reduced its efficacy as a signalling instrument.

While the collapse in interest rate differentials should lead to a fall in currency price swings, as rate changes and their relative levels are major drivers for exchange rate moves, investors say the lack of these two factors is making currency markets more volatile.

This has major implications from investors to central banks because the former express their views on the economic outlook or major events via the bond markets, which the latter use as a key tool for the transmission of their monetary policy.

If the bond markets are broken, then currencies provide an alternative, investors say.

“It is early days but anecdotal evidence from some client conversations suggest that they are looking at currencies as an asset class to predict market trends compared to earlier when discussions would be on what the bond markets are predicting,” said Robert Mcadie, chief cross-asset strategist at BNP Paribas (OTC:).

A State Street (NYSE:) index of prices of various goods across different currencies show volatility is rising for a range of currencies including the U.S. dollar, , euro and the British pound.

More broadly, currency market volatility <.dbcvix> has risen from a 1-1/2-year low hit in late July while overall bond market volatility <.move3m> remains near 2020 lows.

The rise in currency market volatility comes after at least five years of calm when major currencies held within tight ranges.

(Graphic: JAPAN BUYERS OF BONDS link: https://fingfx.thomsonreuters.com/gfx/mkt/oakvenngypr/Bond%20vol%20graphic%202.JPG)

NUMBED

With interest rate markets numbed and an environment where central bank inflation targets are becoming looser, bigger moves in currencies will be more common as forex markets will increasingly bear the primary burden of reflecting large macro-economic trades or major event risks like the U.S. elections.

For example, volatility in the widely watched bond volatility index () is a third of what it was around the 2016 U.S. elections.

Owen Murfin, an institutional fixed income portfolio manager at MFS Investment Management, a $528 billion fund, said it is “far more flexible to express your views” in forex markets than in rates.

Murfin, who said he has been “pretty active” trading the Norwegian Crown versus the U.S. dollar, is bullish on an economic recovery for the oil-exporting nation.

He said the Norwegian bond market can be too small and relatively illiquid to express such views, and volatility there is low.

That view is shared by Oliver Boulind, a senior fixed income portfolio manager at HSBC Asset Management who allocated more risk to Latin American currencies including the Chilean, Mexican and Colombian currencies in the summer than their bond markets.

As bond investors switch to currencies, policymakers are following.

Take the euro for example. Since the European Recovery Fund was announced on May 18, the euro has rallied more than 10% versus the greenback with relative bond yields barely changed even though the news was primarily about debt mutualisation.

That has prompted the European Central Bank to become more vocal about the strength of the currency in recent days.

It is also reflected in tightly controlled currency markets like China where the yuan climbed to 27-month highs this week while bond yields remain largely contained, as investors bet on the outcome of the U.S. elections.

Sentifi, an alternative data provider, say the relative success of the Chinese authorities to deal with the pandemic is also fuelling yuan gains.

WAIT & WATCH

To be sure, switching from bonds to currencies is not easy. They are far more volatile than interest rates with 1%-2% daily swings a common occurrence – large by the standards of bond investors who are accustomed to relatively tiny yield moves.

But that is not deterring investors. Data from Bank of America Merrill Lynch (NYSE:) shows the correlation of FX trading flows on their trading platforms to currency market swings is increasing, suggesting low bond market volatility is pushing more bond investors to currency markets.

The growing contrast between calm bond markets and the edginess in currencies is also changing the behaviour of so-called “carry trade strategies” where overseas buyers of U.S. debt would typically leave currency risk embedded in such trades unhedged because of the expensive hedging costs.

But with interest rates skirting zero in the developed world and volatility absent, Japanese buyers of U.S. and European debt are increasingly hedging FX risks because the after-hedged returns of buying such bonds are now in positive territory.

For example, Japanese investors bought a net 1.946 trillion yen of U.S. bonds in the week of Oct 4-10, according to Ministry of Finance data, the second-biggest weekly buying this year.

“The interest from our clients in FX has never been higher. But there is a wait & see approach from some investors. Do you want to put new capital to work before Nov. 3? Probably not,” said Russell LaScala, co-head of global FX division at Deutsche Bank (DE:) referring to the date of the U.S. Presidential election.

(Graphic: RATES FX VOLATILITY link: https://fingfx.thomsonreuters.com/gfx/mkt/azgpojjwyvd/Bond%20vol%20Graphic%201.JPG)





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Nasdaq 100, DAX 30, Nikkei 225 Forecasts Ahead of Big Tech Earnings

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Nasdaq 100 chart

Chart created with TradingView

Nasdaq 100, DAX 30, Nikkei 225 Forecasts: Neutral

  • The Nasdaq 100 eagerly awaits earnings from Apple, Amazon, Facebook and more
  • German and Euro area GDP data is also due in the week ahead, a key event for the DAX 30
  • The Nikkei 225 will set its sights on the fast-approaching interest rate decision from the Bank of Japan

Nasdaq 100 Forecast

Outlook: Neutral

Earnings season is in full swing and the week ahead will see the release of quarterly reports from some of the world’s largest publicly traded companies. Apple, Amazon and Facebook are scheduled to report after Thursday’s close, a set of stocks that collectively account for more than 27% of the entire Nasdaq 100. Blue chip names like Boeing, General Electric, Pfizer and Ford will also report next week, but the speculative appetite in the big-tech names should afford them the most influence and market-moving potential.

NDX weights

Source: Slickcharts

To that end, market participants have high expectations for the FANGMAN group given their lofty share prices and after their blowout reports last quarter. Therefore, stocks like Apple, Amazon and Facebook will be highly scrutinized and could see a less-than-perfect report result in a seemingly drastic price decline.

Nasdaq Trading Basics: How to Trade Nasdaq 100

Either way, forecasting directional moves following an earnings report is incredibly difficult, so strategies that can benefit from heightened implied volatility may be ideal at this stage.

Nasdaq 100 Price Chart: 4 – Hour Time Frame (September 2020 – October 2020)

NDX price chart

Regardless, the Nasdaq 100, Dow Jones and S&P 500 may wait to stage serious moves until the Presidential election has passed. Given the massive uncertainty surrounding the vote, many traders are likely hesitant to hold significant exposure ahead of such an important event. It could be argued post-earnings price moves might be hampered to some degree, at least until the political landscape has returned to more stable footing.

DAX 30Forecast

Outlook: Bearish

The DAX 30 is set to receive more traditional economic data in the form of Euro area and German GDP readings followed by an ECB rate decision. Struck with another coronavirus wave, Europe may be on pace to disappoint growth forecasts as a slowdown was already hinted at by economic figures toward the end of the prior quarter.

DAX 30 Price Chart: 4 – Hour Time Frame (June 2020 – October 2020)

DAX 30 Chart

The DAX might take notice of a poor result, but I would suspect a GDP-miss might already be priced in to some degree. Nevertheless, the DAX seems tilted to the downside in the week ahead. In the meantime, follow @PeterHanksFX on Twitter for updates and analysis.

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Nikkei 225 Forecast

Outlook: Neutral

Shifting our focus to the Japanese Nikkei 225, traders will have their hands full with an upcoming interest rate decision from the Bank of Japan. After staging an admirable recovery from the coronavirus, Nikkei 225 gains have slowed to a crawl and the index has made little progress since early September. While the upcoming BOJ meeting will likely see a continuation of the norm for Japan’s monetary policy path, the lack of progress might suggest the Nikkei 225 is awaiting a broader uptick in risk appetite.

Nikkei 225 Price Chart: Daily Time Frame (November 2019 – October 2020)

Nikkei chart

With that said, the Nikkei might track moves in US indices as they await earnings and the looming Presidential election. Since little change is expected domestically in Japan, these outside factors could very well deliver the spark required to push the Nikkei above its recent highs. Still, the outlook remains encouraging. Until these outside issues are resolved, however, the forecast remains neutral or cautiously bullish.

–Written by Peter Hanks, Strategist for DailyFX.com





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ECB Meeting to Determine Next Major Move in EUR/USD

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EURUSD Chart

Chart created with TradingView

Fundamental Euro Forecast: Neutral

  • The European Central Bank’s Governing Council meets this coming week and its statement Thursday, followed by its President’s news conference, will likely be important in determining the Euro’s direction over the next month or so.
  • The ECB will leave all its monetary settings unchanged but President Christine Lagarde could well start preparing the markets for a further easing of monetary policy in December.
  • Meanwhile, there are few signs of a breakout from the broad 1.16 to 1.20 range for EUR/USD that has confined the pair since mid-July.

ECB Meeting Critical for EUR/USD

The statement Thursday at the end of the next meeting of the European Central Bank’s Governing Council, and the subsequent comments by ECB President Christine Lagarde at her news conference, will be critical in determining the future direction of the Euro.

There will be no changes in interest rates or Eurozone monetary policy this coming week but Lagarde could hint at a further policy easing as early as December – a move that could weaken EUR/USD and the Euro crosses. The problem is that the Governing Council seems split on the issue.

Some members seem willing to act, fearing a “double dip” in the Eurozone economy as GDP falls again after a brief respite, hit by a second wave of Covid-19 infections that forces more countries and regions into lockdown. Easier monetary policy might help alleviate the resulting economic impact, help lessen deflationary pressures in the Eurozone and offset any damage to the region’s trade caused by the Euro’s advance since EUR/USD hit a low under 1.07 in March.

Others, though, seem more circumspect, worried that after hitting its highest level for more than a month last week EUR/USD may be vulnerable to a setback. There may also be concern about hinting at easier monetary policy so close to the US Presidential election and that more wary view seems to be that of the markets, where pricing suggests the rate on the ECB’s deposit facility will be minus 0.6% by the end of next year, only marginally below the current minus 0.5%.

You can find an FX traders’ guide to the ECB by clicking here

Putting all these factors together suggests that EUR/USD will continue to trade for a while yet in a broad range between the September 1 high at 1.2011 and the September 25 low at 1.1611.

EUR/USD Price Chart, Daily Timeframe (July 22 – October 22, 2020)

EURUSD Price Chart

Source: Refinitiv (You can click on it for a larger image)

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Week Ahead: Data Also Important for EUR/USD

Turning to the economic data on the calendar, the week ahead is a busy one, with German inflation and unemployment figures due Thursday, followed by Eurozone inflation and GDP numbers Friday. Both the German and the Eurozone price data could show steeper falls – emphasizing the ECB’s concerns about deflation – while the GDP data for the third quarter will likely show a strong rebound.

That would do little though to ease double dip concerns so more important might be Monday’s Ifo index of the German business climate in October, the first month of the fourth quarter, and it would be no surprise if that were weaker than in September.

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— Written by Martin Essex, Analyst

Feel free to contact me on Twitter @MartinSEssex





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