There is an element of cautiously positive risk appetite just creeping back into markets this morning. The hope that the US and China can come together to sign up to “Phase One” of their agreement on trade took a step forward over the weekend as both sides talked up prospects. Agreements over respective poultry imports will help to pave the road, but the cancellation of the next phase of tariffs due in December would be a real boost for sentiment if agreed. Talks continue on a vice ministerial basis and the APEC meeting in mid-November is still being eyed as a potential signing event. With volatility falling on equities (the VIX is at a three month low) and on Treasuries (also near a three month low), this should allow traders to look more towards higher risk currencies. The yen is the main underperformer moving into today’s session, whilst equities are also tentatively pushing higher. The EU is still set to announce its decision on another Brexit deadline extension (a three month extension is likely despite the protestations of French President Macron), whilst UK Prime Minister Johnson will try once more to get Parliament to agree to a General Election. Sterling as ever will be in focus as a result.
Wall Street closed solidly higher on Friday with the S&P 500 +0.4% whilst US futures are +0.2%. Asian markets have been positive early today, with the Nikkei +0.3% and Shanghai Composite +0.9%.In Europe there is a slightly more cautious look, with DAX futures showing mild gains +0.1% whilst FTSE futures are -0.1%. In forex, the theme of mild risk positive outlook is also present with JPY underperforming, whilst USD is mildly weaker against EUR and GBP. In commodities, gold is holding still above $1500 but lost some of its recent bull traction, whilst oil is a shade lower after showing decent gains in recent days.
It is a quiet start to the week for the economic calendar. The US Trade Balance is at 1230BST and is expected to see the deficit increase slightly to $73.5bn (from -$73.1bn in August).
Chart of the Day – EUR/CHF
The market is still straining for a closing breakout above a key resistance band between 1.1020/1.1055 and although the bulls have been unable yet to make their move, they are increasingly well positioned. Holding above a near term pivot at 1.0980 as a basis of support in the past couple of weeks, near to medium term moving averages (21 and 55) are picking up decisively. Momentum indicators are increasingly positively configured, with the RSI consistently around 60 (an early move today has the RSI above 63 which is the highest since April), MACD lines rising at multi-month highs and Stochastics strong. With a move into the 1.1020/1.1055 resistance band, the bulls are testing higher. We look to use weakness to find support above 1.0980 as a chance to buy for what is a developing recovery. Increased conviction for this move would come with a decisive close above 1.1020 to be confirmed above 1.1055. This would all then open for a bigger medium term recovery (and suggest an ongoing risk improvement).
The rally on the euro has slipped away in the past week and is now at a key crossroads. How will the bulls respond to the correction? The uptrend of the past three weeks is being tested and the market is back below the $1.1100 breakout again. Support at $1.1060/$1.1075 is being tested and a closing breach would be a disappointment for the bulls. We are also looking at the RSI in the mid-50s, where a decisive drop under 50 would be another negative signal. The market is undoubtedly corrective on a near term basis, but is this enough to destroy the recovery? Hourly momentum reflects the corrective move and the bulls need to overcome resistance at $1.1090/$1.1120 to end a sequence of lower highs. A close under $1.1060 opens $1.0990.
A negative drift on sterling has developed over the past week as a retracement from $1.3012 has set in. It is interesting that the selling momentum has not really taken off and this reflects what looks to be a cautious drift. Much of the caution is borne out of political uncertainty, but the configuration of recent candles has sterling rallies fading now. There is a band of support $1.2785 (an old breakout) and the 23.6% Fibonacci retracement (of $1.2195/$1.3010) around $1.2820. The decision of the EU-27 of how long to extend the Article 50 extension will be a key defining factor in how deep this correction could go. Technically, a closing breach of $1.2780 opens $1.2700 initially and then $1.2580. Initial resistance at $1.2865.
Dollar/Yen traders must be looking at the breakout on gold in the hope that something may be about to happen. However, for now the market is beset by uncertainty and lack of conviction. Yet another nothing candlestick on Friday means that the pair has now traded for the past eight sessions in a 70 pip range between 108.25/108.95. It is noticeable that Dollar/Yen does go through phases like this occasionally, as momentum indicators stagnate and the market lacks conviction. Essentially the outlook will remain in this position until either a break above 109.00 key pivot resistance, or below 108.00 (on the hourly chart a key support within the 106.50/109.00 range. A very slight tick higher today will have the bulls dreaming of breakouts but there is little reason to be overly keyed up until 109.00 is decisively breached.