Three factors have dominated what has been a generally but not uniiversally range bound week.
1. US Rate Hike. The market is increasingly discounting a December rate hike. This had led to a still depressed Gold and US equities and continued weakness in EURUSD.
2. EUR weakness. The big story of the week was the further breakdown on EURUSD both into and through the ECB rate hold on Thursday. The pair has declined 3.34% this month primarily on US rate hike fears breaking the June low this week to close at 1.0884, a level not seen since March. This weakness has ironically held up other currencies against the USD in their ranges but continues to push DAX into its 2016 highs.
3. US Elections. The markets have already been nervous about the outcome of this historic election but this nervousness should increasingly dominate over the two weeks and therefore arrest possibly reverse some recent trends.
Monday was a quiet day, although there was a sharp drop in the NIFTY on general sentiment, and a $2 drop in WTI at the US Open, as traders wound down long positions ahead of Oct 20 contract expiry. The NZ CPI beat at 2145 gave NZDUSD an instant 40c lift, which continued to rise for three days.
Despite mixed Chinese data (including GDP as expected) at 0200, Tuesday saw equities rally across the board in the Asian and European sessions, and all currencies except EUR gained against USD. Even unloved GBP managed to join in the trend, touching the previous week’s high to the tick by 1500 (and exceeding it by 7 pips the next morning). About the half the gains were given up in the US sessions, as USD fought back. Contrary stock AAPL hit a high (in it’s German listing) just before the US bell, and declined all week.
Oil spiked up to a new 15-month high of $52.22 on the EIA beat at 1330, then faded for the rest of the week, although staying above the psychological $50. The BoC rate hold was noticeable, USDCAD spiked down 80 pips on the news to September’s low, to the roundpoint 1.30, but immediately reverses, and that was the low point for the week as it rallied to end the week on a 7-month high. USDJPY touched last week’s low at reversed at the same time.
Thursday’s Asian session saw a sharp rise in the NKY without news, so probably linked to the reversal in the yen. The Australian employment data miss gave traders the excuse they needed to sell the technically extended AUD (see last week’s report), and it sharply reversed, taking NZD with it. Unlike the NKY, the NIFTY also reversed down, to consolidate into the end of the week. A German PPI miss at 0600 stalled DAX into the ECB rate decision at 1145 (hold). However the effect of the rate hold on EURUSD caused a major disconnect as US traders bought DAX and sold SPX. The former (denominated in EUR) had risen 1.6% on the week by the end of the session, compared to only half that (0.8%) on the SPX.
Friday’s Asian session saw profit-taking in NKY and SPX (also being monthly option expiry date), but a fading EUR muted this in DAX which gave up a few points, and then rallied in the US session when SPX reversed the Asian position, to finish less than a point under Thursday’s close. The UK PSBR miss at 0830 knocked 60 pips off GBP, and FTSE duly rallied 30 points, giving up some later in the day.
Monday is PMI day, for Germany and Eurozone at 0730 and the US at 1345. All are comfortably above 50 so little effect is anticipated.
Germany business sentiment is at 0800 Tuesday and then both BoE Governor Carney and ECB President Draghi speak within an hour of each other during the US morning session. Given the ECB rate hold last week, the former is more likely to move markets.
At 0030GMT Wednesday we have Australian CPI, a miss could bring AUD down further. US services PMI at 1345 is estimated at 52.4 so contraction is very unlikely (PMIs only tend to move markets when they cross the 50 figure denoting a move from expansion to contraction or vice versa)
A miss on Thursday’s UK GDP at 0830 would hurt the fragile GBP, a currency where traders these days seek an excuse to sell. The only major US data is Durable Goods at 1230.
Of course by Friday the US election will be only 11 days away. A Clinton victory is expected and partly priced in by (reflected by MXN and Nikkei gains this week) but Brexit has probably taught the market not to be complacent any more about the democratic process. We believe this nervousness will exaggerate very clear historical precedents into and out of US elections. The (more exclusively US) Russell Index may well become our focus for the run in. Friday also sees German CPI at 1200 and US GDP half an hour later. If one misses and the other beats, look out again for DAX/SPX disconnect, although our fractals show than only CB rate decisions cause this.