After making new highs early morning yesterday, the USD has been on a steady decline over the past 24 hours with a mix of factors at play. Brexit news has boosted the pound with a hawkish Bank of England also playing a supporting role and Wednesday’s improvement in risk appetite was enhanced further yesterday by a tweet from President Trump highlighting a ‘’very good conversation with President Xi’’. Moves in currencies have also been amplified by extreme positioning with gains in the NZD and AUD likely reflecting a squaring of short positions. Meanwhile on the data front a soft ISM did not help the USD with UST yields also nudging a bit lower, oil prices also had a rough day weighted down by new data showing OPEC increase in supply. Finally Apple’s disappointing results after the close could set the tone for equities today
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Currencies
The steady rise in the USD over the past fortnight or so has come to an abrupt end over the past 24 hours. It all started after I posted yesterday morning with the improvement in risk appetite helping risk sensitive currencies regain some ground against the USD. Brexit news then hit the screen with The Times reporting the UK and EU had come to a preliminary agreement to allow UK banks and financial services firms to access the EU market after Brexit. The headlines triggered a jump in the pound from 1.2770 to 1.2850 with the Euro also benefiting from the news (now @1.1410). The article noted that under the services deal the EU would guarantee UK companies access to European markets as long as British financial regulation remained broadly aligned with that of Europe. Subsequently, UK officials downplayed the report saying the claims were ‘’unsubstantiated’’ and later on EU chief negotiator Michel Barnier described the report as ‘’misleading’’.
The pound ignored the politician rebuttal and later in the European session a more hawkish Bank of England (BoE) gave Sterling another leg up. The new BoE forecast, which assumes a ‘’smooth Brexit’’, shows inflation above the 2% target for most of the forecast period, implying the Bank foresees a somewhat faster pace of rate rises than priced-in by the market. Governor Carney noted that the economy was at full capacity and wage growth had been higher than expected. Then early this morning the FT reports that EU officials have floated a compromise aimed at overcoming the dispute between London and Brussels over a ‘’backstop’’ provisions to avoid a hard border between Ireland and Northern Ireland. So after starting the day at 1.2770, Sterling now trades at 1.3014, up almost 2%. The news is obviously positive and although we have been down this road before, the sound-bites are encouraging. Worth noting here though that one thing is for the UK government to reach an agreement with the EU, then whatever is agreed still needs to be approved by both the UK parliament and also EU members. So there is still a long and likely volatile road ahead.
Yesterday the USD has been broadly under pressure, not helped by a softer ISM print (more below), but AUD and NZD outperformance has also been boosted by the break of key technical levels which have more than likely been accompanied by squaring of short positions by speculative investors. Both antipodean currencies have been stuck in a downtrend with short positions close to extreme levels, the breaks above 0.6578 for the kiwi and 0.7168 ( 50DMA) for the Australian Dollar have essentially broken these downtrends and if sustained it will discourage speculators to continue to bet on lower levels. If risk sentiment remains buoyant, the clearing of short positions suggest both antipodean currencies have near term upside. Trump’s tweets and Non-Farm Payrolls this afternoon are the ones to watch.
As noted above, USD softness has not just come about by gains in other currencies. The big dollar also came under pressure by a softer then expected ISM manufacturing print. the ISM manufacturing survey fell by more than expected in October (57.7 vs. 59 exp.), led by declines in the new orders and production indices. The survey remains at very healthy levels overall, and consistent with still strong levels of US manufacturing activity, but there are signs that the pace of activity is slowing. BBDXY now trades 0.80% lower at 1200 and DXY is at 96.68, down 0.90 over the past 24hrs.
Equities
Equity markets have started November strongly (S&P500 +1.06%, NASDAQ +1.75%), continuing on from the large increases on Wednesday. Equities and broader risk sentiment were boosted by an encouraging tweet from President Trump on China trade negotiations. Trump tweeted ‘’Just had a long and very good conversation with President Xi Jinping of China. We talked about many subjects, with a heavy emphasis on Trade. Those discussions are moving along nicely with meetings being scheduled at the G-20 in Argentina’’. White House economic advisor Larry Kudlow later told CNBC that “nothing is set in stone right now,, on whether Trump would impose further tariffs on China. Despite the more positive comments, expectations are low that China will make the concessions that Trump has been demanding, making it likely that the US ultimately imposes further tariffs on China. Equities were also supported by better than expected corporate earnings results (although these did not appear to provide much support to the equity market in October). All that said Apple released its results after the close reporting lower than expected revenues. Apple Sees 1Q Rev. $89B to $93B, Est. $92.74B, shares are now down 4% afterhours.
Bonds
UST yields have been relatively stable over the past 24hrs. The softer than expected PMI print weighted on yields with the move lower led by the front end of the curve. The 2y tenor is down 1.5bps to 2.85% and the 10y rate is 1bps lower at 3.13%.
Commodities
Following the improvement ins risk sentiment copper is the outperformer closing up 2.5%. Meanwhile oil prices are sharply lower (WTI -2.5 and Brent -3.45%). Oil prices fell following news that OPEC’s crude production climbed to the highest level since 2016 as increases by Saudi Arabia and Libya offset losses stemming from impending U.S. sanctions on Iran.
Economics/Politics
The ISM Manufacturing Index fell to 57.7 from 59.8 in September, below the consensus, 59.0. The 2.1 decline in the ISM was driven by New Orders (-4.4 to 57.4) and Production (-4.0 to 59.9)
US third quarter productivity rose at a 2.2% annualized rate, a tenth better than consensus. Unit labour costs rose 1.2%, marginally above consensus of 1.0%.
This morning on the Economic Front we have Euro-Zone Manufacturing PMI at 10.00 am. This is followed at 12.30 pm by the US Trade Balance and Non-Farm Payrolls. Bloomberg’s survey median estimate shows the consensus is looking for a 200k NFP print. The Unemployment rate is seen unchanged at 3.7% and although the monthly average hourly earnings reading is expected to ease to 0.2% from 0.3% in September, the yoy reading is expected to rise to 3.1% from 2.8% (last year the October print was -0.2%). I think the latter has the potential to move the market, a yoy print above 3% has not been seen since April 2009. Finally at 2.00 pm we have Factory Orders.
December S&P 500
For the second consecutive trading session the S&P has again missed my buy level before rallying into the close, as the market reversed the late 30 Handle sell-off into Wednesday’s close. This morning the S&P is trading lower on the back of the miss in Apple earnings as we wait for the NFP data at 12.30 pm. I am still flat and today I will now raise my buy level to 2695/2707 with a 2687 tight stop. Meanwhile I will now leave my sell level unchanged from 2758/2772 with the same 2780 stop.
EUR/USD
My long 1.1315 Euro position worked well with the market rising 100 points as predicted by a combination of the August support at 1.13 and the low sentiment reading towards the Euro. This rally higher enabled me to get November off to a positive start with the market hitting my 1.1345 T/P level shortly after I posted. However with the NFP data due later I am not going to chase the Euro higher and today my only interest in buying the market is on a dip lower to 1.1295/1.1335 with a 1.1255 stop.
December Dollar Index
As I said to my Platinum Members yesterday the Daily Sentiment Index is one of the best indicators for predicting price movements especially when these readings are near extreme levels. With the DSI closing on Wednesday at 95% bulls there was very little room for the Dollar to rally further and shortly after I posted the Dollar traded lower to my 96.70 T/P level on my 96.95 short position and I am now flat. Today I will again look to sell the Dollar on any further rally higher to 96.65/97.05 with a 97.40 stop.
December DAX
The fact that the DAX was able to close over the key 11400 previous resistance and pivot point should be encouraging for the bulls. Today I will now raise my buy level to 11300/11370 with a 11230 stop.
December FTSE
The renewed strength in Sterling certainly prevented the FTSE from rallying yesterday and I am still flat. Today I will raise my buy level slightly to 6990/7040 with a 6945 higher stop.
Dow Rolling Contract
It is amazing with all the bears getting excited about the main Indices breaking their respective 200 Day Moving Averages. However the theme all year is anytime this key level is broken that it does not stay below here for long with the Dow closing at 25380 which is now comfortably above its 200 Day MA which comes in at 25138 this morning. I am still flat the Dow and today I will now raise my buy level to 25950/25150 with a 25870 tight stop. I still do not want to be short the market at this time.
December NASDAQ
I am still flat the market and today I will now raise my buy level to 6850/6920 with a 6795 stop.
December BUND
I am still flat the Bund which is trying to hold above the 160 level. Today I will now lower my sell level slightly to 160.65/161.05 with a 161.35 stop.
Gold Rolling Contract
Gold needed to hold the key 1212 support level which it did on Wednesday before mounting a solid rally yesterday which is bullish for higher prices. Today I will now raise my buy level to 1210/1219 with a 1202 stop.
Silver Rolling Contract
Silver finally had a decent rally after days of sideways to lower price action. Yesterday’s move higher saw the market hit my 14.40 T/P level on my latest 14.29 long position and I am now flat. Silver really needs to break and close above 15 to re-test the next strong resistance level of 16. I expect this to happen. Today I will now raise my buy level to 14.20/14.60 with a 13.80 stop. If I am taken long I will have a T/P level at 14.90.
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