Market Brief
On the eighth anniversary of Lehman brothers, there is an eerier calm over the markets. Financial markets were subdued in the Asian session and as the news flow stalls after a busy week, limited equity trading and traders look ahead to next week’s BoJ and FOMC. In the FX markets, USD stronger in the G10 but mixed in Asian EM. For those equity markets not on holiday, risk appetite firmed. The Nikkei was up 0.63% and S&P/ASX 200 rose 1.00%, while European stock futures point to a higher open. Yesterday's release of soft US August retail sales highlighted the possibility of a slowdown. US yield curves continue to steepen, yet this time it was the fall of front ends that pushed the curve. Despite expectations for a Fed interest rate hike in September, nearly non-existent gold continues to weaken, falling to $1314. After the recent surge in volatility, calmer heads are prevailing. VIX has now eased to 16.30, while FX one-month implied volatility is near year-lows. The economic calendar is relatively light and the massive event risk next week suggests that current FX ranges should remain uninterrupted. On the political front, at today's one-day summit, European Union members will meet to discuss its future strategy. It is expected that members will try to reach an agreement on economic security in the wake of the Brexit vote.
Yesterday, the BoE kept its monetary policy rate unchanged as was widely expected following a significant easing on 4th August. With a combination of new views introduced in the meeting minutes and resilient economic data, we believe the immediate possibility of easing has been reduced significantly. While the door remains open, our view that the probably of a November cut has been meaningfully reduced. We remain constructive on the GBP and see the sell-off as an opportunity to reload on longs. GBP/USD traders should be targeting 1.3350 as a bullish extension trigger to 1.3445. EUR/GBP 55d MA at 0.8479 is providing support, with immediate downside risk if broken. Political risks are building as EU leaders will discuss Brexit and measures to protect the union.
The Russian central bank will meet to set its monetary policy today. With the key policy rate at 10.50%, while inflation has moderated to 6.9%, there is room for additional rate cuts in our view. Despite Governor Nabiullina's hawkish assessment of Russia economic outlook, reducing market expectation, we anticipate a 50bp cut in policy rate. With inflation dynamics cooling, evidence of growth decelerating and expectations increasing for crude prices to head lower, the CBR needs to take advantage of the situation and act aggressively.
On the data front, traders will see Canada TIC data, manufacturing sales and US CPI, U. Mich and TIC data. With price expectations lowered the US Michigan Consumer Sentiment Index will provide the greatest market impact. A weak read should see further USD selling and support risk seeking EM trades.
Currency Tech
EUR/USD
R 2: 1.1616
R 1: 1.1428
CURRENT: 1.1226
S 1: 1.1046
S 2: 1.0913
GBP/USD
R 2: 1.5018
R 1: 1.3534
CURRENT: 1.3230
S 1: 1.3024
S 2: 1.2851
USD/JPY
R 2: 107.90
R 1: 104.32
CURRENT: 102.43
S 1: 99.02
S 2: 96.57
USD/CHF
R 2: 0.9956
R 1: 0.9885
CURRENT: 0.9761
S 1: 0.9522
S 2: 0.9444