Market Brief
Risk appetite was weak in the Asian session as ECB indicated that neither a QE extension or tapering of their quantitative-easing program beyond March was discussed at the meeting and on the back of Fed Dudley's comments that a rate hike remains appropriate. Asia’s regional equity indices were broadly lower, following Wall Street lower. USD gained against G10 and regional currencies. The Nikkei fell -0.30% and Shanghai Composite increased a meagre 0.07%. Hang Seng was closed for a local holiday. Crude futures fell on profit taking yet held above the $50 handle. The World Bank raised its crude forecast price for 2017 to $55 brl from $53 brl and indicated that non-OPEC production would keep a cap on prices.
Financial markets continue to digest the results of the ECB meeting yesterday. Draghi deferred any decision until the December's meeting (as we had expected). In our view, the bank seems extremely hesitant to green light the use of additional easing unless it is the only option. This clearly indicates a growing disenchantment in the monetary policy strategy. This will become a key investment theme of 2017. The back and forth in stock prices indicates that markets are also struggling with global central banks next steps. Our interpretation of Draghi's remarks yesterday is that the ECB will extend the asset purchased program in December, while announcing the technical relaxation of parameters of QE to manage the scarcity issues.
In geopolitical news, the President of the Philippines, Duterte announced a “separation” with the USA, while shifting alliance towards China. The new President's relations with the US have been strained but this is an extreme pivot, possibly changing the delicate balance in the pacific.
US yields continue to rally with yield differential further skewed in the USD favor. The strong US data supports the demand for yields especially in the longer end of the curve. Philadelphia Fed Business outlook rose 9.7 vs. 5.0 exp, while existing homes sales increased 3.2% vs. 0.4% exp. Heading into the US election and expectations for December rate hike firming we should see USD remain in demand.
In China, house prices indicated further acceleration in September. New home prices rose 11.2% y/y from 9.2% in August. Of the 70 cites polled 64 indicated price increased. The rapid price increase has fueled concerns of an asset bubble in China. Officials have taken steps to reign in the property markets yet efforts have not spilt over into the data. PBoC continues their gradual CNY deprecation as USD/CNY hit a new cyclical low at 6.75.
On the docket today, traders will be eyeing Canadian data including retail sales and inflation report. According to the BoC, with the risk roughly balanced, this read will influence expectations for additional easing.
Currency Tech
EUR/USD
R 2: 1.1616
R 1: 1.1428
CURRENT: 1.1013
S 1: 1.1046
S 2: 1.0913
GBP/USD
R 2: 1.2857
R 1: 1.2477
CURRENT: 1.2229
S 1: 1.2090
S 2: 1.1841
USD/JPY
R 2: 111.45
R 1: 107.49
CURRENT: 103.91
S 1: 102.80
S 2: 100.09
USD/CHF
R 2: 1.0093
R 1: 0.9950
CURRENT: 0.9881
S 1: 0.9632
S 2: 0.9522