Market Brief
Risk appetite firmed in the Asian session boosted by the stronger Chinese economic data however, volumes remain low. In the US session, equity markets rallied as investors got solid corporate earnings plus encouraging US inflation data (core CPI +0.1% m/m vs +0.2% consensus). In commodities, oil continued to linger around the $50 handle ahead of today inventory data.
The Nikkei rose 0.21% yet the Hang Seng and Shanghai Composite fell -0.30 and -0.165 respectively. In the FX markets, USD trading was balanced but no significant level were damaged as trading remains range bound ahead of the ECB meeting.
USD is weaker as Fed officials have once again provide a mixed message as to the timing of the next interest rate hike. The US yield curve steepen paused as the 30-year yield declined to 2.500% from 2.580% on Monday. Data released today indicates that the Chinese economy expanded 6.7% y/y in Q3.
On a seasonally adjusted basis, the economy expanded by 1.8% q/q changed from the prior read indicating important stabilization. Growth was supported by domestic demand (government spending and property markets) as the external environment remains soft. However, property sector prices continue to accelerate, fueling concerns of an asset bubble.
Micro tuning measures by the Chinese authorities have tightened lending polices yet a cooling effect has not been seen. USD/CNY is near a 6-year high as the PBoC fix was set at 6.7326 indicating that the central bank’s strategy for gradual RMB deprecation.
Markets will be watching the results of UK Prime Minister Theresa May’s first EU summit in Brussels. We should expect significant push back from Brussels, yet recent softening of the hard line position suggests that there is room for negotiation on Brexit. The GBP corrected sharply as the UK High Court cleared the way for the parliament to vote on the details for any exit agreement with the EU.
This should limit the probability of a “hard exit”, which scared investors into dumping sterling. Article 50 should still get triggered by March as the Parliament does not have the right to block. While long term investment uncertainty remains high, we suspect that the panic button which sent the GBP/USD down to 1.2090 needs to be reset. We anticipate GBP traders will become increasingly numb to the Brexit hype, rather than reacting to every headline.
This should allow GBP to appreciate during periods of calm. However, in the longer term, as we get closer to spring 2017 we have a bearish call for the GBP/USD. Not only will Article 50 be launched, but we anticipate the Fed will raise rates. Elsewhere, UK headline CPI surprised to the upside coming in at 1.0% y/y. However, we should not read too much into this single print as clothing and footwear was primarily responsible for the unexpected jump.
While GBP depreciation has forced some consumer goods prices higher, the volatile nature of the goods indicated that the probability of sustained price increases is less likely. GBP/USD has firmed above 1.2127 support, extension of current bullish monument to 1.2490 should be expected. We would buy sell-offs for bounce at 1.2490 where we would reverse our positions.
Traders will be watching UK labor market data, which is expected to show little evidence of damage caused by Brexit. In the US, Housing starts and building permits will be released. Finally, the final US presidential debate will give Republican candidate Donald Trump one last chance to influence his declining poll numbers on a national level.
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