FTSE -16 points at 7510 DAX -20 points at 12993 CAC +4 points at 5398 IBEX 35 points at 10180
The Australian dollar dived on the back of a softer-than-expected inflation read. The inflation in Australia rose by 0.6% in the third quarter, slower than 0.8% expected by analysts. As a result, the consumer price inflation unexpectedly decelerated from 1.9% to 1.8% year-on-year, versus 2.0% expected. Soft inflation gives more time to the Reserve Bank of Australia (RBA) for to keeping the interest rates at the low levels and low interest rates are less appetizing for the carry traders. The AUD/USD (-0.70%) cleared the October support of 0.7726 (which stands for Fibonacci 50% retracement on April – September rise). The weakness could extend toward the 200-day moving average (0.7702) and 0.7632 (major 61.8% retrace).
The EUR/AUD gained two big figures in two days regardless of the decline in AU/EZ yield spread. Still the 2-year spread stands at the highest levels since March. Opportunity cost of holding the single currency versus the Australian dollar could temper the appetite approaching 1.5227 (year-to-date high).
Meanwhile, the EUR/USD fluctuates around its 100-day moving average (1.1750). The direction is unclear before Thursday’s European Central Bank (ECB) meeting. According to some sources, the ECB could reduce the size of its monthly purchases program by half to 30 billion euro. Some think that the ECB would rather opt for a gradual Quantitative Easing (QE) unwind. The truth is nobody really knows what to expect. President Mario Draghi will more likely than not disappoint the hawks, given that a sharp QE unwind would cause a sharp appreciation in the euro and weigh on the already-low inflation. This is something the ECB does not want and may not afford. Traders will likely lie in wait until they have more clarity on the ECB’s policy guidance. The 50-day moving average (1.1850) should cap the upside attempts. Buyers are touted within the 1.1700/1.1750 range. Decent put options trail below 1.17 level as a hedge against an eventual sell-the-fact move.
The US stocks and the dollar remain well bid as optimism is building on Donald Trump’s tax reform approval. The probability of a Federal Reserve (Fed) December rate hike stands at a solid 83.6% with or without an approval for Trump’s expensive fiscal plans. We now know that the simple fact of dreaming of tax cuts is enough to wet investors’ appetite. The US 10-year yield broke above the 2.40% level, as capital flew into the US stock markets on Tuesday. Good earnings from major names as Caterpillar (NYSE:CAT), General Motors Company (NYSE:GM) helped. The Dow Jones (+0.72%) renewed record, the S&P 500 (+0.16%) and NASDAQ (+0.18%) gained as the VIX index bounced back to 11% after having eased to 10.39% in the first half of the US trading session.
Nasdaq Inc (NASDAQ:NDAQ), Citrix Systems Inc (NASDAQ:CTXS), Coca-Cola Company (NYSE:KO), Visa Inc (NYSE:V) are among companies releasing results today.
Asian traders appeared more down to earth. Nikkei (-0.17%) and Topix (-0.12%) reversed earlier gains in the afternoon session. US equity futures eased as well. FTSE futures (-20 points) traded under pressure. The USD/JPY traded slightly below 114 level in Tokyo, but didn't get the chance to test Monday's post-election peak at 114.10.
As predicted, firm oil and energy prices kept the downside in FTSE 100 limited at 7500p on Tuesday. This could not be the case at today’s session. The FTSE could successfully test the 7500p level on the downside, if the pound remains supported above its 100-day moving average level.
The GBP/USD is rangebound between the 50 and 100-day moving averages (1.3240/1.3110). The UK’s 3Q preliminary GDP data is due today. Expectations are flat, the consensus points at an unchanged growth at 0.3% quarter-on-quarter and 1.5% year-on-year. A positive surprise could build a stronger case for a Bank of England rate hike beyond a one-off action and boost the BoE hawks. Though, anything less than a big surprise should keep the BoE expectations steady. A rate hike before the end of the year is mostly priced in. The probability for a November or a December rate hike stands at 81.7% and 84.3% respectively.
Later today, the Bank of Canada (BoC) will announce its rate decision today. The BoC is expected to maintain the overnight lending rate unchanged at 1.00% after having raised rates in the past two meetings. The bank will certainly keep the possibility of a year-end hike on the table. Any hawkish sign from the BoC should halt the USD/CAD’s surge before the 1.2723 (major 38.2% retracement on May – September decline) and encourage a pullback below the 1.25 mark.
Finally, we note that the appetite for risk assets and the improved US yields weigh on gold prices. The short-term negative trend strengthens. The 100-day moving average ($1’274) is cleared and the price pullback could continue toward $1’260 (October low). Resistance is eyed at $1’280/1’285 (minor 23.6% and major 38.2% retracement on Oct 16 – Oct 23 pullback). Gold miners (Randgold (LON:RRS) and Fresnillo (LON:FRES)) will likely remain under pressure on cheaper gold.