The risk-off sentiment dominated the overnight trading session. Asian stocks edged lower, the US equity futures and FTSE futures were offered. Oil traded mixed. US treasuries gained, yields eased. The European stock markets are set for a bearish open.
The US dollar was better bid against all G10 pairs. There is no major news regarding the progress in the US tax bill, augmented by the repeal of Obamacare individual mandate. There will unlikely be a surprise progress before Thanksgiving (Nov 23).
Gold advanced to $1,296 on Friday, as the improvement in the US yields has not been well sustained. The US 10-year yield slipped below 2.33% at the start of the week. Gold buyers could find interest in increasing their gold allocation as the US 10-year yield approaches the critical 2.30% level (200-day moving average). Soft US yields could encourage a new attempt to $1,300 in the gold market.
Japan’s trade surplus came in less than expected in October, yet exports growth steadied at two-digit level, +14%, versus 15.7% expected by analysts. Nikkei (-0.57%) and Topix (-0.19%) trended lower. The USD/JPY stepped in the daily Ichimoku cloud (112.35/110.40). Trend and momentum indicators turned negative and the pair tested 112.91 (major 38.2% retracement on September – November recovery). A break below this level should signal a short-term bearish reversal and pave the way for a further slide to the 200-day moving average (111.46).
The AUD/USD traded near 0.7555, the lower Bollinger band (on daily chart). The AU/US two-year spread continues narrowing. As an indication, the AU/US yields stood at 2.00%/1.44% respectively two months earlier versus 1.77%/1.71% today. Hence, carry traders are not excited by the rate differential. The lack of carry appetite leaves the Aussie under pressure. The Reserve Bank of Australia (RBA) will release its latest meeting minutes tomorrow. The RBA statement is expected to remain accommodative, as a result there is little incentive to enter fresh long positions. CFTC data confirms that net long speculative AUD positions have been declining since the end of September. The next natural target for AUD/USD short positions stands at 0.75 level.
The single currency kicked off the week downbeat on news that German Chancellor Merkel’s efforts to form a coalition government collapsed. The euro was the leading G10 loser against the greenback in Asia. The EUR/USD retreated to 1.1722. The 100-day moving average (1.1798) could act as a resistance to any price recovery. Bloomberg warns that Merkel could face a new election. The German event risk could curb the positive momentum in euro and keep the appetite limited in the DAX stocks.
In addition, the European Central Bank meeting accounts (due on Thursday) could reveal that some policymakers dissented to discuss about tapering at last month's meeting. Even if this is true, it won’t change the ECB’s plans to continue the Quantitative Easing (QE) program at half speed from January. The euro interest rates are expected to stay low for sufficiently long after the end of the QE. This is already priced in.
The pound is better bid as Chancellor Philip Hammond wants to offer a higher EU divorce bill, which could help moving on with the Brexit negotiations. According to the FT, the UK could double its exit deal offer from 20 billion pounds proposed earlier. Cable consolidates close to the 1.3200 mark. The UK budget is due on Wednesday. If the UK decides to increase its bid for a Brexit deal, the chances of fiscal gifts will likely be limited. Chancellor Hammond is expected to display a cautious budget plan and the Bank of England will likely stay accommodative. The pound may not react significantly to the budget statement unless there is a big surprise. The Brexit talks will certainly be the main driver for short-term price volatility. The key support to November recovery stands at 1.3175 (major 38.2% retrace). Offers are eyed at 1.3250/1.3275.
The EUR/GBP is testing 0.8880 (50-day moving average) on the downside, as euro declines face to a steady pound. The next plausible target for EUR/GBP shorts is 0.8840 (major 61.8% retrace on October 21 – November 14 rebound).