29 / 09 / 2017 | Technical Analysis

Technical Analysis 2017.09.29 - AUD/JPY: Ichimoku clouds

Let's look at the four-hour chart. Tenkan-sen line is below Kijun-sen, the red line is directed downwards, while the blue one remains horizontal. Confirmative line Chikou Span is below the price chart, current cloud is descending. The instrument is trading below Tenkan-sen and Kijun-sen lines; the Bearish trend is still strong. One of the previous minimums of Chikou Span line is expected to be a support level (88.000). The closest resistance level is Kijun-sen line (88.865).
 

 
On the daily chart Tenkan-sen line is above Kijun-sen, the lines are horizontal . Confirmative line Chikou Span is above the price chart, current cloud is ascending. The instrument is trading between Tenkan-sen and Kijun-sen lines. The closest support level is Kijun-sen line (87.989). The closest resistance level is Tenkan-sen line (89.077).
 

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.
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29 / 09 / 2017 | Market News

Fundamental Analysis 2017.09.29 – Trump’s New Tax Reform

Market Recap
USD slipped as the market re-evaluated the likely impact of the Trump tax breaks, or perhaps more accurately, the likelihood of them getting enacted as is. Furthermore, many bond investors rolled out their positions slightly as the end of the month approached in order to keep in line with bond indices, which also had the effect of bringing US interest rates down. Lower US rates put downward pressure on USD. 

It was notable that the market ignored several indicators that should have been positive for USD:  an unexpected upward revision to Q2 GDP (albeit a small one), a much narrower-than-expected US trade deficit, a much higher-than-expected rise in wholesale inventories, and an unexpected rise in the Kansas City Fed manufacturing activity index. This just shows me how the focus in the US is largely on politics and Fed policy and how the underlying sentiment towards USD is so negative.

CAD was the best-performing G10 currency as the USD weakened and some of the pessimism caused by Bank of Canada Gov. Poloz’ recent speech faded. Investors may buying ahead of today’s Canada GDP and industrial product prices, although I expect only the latter to be a reason to push CAD higher (see below). CAD’s rallyl was all the more impressive given that oil prices fell on the day.

Today’s market
Following yesterday’s German CPI figures, the focus for the indicators today remains on inflation, with the EU-wide inflation figures and the US personal consumption expenditure (PCE) deflators coming out.
There’s a lot happening over the weekend, too. If Catalonia goes ahead with its referendum on independence, that could hurt EUR. And Japan announces the results of its quarterly Tankan report, the most important Japanese economic indicator, at the start of its business day on Monday.

UK indicators will dominate during the European morning.

The European day starts with British house prices from the UK Nationwide Building Society. While the year-on-year rate of growth is expected to slow, on a month-on-month basis, prices are expected to rise slightly, compared to the slight fall in the previous month. That could be interpreted as supportive for the pound, even though it does appear that the downward trend is still in place. 



German unemployment can sometimes affect EUR, but usually it’s just a minor impact.

The Bank of England data on mortgage approvals is expected to show a 2% month-on-month decline. This would be in contrast to the 0.4% mom increase in the British Bankers’ Association. While not impossible, the two indicators have moved in the same direction 85% of the time since 1999 (88% since 2010), so such divergence would be a relatively rare occurrence. I see a good possibility of an upward surprise in this indicator, which could also be positive for the pound (if it happens). 


 
The third and final revision of UK Q2 GDP is expected to be unchanged from the 2nd revision and therefore unlikely to have much impact. 


 
EU CPI is the crucial indicator for the Eurozone nowadays as the ECB mulls withdrawing some of its extraordinary stimulus by slowing down and eventually stopping its monthly bond purchases. Today’s CPI data is the last one before the ECB’s October meeting (26 October) and hence will set the background for the discussion then.

While the headline figure is expected to creep up a notch, core CPI (which excludes energy prices) is expected to rise at the same pace as in the previous month, well below the Bank’s target of “below, but close to, 2%”.

Nonetheless, this result is already incorporated in the ECB’s outlook and shouldn’t give the Board pause. At the Bank’s last meeting on 7 Sep, ECB President Draghi noted that core inflation has “yet to show convincing signs of a sustained upward trend.” Nonetheless, he said it “is expected to rise gradually over the medium term, supported by our monetary policy measures, the continuing economic expansion, the corresponding gradual absorption of economic slack and rising wages.” Thus so long as inflation doesn’t slow further, the report should be positive for the euro.

Yesterday’s German HICP inflation rate was unchanged from the previous month, contrary to expectations that it would accelerate slightly.  


 
The US day starts off with US personal income and spending. Both are expected to be up from the previous month, but growth is expected to drop by 20 bps from the previous month’s month-on-month rate of growth. Both are expected to rise at a below-trend pace. Growth in incomes is expected to continue to outpace growth in spending (not in my family, unfortunately), which is healthier over the longer term but may result in some negative reaction in the dollar.

An examination of the impact of these two indicators on EUR/USD suggests that the market largely ignores the income figure and focuses on spending, at least with regards to the surprise vs expectations. 


 
The US PCE deflators are expected to show much the same story as the EU CPI data:  headline inflation accelerating slightly but core inflation remaining stubbornly below target. This is important for the US, because the core PCE deflator is the Fed’s preferred gauge of inflation. Nonetheless, again as in Europe, this prospect seems to be incorporated already in the FOMC’s thinking, as embodied in Fed Chair Janet Yellen’s recent comment that “it would be imprudent to keep monetary policy on hold until inflation is back to 2 percent.” Accordingly, so long as the PCE deflators don’t slow, I would expect this report to be positive for the dollar and to outweigh the impact of slowing incomes & spending. 


 
An examination of all four of these four indicators – personal income, personal spending, PCE deflator and core PCE deflator – shows that the market’s reaction seems to follow the headline PCE deflator most strongly, at least in the first 30 minutes. That’s what I would expect the market to focus on if there’s any contradiction among the indicators. 
Canada will also be in focus as the country announces its monthly GDP figure as well as industrial product prices, the equivalent of producer prices. These two series, which are released simultaneously, are forecast to have opposite impacts on the currency, which suggests considerable volatility following the reports as investors weigh the relative importance of each.
Canada’s GDP growth is forecast to have slowed somewhat in July. This should come as no surprise to the Bank of Canada; Gov. Poloz said in his speech on Wednesday that the 4.5% pace of growth in Q2 “is unlikely to be sustained, and recent data point clearly to a moderation in the second half of the year.” Still, in the context of his observation that monetary policy “will be particularly data dependent”, plus the market’s newfound skepticism about the pace of rate hikes in the country, the news could be negative for CAD.
 

 
On the other hand, the nation’s industrial product prices are forecast to rise sharply after two months of steep declines. This could bring the prospect of higher inflation back into the conversation and reverse some of CAD’s recent softness. 


 
Which indicator is likely to win out? Watch for any divergence from the forecast. My guess is that since industrial product prices are most closely associated with inflation, the result here should be the key to CAD, but of course the market is not always so rational. It also depends on the size of any miss.

There will be a major hurdle for EUR over the weekend:  a possible referendum on independence for the Spanish region of Catalonia. The regional government there has pledged to go ahead with the referendum, which Spain’s Constitutional Court has outlawed. If the referendum goes ahead – not certain at the time of writing – and if the vote is for independence – also not certain – it could plunge Spain into a constitutional crisis. Following the recent better-than-expected showing by the AfD in Germany, such a result could resurrect political concerns about the Eurozone, resulting in downward pressure on EUR.

Catalonia held a symbolic poll in 2014. The vote was overwhelmingly in favor of complete succession (80%), but only 32% of the electorate took part, meaning only 26% of possible voters voted in favor of succession. Thus even if the vote goes ahead on Sunday, it’s impossible to say how it will go, and even if it goes in favor of succession, it’s impossible to say what impact it will have, since the central government has already ruled it’s illegal. Nevertheless, uncertainty is bad for a currency, and such a result could be expected to be negative for the euro.

Finally, right as the market opens for business Monday morning Asian time, Japan announces the Bank of Japan’s short-term survey of economic conditions, aka Tankan, for Q3. This is the most important Japanese economic indicator. While there are almost limitless data points from this survey of 10,799 non-financial and 196 financial companies, the most important ones are probably the diffusion index (DI) for large manufacturers, plus the larger manufacturers’ forecasts for what their DI is likely to be in Q4. That gives an indication of whether they see things headed. Both are expected to improve by one point. Oddly enough, that could be negative for the yen, because the tankan often has a strong impact on the stock market, and when the stock market rallies, JPY often weakens. 


 

 

 
This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.
 
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28 / 09 / 2017 | Market News

Fundamental Analysis 2017.09.28 – Interest Rates and Major Currencies

Market Recap
It’s all about interest rates these days. As the graph below shows, the change in a currency’s value vs USD over the last two weeks has been 61% determined by the movement of that country’s 10-year yields. For USD, thoughts of faster-than-expected tightening by the Fed and hopes of faster economic growth brought about by the Trump administration’s proposed tax cuts have been pushing up bond yields and thereby supporting the dollar. 


 
The Reserve Bank of New Zealand kept policy unchanged, as expected. The forward-looking last paragraph was unchanged, leaving the possibilitiy of a further cut in rates if necessary. Concerning FX, the main change was that since the NZD had weakened a bit since the August statement, they said a weaker currency “would help” rather than “is needed” “to increase tradables inflation and help deliver more balanced growth.” NZD had weakened in the days ahead of the meeting and was little changed when the statement actually came out. Given that New Zealand is one of the few countries around that is still holding out the possibility of easing policy, I would expect the currency to decline further.

Today’s market
The focus during the European day will be on the German inflation data. It starts off as usual with the consumer price index (CPI) for Saxony early in the morning. Although this isn’t usually forecast, the market does pay attention to it, because as Saxony goes, the country often goes too (even though Saxony is only the sixth most populous state out of the country’s 16).
Later in the day, the pace of national inflation is expected to accelerate a bit to 1.9%, exactly at the ECB’s “close to, but below, 2%” target. Alas Germany is not the EU as a whole, but still, reaching that point could be positive for the euro. 


 
Another focus Thursday will be a conference on “Independence 20 Years On” at the  Bank of England, in commemoration of the 20 years since the BoE was granted operational independence over monetary policy. Before then, the Chancellor of the Exchequer (the British equivalent of the Treasury Secretary) decided monetary policy. “The 20th anniversary is an appropriate time for us to reflect on the theory of central bank independence, its practical application and its future,” according to the BoE’s web site. Speakers include BoE Gov. Carney, BoE Deputy Gov. Broadbent, Fed Vice Chair Fischer, RBA Deputy Gov. Debelle, IMF MD Lagarde, and former US Treasury Secretary Summers. The discussions may be largely theoretical, but of course with so many policy makers speaking, something of note to the markets may also come out.

ECB Chief Economist Peter Praet gives the keynote speech at a financial industry conference. His topic will be “The Effects of Quantitative Easing on the European Financial Markets.”
The third estimate of US 2Q GDP is expected to be unchanged from the second estimate at 3.0% qoq SAAR. That would be somewhat disappointing, since the figure has been revised up on the third revision for the last six quarters. The lack of any upward revision could be negative for the dollar, but even so, the effect is likely to be minor at this point, in my view. The Trump administration’s tax plans and their expected impact on the economy and interest rates in the future will probably be more important. 


 
US wholesale inventories are expected to be up 0.4% mom, below the 0.6% mom rate we’ve seen for the last three months. Although this may be considered a deceleration, it’s still slightly above trend and so should be dollar-positive. 


 
Meanwhile, the US advance trade balance is expected to be in deficit by $65.1bn, a notable widening from $63.9bn in the previous two months. Nonetheless, this would be exactly at the 6-month moving average. That could be taken as a sign that the deficit has stabilized (dollar-positive), or it could be taken as a sign that the deficit has stopped narrowing (dollar-negative). Given the current “buy dollar” sentiment, I expect the market would interpret an ambiguous indicator like this favorably if it comes in as forecast. Otherwise, of course the impact depends on whether it misses or exceeds expectations.  


 
Overnight, we get the usual end-of-month slew of Japanese economic indicators. The most important one of these for the FX market is probably the Japan CPI, as that has the most direct impact on Bank of Japan policy. If so, then the impact is likely to be positive for the yen – all the major gauges of CPI are expected to show some measure of acceleration. 


 
Japan’s industrial production is also expected to accelerate, which could be another JPY-positive development. 


 
Australia’s private sector credit growth is expected to maintain the healthy month-on-month pace of growth of the previous month, which would mean an acceleration on a year-on-year basis. That could be positive for AUD.


 
But 15 minutes later, the Caixin/Markit manufacturing PMI for China comes out and that could be even more important. The index is expected to fall slightly to 51.5 (the same as the official manufacturing PMI, due out Friday, which is why there is only one dot for the forecasts in this graph). A slowdown in Chinese manufacturing might be considered more significant for Australia than a rise in domestic borrowing and therefore be negative for AUD. 


 

 
This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.
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28 / 09 / 2017 | Technical Analysis

Technical Analysis 2017.09.28 - EUR/USD: wave analysis

The trend is downward.
On the 4-hour chart the downward correction (2) of the higher level is forming. At the moment the wave А of (2) is developing, within it the “bearish” momentum is forming as a third wave of the lower level iii of A. If the assumption is correct, the pair will fall to the levels of 1.1650–1.1600. The level of 1.1815 is critical for this scenario.

 
 

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.
 
 
 
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27 / 09 / 2017 | Technical Analysis

Technical Analysis 2017.09.27 - AUD/USD: wave analysis

The pair is in correction.
On the 4-hour chart the downward correction is developing as a fourth wave iv of the higher level. Locally the formation of the wave (a) of iv is ending. If the assumption is correct, the pair will fall to the level of 0.7725 after the end of the upward correction of the lower level (b) of iv. The level of 0.8125 is critical for this scenario.


 
 

 
This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.
 
 
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27 / 09 / 2017 | Market News

Fundamental Analysis 2017.09.27 – The Fed Talks Numbers (finally)

In view of the absence of important macroeconomic releases the rate of USD continued to grow against the majors. The dollar was additionally supported by the statement by the Fed's head Janet Yellen at the annual meeting of the National Association for Business Economics in Cleveland. The head of the Fed pointed out that in the current economic conditions the regulator considered it reasonable to gradually increase the interest rate. Investors reacted to this news with purchases of the US currency.

In view of this the pair EUR/USD dropped by 0.61% to 1.1774. Euro is under additional pressure from the results of the election of German Bundestag.
The rate of GBP/USD dropped to 1.3419 (-0.34%).

The pair USD/JPY strengthened by 0.63% and is trading around 112.41.

The rate of AUD/USD continues to gradually go down in view of growing USD. During the previous day the pair dropped by 0.91% to 0.7865.

Metal quotes are reducing. Gold dropped to 1293.49 (-1.31%). Silver lost 1.92% and is trading around 16.82.

Oil prices are showing mixed dynamics. Brent reduced to 58.14 (-0.50%). WTI is trading around 52.23 (+0.12%).

American stock market is trading in both directions. Dow Jones is trading around 22300.5 (-0.08%). NQ rose to 5891.7 (+0.33%). S&P is near 2497.8 (-0.07%).

British FTSE is trading around 7289.5 (-0.18%). French CAC rose to 5280.3 (+0.13%). German DAX gained 0.38% and is trading around 12636.6.

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.
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26 / 09 / 2017 | Technical Analysis

Technical Analysis 2017.09.26 - EUR/JPY USD/JPY: Ichimoku clouds

Technical Analysis 2017.09.26 - EUR/JPY: Ichimoku clouds
 
Let's look at the four-hour chart. Tenkan-sen and Kijun-sen lines have merged, the lines are horizontal . Confirmative line Chikou Span is below the price chart, current cloud is going to reverse from ascending to descending. The instrument has entered the cloud. The closest support level is the lower border of the cloud (131.814). The closest resistance level is the lower border of the cloud (132.921).
 

On the daily chart Tenkan-sen line is above Kijun-sen, the blue line is directed upwards, while the red one remains horizontal. Confirmative line Chikou Span is above the price chart, current cloud is ascending. The instrument is trading between Tenkan-sen and Kijun-sen lines. The closest support level is Kijun-sen line (131.180). The closest resistance level is Tenkan-sen line (132.893).
 
USD/JPY: wave analysis

The pair is in correction. The fall is possible.

The wave C of the higher level, within which the development the first wave i has ended, is forming. At the moment the local correction as a wave ii is forming. If the assumption is correct, the price will fall to the level of 110.00. The level of 112.53 is critical for this scenario.

 
This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.
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26 / 09 / 2017 | Market News

Fundamental Analysis 2017.09.26 – Market Overlook

Markets seem to be risk adverse at the moment, we are seeing investors running to safe-havens as the North Korean/US conflict continues.

Gold saw a jump to $1,300. This is likely a short term trend though, as markets are just waiting for tensions to abid.

The margin between WTI and Brent seems to hold at $7, as frictions also continue in Kurdistan. Brent is speculated to find resistance at the $60/barrel mark whereas WTI has broken through the $52 level.

The JPY has had slight gains as a safe-haven – largely due to its proximity to N. Korea and the political instability the country is experiencing at the moment. The Japanese Prime Minister Shinzo Abe seeks an impromptu election on October 22nd but to do so he first needs to dissolve the current government. At the moment this seems like a Theresa May move, he is attempting to consolidate his political power as polls are showing an increase of his popularity.

The NZD slipped 0.28% against the US dollar, as the ANZ business saw a significant drop in confidence this month. Post-election instability also contributed largely to this effect.

EUR/USD saw a 50-day SMA of 1.1865for the first time in 5 months. German election in combination with the Catalan referendum caused EUR traders to risk-off the one-currency. EURUSD should experience resistance at the 1.1895/1.1915 level

GBP is currently trading at 1.3450, hinting toward a need for the that dynamic to correct post-Bank of England (BoE) rally support is expected at 1.3400 and 1.3345.

EURGBP is currently trading at 0.8775. With the 200 MA set at 0.8740.

The FTSE should see a jump moving the index towards the 200-day moving average at 7338p.

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.

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25 / 09 / 2017 | Market News

Fundamental Analysis 2017.09.25 – The Results of The German Election

Today’s market
The day’s trend will probably be determined by Sunday’s election for the Bundestag in Germany. Although Chancellor Merkel won another term, as expected, the far-right AfD took a substantial amount of support from both her Christian Democratic Union (CDU) party and the Social Democratic Party (SPD). Support for these two main parties fell to historic lows. The SPD announced it would not renew its coalition agreement with the CDU, meaning the CDU would have to form a new coalition. This could prove somewhat destabilizing for the euro today.
The continuing dispute over a referendum on Catalonian independence, scheduled for 1 October, may also cause some political worries for the euro.
Also on the political front, the Brexit negotiations get under way again today after UK PM May’s speech on Friday. May did make some concessions, but the EU’s chief negotiator, Michel Barnier, called for a “precise negotiating position.” I think the talks are likely to go nowhere fast and therefore be negative for the pound.
The indicators start off with the Ifo survey for Germany. The forecast is for all three indicators to be 0.1 point higher, which is virtually unchanged in my book. That would be a contrast with the sharp (and unexpected) rise in the German purchasing managers’ indices for the month. If the figures come in as forecast, I’d expect the euro to be little changed. However looking at the PMIs, I think there’s a good chance of an upward surprise that might boost the euro.


 
 
The Dallas Fed survey is expected to be sharply lower, in contrast to the sharp rise in the Philadelphia Fed survey and the small drop in the Empire State survey. Considering the disastrous weather that hit the region, this would be no surprise. I expect the market would discount the extraordinary conditions there and the figure would probably have little impact on the dollar, particularly after the Fed said after its recent meeting that “past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term.”


 
 
Overnight, New Zealand’s trade balance is expected to swing into deep deficit from a modest surplus. However the figures are not seasonally adjusted and so it makes more sense to look at a 12-month moving average. On that basis, the forecast deficit would still mean a slightly narrowing of the deficit, which could be positive for the NZD. However, I expect the impact of this figure to be largely muted by the discussion of the results of the weekend’s inconclusive election. The ruling party failed to win a majority, which means there are probably several weeks of talks to form a coalition.


 
 

 
This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.
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25 / 09 / 2017 | Technical Analysis

Technical Analysis 2017.09.25 - AUD/JPY: Ichimoku clouds

Let's look at the four-hour chart. Tenkan-sen line is below Kijun-sen, the lines are horizontal . Confirmative line Chikou Span is above the price chart, current cloud is ascending. The instrument is trading above Tenkan-sen and Kijun-sen lines; the Bullish trend is still strong. The closest support level is Kijun-sen line (89.37). One of the previous maximums of Chikou Span line is expected to be a resistance level (89.60).

 

On the daily chart Tenkan-sen line is above Kijun-sen, the red line is directed upwards, while the blue one remains horizontal. Confirmative line Chikou Span is above the price chart, current cloud is ascending. The instrument is trading above Tenkan-sen and Kijun-sen lines; the Bullish trend is still strong. The closest support level is Tenkan-sen line (88.95). One of the previous maximums of Chikou Span line is expected to be a resistance level (90.09).



This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.
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