“A normal market is the kind that never really happens“
– Hamilton (1911)
Figure 1. US stock market
Welcome back – from the political noise to economic reality.
It was all about the USD last week – the broadly stable EURGBP was a reflection of that. US downgrade fears, pain for reserve managers…and this is just the beginning. Both the EURUSD and GBPUSD are now closer to critical multi-month resistance levels: a break above 1.3950/4000 and 1.6250/350, respectively, would mark the breach of major downtrends from 2008. The question is now not “if” but “when”, in my view. But patience is virtue – and timing is everything.
Taper off? With the US fiscal debate and deadlines postponed to December – mid February, the expectations for Fed tapering have also been pushed forward: now many expect the first taper at Fed’s March 20th meeting. Reasonable, and yet…case for an earlier taper can still be brought forward in Markets if the data fails to disappoint. E.g. the US regional surveys look ok so far, together with new orders from September ISM suggesting potential upside for durable goods orders this Friday: maybe something the USD could grab upon, only if temporarily.
The US September payrolls, unusually, to be reported on Tuesday. Remember, this is data from pre-shutdown, and thus while old, still “clean” and relevant. A 170-190k number is broadly expected, and a deviation could be a trigger to 1) panic, 2) taper mode – and make the risk sentiment sour, hereby bringing the stock market down (Figure 1). This could also help the USD reverse the recent move down.
Focus shifts to European politics now (was, of course, kidding about the political noise off). This week we get more details on euro area bank Asset Quality Review, scheduled for Q1 2014, which could, to start with, generate some nervousness. (But next year could surprisingly to many be EUR positive). The European PMIs are to be released this week (Figure 2); a marginal gain is expected. It will be too bad for the EUR if manufacturing PMIs decline again (remember, the services drove the composite up in September). Even more important will be the money data: ECB is watching broad measures (M3) and credit to confirm that recovery is on track. The M1 (leading) growth has been softer lately, suggesting the PMI cyclical peaks on the horizon (in 3-4 months).
Figure 2. EMU PMI and M1
Short term, technically it does seem likely that EURUSD and GBPUSD are carving short term peaks, and may retreat lower before heading higher. The 1.3480 is the strong support for the EURUSD – a break would open the door for 1.3400/30, then low 1.32s (Figure 3). Stalling below Friday’s close will be indication for a potential reversal, would be an invitation to go short. But if a break above the 1.3711 level, resumption toward 1.3800/30 is a done deal, likely on the way to 1.40s. The GBPUSD, likewise, looks like a H&S peak with the bearish candle formation (Figure 4).
Figure 3. EURUSD
Figure 4. GBPUSD
The EURGBP has resisted the 0.8500/0.8550 area so far, and while below the risks are for further downside towards 0.8200. If USD weakness continues broadly, I believe, if there is any chance of worry about too much currency strength, it will first come from the ECB rather than the Bank of England. This is not least due to the current inflation dynamics (euro area: 1.1% y/y, UK: 2.7% y/y).
Otherwise, positioned for a “reality check” this week. Short GBPUSD (tight stop above 1.6200). UK Q3 GDP on Friday: too bad, if expectations are in line with recent fabulous survey data… Took profit on long AUDUSD for now (CPI on Tuesday and China flash PMI Thursday – risks). Also, long USDCAD, cleanest USD long and chances for dovish BoC this Wednesday. Still short USDJPY, for lower UST yields and profit taking on stocks, ideally a large correction.
Figure 5. AUDUSD and China economic surpise index
Nordea