Premier Xi jumps in with more verbal support
It was a heady start to the trading week for Chinese equities, with the China50 index powering ahead to the biggest one-day gain since 2016. Today’s move brings the two-day advance from Friday, triggered by a three-pronged verbal commitment by Chinese officials from regulators and the central bank to support non-state linked companies, to more than 8.2%.
At the weekend, Chinese President Xi Jinping added his voice to the verbal support, saying in a letter to private entrepreneurs that the government would offer “unwavering support” for the country’s private sector, while the country’s exchanges committed to help manage share-pledge issues. Earlier this morning PBOC advisor Ma Jun said he expects policy measures to support the market.
The index has risen to test the 100-day moving average at 11,484 for the first time since October 3 while the September 28 high of 11,925 is likely to act as the next resistance point. The daily stochastics momentum indicator is still showing a bullish signal.
China50 Daily Chart
Source: Oanda fxTrade
Outside of China, the sentiment is not quite so buoyant. The Japan225 index is just 0.71% higher while the US30 index added just 0.1% and the NAS100 index gained 0.42%. Hong Kong stocks were closest to China gains, with an advance of 2.67%.
Aussie dollar underperforms
The Aussie dollar was the worst performer in the G-10 space versus the US dollar, as a weekend by-election meant the Liberal government lost a seat and thereby its governing majority, now holding 74 out of the 150 seats.
AUD/USD slid as low as 0.7087, the lowest in eleven days, before consolidating above the 0.71 handle. Previous lows near 0.7040 still offer some technical support.
AUD/USD Daily Chart
Source: Oanda fxTrade
Earlier this morning RBA Deputy Governor Debelle said he had an open mind on what constitutes full employment. His remarks come after data last week showed the unemployment rate falling to 5.0%, a 6-1/2 year low and a rate that many viewed as the full employment rate. Last week, Debelle had said that that it is possible the country’s jobless rate would have to fall further than on previous occasions before wage growth would increase at a faster pace.
A slow start to US GDP week
There’s not much to excite on the data front today, with US Chicago Fed activity index for September the only release of note. We also see Canada’s August wholesale sales. Things remain quiet until Wednesday when we see Markit flash PMIs for Germany, the Eurozone and the US. Wednesday also sees the Bank of Canada’s rate decision, where economists are evenly split whether we will get a rate hike or not. The ECB rate decision follows on Thursday but the main event is left until Friday, with the release of US Q3 GDP numbers, which are expected to slow to 3.3% y/y from Q2’s 4.2%. At 3.3%, this would still be the highest growth since Q3 2016.
US GDP Growth Historical Snapshot
Source: MarketPulse
You can view the full MarketPulse data calendar at https://www.marketpulse.com/economic-events/
The US dollar is mixed on Friday. Investor’s appetite for risk rose and safe haven currencies (JPY and CHF) fell while positive China and Brexit news saw the NZD, EUR, GBP and AUD advance against the USD. The Canadian dollar was dragged down in the last trading day of the week after softer than expected retail sales and inflation data. Next week’s Bank of Canada (BoC) monetary policy meeting is anticipated to bring a 25 basis point rate hike. Despite the miss inflation has been above the central bank’s target and businesses are optimistic about strong sales.
- BoC expected to hike interest rate to 1.75%
- German Business Climate to cool down
- US first estimate of Q3 GDP to confirm solid growth
Euro Caught Between Brexit and Italian Budget
The EUR/USD fell 0.41 percent in the last five days. The single currency is trading at 1.1510 after rising on Friday due to a combination of softer US housing data and positive Brexit News. The gradual pace of rate lifts by the U.S. Federal Reserve had a negative impact on previously owned homes in September.
The euro rallied on Friday after a report that Theresa May’s government is ready to drop the time limit demand on the Irish border. The EU and the UK are said to be close to a deal, 90 percent by the estimate of the EU’s top negotiator, but the final 10 has proven hard to agree on.
Italian budget issues continue to drag on the euro. The threat of a downgrade of Italian debt does not seem to faze local politicians that are ready to square off against Brussels.
The European Central Bank (ECB) will publish its main refinancing rate and host a press conference on Thursday, October 25. No changes are expected, but investors need to be aware of the tone of the press conference as Mario Draghi could push a more dovish rhetoric.
Loonie to get BoC Rate Hike Boost
The USD/CAD fell 0.74 percent in a weekly basis. The currency pair is trading at 1.3117 and will look at the Bank of Canada (BoC) for support. The central bank is highly anticipated to announce a 25 basis points interest rate hike. The central bank has lifted rates twice in 2018 and rising inflation is forcing the hand of the BoC.
The rate decision has been priced in for some time, but the fundamental picture has worsened reducing the probabilities of a rate hike while still at near 80 percent. The NAFTA renegotiation was a big risk keeping the BoC awake at night, and with the USMCA some of that risk is lifted.
With inflation data lower than forecasted it now validates the gradual approach of the BoC and unless there is hawkish rhetoric from Governor Poloz, the loonie will continue to underperform against the USD.
Oil Drops as US Weekly Buildup Pressures Prices
West Texas Intermediate lost 0.95 percent this week. WTI is trading at $69.36 after staring a rebound on Friday due to surging Chinese demand. Supply concerns continue to guide daily price action. The US weekly inventories showed a buildup last week and pushed prices lower. Iranian exports have been cut ahead of the start of US sanctions, but there are reports that OPEC and other major producers are already closing the gap.
Saudi Arabia is embroiled in a diplomatic scandal and is quickly losing the goodwill it gained for having engineered price stability with the production cut agreement. The OPEC and major producers agreed to limit output to stop the free fall in energy prices and have extended the agreement to this year.
Trade war concerns eased on Friday as China and the US have agreed to meet during the sidelines of the G20 meeting in Buenos Aires. The leaders of the two nations will fly in a day ahead of the event to try and mend the trade relationship.
Gold Rises for Third Week Straight
Gold rose 0.6 percent last week. The yellow metal is trading at $1,229.40 despite gradual rate hike talk by Fed members and the minutes form the September FOMC. The rebound of the stock market correlated with the rise of the yellow metal. Safe haven appetite in gold holdings has returned and in a market with no shortage of geopolitical risk for the remainder of the year the yellow metal is set to continue on its rise.
Market events to watch this week:
Wednesday, October 24 10:00am CAD BOC Monetary Policy Report 10:00am CAD BOC Rate Statement 10:00am CAD Overnight Rate 11:15am CAD BOC Press Conference
Thursday, October 25
7:45am EUR Main Refinancing Rate 8:30am EUR ECB Press Conference 8:30am USD Core Durable Goods Orders m/m
Friday, October 26
8:30am USD Advance GDP q/q
*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar
The Canadian dollar has posted gains in the Friday session, erasing most of the losses sustained on Thursday. Currently, USD/CAD is trading at 1.3030, down 0.42% on the day. On the release front, Canadian consumer indicators are in the spotlight and traders should be prepared for volatility from the Canadian dollar during the North American session. After a shocking decline in August, CPI for September is expected to gain 0.1%. Retail Sales is forecast to remain at 0.3%, but Core Retail Sales is expected to drop sharply to just 0.1%, compared to 0.9% in August. In the U.S, there are no key releases. Existing Home Sales is expected to drop to 5.29 million.
Employment numbers are important leading indicators of consumer spending, and there was good news on Thursday, ahead of key Canadian retail sales reports on Friday. ADP nonfarm payrolls jumped 28.8 thousand in September, up from 13.6 thousand a month earlier. Will the retail sales numbers also point higher? The Bank of Canada will be carefully monitoring the retail sales and CPI releases, ahead of a policy meeting next week. The markets are expecting the BoC to raise rates by a quarter-point, which would mark the third rate increase in 2018. With Canada, the U.S and Mexico about to enter the USMCA, which replaces the NAFTA pact, the last obstacle for the BoC on the path to normalization has been removed and analysts are now expecting three rate hikes in 2019, up from a forecast of two hikes just a few months ago.
The U.S dollar is broadly higher on Thursday, after a hawkish tone from the Federal Reserve minutes. The minutes indicated that a majority of members want to continue raising interest rates until the U.S economy shows signs of slowing down. However, the duration of a tighter policy remains unclear, as the minutes noted that “there is considerable uncertainty surrounding all estimates of the neutral federal funds rate.” This would likely be around the 3 percent level, which will not be reached until the second half of 2019, as the Fed has indicated it will raise rates three times next year. At the September meeting, the Fed removed the phrase “the stance of monetary policy remains accommodative”, which was considered outdated, given the policy of steady rate hikes. As rates approach the “neutral rate”, we could see further changes in language at upcoming policy meetings.
China offers verbal support as growth hits lowest in nearly a decade
Asia rebound leads europe higher
Pick your poison
USD/CAD Fundamentals
Friday (October 19)
- 8:30 Canadian CPI. Estimate 0.0%
- 8:30 Canadian Core Retail Sales. Estimate 0.1%
- 10:00 US Existing Home Sales. Estimate 5.29M
*All release times are DST
*Key events are in bold
USD/CAD for Friday, October 19, 2018
USD/CAD, October 19 at 7:30 DST
Open: 1.3086 High: 1.3089 Low: 13037 Close: 1.3030
USD/CAD Technical
| S3 | S2 | S1 | R1 | R2 | R3 |
| 1.2733 | 12831 | 1.2970 | 1.3067 | 1.3198 | 1.3292 |
USD/CAD posted has ticked lower in the Asian session and has recorded stronger losses European trade
- 1.2970 is providing support
- 1.3067 has switched to a support role following losses by USD/CAD on Friday
- Current range: 1.2970 to 1.3067
Further levels in both directions:
- Below: 1.2970, 1.2831, 1.2733 and 1.2649
- Above: 1.3067, 1.3198 and 1.3292
The DAX index continues to lose ground on Friday, after sharp losses in the past two sessions. Currently, the index is at 11,552, down 0.32% on the day. The index has given up the strong gains which it recorded early in the week. The sole event on the schedule is the eurozone current account surplus, which widened from EUR 21.3 billion to 23.9 billion. This easily beat the estimate of EUR 21.4 billion.
This week’s EU summit came and went without a statement on the Brexit negotiations, one of the most important issues facing the EU. European leaders openly expressed their pessimism over reaching a deal, unless Theresa May brings fresh proposals to the table. In a conciliatory move, Michel Barnier, chief Brexit negotiator for the EU, offered to extend the transition phase by 12 months, which would leave it in place until December 2021. This would give the sides more time to work on the shape of a new customs union as well as outstanding issues. Prime Minister May said she would consider extending the transition stage “for a few months”, but even this suggestion has raised the ire of Brexiteers in the cabinet, who want a clean cut from Brussels. With the Brexit negotiations at an impasse, the mood over Brexit is so sour that officials are saying that they may not hold a November EU summit, unless substantial progress is made in the next several weeks.
Italy’s draft budget has become the latest crisis for the European Union. The budget boosts public spending and cuts taxes, would raise the country’s deficit, which breaches EU rules. The government has sent the budget for approval to the European Union. On Thursday, the European Commission told Italy that the budget was not acceptable, and demanded a reply by Monday. This could put Rome and Brussels on a collision course, and the sour mood has sent Italian bond prices higher. The yield on 10-year Italian bonds stands at 3.73%, some 3.33% over the equivalent German bonds, as the gap between the two continues to widen. Bond prices in Spain, Portugal and Greece have also increased, making investors nervous. Italy’s debt stands at an astounding 132% of GDP, and there is a real risk that the country’s financial woes could destabilize the entire eurozone.
China offers verbal support as growth hits lowest in nearly a decade
Asia rebound leads europe higher
Economic Calendar
Friday (October 19)
- 4:00 Eurozone Current Account. Estimate 21.4B. Actual 23.9B
*All release times are DST
*Key events are in bold
DAX, Friday, October 19 at 6:35 DST
Previous Close: 11,589 Open: 11,595 Low: 11,499 High: 11,617 Close: 11,552
EUR/USD has steadied on Friday, after posting considerable losses in two straight sessions. Currently, the pair is trading at 1.1447, down 0.04% on the day. It’s a quiet end to the week, with no key releases on the schedule. The eurozone current account surplus widened from EUR 21.3 billion to 23.9 billion. This easily beat the estimate of EUR 21.4 billion. In the U.S, Existing Home Sales is expected to drop to 5.29 million.
Italy’s draft budget has become a major headache for EU officials, and the crisis could escalate. The budget, which boosts public spending and cuts taxes, would raise the country’s deficit, which breaches EU rules. The government has sent the budget for approval to the European Union. On Thursday, the European Commission told Italy that the budget was not acceptable, and demanded a reply by Monday. This could put Rome and Brussels on a collision course, and the sour mood has sent Italian bond prices higher. The yield on 10-year Italian bonds stands at 3.73%, some 3.33% over the equivalent German bonds, as the gap between the two continues to widen. Bond prices in Spain, Portugal and Greece have also increased, making investors nervous. Italy’s debt stands at an astounding 132% of GDP, and there is a real risk that the country’s financial woes could destabilize the entire eurozone.
The Federal Reserve minutes from the September meeting showed that a majority of members want to continue raising interest rates until the U.S economy shows signs of slowing down. However, the duration of a tighter policy remains unclear, as the minutes noted that “there is considerable uncertainty surrounding all estimates of the neutral federal funds rate.” This would likely be around the 3 percent level, which will not be reached until the second half of 2019, as the Fed has indicated it will raise rates three times next year. At the September meeting, the Fed removed the phrase “the stance of monetary policy remains accommodative”, which was considered outdated, given the policy of steady rate hikes. As rates approach the “neutral rate”, we could see further changes in language at upcoming policy meetings.
China offers verbal support as growth hits lowest in nearly a decade
Asia rebound leads europe higher
EUR/USD Fundamentals
Friday (October 19)
- 4:00 Eurozone Current Account. Estimate 21.4B. Actual 23.9B
- 10:00 US Existing Home Sales. Estimate 5.29M
- 12:00 US FOMC Member Bostic Speaks
*All release times are DST
*Key events are in bold
EUR/USD for Friday, October 19, 2018
EUR/USD for October 19 at 5:35 DST
Open: 1.1452 High: 1.1470 Low: 1.1441 Close: 1.1447
EUR/USD Technical
| S1 | S2 | S1 | R1 | R2 | R3 |
| 1.1190 | 1.1300 | 1.1434 | 1.1553 | 1.1611 | 1.1735 |
EUR/USD was flat in the Asian session. The pair has posted small losses in European trade
- 1.1434 is under pressure in support
- 1.1553 is the next line of resistance
Further levels in both directions:
- Below: 1.1434, 1.1300 and 1.1190
- Above: 1.1553, 1.1611, 1.1735 and 1.1840
- Current range: 1.1434 to 1.1553
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China to the rescue
Asian equity markets fared much better than their US counterparts did yesterday, mostly helped by comments out of China. Before the markets opened, we heard coordinated voices from the heads of China’s securities regulator (CSRC), the banking and insurance regulator and the central bank. The chief of CSRC said that China will support non-state backed listed companies, while the PBOC governor said low market valuations and market volatility are caused by investor sentiment and were not in line with China’s economic fundamentals. He added that the central bank will support financing to non-state backed firms.
China50 Daily Chart
Source: Oanda fxTrade
Investors interpreted the comments to imply official money would be flowing into the market, so the local index started off in the black, and powered ahead to gains of more than 1.8% at one stage. This filtered through Asian bourses, with the Japan225 index currently up 0.3%, the HongKong33 index gaining 1.1% and the Australia200 index adding 0.8%. The NAS100 index, the worst hit of the US indices yesterday, rose 0.2%.
China data disappoints
China recorded GDP growth of 6.5% y/y for the third quarter, below estimates of 6.6% and down from Q2’s 6.7% rate. That was the slowest rate of growth since Q1 2009, when the Global Financial Crisis was in full swing. China’s Statistics Bureau laid the blame squarely on the trade war, saying the “extremely complex and severe international situation” was a drag on growth.
In other data, industrial production slowed to +5.8% y/y in September, the weakest since February 2016, while retail sales provided the only bright spot, rising 9.2% y/y, better than the 9.0% predicted in a poll of economists, and the fastest pace in five months.
The Aussie took an initial knee-jerk dip after the GDP numbers, hitting the lowest in more than a week, but soon recovered amid the positive sentiment across equity markets. However, AUD/USD has yet to regain the 200-hour moving average at 0.7113, which has actively guided the pair over the past five sessions.
AUD/USD Hourly Chart
Source: Oanda fxTrade