Two Indicators You Can Profit From This Week

This week's light economic calendar will broadly keep last week's themes in focus for the Forex markets.
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Last week saw the good the bad and the ugly in forex markets. This week’s light economic calendar should broadly keep last week’s themes in focus.

We saw the good with a revised Nafta deal and saw the bad with Italian politics causing panic in the markets.

Finally, there was also the ugly with the jump in 10yr US bond yields causing lots of pain to the antipodeans.

In this week’s article we will discuss the following:

  1. What happened in markets last week
  2. Events coming up in the week ahead
  3. Trade ideas for the week ahead

 United States

What Happened Last Week?

The dollar started strongly following the hawkish FOMC press conference of 26 Sep 2018. Italian politics put a lot of pressure on the EUR which exacerbated the dollar’s strength.

Last week also saw the release of the ISM Manufacturing and Non-Manufacturing PMI’s. The latter smashed analyst expectations coming in at 61.6 versus a forecast of 58.0.

The chart below better illustrates how significant the 61.6 reading was.

This was the second highest reading for the ISM Non-Manufacturing on record from 1997. This showed that the current US expansion is expanding well above trend.

Wells Fargo explains that any reading above 50 is already good for an economy. It means that more businesses see conditions improving rather than worsening.

However, Well Fargo also states that the high ISM number points to a 5% GDP for Q3. Some analysts say that is unlikely and the market needs to take this release with caution.

The ADP National Employment also beat expectations on Wednesday. ADP employment showed an increase in 230k jobs versus expectations of 185k.

Also on Wednesday we had a speech from Fed Chair Jerome Powell. He explained that the US is experiencing remarkably positive economic circumstances.

Fed Powell further increased his hawkish tone when he said the funds rate was “a long way from neutral”.

Due to Powell’s comments and the ISM beat the 10yr US treasury yields went soaring.

The 10yr treasury yields rose to its highest level since 2011 after Powell’s comments. This spurred even more gains for the dollar.

Due to the big beats on ADP and the ISM employment component the market was expecting a big NFP number on Friday.

However, the actual release was “all sizzle but no steak” according to Saxo Bank.

This was due to Non-Farm Payrolls missing expectations at 134k versus a forecast of 185k.

However, under the hood the release was not that bad as last month’s reading was revised upwards.

It’s important to note that Hurricane Florence was the main reason for the big miss.

Furthermore, the unemployment rate also dropped further to an almost 49 year low of 3.7%.

According to White House economic advisor Larry Kudlow Unemployment can still go lower.

Such low unemployment despite eight rate hikes should be encouraging for the FED.

The Week Ahead

Consumer Price Inflation will be the main event for the USD in the week ahead. So far, the market is expecting CPI YY to soften to 2.4% from 2.7%.

Core CPI YY is expected at 2.3% versus a prior reading of 2.2%. Scotiabank states markets will be focused on Core CPI after an unexpected drop in August.

They added that gasoline prices unexpectedly spiked in September 2017.

With a 4.4% weight in CPI a lower gasoline price this year could cause the YY number to decrease further.

According to Wells Fargo, CPI is expected to gradually trend upwards. But does not expect it to accelerate to force the FED to hike more than currently forecasted.

Trade Ideas

Last week’s USD strength from higher bond yields and economic data is set to continue this week. Watch out for profit taking from dollar long positions which might cause pullbacks.

Prepare for CPI on Thursday as it will be the main event for the USD this week. Big beats or misses can cause moves in the USD.

Also, be aware of the next slew in FED speakers who will be on the wires this week. Watch out for dovish members who might be turning hawkish after recent economic data.


What Happened Last Week?

The main drivers for the EUR last week was Italian politics and Dollar strength. Monday started off bad for the EUR as EU’s Dombrovskis said Italy’s budget breaches EU rules.

Concerns over Italy started with their initial proposed budget deficit of 2.4% of GDP. Things escalated quickly when Jean-Claude Juncker said Italy’s budget could destroy the Euro.

PM Di Maio further escalated the concerns when he pledged that Italy will hold firm on the 2.4% deficit targets.

This caused the yield on Italy’s 10-year bonds to reach four year highs at 3.44%.

Wednesday saw the EUR gain strength when Italy offered concessions to the EU.

Italy compromised to see the deficit at 2.4% in 2019, 2.1% in 2020 and narrowing to 1.8% by 2021.

It’s important to note the revised deficits are based on optimistic growth assumptions. Thus, there are big risks that the EU does not accept the budget and asks Italy for a revision.

The Week Ahead

The main drivers for the Euro this week will remain on the budget deficit. The official date for Italy to submit their budget to the EU is 15 October 2018.

Rhetoric between Italy and EU members will be important to watch for in the week ahead.

In terms of data, the only real drivers for the Euro is the previous ECB meeting minutes on Thursday. Danske bank states that any mention of inflation will be closely watched.

The ECB has been confident in their inflation expectations due to rising wages. Any drastic changes in rhetoric regarding inflation will be very important.

On Friday we will also see the release of the August Industrial Production numbers. The market expects the MM figure to climb to 0.4% from -0.8% and the YY to fall to -0.3% from -0.1%.

From the chart we can see that Industrial Production has been on a steady decline from December 2017. A miss of below -0.4% would be the lowest reading since 2013.

Trade Ideas 

Keep close tabs on the Italian budget developments. Any positive or negative comments could drive the Euro in either direction.

Watch out for the ECB minutes and look for any big changes with regards to the ECB’s inflation outlook. This could provide good trading opportunities.

With a light calendar this week the Industrial Production might provide an opportunity. Trade the economic releases in line with the current sentiment regarding Italy.

If sentiment is positive, expect positive data releases to have more impact.  If sentiment is negative, expect negative data releases to have more impact.


What Happened Last Week?  

The Canadian dollar saw tremendous strength at the start of last week. This was due to reports that Canada and the US were very close to reaching agreement on a new NAFTA.

Later on Monday a revised Nafta deal was announced between the US, Canada and Mexico. The new United States-Mexico-Canada Agreement (USMCA) caused a positive risk tone on Monday.

The CAD reached its strongest level in four months after the new agreement was reached. The good news for the CAD was short lived as the risk tone soured due to Italian concerns.

As a commodity currency the CAD was pressure along with the AUD and NZD due to the strong USD. Another hiccup for the Canadian dollar was a sharp fall in Oil prices.

Investment bank ING expected a much stronger CAD after the revised NAFTA announcement. But a strong dollar, falling oil prices and negative risk tones kept it lower.

The latest seasonally adjusted Ivey PMI came out with an unexpected drop to 50.4 from 61.9. The chart below illustrates the sudden drop in the PMI.

Some economists cautioned that the Ivey PMI tends to have rapid swings from month to month.

The negative Nafta news in September was probably the reason for the drop-in confidence.

We will need to keep a close eye on the October Ivey PMI released in November. We will see if it bounces back or not.

On Friday the CAD saw further selling pressure with the latest jobs report. The numbers showed a drop in wage growth to 2.2% from 2.6% and a 16.9k drop in full-time employment.

With Nafta out of the way the bigger picture looks much brighter for the CAD in our opinion.

Markets expect the BOC to raise interest rates at their October meeting.

Keep this bigger picture view in mind when planning your next CAD trade.

The Week Ahead

Canada has a very light economic calendar this week.

According to ING, risk sentiment and oil will be the biggest influence on the CAD in the week ahead.

With NAFTA out of the way the market can start focusing on monetary policy again. As there is no important data the CAD should have a quiet week.

Trade Ideas

One of the most important rules in trading is to never force a trade where there is no trade. This sums up our approach to CAD in the week ahead.

The CAD is considered as a commodity currency and thus risk sentiment will cause moves in the CAD.

Look out for risk-based trades but keep the bigger picture in mind if you are going to trade against the CAD.

 United Kingdom

What Happened Last Week?

The British Pound started and ended last week on a positive tone. On Monday the pound surged 0.7% as reports stated PM May was willing to compromise on Irish Border Rules.

Due to a lack of details regarding the compromise the pound pared back most of the gains. The Conservative Party Conference ended well for PM May.

This was due to Boris Johnson urging his colleagues to chuck the Chequers plan, but to back Theresa May.

This was significant as some were expecting a challenge to May’s leadership.

The Pound stayed supported following the Conference Party. On Friday the Pound went soaring on news that EU negotiators said a Brexit deal was ‘very close’.

There were no further details about this, but the Pound did not care and finished the week with decent gains.

The Week Ahead  

Danske Bank expects a lot of Brexit negotiations to take place this week. The reason for this is the upcoming EU summit taking place on 18-19 October.

Both the EU and the UK would want to get as far as they can on the remaining issues before the summit takes place.

The biggest hurdle towards a Brexit deal remains the Irish backstop issue.

In terms of data, there are speeches from BOE members on Tuesday, Wednesday and Thursday.

The most watched events will be GDP MM on Wednesday and the BOE Credit Conditions Survey on Thursday.

Markets expect GDP MM to slow from 0.3% to 0.1% in August and GDP YY to stay flat at 1.6%.

ING states the Credit conditions report poses a headline risk for the GBP this week.

Trade Ideas

It seems like the market is looking for reasons to be bullish on the Pound at the moment.

With the risks of a no-deal Brexit looking smaller the outlook seems more positive for the GBP.

This week keep the news squawk ready to take advantage of any Brexit headlines. In terms of the data releases, trade in line with the current Brexit sentiment.

For example, only place trades if the news deviates in favor of the current Brexit sentiment at the time.


What Happened Last Week?

Ouch! That would be the best way to describe the price movements for the AUD last week.

The week started with the RBA. As expected the RBA held interest rates on hold for the 26th consecutive month.

Household consumption and lagging wage inflation remains the RBA’s biggest challenges and focus. The reaction of the rate decision was muted.

On Wednesday Building Approvals had a big miss of -9.4% versus a forecast of 1.0%. According to Westpac, this downtrend is set to continue and fall throughout 2019.

The biggest challenge for the AUD this week was the USD and AUD interest rate differentials. As expectations for extra FED rate hikes increased the expected differentials also increased.

The chart below better illustrates the interest rate differences.

At the moment the differential is about 60 basis points. But Westpac points out that recent FED rhetoric might lead to a 137 basis point difference by June 2019.

The Week Ahead

On Friday we will have the release of the semi-annual RBA Financial Stability Review. According to ING, this will be the data highlight for the AUD this week.

Things to look out for in the report is mention of the mortgage rate increases by some Australian Banks.

Also, any mention of household consumption or trade war impact could be important.

On Tuesday we have the NAB Business Confidence. Followed by the Westpac Consumer Sentiment on Wednesday.

Also, with China back from a week-long holiday, watch out for any trade war rhetoric.

Trade Ideas

The AUD sold off against most of the major currencies last week. We would not advise jumping in at the lows so be careful when trading AUD pairs.

If last weeks’ negative sentiment continues look for misses on the confidence releases.

Also, keep the news squawk tuned in for any possible trade war developments. Just keep the bigger economic and interest rate picture in mind if you intend to buy the AUD.

 New Zealand

What Happened Last Week?  

The New Zealand dollar suffered a similar week as the Australian Dollar.

The NZIER confidence for Q3 slowed to a nine year low of -30 from -20. Dairy prices fell for the fourth auction in a row and slowed a further -1.9%.

These misses just exacerbated the NZD sell-off which resulted from the strong USD. The NZD moved to its lowest level against the USD from the start of 2016.

At the moment the market is struggling to find a reason to be positive about the New Zealand Dollar. According to ING, there is very little right now that could trigger a short squeeze.

The Week Ahead

Not a very exciting week in terms of economic data for the NZD.

The most significant release will be the Business NZ Manufacturing Index on Thursday. The prior reading came in at 52.0 which is below its longer run average.

ING states the RBNZ’s recent dovish outlook is due to a lack in domestic business confidence.

Thus, any slowdown in the manufacturing PMI could send the kiwi lower this week.

Trade Ideas 

With the light data calendar, it should be a relatively quiet week for the NZD.

As a commodity currency the NZD is correlated with risk sentiment. Thus, keep the squawk on to take advantage of any changes to risk sentiment.

The market is positioned very bearish on the NZD right now. For that reason, be careful with selling at the lows on NZD crosses.


 What Happened Last Week?

The latest Tankan manufacturing index fell to 19 from 22 prior in Q3. It showed that business sentiment among Japan’s big manufacturers has worsened.

The more interesting move in the JPY played out later in the week. On the back of the climb in US bond yield the 10yr JGB yields reached a high of 0.155%.

The BOJ has adopted a yield curve control (YCC) policy which intervenes to keep yields low.

But markets were surprised that the BOJ did not intervene last week to force the rising yields lower.

The 10yr bond yields reached a 2 year high on Friday as seen on the chart below.

This led to some Yen strength late last week. Friday also saw equities take a beating which caused safe haven flows into the Yen.

The Week Ahead

There are no significant data points on the calendar for the Yen this week.

Saxo Bank explains there might be a big upside to the Yen which traders need to be aware of.

Firstly, if the rising US bond yields start to pressure equity space it could provide lot of support for the Yen.

Secondly, the Yen will appreciate if the BOJ does not intervene to keep the 150-basis point cap on JGB yields. Place these two possible scenarios on your watch list.

Trade Ideas

With no significant data releases the JPY will mainly be driven by risk sentiment this week.

Also, keep an eye on the 10yr JGB yield as well as possible push back or reaction from the BOJ on the matter.

Watch out for a further decrease or recovery in equities when taking trades on the Yen.


What Happened Last Week?

Despite the Italian concerns the CHF remained pressured last week.

In terms of data, the Manufacturing PMI slowed to 59.7 in September from 62.0 in August. The CPI YY also came in softer at 1.0% versus expectations of a 1.1% print.

The misses on expectations further fueled the pressure on the CHF last week. According to ING, the reason for the softer CHF is an unwinding of safe haven flows.

The Week Ahead

The only significant data point for the CHF this week will be the unemployment rate on Monday. Markets are expecting unemployment to edge lower to 2.5% from 2.6%.

However, we do not expect any fireworks from the release.

Trade Ideas

At the moment, there are no clear trading opportunities for the CHF in our opinion.

If you do decide to trade the CHF, make sure you take heed of the risk sentiment at the time. As the Swiss Franc is a safe haven currency risk sentiment is one of its main drivers.

Wrap Up

The Japanese, US and Canadian markets will be closed on Monday due to public holidays. If you are trading on Monday expect thinner liquidity in the market.

In terms of data, the biggest impact will probably come from the US CPI and UK GDP releases.

As always, keep up to date with Brexit headlines for trading opportunities.

Also, with China back from a week’s holiday watch out for possible trade war developments.

Make sure to have your news squawk on and ready to jump when the opportunity presents itself.

Feel free to leave any comments or questions below.




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