Daily Market Outlook, October 26, 2021

Overnight Headlines

  • Manchin Sees Framework In Reach As Democrats Inch Toward Deal
  • Japan Service Prices Rise For 7th Straight Month On Freight Cost Gains
  • South Korea's Q3 GDP Grows At Slower Pace, Misses Forecast
  • PBoC’s Liquidity Injections Dim Prospects For RRR Cut, CSJ Says
  • China NDRC Studying Mechanism To Stabilise Coal Prices Over Long-Run
  • China To Create Rare-Earths Giant By Joining Three State Companies
  • Aus PM Morrison: Australia Sets Target For Net-Zero Emissions By 2050
  • KiwiBank Now Sees RBNZ Raising OCR To 2% By November 2022
  • US Dollar Steadies As Traders Look To Central Banks For Guidance
  • Bonds Are Set To Reap $5 Billion In Month End Pension-Rebalance Shift
  • Oil Takes A Breather On Tuesday After Latest Charge Amid Tight Market
  • SEC Gets Path To Rein In Stablecoins As U.S. Weighs New Rules
  • Asia Stocks Catch Wall Street Cheer Tuesday But China Caps Gains
  • Chinese Developer Modern Land Misses Payment On Dollar Bond
  • Facebooks Rises On User Growth For Family Of Apps, Buyback
  • Canadian Stocks Add $191 Billion Of Value In Longest Rally Ever

The Day Ahead

  • Asian equity markets are mixed this morning with a majority up but Chinese indices down on the day. Meanwhile, the Brent crude oil price moved above $86bbl. Talks continue in the US over President Biden’s fiscal package. Biden is reported to want things settled this week before he flies to Europe for the UN climate conference in Glasgow. However, Congress seems to still be divided on some substantive issues.
  • In the UK, reports suggest that the national living wage will be raised by 6.6% in Wednesday’s Budget, taking it to £9.50 an hour for workers aged 23 and over, and that the pay freeze on public sector staff will be ended. Yesterday, Bank of England policymaker Tenreyro again made clear her objections to an early hike in interest rates citing various uncertainties.
  • In an otherwise quiet week for UK data, today’s CBI retail report will provide one of the first indications for consumer spending in October. This survey has been particularly volatile of late surprising significantly on the upside in August before dropping by much more than expected in September. The official retail sales outturn also fell in September, for the fifth successive month. Moreover, the GFK consumer confidence measure has declined sharply over the past two months to its lowest since February. With the important pre-Christmas spending period fast approaching markets will be hoping for some more positive signs from the retail sector.
  • US consumer confidence also appears to be under pressure. The Conference Board’s indicator dropped to its lowest level since February last month. That potentially reflects concerns about rising inflation and the pick-up in US Covid cases through the summer. As an alternative gauge of consumer sentiment the University of Michigan survey fell in October; it seems likely that the Conference Board’s measure may slip further. Look for a decline to 109.0 in October from 109.3. Also of interest in the US will be September new home sales and the Richmond Fed’s manufacturing index for October.
  • With the European Central Bank’s monetary policy update just two days away today’s speeches from ECB Governing Council members De Cos and Villeroy are not expected to say anything about the immediate policy outlook. Instead, both are set to talk about what contribution central banks can make to combating climate change. As the US Federal Reserve and the Bank of England are also now in the pre-announcement silent period no further comments are expected from either on policy before next week’s announcements.

G10 FX Options Expiries for 10AM New York Cut

(Hedging effect can often draw spot toward strikes pre expiry if nearby (P) Puts (C) Calls )

  • EUR/USD: 1.1600-10 (1.5BLN), 1.1700 (272M), 1.1720-30 (849M)
  • GBP/USD: 1.3800 (278M). AUD/USD: 0.7400 (772M)
  • USD/CAD: 1.2300 (370M), 1.2400 (1BLN), 1.2500 (258M), 1.2550 (651M)
  • USD/JPY: 113.55-60 (626M), 113.85-114.00 (1BLN), 114.20-25 (500M) 114.50 (1.1BLN)

Technical & Trade Views

EURUSD Bias: Bearish below 1.17 Bullish above

  • Maintains heavy tone through Asian session
  • EUR/USD opened 0.30% lower at 1.1611 as market prices for dovish ECB
  • It remained heavy in Asia after completing bearish outside day on Monday
  • Heading into the afternoon it is just above the session low at 1.1598
  • A close below the 21-day MA at 1.1600 would add technical pressure
  • It appears a top is forming at the 38.2 of 1.1909/1.1522 move at 1.1670
  • Recent soft EZ data is hardening the view the ECB will remain dovish
  • EUR/USD may start making tracks towards the Oct 12 trend low at 1.1522

GBPUSD Bias: Bearish below 1.37 Bullish above.

  • Solid 1.3830/35 resistance, as the bounce falters
  • Steady, at the top of a 1.3758-1.3769 range with only modest interest
  • UK's Sunak to unfreeze public sector wages in the budget...
  • Budget's major components appear to have all been given to the press
  • Charts; 10 & 21 day moving averages climb, 21 day Bollinger bands expand
  • Daily momentum studies conflict - bullish setup while 1.3750 10 DMA holds
  • Close below 1.3750 would target a test of 1.3653 21 day moving average
  • 1.3831, 50% of 2021 fall capped last week - break to test 1.3913 Sep high
  • Sterling vulnerable as the good news is priced in

USDJPY Bias: Bullish above 112.50 Bearish below

  • USD/JPY back into 113.68-91 hourly Ichi cloud after swoon to 113.42 Friday
  • Some choppiness on ratchet up to 113.68-83 EBS today, looks better bid
  • Japanese importers continue to support the bid, investor interest too
  • Fresh USD buys from Japanese investors as well as asset hedging interest
  • Base in place? Jury still out, eyes to remain on moves in US yields
  • Risk on, Nikkei already +1.7% on day after TSE open to @29,073
  • USD/JPY and JPY complex led by AUD/JPY higher in Asia, risk on
  • Nikkei surges in early TSE action, still bid, +1.75% @29,100
  • Bounce in Australia, other yields behind fresh JPY weakness
  • AUD/JPY 85.08 to 85.52, through top of 85.41-52 hourly Ichi cloud
  • Resistance 85.50-60 double top Friday-Monday but break above bullish
  • Would target 86.00 again, 86.24 spike high last Thursday
  • USD/JPY up too with US yields up again, 113.68 to 113.95 EBS
  • Also through top of 113.70-91 hourly Ichi cloud, 100-HMA 113.94 above
  • Option expiries today supportive? $1.3 bln between 113.55-85 strikes
  • That said, $2.4 bln+ above between 114.00-50 strikes, also caution pre-BoJ
  • Yield on US Tsy 10s firm, from 1.620% to 1.647% in Asia, now @1.636%
  • EUR/JPY 131.99-132.20 EBS, GBP/JPY 156.53-84, both steady

AUDUSD Bias: Bearish below 0.75 Bullish above

  • AUD well bid in Asia, AUD/JPY through Ichi cloud
  • AUD well bid in Asia today, both AUD/USD and AUD/JPY strong
  • AUD/JPY from 85.08 to 85.52, through top of 84.93-85.41 hourly Ichi cloud
  • Looking to test resistance between 85.50-60? 85.54 high Friday
  • Break above 85.50-60 projects re-test of 86.00, 86.24 spike high Thursday
  • Base of sorts now at 84.55-65, double low Friday-yesterday (84.57, 84.61)
  • Firm Aussie yields behind AUD strength, government 10s @1.803%