USD Edged Down As EUR, GBP Recovered; Dow Future Roared Back By Over 100 Points
On Thursday early EU session, the US dollar index (DXY) is currently trading around 96.29, edged down by almost -0.15% as EUR, GBP recovered to some extent, and JPY got some boost amid global equity sell-off “risk-aversion” sentiment earlier in the day. On Wednesday, the US dollar index (DXY) closed around 96.35, jumped by almost +0.40% on a slump in EUR and GBP.
On Thursday, the Dow Future (DJ/US-30) is currently trading around +0.50% higher (+130) after upbeat report card from Ford, Tesla (NASDAQ:TSLA), and Microsoft (NASDAQ:MSFT), but AMD reported a terrible report card. The risk-on sentiment was also boosted by some optimistic comments from a White House official, who downplayed the US market plunge and said “fundamentals and future of the US economy remain strong” ahead of the Friday US Q3 GDP.
The White House said: “Unemployment is at a record low for the past half-century, business and consumer confidence have hit record highs, and women and minorities are entering our workforce in droves. We remain focused on the long-term outlook of the US economy and confident in our path of continued growth”.
On Wednesday, USDJPY stumbled -0.39% to 112.00 on terrible US home sales data and on risk-aversion as Dow slid from the Boeing (NYSE:BA) high by almost 775 points led by Techs, AT&T (NYSE:T) (subdued report card) and higher US dollar index (DXY). On early Thursday, USDJPY made a low of 111.82 on “risk-off” mode amid a renewed slump in the Asian market following an overnight plunge in the Wall Street. The US10Y bond yield also slumped by 7 bps to a low of 3.10%, but was able to sustain the vital 3.10% level and is now trading around 3.12%.
On Wednesday, GBPUSD also tumbled almost -0.76% on the never-ending Brexit saga and UK political soap-opera. Theresa May could face another leadership challenge from some of her own party colleagues over her Brexit path.
But on early Thursday, GBPUSD edged up around +0.23% on reduced UK political tension after a report that Theresa May “may” not face any serious leadership challenge immediately as there is no credible alternative among her Tory rebels and the overall rebel numbers are also less than the minimum 40 marks. In her cabinet meeting Wednesday, May was able to survive without any scratch and now some of her Tory rebels are now calling to support the “leader” May in her Brexit fight.
On Wednesday, USDCAD tumbled by almost -0.70% on a hawkish hike by BOC as it removed the gradual hikes word in its statement and talked about reaching to the neutral rate (in line with the Fed) as soon as possible as the Canadian economy is now strong enough. The rate hikes to neutral are also required in order to stay ahead of the inflation curve. Later USDCAD recovered after the BOC presser and closed around -0.28% lower. USDCAD is now trading around 1.3028, slumped by around -0.21%.
On Wednesday, BOC, the most hawkish central bank after the Fed in the G-10 universe basically tried to downplay the drop in headline CPI in September and it maintains tightening bias to move interest rate to a neutral stance.
In the statement, the BOC noted “CPI’s fall to 2.2% in September was in large part because the summer spike in airfares was reversed. Also, there were other temporary factors pushing up inflation, such as past increases in gasoline prices and minimum wages, should fade in early 2019”. The BOC expects inflation to remain close to 3% target through then of 2020. Additionally, it noted that “core measures of inflation all remain around 2%, consistent with an economy that is operating at a full capacity.”
On monetary policy, the BOC said “policy interest rate will need to rise to a neutral stance to achieve the inflation target. Nonetheless, the pace will depend on how the economy adjusts to higher interest rates”. The BOC also pledged to pay close attention to global trade policy developments and the implications on the inflation outlook.
On Wednesday, EURUSD plunged almost -0.63% on lingering Italian budget concerns and subdued PMI data. The market is concerned that Draghi may be non-committal in Thursday’s presser about the Dec’18 full QE tapering; i.e. full closure of the bond buying, considering Italy’s surging Bund yields.
The ECB is the largest investor (buyer) of Italian debts (Bunds) so far, helping the Italian Bund yield at relatively lower levels. But if the ECB shuns on Italian debt after the full closure of its bond-buying programme in Dec, then Italian Bund may fall more and yields will go much higher.
On early Thursday, EURUSD edged up +0.10% on short covering ahead of Draghi. The market is also expecting some kind of negotiation between Italy and the EU on the budget.
Pivot: 1.137 Support: 1.134 1.12995 1.1245Resistance: 1.145 1.15 1.157 Scenario 1: STRONG ABOVE 1.14500 Scenario 2: WEAK BELOW 1.14300 AND FURTHER BELOW 1.13700 Comment: RANGE : 1.12995-1.15700
On Thursday, the European market (Stoxx-600) is currently trading around 353.30, almost flat but recovered from the earlier slump of almost 1% (low 349.58) on hopes of Italian budget truce after Di Maio said he is Confident that Italy-Germany bond yields spread will fall over the next few weeks. Di Maio also reiterated that the government doesn’t want to exit the Euro (as per Italy’s daily ritual), but he doesn’t think that the 2.4% deficit target should be changed either.
On Wednesday, Italy EM/FM Tria said: The German-Italian Spread at 320 bps will hurt weakest parts of the Italian banking system. Tria warned yesterday that German-Italian yield spread at 320 bps is not sustainable. Tria pointed out “it’s not so much for the consequences it would have on debt interest payments, but for the impact, it would have on the weakest parts of the Italian banking system”. In any way, on the budget rejected by the European Commission, Tria insisted that the budget is correct and there is no reason to change it.
The Italian Cabinet Undersecretary Giorgetti also noted earlier that some smaller Italian banks will need recapitalization if the spread breaks 400 bps, but the Italian coalition government stands ready to intervene if that happens.
It’s now almost clear that whatever may be the Italian political narratives, Itlay will try to avoid any further surge in spreads and thus bound to blink with its negotiation with the EU.
The 10Y Italian Bund yield has made a high of 3.648% on early Thursday and is currently trading around 3.572%. On the other side, the benchmark German 10Y Bund yield has made a low of 0.378% on risk-aversion and is now trading around 0.394%. The current Italian spread is around 317-327 bps, considerably higher than the earlier redline of 300 bps.
Germany’s DAX-30 edged up +0.15% to around 11210 from an earlier multi-years slump to 11078. But subdued IFO data and earnings report card may also drag the index in the coming days. Deutsche bank plunged on Wednesday after a subdued report card. Although Deutsche Bank (DE:DBKGn) reported the Q3 earnings better than the estimate at EUR 229M vs 149M expected, the Q3 bottom line plunged almost -65%.
Germany 30 Chart
Pivot: 11400 Support: 11300 11040 10920Resistance: 11550 11850 12100 Scenario 1: STRONG ABOVE 11400 Scenario 2: WEAK BELOW 11350-11300 Comment: RANGE: 10920-12100
The German auto major Daimler was also plunged on guidance warning amid China slowdown, Trump auto trade war, and Germany’s own diesel emission issues.
Pivot: 52.1 Support: 51 49.5 48.7Resistance: 53.55 54.8 56.05 Scenario 1: STRONG ABOVE 52.10 Scenario 2: WEAK BELOW 51.75-51.00 Comment: RANGE: 48.70-52.10
On Thursday, Gold surged +0.55% to 1235 on lower US dollar index, Fed concern of higher inflation, thanks to Trump tariffs and equity market risk as-well-as geopolitical risks (Brexit, Italexit and Saudi thriller).
Pivot: 1245 Support: 1220 1200 1180 Resistance: 1265 1280 1305 Scenario 1: STRONG ABOVE 1245 Scenario 2: WEAK BELOW 1235 Comment: NEAR TERM RANGE: 1180-1245