Market Overview
A “technical” agreement has been reached between the UK and the EU over a Brexit withdrawal agreement. However, as calamitous hotelier Basil Faulty would have said, “piece of cake, now comes the tricky bit”. Indeed that may actually be true, as it is one thing to agree a draft deal with the EU, but it is entirely another to win over what is a deeply sceptical UK Parliament. First of all though, Prime Minister May needs to convince her own cabinet in a meeting at 1400GMT and if she can get through today with no resignations it will be taken as a positive for Gilt yields and sterling. The sticking point will be the content of the deal (which as yet is not known but may come out in a series of leaks) and what Mrs May has had to give up to obtain what is likely to be some sort of time limited backstop over Northern Ireland. For all the political posturing, Brexit is possibly the hardest political problem to solve in modern European history, at least from a UK perspective. Now we will find out whether UK politicians understand they cannot have their cake and eat it and that compromise is the only possible solution. Sterling has rallied sharply in anticipation of the deal, but volatility will be elevated in the coming hours and days on newsflow of the political wranglings. In Europe, traders still await news of the Italian budget re-submission which was due yesterday. Suggestions are that the Italians are likely to alter growth projections, but spending plans are to remain much as previous. This will open them up to renewed criticism from the European Commission. It would also drive further volatility through the euro. Chinese data was mixed overnight with China Industrial Production ahead of expectations and improving to +5.9% (+5.7% exp, +5.8% last) whilst China Retail Sales disappointed at +8.6% (+9.1% exp, +9.2% last) whilst Fixed Asset Investment was slightly better at +5.7% (+5.5% exp, +5.4% last).
Wall Street closed a choppy session lower with the S&P 500 -0.1% at 2722 whilst the futures are a tick higher today. In Asia there was a mixed picture with the Nikkei +0.1% but the Shanghai Composite -0.8%. European futures are following the Wall Street lead and are slightly lower in early moves. In forex, there is a broadly mixed outlook forming on major pairs, with sterling edging higher again (but likely to remain nervous) but little other movers aside from some continued strong performance on the Kiwi. In commodities, gold continues to flirt with $1200 whilst oil is once again lower, as WTI falls early today conceivably for a thirteenth session in a row.
Inflation is the name of the game for traders looking at the economic calendar today as the UK and UK release CPI numbers, although there is also a sprinkling of Eurozone growth for good measure. UK CPI is at 0930GMT and the market is expecting headline CPI to tick back higher a shade to +2.5% (from +2.4% in September) but core CPI is expected to remain steady at +1.9% (+1.9% in September). It is also worth watching the PPI Input Prices which reflect the impact of sterling on inflation further down the line, which is expected to drop back to +9.6% (form +10.3%). The preliminary reading of Eurozone Q3 GDP is at 1000GMT and is expected to dip to +0.2% on the quarter with the year on year number back to +1.7% (from +2.2%). US CPI is at1330GMT and is expected to increase to +2.5% (from +2.3% in September) whilst the core CPI is expected to remain flat at +2.2% (+2.2% in September).
Chart of the Day – USD/CAD
Dollar strength has been a trend through the major pairs. Even though the dollar suffered a corrective across the majors yesterday, the Canadian dollar still looks relatively weak. As the oil price continues to plunge, USD/CAD remains bullish and is a buy into weakness. Yesterday’s breakout above 1.3225 was the latest move through resistance to take it to a four month high. However it is the strength on momentum indicators which is the most interesting feature of the chart, with the RSI at its strongest since June and leading the price higher. The breakout has opened the July high at 1.3290 as the next test but the market is positioning for a move to 1.3385. The question on traders’ minds is whether to chase this run higher (for fear of a sharp technical rally on oil and dollar correction). With the uptrend of the past six weeks coming in at 1.3120 today and there is now a support band 1.3175/1.3225 as a near term buy zone into a corrective move. Key support is back at 1.3045.
The euro rebounded strongly yesterday as hopes of a Brexit deal helped to drag the single currency higher. However the move that added over 70 pips on the day has simply unwound EUR/USD back to the old support around $1.1300 which is now new resistance. Having broken down on Monday, there is now a zone of overhead supply between $1.1300/$1.1430 which is now prime for a renewed sell signal as near term momentum unwinds. There is still a bearish configuration on daily momentum indicators on a medium term perspective which would suggest that rallies are a chance to sell. The Italian budget is still a big concern for traders and as the argument drags on this will weigh down the euro. There is initial support on the hourly chart at $1.1250 above the $1.1215 low from Monday but already hourly momentum is threatening to roll over and given initial resistance at $1.1320, traders will be on the lookout for the next negative signal.
With a crucial stage of Brexit having been reached, with the UK MPs now key to the whole process, expect volatility to remain elevated in the coming days. Sterling shot back higher yesterday as hopes that a deal could finally be close, however, the difficult part is getting UK MPs to buy into it. Cable rallied over 200 pips at one stage yesterday, and although some of that was given back into the close, a strong bull candle still resulted and the move higher early today suggests confidence continues to build. The $1.3000 is always seen as a psychological line in the sand, with a mid-range pivot around $1.3050/$1.3060 (along with the 23.6% Fib level at $1.3065) worth keeping an eye on. Daily and hourly momentum indicators are though very mixed and the truth is that it will not be the technicals that drive Cable in the coming hours and days. Newsflow on potential support or resignations from Cabinet will be key. The near term pivot at $1.2950 is supportive.
Will Dollar/Yen be a signal for a corrective move on the dollar? Amidst the run higher on the dollar in recent sessions, Dollar/Yen has been posting distinctly neutral signals. The uptrend of the past couple of weeks is being tested in this move now which is stalling around 114.20, which is building as resistance. Having posted a negative candle on Friday this has been followed by two doji candles. Will this consolidation resolve with a corrective slip back? There is good breakout support at 113.15/113.40 with a key near term higher low at 112.55 as support. Momentum indicators remain positively set up on a medium term configuration but there is a near term question mark beginning to develop on the Stochastics. This suggests that there could be a correction in the offing which could be set to provide with another opportunity to buy USD/JPY at a better level before the bulls resume course for a test of 114.55.
Gold
The outlook for gold continues to teeter on the brink. There seems to be a fine line at the moment over whether dollar strength or risk aversion is the key driver. Up until yesterday, the stronger dollar has been a decisive drag lower on gold, but the market is not yet closing below $1200 which would be a key psychological breakdown. However, despite the minor rebound and mildly positive candle yesterday there is still a concern that there has been a break below pivot support band $1208/$1217 which is now a basis of resistance for any technical rally. There is also still a corrective dimension to the momentum indicators which suggest that today’s session will be seen as important for gold. A second rebound candle would be an encouragement today. Initial support is yesterday’s low at $1195.90 whilst a close below $1200 opens $1180.
WTI Oil
The oil sell-off is accelerating to levels of bearishness that have not been seen for years. A twelfth consecutive negative close was the most bearish session of the lot yesterday with a 7% fall on the day. The incredible run lower on the RSI has now reached 13 which has never been seen on my Reuters chart which goes back around 35 years! The one positive might be that this sell-off has reached almost exponential levels and often this sort of move will be met with a significant snap rally. There was a capitulation feel to the move yesterday. Right now though it is difficult to see this happening as the market has opened lower again today, however yesterday’s low at $54.75 is initial support now. The concern is that there has been key breaches of support at $58 which now leaves $58/$60 as overhead supply in a rally scenario.
Another negative candle yesterday moved to continue to drag the market lower. Perhaps the biggest disappointment was that the market actually traded for much of the session in positive territory, only to lose ground into the close. It suggests an increasing nervousness following the sharp move lower on Monday. The daily momentum indicators are also deteriorating now with the cross lower on the Stochastics close to confirming a near term sell signal, whilst the MACD lines are also rolling over under neutral. There is a basis of resistance between 25,580/25,800 whilst yesterday’s high at 25,511 adds to near term overhead supply. Given the intraday moves yesterday, this seems to be a choppy phase of trading but a move below 25,079 would increase momentum of the selling pressure, re-opening 24,906 and the key low at 24,122 again.
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