A survey by Kyodo news agency indicates Japanese PM Abe's coalition government is likely to retain power following Sunday's elections.
The coalition is on the track to win roughly two-thirds majority, while its conservative rival by Tokyo Governor Yuriko Koike appeared to lose momentum.
Amid a pick-up in buying interest seen in Treasury yields and positive Asian equities, the USD/JPY pair continues to find support on 112 handle.
USD/JPY re-attempts gains above 10-DMA at 112.28
The major is seen wavering back and forth in a 15-pips narrowing, closely tracking the USD price-action amid a lack of fresh fundamental catalysts, while investors gear up for a fresh round of US economic releases due later on Wednesday for fresh impetus on the buck.
Meanwhile, positive tone seen on the Asian equities combined with higher commodities’ prices, continue to keep a lid on further upside in the safe-haven Yen against its American counterpart.
Also, hawkish comments from the Fed member Harker as well as Trump’s remarks on the tax reforms stalled the greenback’s corrective slide, in turn aiding a minor recovery in USD/JPY pair from 112.13 lows. At the time of writing, the spot is seen trading at 112.25, up +0.03% on the day.
Looking ahead, the range-trade is expected to continue in USD/JPY, so long as it holds above 112 handle, as pre-caution trading ahead of Sunday’s Japanese election is likely to drive the sentiment around the Yen markets.
USD/JPY Technical View
Jim Langlands at FX Charts lays out the preferred strategy: “US$Jpy has had a tight 40 point range and further consolidation in the 112.00/113.00 may be in store. The hourly indicators look a little heavy but the 4 hour charts look positive and if the session high at 112.47 can be taken out, then 112.75 would be the first real hurdle ahead of 113.00 and 113.43 (6 Oct high). On the downside, back below 112.00, good support now seen at 111.60/70, and buying dips is preferred today. Further out, the dailies look less positive, so further range trade between 111.60/113.00 may be in store for the next few days.”
President Xi Jinping, while speaking at the Communist Party congress, said the government will deepen financial reforms and shall keep cutting overcapacity.
EUR/USD three-month at the money (ATM) option volatility dropped to 6.55; its lowest level since July 17.
The decline in the volatility gauge (fear/uncertainty gauge) indicates that the investors are skeptical that Catalan can succeed in its quest for independence and expect the crisis to die down in a couple of weeks.
However, there is evidence that investors are hedging against a Catalan-led drop in the EUR/USD spot.
One-week risk reversals
The one-week 25 delta risk reversals has retraced from Oct 10 high of 0.25 and is close to being negative. The decline indicates the falling demand for EUR calls/increasing demand for out of the money Puts.
Focus on Draghi
ECB President Mario Draghi speech is scheduled at 08:10 GMT today. EUR might see a convincing break above 1.18 levels if Draghi hints at winding down of Eurozone stimulus in the near future. The bar of expectations has been set low as Catalan crisis is grabbing all the attention. Draghi may not discuss much of the monetary policy as the topic of the speech is "structural reforms in the euro area". ECB's Praet and Coeure will be speaking at the same conference as well.
EUR/USD Technical Outlook
The spot traded around 1.1770 levels in Asia. FXStreet Chief Analyst Valeria Bednarik writes takes note of "a clear bearish stance in the short term, as in the 4 hours chart, the price is also accelerating below its moving averages, whilst technical indicators gain further downward momentum within bearish territory. The pair faces its next short-term support at 1.1720, with a break below the level opening doors for additional declines towards the 1.1660 region, where the pair bottomed in August and September."
Support levels: 1.1720 1.1660 1.1620
Resistance levels: 1.1790 1.1830 1.1865
In its latest credit ratings review, the US-based Moody’s Investors Service affirmed South Korea’s credit ratings at AA2, with a ‘Stable’ outlook.
Reuters is out with the key findings from its latest corporate survey on Sunday’s Japanese election:
Japan Inc wants Abe election win, but smaller majority
Two-thirds of Japanese firms want Abe to stay, with less power
Companies wary of overconcentration of power after Oct. 22 poll
Many oppose delay to budget balancing, back 2019 sales tax hike
Revising pacifist constitution seen as low priority
The survey suggests corporations want political stability but don't want to hand Abe a landslide victory for fear he might become complacent about reviving the economy
Many companies in the survey expressed concern that a big election win would encourage Abe to invest his energy in a long-held ambition to revise Japan's pacifist constitution, at the expense of economic policy
94 percent of companies hoped Abe's coalition would win the election
48 percent wanted his bloc to obtain a smaller majority
20 percent hoped the ruling camp would retain the 323 seats it held before the lower house was dissolved last month
Seven percent wanted the ruling bloc to win more seats
Meanwhile, the corporate survey was conducted Sept 28 to Oct 12 for Reuters by Nikkei Research.
More comments flowing in from China’s President Xi, as he continues to speak at the opening of the 19th National Party Congress.
Will let the market play a decisive role in resource allocation
One-China principle' must be adhered to
Need to deepen reforms
Zero tolerance for corruption within the party
HSBC Analysts offer their thoughts on what to expect from today’s UK labour market report due on the cards at 0830 GMT.
“UK unemployment dropped to 4.3% in the three months to July, the lowest since 1975, and 0.2ppts below the BoE's estimate of equilibrium unemployment.
This continued strength in job creation fed into the BoE's more hawkish stance and we don't expect any signs of weakening in this release: we expect unemployment will remain at 4.3% but the risks are skewed to another fall. By contrast, regular pay growth should remain sluggish, potentially slipping back below 2%. The BoE has signalled it sees positive signs in private sector pay growth on a 3-month annualised basis, so this measure may be one to watch out for.”
The GBP/USD pair remained better bid in the Asian trades, as the bulls consolidated the American recovery in a bid to regain 1.32 handle ahead of the UK labour market report due later today at 0830 GMT.
More Losses in Store for GBP?
The spot is seen facing stiff resistance just shy of 1.3200 so far this Wednesday, as the sentiment around the pound continues to remain undermined by the cautious BOE speaks delivered yesterday.
The BOE officials, including board members Tenreyro and Ramsden as well as Governor Carney, expressed their concerns over inflation peaking over 3% this month, while having failed to shed fresh light on the prospects of a Nov rate hike.
BOE’s Tenreyro: MPC far from the point at which we will unwind QE
BOE’s Ramsden: Loss of market confidence could lead to higher BOE rates, weaker GBP
BOE’s Carney: BOE rate hike in coming months may be appropriate
Meanwhile, the UK inflation report release did little to offer any respite to the GBP bulls, as the Brexit uncertainty added to the renewed weakness in Cable, despite EU Brexit negotiator Barnier's remarks, suggesting that the EU has no intention of holding up the Brexit process.
More so, narrowing monetary divergence between the Fed and BOE is back in play, especially after yesterday’s Fedspeaks and upbeat US macro news, which continue to back the case for a Dec rate hike and 3 more rate hikes next year. The US import prices edged higher, while industrial production also rose 0.3% and Oct NAHB housing market index jumped to 68 vs 64 expected.
Looking ahead, the major eagerly awaits the release of the UK employment data, with a favorable print across all indicators to take the rate further towards 1.3250 levels, while a downside surprise could knock-off GBP/USD back to the three-day lows of 1.3155.
GBP/USD Technical View
Matias Salord, Analyst at FXStreet noted: “To the upside, the next resistance is seen at 1.3200 and above at 1.3260 (uptrend line from last week highs). A slide back under 1.3160, would expose 1.3120 (Oct 12 low) and below, the next support might lie at 1.3070 (last week low).”
Comments from Bank of Japan (BOJ) board member Sakurai are crossing the wires via Reuters-
The Chinese President Xi Jinping crossed the wires last minutes, via Reuters, as saying that he will safeguard China's sovereignty and security, while adding that he will oppose any behaviors that will try to separate China.
NZD/USD daily chart shows Doji candle, which highlights indecision in the marketplace despite a convincing break above the 200-day moving average on Oct. 13.
At the time of writing, the currency pair was trading flat lined around 0.7165 levels. The offered tone could remain intact as the New Zealand-US 10-year bond yield differential is losing height
The narrowing yield spread indicates the markets are not convinced by the hawkish case put forward by the strong NZ inflation data released this week. HSBC Global Research team writes, "rising food and petrol prices have supported inflation, but non-tradable inflation is also gradually picking up".
The Kiwi's struggle to rally above the 200-DMA indicates investors may want to see evidence of pick up in core inflation.
NZD/USD Technical Levels
An end of the day close today below 0.7147 (previous today's low) would confirm bearish doji reversal and shall open doors for a drop to 0.7122 (10-DMA) and 0.71 (zero levels). On the other hand, a break above 0.7178 (session high) would open up upside towards 0.7207 (previous day's high) and 0.7222 (50-DMA).
The US-based ratings agency, Fitch Ratings, out with the results of its Q4 2017 fixed-income investor survey:
A China downturn has moved back into the top spot of Australian credit markets risks over the next 12 months (42% of respondents ranking a hard landing as a high risk, up from 25% in 2Q17)
China replaces a domestic housing market downturn as the top risk (dropped to third)
The prospect of quantitative easing (QE) withdrawal has moved into second place
More investors (43%) expect fundamental credit conditions to deteriorate for financials, rather than improve (16%)
Property market exposure is still considered the main threat to bank asset quality, although risks were broadly considered to be rising
Most investors also expect bank lending conditions to tighten over the next year
Investors are more upbeat about the economic outlook
Livesquawk reported comments from the US President Trump earlier today, noting that he wants to repatriate offshore profits worth maybe substantially more than usd3tln.
Trump also said that he wants tax reform "by Christmas".
The Bank of Japan (BOJ) board member Makoto Sakurai is on the wires now, via Reuters, speaking at a meeting with business leaders.
2% inflation target can also help stabilise yen FX rate
It is key for the BOJ to continue powerful easing
The People's Bank of China (PBOC) set the Yuan reference rate at 6.5991 vs. Tuesday's fix of 6.5883
In an interview with the Wall Street Journal, Philadelphia Fed President Harker said another rate hike is appropriate this year, but cuationed that his forecast could change if inflation shows no signs of life.
Comments from China State Administration of Foreign Exchange (SAFE) crossing the wires via Reuters-
Currently, USD/JPY is trading at 112.22, up 0.02% on the day, having posted a daily high at 112.26 and low at 112.13.
While being a non-mover in the Tokyo open, USD/JPY rose from 112.10 to 112.48 overnight and remains under pressure below the 113 handle. The dollar was bid overnight and the 2yr yields were rising from 1.53% to 1.56% while the US 10yr treasury yields moved in a narrow range between 2.30% and 2.33%. Spreads remain key while the market is pricing in a Fed hike for December and the chances of a more hawkish Fed Chair. The Fed fund futures yields firming and the chance of a December rate hike now at 92%.
Wall Street backs off record peaks, closes day slightly higher
FOMC member Harker argued that the labour market had little slack nationally but there were soft patches regionally. The US data had import/export prices both higher than expected while US industrial production rose in line by 0.3% for September. Homebuilder sentiment climbed from 64 to 68 against 64 expected.
From a technical point of view, the upward potential remains limited, according to Valeria Bednarik, chief analyst at FXStreet:
"The price seems unable to surpass a flat 100 SMA in the 4 hours chart, acting as dynamic resistance at 112.45, also the daily high. In the same chart, the RSI indicator heads higher around 55, but the Momentum remains flat around its 100 level, reflecting the limited buying interest at current levels. Nevertheless, an upward acceleration through the mentioned level should lead to a retest of 113.43, the high set this month."
The sideways action around 88.00 handle suggests indecision in the AUD/JPY market, although the bond yield differential and risk reversals indicate increased odds of a downside move ahead of the Japanese elections.
Aussie-Japan 10-yr yield spread narrows
Risk reversals at 5-1/2 month low
Analysts at Nomura offered their model's projection for USD/CNY fix.
"Our model1 projects the fix to be 288 pips higher than the previous fix (6.6171 from 6.5883) and 11 pips higher than the previous official spot USD/CNY close of 6.6160. The basket implied change is 13 pips higher than the previous official spot USD/CNY close (6.6173 from 6.6160)."
Comments from unnamed analysts crossing the wires via China Securities Journal-
Analysts at ANZ explained that UK inflation rose to 3%, the quickest pace of growth since April 2012, with core inflation at 2.7%.
"There were a number of BoE speakers with Governor Carney declining to comment on a specific time for the next rate rise and tight-roping the need to cautiously raise rates."
"Silvana Tenreyro said, “my view is that we are approaching a tipping point at which it would be necessary or justified to remove some of that stimulus.” However, Dave Ramsden said “I still think there is some slack in the economy... I’m going to approach each MPC meeting as it comes.” "
Currently, AUD/USD is trading at 0.7843, down -0.03% on the day, having posted a daily high at 0.7848 and low at 0.7843.
RBA Minutes: Limited new information and no surprises – RBC CM
In a recovery, AUD/USD moved back from 0.7818 lows to 0.7849 in NY while copper consolidated after yesterday's spike on a better macro outlook. The RBA minutes were the main focus yesterday where the detail arrived was as expected - inflation remains subdued amid AUD strength with some gentle jawboning of the currency; AUD/USD drifted down to 0.7835 (lining up with the 38.2 of the 0.7733/0.7898 move) and then recovered back to 0.7960 before the sell-off to 0.7818. Buyers emerged and NY handed over to Asia at 0.7844.
Meanwhile, the day ahead is looking rather uneventful, so eyes stay with Australian September jobs data due Thursday where employment is forecasted to be at +15k. We do, however, have September's Westpac-MI Leading Index that was last at -0.19%. "The index has swung sharply in recent months from well above trend to back below trend," explained analysts at Westpac.
China continues to show better progress - UOB
AUD/USD 1 day:
Analysts at Westpac explained that AUD/USD is expected to continue consolidating in a 0.7800-0.7900 range if the USD does likewise.
AUD/USD 1-3 month:
Further out, the analysts explained that iIf the RBA remains firmly on hold, as we expect, and the US dollar rises on delivery of a Fed interest rate rise in December, then AUD/USD could fall to 0.76 by year end. (5 Oct)
"The 4 hours chart indicates that the risk is towards the downside, as the price is developing below its 200 EMA, which converges with the mentioned Fibonacci resistance, and below the 20 SMA," explained Valeria Bednarik, chief analyst at FXStreet, adding, "technical indicators in the same chart have retreated all the way down towards their mid-lines, but partially lost downward strength around them, failing at this point to confirm further slides ahead. The next Fibonacci support comes around 0.7815 the level to break to confirm additional declines ahead towards the 0.7770 region."
Analysts at ANZ explained that the USD continued to rise, with the Treasury curve bear flattening.
"US equities hit new records before coming off the highs in the New York afternoon. Commodity prices declined. DJIA hit 23,000 for the first time, up around 25% since the election, with S&P 500 unchanged on the day.
European bourses were mixed, with Spain rebounding 0.4% and other bourses biased downward. The US Treasury curve continued to flatten, with the front-end up 1bp and 10 year unchanged at 2.30%.
Speculation that John Taylor will be the next Fed chair is driving a bear flattening of the curve. Periphery yields fell 2-3bps, while core European yields were relatively unchanged.
The USD gained against all in the G10, with NOK and SEK underperforming. GBP initially climbed higher after the CPI release although a divided BoE saw the currency fall below 1.32."
Analysts at Nomura offered a preview of the Fed's Beige Book.
"In the Beige Book prepared for the September FOMC meeting, the Federal Reserve noted that economic activity expanded at a “modest to moderate pace” across the 12 reserve districts in July and August. Most of the information for the September Beige Book was collected before Hurricane Harvey’s landfall.
In preparation for the October FOMC meeting, we expect the Beige Book to point to sustained economic activity albeit with some transitory disruptions due to the recent hurricanes. In particular, activity in the 11th district (Dallas) and sixth district (Atlanta) will likely provide more anecdotal evidence on the impact from Hurricanes Harvey and Irma, respectively.
As the Beige Book is based largely on anecdotal evidence from business leaders and market participants, the report for October’s meeting could provide additional information from local businesses in the affected areas on how long the recovery is expected to last. Elsewhere, anecdotal information on the housing market, currently experiencing a supply shortage, and local price pressures will be worth noting."
Analysts at Westpac offered their outlook for the antipodeans and rates.
"AUD/NZD 1 day: Probably consolidates in a 1.0900-1.1000 range.
AUD/NZD 1-3 month: September’s downward correction should give way to a resumption of the trend rise which started in June, and test 1.12, contingent on AU commodity prices recovering and risk sentiment remaining elevated.
AU swap yields 1 day: The 3yr should open around 2.14%, the 10yr around 2.90%.
AU swap yields 1-3 month: Our RBA outlook (on hold throughout 2018) is anchoring short-maturity interest rates and should keep 3yr swap rates in a 1.80% to 2.30% range, as long as core inflation remains below 2%. Longer maturity rates will largely follow US rates.
NZ swap yields 1 day: NZ 2yr swap rates should open up 1bp at 2.21%, the 10yr unchanged at 3.20%, in response to AU and US interest rates movement overnight.
NZ swap yields 1-3 month: Our RBNZ outlook (on hold throughout 2018) is anchoring short-maturity interest rates and should keep 2yr swap rates in a 2.10% to 2.50% range, as long as inflation remains below 2%. Longer maturity rates will largely follow US rates."
Forex today was driven by a stronger dollar again with some of the US rates higher while the STIR curve steepened. The US dollar index is 0.2% higher on the day.
The 2yr yields moved the most, rising from 1.53% to 1.56%. The US 10yr treasury yields moved between 2.30% and 2.33% to close unchanged at 2.30%. The market is pricing in a Fed hike for December and the chances of a more hawkish Fed Chair. The Fed fund futures yields firming and the chance of a December rate hike now at 92%.
For data, the import/export prices were both higher than expected. US industrial production rose in line by 0.3% for September. Homebuilder sentiment climbed from 64 to 68 against 64 expected.
Ears are out for Fed speak this week, while Yellen's comments from Sunday are still a factor. On Tuesday, FOMC member Harker argued that the labour market had little slack nationally but there were soft patches regionally.
While the dollar firmed across the board, carving out a bullish H&S across most major's the euro was also weighed by European yields that dropped again after the German ZEW miss. EUR fell from 1.1780 to 1.1736 before rebounding to 1.1775 late in NY. Sterling was knocked by more Brexit woes. GBP/USD fell from 1.3287 to 1.3154 the low before recovering to 1.3180 the close. USD/JPY rose from 112.10 to 112.48 and remains under pressure below the 113 handle, closing at 112.15 with eyes on N.Korean headlines. The higher beta currencies are heavy on the back of higher US rates, but managed to correct early in NY. The Kiwi dropped to 0.7147 before retracing to 0.7173, but was not kocked off its perch due to the disappointing GDT dairy auction. AUD/USD moved back from 0.7818 lows to 0.7849. Copper consolidated after yesterday's spike on a better macro outlook, while Gold dropped further on the back of a firmer greenback.
Key events in Asia
Analysts at Westpac noted the forthcoming events for the Asian session:
"Australia: Sep Westpac-MI Leading Index was last at -0.19%. The index has swung sharply in recent months from well above trend to back below trend.
China: The 19th National Congress begins where five of the seven Politburo Standing Committee members are scheduled to retire. Key agenda items are President Xi’s political power and development (Belt & Road Initiative)."
Key notes from US session
Data source: FX Street
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