| | Developments in markets for Friday 31 October...... - Snapshot: S&P500/Nasdaq?? yields??, crude oil??, gold??US dollar??
- AUD/USD:??3-day pullback halted in 0.6530's, ends week near 0.6540
- AUD WoW?: GBP: +1.70%, EUR: +1.03%, JPY: -0.80%, NZD: +0.80%, USD: +0.18%
- USD continues to outperform in the wake of a hawkish Powell
- Tokyo CPI runs hot, increasing odds of a December cut to a 50/50 call
- Eurozone inflation remains steady, validating the ECB's wait-and see mode
- Week ahead: nonfarm payrolls will not be released, ADP in focus; ISM PMIs
- Central banks: RBA to remain on hold; BoE 25-bps cut a tight call
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Each morning we bring you up to speed with the latest market news, including the events and themes that are impacting currencies and other related asset classes......
| | | | Despite signs that market participants would remain spooked following Jerome Powell's hawkish FOMC conference 48 hours earlier, a sense of calm eventually prevailed in financial markets as an eventful week concluded. Equity bulls regained control during Halloween trade, leading to modest gains for the three major U.S. equity indices, whilst the dollar maintained its positive momentum, the dollar index's (DXY) +0.86% week-on-week gain one of its best, year to date. The New Zealand dollar declined for a third consecutive day, having peaked above 66 US cents just prior to Thursday morning's FOMC announcement. Although the descent continued at a slower pace, the Kiwi concluding the week around 0.6540.
Of technical note, AUD/USD lows over the past two trading days have touched the 100-day moving average, located around 0.6530, which also aligns with the midpoint of the 14 to 29 October rebound. Early week attention will be fixated on the widely observed trend following indicator to assess if selling momentum is fading and the Aussie can resume its advance back through 66 US cents.
Heading into the start of last week, the consensus view was for the 2-day FOMC meeting to take a back seat to the Trump/Xi trade meeting amidst expectations for Fed Chair Powell to maintain the status quo given the ongoing U.S. government shutdown and macroeconomic data vacuum. With a lack of compelling new data to alter the assessment of notably declining jobs growth, the market headed into the week's FOMC meeting assuming both October and December cuts were a slam dunk.
Jerome Powell had other ideas.
It was clear early in the Q&A portion of Powell's press conference the intent he had to pour water on the assumption that a 25-bps cut on 10 December was a done deal. Stating a December cut "was not a foregone conclusion….far from it", Powell also referenced the dearth of critical data and how it may affect the final meeting for the year: "If you asked me could it affect ... the December meeting, I'm not saying it's going to, but yeah, you could imagine that. You know, what do you do if you're driving in the fog? You slow down."
The market is now faced with a critical question: if the government shutdown continues, will the Federal Reserve decide to pause its actions on December 10th, waiting for the resumption of nonfarm payrolls and other essential data releases before making any further moves?
By pushing back against market pricing, Powell has provided the committee the optionality. Should the government agency issued data flow resume, continuing to record a cooling labour market, a December cut will again be a lock. Conversely should key labour market metrics indicate that job losses are slowing or reversing, Powell and most of his voting peers (Miran aside) may opt to hold the target rate at 3.75-4.00% on the assessment that this is close to estimates of the neutral rate - a level that is neither restrictive nor expansionary.
At the conclusion of the week, SOFR futures assigned a circa two-thirds implied probability to a quarter-point cut on 10 December……for now, this remains the base case. | | | | US equity markets as at time of morning update release and may not represent session closing prices | | | | In data news from Friday, Tokyo CPI which precedes the national level reading and is regarded as an accurate guide, printed hotter-than-expected, annualised core CPI rising from 2.5% to 2.8%, remaining well above the Bank of Japan's 2% target. Following Thursday's BoJ meeting in which the board voted 7-2 in favour of no change, the CPI beat has lifted the implied probability of a December hike to a near coin toss.
Having ascended to a near 12-month high a pip or so beyond 101.20 following the dovish BoJ decision, AUD/JPY pulled back on the CPI data, closing the week in the 100.70's. Critical resistance is located at 101.70 ahead of the November 2024 prominent high, located near 102.40. Should the BoJ refrain from a December hike as year-end seasonals benefit risk sensitive currencies such as the Australian dollar, AUD bulls likely drive the pair beyond these key levels to 18-month highs. Of course, given the yen has notably weakened following the recent appointment of PM, Sanae Takaichi, it would be short-sighted to overlook the possibility of currency intervention as the MoF becomes increasingly uncomfortable with a depressed yen.
Also released Friday, eurozone inflation remained steady, the annualised core rate remaining at 2.4% whilst headline eased from 2.2% to 2.1%, validating the European Central Bank's decision to maintain current policy settings at Thursday's ECB meeting. During her press conference, ECB president Lagarde commented that policy is in a "good place" implying that a wait-and-see approach is likely to continue through the first quarter of the new year.
Having formed a double bottom around 0.5510 via August and October swing lows, AUD/EUR has rebounded over 3% through the second half of October to now test the upper bound of the prevailing 4-month range. Marking last week's high a few pips shy of 0.5690, also within a couple of pips of the 09 October swing high, 0.5690 presents as a major upside hurdle for the pair to clear. The 200-day moving average also lurks in the 0.5690's. Ascending beyond 0.5700 with conviction would be a major win for AUD bulls.
Looking to the week ahead and the start of the new month, equity market bulls will be cheering the commencement of November, a historically strong month of the year. Since 1927, the S&P500 has risen close to 60% of the time by an average gain of around 1%. The odds that November will be a winning month for investors increases to over 90% during the first year of a presidential cycle and following strong gains in October. The S&P500 logged a month-on-month gain of over 2% in October.
Settings are ripe for upside for U.S. equities which may propel risk sensitive currencies such as the Australian and New Zealand dollars higher.
Given it's the first week of the month, non-farm payrolls are scheduled to be released, but will not due to the ongoing shutdown. Market participants will therefore zero in on the privately released, ADP Employment change, scheduled for the early hours of Thursday morning. Other major data points include the ISM PMIs, eurozone retail sales, NZ jobs and domestic trade balance.
The RBA and Bank of England meet, the former to remain on hold following last week's hot 3Q CPI print. Odds for a November BoE cut have been climbing, rates markets assigning a circa 30% implied probability of a 25-bps cut, Thursday……it's a tight call!
As for the Aussie dollar, attention will be focused on 0.6530 to determine if the pair can arrest its slide to resume the rebound which commenced off the 14 October low, marked at 0.6440. It would not surprise if the market reassessed its reaction to last week's FOMC meeting, concluding a December cut is still the likely outcome…..therefore leading to a USD pullback.
Have a great week!
Stuart Talman (stuart.talman@xe.com)
Xe Corporate | | | | |
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