EU equities continued to march higher as Joe Biden is getting closer to becoming the next US President. Wall Street rallied as well with investors eyeing a split Congress, something that could make it hard for Biden to push for tax increases and stricter regulation. Yesterday, the Fed stood pat and proceeded with virtually no changes in their meeting statement, while today, we get the US employment data for October.
Bets of a Biden Victory drive Equities Up, US Jobs Data in Focus
The dollar continued drifting south against all the other G10 currencies on Thursday and during the Asian morning Friday. The main gainers were AUD, NZD, GBP and NOK, while the greenback lost the least ground versus CAD.
The weakening of the dollar, combined with the strengthening of the risk-linked Aussie and Kiwi, suggests that the financial community continued trading in a risk-on manner. Indeed, turning our gaze to the equity world, we see that major EU and US indices were a sea of green, although investors’ appetite softened today in Asia. Japan’s Nikkei 225 closed 0.91% up, but China’s Shanghai Composite, Hong Kong’s Hang Seng, and South Korea’s KOSPI are currently down 0.24%, 0.04%, and 0.36% respectively.
As we noted yesterday, the catalyst behind the rally in EU equities may be the fact that Joe Biden is getting closer to securing the 270 electoral votes needed to become the next US President, although Trump alleged voting fraud, filed lawsuits and called for recounts in some states. It seems that investors believe that Biden will adopt a softer stance than Trump in handling the trade relationships of the US and the rest of the world. Wall Street gained as well, as Republicans appear likely to retain majority in the Senate, something that will make it hard for Biden to proceed with the tax increases and stricter regulations he promised.
In the FX world, Biden is seen as negative for the US dollar due to his fiscal agenda being looser than Trump’s, but with Republicans staying in control of the Senate, he may not be able to push through with his plans. That said, investors kept selling dollars, perhaps in anticipation that this could pressure the Fed to step up its stimulus efforts.
Speaking about the Fed, the Committee ended a two-day monetary policy meeting yesterday. They decided to keep their monetary policy settings unchanged and to proceed with virtually no changes in the accompanying statement, maintaining their pledge to do whatever they can to support their coronavirus-hit economy.
Investors may take a cue on whether additional action could come in December, from the US employment report for October, due to be released later today. Nonfarm payrolls are expected to have increased by 600k, less than September’s 661k, but still a very good number, consistent with further improvement in the labor market. The unemployment rate is forecast to have declined to 7.7% from 7.9%, while average hourly earnings are anticipated to have slowed somewhat, to +4.6% yoy from +4.7%. In our view, a decent report may increase the chances for Fed officials to stand pat at the December meeting as well, as it would signal that the already-adopted stimulative measures are having the desired effect on the economy. We may need to see those forecasts being missed for investors to add to speculation that the Fed could increase its easing efforts next month.
IBEX 35 – Technical Outlook
This week, the Spanish IBEX 35 index had a good run north, which yesterday resulted in a break of a short-term downside resistance line drawn from the high of August 13th. The price also managed to stay above its 200 EMA on our 4-hour chart, which might also be seen as a bullish indication. As long as the index continues to balance above that 200 EMA and the downside line, we will remain positive, at least with the near-term outlook.
A further move north could bring the price closer to the 6969 barrier, marked by the high of October 20th. In order to get a bit more comfortable with the upside, we would prefer to see a strong push above that barrier. This way more buyers might join in and drag the index to the 7024 hurdle, or the 7107 zone, marked by the high of September 16th. Initially, IBEX 35 could stall around there, or even correct slightly lower. That said, if the price is able to remain somewhere above the 6969 area, we might see another push north again. If this time the bulls are able to overcome the 7107 obstacle, the next potential target may be at 7214, which is the high of August 25th.
In order to start looking at some lower areas, we would first need to see a drop back below the aforementioned downside line and then a move below the 6800 zone, marked by the high of November 4th. That’s when IBEX 35 may fall to the 6674 hurdle, a break of which could open the way to the 6560 level, marked by the low of November 4th.
USD/CAD – Technical Outlook
Yesterday, after testing a new support area at 1.3027, USD/CAD reversed back up and this morning it is trying to recover some of the losses made during this week. The pair is still trading well below its short-term tentative downside resistance line taken from the high of November 2nd. Even though we could see the rate retracing a bit more to the upside, this move could be short-lived, hence our somewhat bearish approach for now.
A small push higher might bring the pair a bit higher, above the 1.3095 zone, marked by the low of November 4th. USD/CAD could test the area somewhere around the 1.3108 hurdle, which is an intraday swing high of November 4th, and if it struggles to move further north, the bears may jump back into the action again. If so, the pair might slide back to the 1.3095 obstacle, or even to the 1.3080 territory, which is the lowest point of October. If the fall doesn’t stop there, the next possible target could be the 1.3027 level, marked by the current low of this week.
Alternatively, if the rate continues to rise above the 1.3108 hurdle, or the 1.3127 barrier, marked by yesterday’s intraday swing high, that may increase the pair’s chances of going for a larger correction higher. USD/CAD might then drift to the 1.3147 obstacle, a break of which could set the stage for a move to the 1.3177 level, marked by yesterday’s high. Around there, the rate may also find some resistance from the aforementioned downside line, which might keep USD/CAD from climbing higher.
As for the Rest of Today’s Events
Apart from the US employment report, we also get jobs data for October from Canada as well. The unemployment rate is forecast to have declined to 8.8% from 9.0%, while the net change in employment is expected to show that the economy has gained 100k jobs, less than the 378.2k gain in September.
We also have two BoC speakers on the agenda: Governor Tiff Macklem and Deputy Governor Lawrence Schembri.
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