Most equity indices traded in negative waters on Monday and during the Asian morning Tuesday, as concerns over the second wave of covid cases continued to dominate the markets. Investors may have also adopted a cautious stance ahead of the November 3rd US presidential election. In the FX world, the Aussie was the main loser after the RBA minutes revealed discussions over a potential rate cut.
Markets Continue to Trade in a “Risk-off” Fashion
The dollar traded mixed against the other G10 currencies on Monday and during the Asian morning Tuesday. It gained against AUD, NZD, and JPY in that order, while it underperformed versus CHF, EUR, NOK, SEK and GBP. The greenback was found virtually unchanged against CAD.
The weakening of the risk-linked Aussie and Kiwi, combined with the strengthening of the safe-haven Swiss franc, suggests that markets traded in a risk-off fashion yesterday. That said, the weakening of the Japanese yen points otherwise. Thus, in order to get a clearer picture with regards to the broader market sentiment, we prefer to turn our gaze to the equity world. There, the majority of EU and US indices closed their sessions in the red, with the only exception being Spain’s IBEX 35, which gained 0.15%. Sentiment was more mixed during the Asian session today, with Japan’s Nikkei 225 and Hong Kong’s Hang Seng losing 0.53% and 0.22% respectively, but China’s Shanghai Composite and South Korea’s KOSPI gaining 0.18% and 0.28%.
It seems that concerns over the second wave of coronavirus infections continued to dominate the markets, with the new restrictive measures around the world having the potential to hurt the global economic activity even before it manages to recover from the first storm. The latest declines in riskier assets may have been also the result of re-positioning ahead of the November 3rd presidential election in the US, but also due to speculation that a coronavirus-aid bill is unlikely to be agreed by tonight, the deadline in order for the bill to pass through Congress before the election, despite optimistic remarks by Nancy Pelosi that a breakthrough could still happen.
As for our view, it has not changed. With the election day drawing closer, we prefer to stick to our day-by-day approach. The technical picture for most stock indices, especially the US ones, remains relatively positive, but even if we sed a rebound in the next couple of days, we remain reluctant to trust a long-lasting recovery. As we approach the US election, and with covid infections around the globe rising at a fast pace, investors may refrain from engaging into large trading positions. They may keep their cautious stance. As to how the election could affect the financial community, we may get an idea on Thursday, when the 2nd debate between Trump and Biden is scheduled to take place.
Nikkei 225 – Technical Outlook
Nikkei 225 is still trading above a short-term upside support line taken from the low of September 21st, despite declining recently. The slide happened after the price tested the area near the 23737 hurdle, which is the current highest point of October. Although the current trend is still to the upside, in order to examine higher levels, we would need to wait for a pop above that 23737 barrier first. Until then, we will take a cautiously-bullish stance.
If, eventually, we do see that rise above the 23737 barrier, this would confirm a forthcoming higher high, potentially opening the door for a move to the 23806 territory, marked by the high of February 20th. If the buying doesn’t end there, the next possible target might come at 24035, which is the highest point of February.
On the downside, if the previously-mentioned upside line fails to provide good support and breaks, that may signal a change in the current trend. More bears might run into the field if the index drops below the 23368 zone, marked by the low of October 15th. At the same time, Nikkei 225 could be placed below the 200 EMA on our 4-hour chart, what some traders and investors may see as a short-term bearish indication, possibly increasing the probability of the downside scenario. That’s when we will aim for the 23232 obstacle, a break of which may set the stage for a push to the 23106 level, marked by an intraday swing high of October 2nd.
RBA Minutes Reveal Discussion Over a Rate Cut
Now, back to the currencies, the Aussie was the main loser, coming under strong selling interest after the minutes from the latest RBA meeting revealed that officials discussed cutting rates and buying longer-dated debt as means to support the economy. Following similar remarks by Governor Philip Lowe, this suggests that other members also share the same view, which increases the chances for additional easing at the upcoming gathering, scheduled for November 3rd. According to the ASX 30-day interbank cash rate futures yield curve, there is a 74% chance for interest rates to be cut to zero at the upcoming gathering. Market chatter suggests that rates could be cut to 0.10%, a move that is more than fully priced in.
Looking ahead, the Aussie is likely to continue being affected by the broader market sentiment, but due to the increased speculation over a rate cut at the RBA’s next meeting, we expect it to underperform the other risk- and commodity-linked currencies. For example, regardless of whether markets will trade in a risk-on or risk-off fashion, we believe that AUD/NZD and AUD/CAD are likely to continue drifting south.
AUD/CAD – Technical Outlook
AUD/CAD continues to trade below a short-term tentative downside resistance line drawn from the high of September 21st. Even though the pair could rebound somewhat, as long as the rate stays below that downside line, the current trend might remain to the downside. Hence our bearish approach for now.
If AUD/CAD moves a bit more to the downside, it could end up testing a support area between the 0.9270 and 0.9280 levels, marked by the lows of June 15th and 21st. If that area initially provides a good hold-up, the rate may retrace back up a bit, however, if it struggles to overcome the above-discussed downside line, we might see another slide. If this time the bears are able to send the pair below the 0.9270 hurdle, that’s when we will aim for the 0.9193 zone, which is the low of June 2nd.
Alternatively, a break of the aforementioned downside line might change the short-term trend and more buyers may join in, especially if the rate also rises above the territory between the 0.9440 and 0.9448 levels, marked by the high of October 14th and the low of October 8th. If such a move happens, that could open the door for a move to the 0.9503 obstacle, a break of which may set the stage for a push to the 0.9550 barrier, which is the high of October 5th.
As for Today’s Events
Tuesday appears to be a relatively light day in terms of economic indicators and releases. We have the US building permits and housing starts for September, both of which are expected to have increased somewhat.
As every Tuesday, the API (American Petroleum Institute) report on crude oil inventories for last week is coming out as well, but as it is always the case, no forecast is available.
We also have four speakers on the agenda: BoE MPC member Gertjan Vlieghe, New York Fed President John Williams, Chicago Fed President Charles Evans, and Fed Board Governor Randal Quarles.
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