Markets Report 21/10/2015

Overview

Another day of consolidating price action ahead of the crucial ECB tomorrow. USD index stayed supported above 0.9450 without ever looking like breaking above 0.95. EUR has had its first day of gain in 4 days partly on position adjustments and partly courtesy the results of ECB’s Bank Lending Survey, where it was reported that lending conditions largely continued to improve in the third quarter and that effects of QE is eventually reflecting in the transmission. GBP failed another probe at 1.55, but offered no directional cue otherwise. Kiwi came under pressure on the back of GDT auction results, while AUD stays lackluster.

The counteracting forces of the world’s leading central bank actions is keeping the markets tied to a tight spot and desperately looking for signs of who is ahead in the race to tighten (relatively) and who are diverging away. The signs at the moment are too few to offer meaningful cues. The cost of being on the wrong side is quite high. Central bankers have too much at stake to be completely transparent about their dilemmas to the market. In this environment comes tomorrow’s ECB communication: the nervous price action is totally understandable.

Equities

Despite positive closes in Asia, the equities were subdued all day digesting the mixed housing numbers and weaker oil, to close marginally negative. DJIA (-0.08%), NASDAQ (-0.50%) and S&P 500 (-0.14%)

Currencies

EURUSD (1.1360) couldn’t really test the 1.1325 support again as it stayed bid around there and the BLS results on improving credit conditions saw some rally in the pair to a high of 1.1387. The spike is more a position readjustment ahead of ECB about which there were increasing noises of an imminent expansion of QE, the BLS results came in as a reality check just ahead of the meeting. Technically 1.1325 resistance turned support holds well despite a minor probe below yesterday. The pair has halted 3 successive negative trading days to close positive, but not much can be read into it. Expect more nervous price action without any breakthrough ahead of tomorrow’s MPC.

GBPUSD (1.5442) made another probe into the 1.55 handle and has been flirting around the daily resistance line for 5 consecutive days. While the failures at 1.55 keep the bulls in check, the lack of any momentum on the downside keeps the pair in the dicey zone. The move down to 1.5440s was encouraging, but it was primarily driven by EURGBP price action on the back of ECB Bank Lending Survey results. EURGBP is back above the crucial 0.7330 support after brief test below failed. 1.5510 is the resistance to watch out for and 1.5385 is the key support. Watch out for any break of 0.7330 and then 0.73 on the EURGBP as well.

USDJPY (119.96) is steadily inching back to 120 extending the bounce from 18.07 low. Don’t foresee a breakthrough on either side for now. Expect more consolidation. 120.60–85 is key resistance zone, while 118.85 is the support on the downside.

AUD (0.7275) continued to be lacklustre with no momentum to test 0.72 on the downside and staying contained around 0.73 on the upside. Oil is holding on to 46 despite a few attempts to break below. Don’t foresee a break on either side for now, though with a bearish bias. NZD (0.6750) came off sharply extending its down move from 0.6897 high further on the back of latest GDT (Global Diary Trade) auction which saw a 3.1% fall in Fonterra’s price index. The pair is hovering around the important 0.6740 support zone. A break below 0.6740 opens up scope for a much larger correction.

USDINR (65.12) is marginally weaker as emerging currencies at large are under pressure, but thanks to RBI’s reputation to intervene on either side to reduce volatility, expect the currency to remain steady (at least relatively) as emerging currencies are increasingly more volatile.

Commodities and Bonds

Gold (1177) stays steady in the 1170s as USD stays supported

10 Y Treasury yield at 2.0670%

Key Data Ahead (in GMT)

UK public finances data at 08:30

US Mortgage Applications at 11:00

Bank of Canada Rate decision at 14:00

Gameplan

No change from yesterday. Stay aside on EUR — except the cheap OTM call bet. Still (nervously) bearish on GBP. Stay alert to EURGBP price dynamics.

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