Markets Report — 26/10/2015

Overview

Friday saw further consolidation of post-ECB moves till China followed suit on easing and cut interest rates — one year lending and deposit rates cut by 0.25% while cash reserve ratio was cut by 0.50% (additional 0.50% for certain qualifying institutions). That makes it 6 rate cuts in a year for China. When there is international pressure to stay away from weakening the currency further, there is always a rate cut to fall back on. The news lead to typical reactions across the board — USD strengthened, and so did commodity pairs, except that the commodity pairs couldn’t sustain and eventually more than surrendered the immediate gains. Is further easing a sign of China providing stimulus for the check in growth rate or an admission of further weakness ahead? That seems to be the dilemma of the price action. With more central bank meets scheduled for the week — FOMC, RBNZ and BoJ — expect some reshuffling of the easing vs more easing vs relative tightening equation among the currencies.

Equities

Equities welcomed further liquidity in the market with open arms as DJIA futures soared to 160 points up immediately China rate cut news, also helped by firm earning reports from Technology companies. DJIA cash opened 90 points up, stayed checked for a brief while but closed comfortably positive. DJIA (+0.90%), NASDAQ (+2.27%) and S&P 500 (+1.10%)

Currencies

EURUSD (1.1037), slid further without any meaningful bounce from Thursday close. China rate cut news drove the USD up across the board and ensured the 1.1070 support line was clearly broken to make probes near 1.10 handle, touching a low of 1.0997, and closing marginally above at 1.1018. That is a super impressive Daily/Weekly close. There is scope for a bounce to 1.1080 on oversold conditions, but further downside moves are favoured, perhaps to 1.0910 support line coming in from March 13th low of 1.0463. Clearance of 1.0910, looks unlikely for now with USD near important resistance and central bank meetings loaded up for the week, sees solid support at 1.0853 (Support line on the weeklies running in from 1.0820, May 1st week).

GBPUSD (1.5336) was quite resilient in the midst of extension of Thursday’s moves and for a while even after the China rate cut news hit the wires, holding 1.5380s reasonably well. But the USD surge eventually pushed the pair below to a low of 1.5307. While the outlook on the pair remains bearish and any bounce to 1.5400–10 is a good percentage sell, downside probes will face a solid test around 1.5240–50 (congestion zone).

USDJPY (121.11) closed comfortably outside of the triangular convergence zone it has been trading since end of August on the back of USD surge plus China rate cut driving equities higher. Part of the spike is also a sign of expectation from BoJ to take the cue from ECB and China to step up their stimulus package further in their meeting on Oct 30th. Need a close below 120.74 to bring back neutral readings on the pair. Although further upside should face a solid resistance at 121.75.

AUD (0.7252) surged to 0.7297 immediately on China news, but didn’t have the legs to get past 0.73 and was eventually sold down to close at 0.7216 after a minor probe below 0.72. The price action reflects the conflicted reading of China rate cut especially for commodity pairs which are more directly linked to China’s growth prospects. Is this timely action or sign of further trouble in the offing? Is it positive for the commodity pairs as China easing in a normal environment is? Or is it a cue for RBA to follow suit? Expect more nervous price action ideally till Nov 3 (RBA), but at least till the double header of FOMC and RBNZ (separated by a couple of hours).

NZD (0.6780) reacted similar to AUD, moved from 0.6780 to 0.6820 on China news hitting the wires, but couldn’t sustain the move for long. The pair was eventually sold down to test the support at 06735–50, which it has held, and has bounced back to 0.6780 so far this morning. Hard to foresee any breakthrough moves with a crucial RBNZ scheduled for later this week.

USDINR (65) is marginally weaker as emerging pairs are under pressure since China rate cut

Commodities and Bonds

Gold (1165) soared to 1179 in the immediate reaction, but was sold to 1160s on USD strength across the board eventually

10 Y Treasury yield at 2.0760%

Key Data Ahead (in GMT)

For a data heavy week, today is reasonably light

German IFO at 09:00

UK BBA Loans for House purchase at 09:30

US New home sales at 14:00

Gameplan

EUR continues to look weaker and any bounce is a good opportunity to add to the shorts. Expect a test of 1.0910, if not below, going into a low profile FOMC later this week. GBP, relatively resilient, looks weak too — though any breakthrough move on the downside needs a solid trigger.

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