Investors towards EM, BoJ likely on hold

Forex News and Events

EM still attractive

Despite the growing idiosyncratic risk that it’s unlikely that EM demand will taper near term global liquidity remains a primary driver of asset prices, above fundamentals. Although there are plenty of distractions such as the US election and EU / UK relations until there is an actual structural shift, EM will continue to be in demand. Headlines have pointed to higher global yields potentially leading to increased volatility premia, but we suspect that the bond sell-off should moderate allowing higher yielding EMs to improve. EM bond funds saw good inflows last month despite negative noise. Should we be incorrect and global bonds see further liquidation watch for commodity linked currencies and EMs with higher current account deficits to be sold first (Near mirror image of the 2013 taper tantrum).

BoJ unlikely to slow purchases, sell JPY

We are not expecting much at this week’s BOJ monetary policy meeting. While economic data further slow the BOJ is likely to hold off any action until after the US election and fed December rate hike. That said the tone could suggest a shift from QE to interest rate targeting given the rate of balance sheet expansion. This would be meaningful not just for japan but for global central banks. Yields are rallying partly due investor limited expectations for addition central bank stimulus. Should the most progressive central bank in terms of policy mix “throw in the towel”, it would be a clear signal that the days of unlimited liquidity are over. With bond yields higher, pressure is mounting on the Japanese yield curve. BoJ’s Kuroda, has confirmed that the central bank was actively buying in September. These comments and mixed economic data suggest that the BoJ is unlikely to taper asset purchase. Further extension of the bond buying program should help weaken JPY already under pressure as US rates shift upwards.

Sell GBP on rallies

The sterling was able to gain some lost ground on the back of the higher Q3 GDP print. Stronger-than-expected growth data currently indicates that Brexit has not doomed the UK economy like many had predicted. This solid read would also suggest that the BoE will not cut interest rates at the next meeting. However, GBP is not trading on fundamentals but rather on speculation of potential Brexit scenarios. The more fragmented and chaotic the political process, the more negative the sentiment grows around the GBP. We are still so early in the process that there seems to be a critical lack of framework indicating that the run-up to sending Article 50 to Brussels is going to get messy and temporary reprieve is likely to be met with disorderly rhetoric.

We would be less likely to manifest our Brexit strategy through EURGBP than GBPUSD were the USD story clearer. EUR faces Belgium CETA backlash, Spanish elections, Deutsche Bank fears, ECB exhaustion just to name a few. Despite the US election risk the US looks like an easier play.

The Risk Today

EURUSD – EUR/USD is moving higher. Strong resistance lies at 1.1058 (13/10/2016 high). Key resistance is located far away at 1.1352 (18/08/2016 high). Expected to move higher towards 1.1000. In the longer term, the technical structure favours a very long-term bearish bias as long as resistance at 1.1714 (24/08/2015 high) holds. The pair is trading in range since the start of 2015. Strong support is given at 1.0458 (16/03/2015 low). However, the current technical structure since last December implies a gradual increase.

GBPUSD – GBP/USD is trading around 1.2200. However, the momentum seems still negative. Hourly support is given at 1.2083 (25/10/2016 low) while hourly resistance lies at 1.2329 (11/10/2016 high). Key resistance stands far away at 1.2620 then 1.2873 (03/10/2016). Expected to show continued weakness. The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.

USDJPY – USD/JPY is consolidating within former uptrend channel. Hourly resistance is given at 105.53 (28/10/2016). Next key resistance lies at 107.49 (21/07/2016 high) while hourly support is given at 102.81 (10/10/2016 low). Key support can be found at 100.09 (27/09/2016). We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).

USDCHF – USD/CHF’s bullish momentum has ended. The pair has broken uptrend channel. Hourly support is located at 0.9843 (20/10/2016 low) then 0.9632 (26/08/2016 base low). Stronger resistance area is given around the parity. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.

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