The Australian dollar plunged to a five-month low (0.7532), after the Reserve Bank of Australia (RBA) meeting minutes revealed concerns about low wages growth and tame inflation. According to policymakers, the globalization and the technology could mean low unemployment, but this does not necessarily bring a positive pressure on inflation. Hence, the RBA is in a good position to keep its benchmark interest rate at the historical low of 1.5% if inflation allows. The Aussie yields declined further and the AU/US yield differential further narrowed as the US 2-year yield reached 1.75%, versus 1.766% offered by 2-years in Australia. Therefore, the absence of carry traders is also weighing on the pair and could encourage a further decline in the short-run. The next natural target for AUD/USD short positions is the 0.75 level.
Asian stock markets edged higher. Nikkei (+0.70%) and Topix (+0.65%) gained as the yen depreciated. The USD/JPY rebounded after having tested 111.90 (major 38.2% retrace) twice over the past two sessions. The failure to stretch below this level could encourage some dip-buyers to join the market. The mid-Bollinger band (113.47) could be a plausible target for a short-term recovery in the absence of major news and/or data.
The US 10-year yield stagnates near 2.35%, as Janet Yellen announced her departure after Jerome Powell takes over the reins of the Federal Reserve (Fed). With Yellen quitting, there will be four seats to be filled. The Fed uncertainty makes the future policy less predictable in the eyes of traders and investors. Fluctuations could be expected.
The US stock markets gained on Monday, after being handed a bullish market from European traders. There will unlikely be a significant progress regarding the US tax reform before Thanksgiving (Nov 23). On the other hand, the Fed minutes (due Wednesday) could hardly be a hawkish surprise for the USD traders. The market already assesses over 90% probability for a December rate hike. Combined with the latest pick up in the US core inflation, the minutes could cause little price volatility in USD and yields. Investors continue watching the critical 2.30% (200-day moving average) in the US 10-year yield. A slide below this level could ring the alarm bell.
Gold retraced to its mid-Bollinger band ($1,276) on daily basis. The mean reversion trading keeps the price of an ounce within a horizontal trading range. Sellers are eyed into $1,288/$1,296 (upper Bollinger band / weekly resistance). Buyers are presumed at $1,265/1,264 (lower Bollinger band / 200-day moving average). Open interest in gold climbed to the highest in five months, if the US yields gain more negative momentum, the positive breakout could bring the $1’300 level back on radar.
The EUR/USD consolidates losses after news that German coalition talks ended with no deal hit the euro on Monday. German Chancellor Angela Merkel said she is ready for new elections, ‘a minority government isn’t part of my plans’ she added. The latest opinion polls showed that the probability of a new election stood at 45%, chances of a grand coalition were slightly above 25% versus a minority coalition with slightly less than 25% (source Forsa for RTL/n-tv, Bloomberg). The German political turmoil didn’t prevent the DAX from outperforming European peers on Monday and should not be particularly negative for the euro in term, given that new elections would not have an impact on the European integrity nor Germany’s commitment to the single currency. However, the crisis has curbed the positive momentum in euro, which is needed to push the currency higher in the current low yield environment. The hourly trend and momentum indicators are negative, and the downside move could stretch to the 200-hour moving average (1.1720) and 1.1707 (50% retracement on November rise).
Cable extended gains to 1.3280 yesterday, on news that the UK would offer to pay a higher Brexit bill so that the Brexit negotiations with the EU could carry on. The UK budget is due tomorrow. Chancellor Philip Hammond is expected to remain cautious on the budget, especially if the UK prepares to loosen its purse string to quit the EU in a friendly manner. Of course, the UK’s offer may fall short of the EU’s demand. The downside risks prevail, and resistance could be found at 1.3280-1.3300 area.
The FTSE 100 added 8.78 points on Monday, as Glencore (LON:GLEN) (+1.81%), Barclays (LON:BARC) (+2.03%) and Unilever (LON:ULVR) (+1.19%) contributed with 7.63 points to overall gains. Energy stocks (+0.50%) held ground despite downside volatility in the oil markets. The FTSE futures were flat in Asia, hinting at a relatively steady open in London.