USD down. US earnings season kicks off

By Ipek Ozkardeskaya, Senior Market Analyst
London Capital Group

Nikkei (+0.35%) and Topix (+0.20%) consolidated gains in Tokyo, as Korea’s Kospi index closed on record high for the second consecutive day.

European markets opened flat. FTSE 100 traded lower in London, as many stocks traded ex-dividend including HSBC and Tesco.

The DAX and the CAC may be under the pressure of the euro rebound, while the IBEX is correcting yesterday’s gains amid looming political tensions between the Spanish and Catalan governments.

In Spain, PM Mariano Rajoy asked for more clarity, while keeping his position clear: Spain will not negotiate the Catalan independence and is ready to take measures to suspend Catalonia’s autonomy if Catalonian President Carles Puigdemont insists on independence. Catalonia is given time until Monday to deliver its verdict on independence. Uncertainty looms, but the Catalan independence deal seems harder to be sealed as time goes by. EUR-traders have been showing little-to-no sign of anxiety to the Catalan crisis.

The EURUSD took over the 50-day moving average (1.1860) on relief that Catalonia suspended the declaration of independence. The hawkish European Central Bank (ECB) expectations are gaining territory. The 3-month (25-delta) EURUSD risk reversal spiked to the highest level since mid-2009 as investors move into hedging the upside euro risk before the ECB’s October 26 policy meeting.

The pound extended gains versus the greenback. The golden cross formation (50-hour moving average crossing above 200-hour moving average) on hourly chart is encouraging for a further rise. The pair is testing the critical Fibonacci resistance at 1.3268 (major 38.2% retrace on September – October decline), if surpassed should indicate a short-term bullish reversal. The next target could be found at 1.3340 (50% level / 100-week moving average). Large call options stand at 1.3350/1.3400 at today’s expiry. The UK politics remain the major downside risk to the actual pound appreciation, yet outstanding options suggest that traders are mainly hedged for a slide below 1.31/1.30 area.

Higher US inventories capped topside in oil

The WTI futures edged lower from $51.60 on Wednesday after the weekly API data showed a surprise rise in the US stockpiles. The more official EIA data is due today. Analysts expect 1.9-million-barrel contraction in last week’s inventories, but the recent API data suggests there could be a build on last week’s US inventories instead. Higher oil inventories would dent the buy-side appetite. Support is eyed at $50/barrel, resistance is presumed at $52.90 (September high).

USD softer on Fed’s low inflation concerns

The US dollar is softer against the G10 majors as the Federal Reserve (Fed) minutes showed concerns about the low inflation on Wednesday. Some FOMC members are willing to wait for a stronger evidence of rising inflation to carry on with the rate hikes. The probability of a December rate hike is slightly down to 76.7%. The US 10-year yields give toppish signs near 2.35%.

The Dow Jones traded at a new record of $22’872.89 on Wednesday, while Asian traders lacked appetite for the US equity futures in the overnight session. In the absence of anxiety, traders remain buyers despite intra-Republican controversies on Donald Trump’s fiscal plans.

US earnings season kicks off

The US earnings season starts today. Citigroup and JP Morgan Chase are among stocks to watch in New York. Banks’ 3Q revenues will be in focus as expectations were revised lower after the prosperous 1Q. In fact, the market volatility has been significantly lower compared to a year earlier, when Brexit referendum and US elections had given a decent shake to the financial markets and had fostered bank revenues. Discouraging results could curb the appetite in the US’ financial sector despite prospects for higher US rates.

Yen rangebound on the run up to Oct 22 election

The USDJPY stagnates above the 112.00 mark. The lack of a positive boost in USD, combined to the Japanese uncertainty on the run up to the October 22 snap election hold traders back from a directional move. PM Shinzo Abe’s main rival Yuriko Koike is no longer running for the election, increasing Abe’s chances to come out stronger posterior to October 22. Abe’s rule involves ultra-loose monetary policy, massive government spending and a planned increase in sales tax. As a results, the so-called Abenomics is negative for the yen in medium-to-long term. In the short-run, the 112.25/112.00 could be a pivot. Light put options stand at this area at today’s expiry.

Aussie gains despite lower yields

The Aussie gained in Sydney as home loans and investment lending beat estimates in August. AU 10-year yields came under pressure following the nation’s largest ever bond sale, yet the softer US yields appear to compensate for the downside pressure on the rate differential. The AUDUSD broke above the 0.78 handle and is paving its way toward the 100-day moving average (0.7853) and October high (0.7875).