Chinese spot on FRS flag

China produced some growth of currency reserves, and its trade balance is better than expected
The market is under the power of "fundamental" elements again. The American employment report has hit the market again, although it looks like new forgery. The Bank of Japan's meeting did not satisfy those who expected the expansion of stimulation programs. China has continued its currency interventions, and Greece, for the first time since the beginning of summer, has not received a new loan. Judging by general NFP indicators, price stability is there, inflation has been frozen, and labor market is ready for rate increase. Practically all the points of the report made by the Bureau of Statistics have been improved, hourly wages have been growing, and there is an increase of labor force. However, labor market continues to grow with lawyers, economists, programmers, and workers of public services rather than with the qualified personnel of industrial sector. In this regard, there is obvious growth of employable population. Recently, complaints were made in the Beige book regarding too expensive dollar. And the composite index of PMI (which also includes employment), practically, does not grow, and also, other production indexes do not look optimistic. Such discrepancies in reports are always seen before FRS makes critical decisions regardless if they relate to rates or some other adjustment of stimulation programs. In December, whatever is necessary will be adopted, statistics will be adjusted at the beginning of the year, and everything will straighten out. All the indexes should be perceived critically, it is too early to be happy about the USA statistics.

It has been almost one year that the market has been expecting its sacred 25 points of rate increase; however, there is an impression that we should look for problems not in the American economy or in FRS comments, but rather in China. Over the weekend, China produced some growth of currency reserves, and its trade balance is better than expected; however, its exports along with imports continue to fall. It is obvious that this statistics is recommended to be viewed with a great share of distrust. Currency interventions authorized by the state do not stop. The logical consequences of record-breaking accumulation of dollar capital is this: China has been actively selling American papers and buying its own currency. The financial consequences of this process have been in direct opposition with the quantitative easing effect. Presently, the Federal Reserve buys papers at the rate of 85 bln dollars per month, and China, since the date of yuan devaluation in August, has been selling such reserves in the amount of 100 bln dollars. Oversupply goes to private capital.

Expectations for FRS rate increase grew dramatically above 70%, but no one knows how long that outflow of resources from China will last; and therefore, the present delay of FRS decision looks quite substantiated. And until China begins to have an active sale of euros, ECB should also take into consideration that Asian factor in making a decision regarding Euro QE at its December meeting. Besides the refusal to expand QE, the Bank of Japan worsened its inflation development forecasts. It is clear that the Bank of Japan would not have been able to handle negative inflation without stimulation. And the first results have already manifested, prices began to grow; however, stability vanished all of a sudden, the fall of inflation began to gain momentum again, surplus money in the system stopped working. Morning statistics on Tuesday only confirmed the general negative; however, the Bank of Japan has been patiently waiting hoping to reach inflation goals (2% is standard) as soon as in the middle of 2016. Conclusion: presently, yen has no need to fall against dollar on the basis of its indicators, it will go down only in case of dollar growth against all currencies.

Adoption of additional stimulus measures at the ECB meeting on December 3 looks extremely doubtful, except that there may be an expansion at a symbolic amount for the sake of supporting of influence. The present price of EUR includes reduction of ECB's deposit rate and QE expansion, and ECB's moderate steps will result in profit fixation on short positions in euro. Whatever ECB's and FRS December meetings will produce, in November, dollar will continue its growth, long positions in dollar will grow in case of any of its decline. In case of decline of Chinese stock markets, we should expect the second wave of panic with the vertical growth of EUR/USD. This week, we should turn our attention to the final inflation assessment of individual Eurozone countries and GDP for the 3rd quarter. We should also listen to Yellen on Thursday; obviously, we will hear nothing new, and Draghi's speeches in London on Wednesday and to the European Parliament on Thursday may be much more interesting.

So far, technicalities are clearly seen only in euro. EUR/USD is consolidating after a decline; in general, it resembles calm before a storm. Current support: 1.0700-1.0643 and is actively supported by market-makers. In order for a bullish scenario to develop, it needs to consolidate above level 1.1000-1.0978. There are not many chances for that now. In general, the forecast is negative, but the general range of movement is 1.0790-1.0630.

Author: Alexander Ward,
ForexChief Currency strategist