Halloween: we determine fears of November

Strong emission of dollar on the markets is expected practically right after elections in the USA

Last month left enough scars on charts of key currencies quotations. November threatens with global changes: FRS smoothly approaches further toughening of monetary policy, England for sure leaves the EU, and the USA waits for the new president.

Hyperactive October was remembered:

For USD: expression of «the interest rate can be raised relatively soon» in the FRS protocol.

For EUR: rumors about reducing the program of ECB of stimulation, which accelerate EUR/USD rate more than on a figure. And now commentators from the ECB continue to throw actively information on prolongation of the program of quantitative mitigation and correction of the list of assets for further purchases.

For GBP: sharp Flash Crash on 500 points against dollar, the prospects of inflation and Scotland claims of special conditions of Brexit because of Britain meet halfway the Japanese concern Nissan.

For CAD: fantastic (almost not reasonable) volatility, prolongation of the target level of inflation (2%) for five years more, and also a scandalous performance of the Poloz about risk of divergence between monetary policy of the USA and Canada.

Strong emission of dollar on the markets is expected practically right after elections in the USA, then the attention will switch to Europe and any information on this region can be useful. So far the main policy risk is a referendum on the constitutional reform in Italy, which will take place on December 4, and also in negotiations on Brexit.

The British GDP grows the 15th quarter in a row - since I quarter 2013, and data for last III quarter confirm it (+0,5%). It proves once again that the fear of shocks for Britain and in general for the market was extremely exaggerated - the regular well planned market «horror». Besides, it was the excellent reason for FRS to postpone increase in the rates indefinitely. Fall of pound for 20% was caused not by economic data, but exclusively by political uncertainty.

The last chance of a loyal exit died last week. The High Court of Northern Ireland decided that the decision of the prime minister of Great Britain on the beginning of the procedure of an exit from the EU can't be limited to laws of regional parliament. In understandable terms - the consent of parliament to this step isn't required and Theresa May can activate the 50th article of the Lisbon agreement without parliamentary vote. On Friday the pound sharply and noticeably fell in price on all range of the market.

The foreign exchange markets ignored quite good provisional figures of GDP of the USA for the third quarter. The fact is interesting, that except of the data of Advance GDP (better than the estimation), an index of dynamics of salaries and awards (US Employment cost index) shows strange stable surplus (quarterly on +0,6%), which FRS considers as basic element of the macroeconomic model. So increase in rates in December will obviously be, especially, positive dynamics of the state bonds market renewed after the FRS members made a powerful verbal intervention.

USA continues to buy up the bonds of developing countries in vast numbers, and also the percent of foreign holders of the American bonds significantly moved to offshore and European holders. FRS prepared everything for increase in an rate and will be the winner anyway if, of course, the unexpected victory of Trump doesn't lead to new escalation of a problem. The dollar smoothly grew up to main currencies, first of all - to euro and yen, and now any hint on a positive in economy will provide steady demand to the American currency.

Investors more and more doubt a capability of OPEC to come to consensus. The meeting on which again will be discussed individual quotas on oil extraction, is appointed to November 30, but the refusal of Iraq of reducing amounts of production continues to block all initiatives of OPEC. Continuation of opposition can sharply increase aggression of negotiations and cause «domino effect» - other producers can also demand adjustments of their obligations on decrease in production.

In the end of Friday the yen broke through troubled level 105.00 after all. The main reason consider buying up of dollar by large investors before the American report on GDP, as the Bank of Japan, most likely, won't change monetary policy at a meeting on October, 31- November, 1, because it should analyse already taken measures. The price zone of resistance 17500 - 17800 on the Nikkei 225 index, which is irresistible barrier within a year, can baffle to further movements up of USD/JPY.

From the other events we will note:

  1. On Monday EnterpriseProductsPartners reported about a technological leakage from the Seaway oil pipeline, which transports up to 400 000 oil barrels a day from Cushing terminal in Oklahoma, from which supply of the oil, which is traded on NYMEX, to the Gulf of Mexico are performed. This factor led to a sharp imbalance of oil prices of WTI in relation to Brent oil. This «hole» will be closed by next week already.
  2. The government of Venezuela, having lost fight against a hyperinflation, once again issues new notes with a big nominal - 20000 bolivars, that is in 200 times more, than the biggest current nominal. The flying up prices reflect considerably reduction in cost of currency of this socialist country. So far the only profit on new money will be got by several companies, which had contracts for a print of new notes including the world's largest British De La Rue. Now the biggest note of Venezuela will cost $15 in the black market, and the country will again pay hundreds of millions dollars to the companies printing money, to provide the economy with cash.
  3. The capital inflow to the country because of currency inclusion in structure of special drawing rights of the IMF since October 1 of this year became a reason for the next sharp devaluation of yuan. According to the SWIFT system, the share of the Chinese currency in the international payments in September grew to 2.03% - it is the maximum value since January of this year. The government still controls currency by means of daily fixing, which keep in check currency fluctuations in the 2% range. China is quite capable of surprises - the previous rounds of verbal interventions preceded interventions in the foreign exchange market: if volatility grows, the regulator will take measures to calm the markets.

By itself, next week we track FOMC on November 1-2 - accurate signals for December shall follow. Besides, meetings of RBA, the Bank of Japan and the Bank of England are coming, and the NFP data will become a finale.

EUR/USD: the main attention to level 1.0900. Intraday: supports: (1.0968/1.0939) - breakdown is dangerous by return to (1.0858/1.0838); resistance: (1.0980/1.0988) (very strong) - (1.1000/1.1019) - 1.1040 (very strong). The change of a bear trend is possible only at sure trade higher than 1.1100.

USD/JPY: the current correction is executed down. Intraday: resistance: (104.92/105.18) - 105.58 - 106.00 - (106.32/106.66) (protection); supports: (104.56/104.38)(very strong, breakdown will return the price to a zone 102.04) - (104.01/103.84) - (103.47/103.18) - (102.94/102.76)(very strong) - (102.24/102.10) (protection). The trend will define behavior near key level 105.26.

Author: Alexander Ward,
ForexChief Currency strategist