The Weekly Close Out

Dollar Index (DXY):

The greenback benefited this week from the multifactorial risk-off issues percolating in markets. We had a tech rout on Monday, stagflation concerns (slowing economic growth and rampant inflation) caused by soaring energy cost, continued Chinese property distress. Debt ceiling uncertainties have temporarily been solved with the date for a decision being pushed out to December, however, there are plenty other deadlines occurring at the same time which could lead to heated debates and lack of progress. The debt limit was raised by $480 million which Treasury says gives them till the 3 December. Inflation breakevens surged on the back of the gas price resembling more of a cryptocurrency than a commodity causing a rapid rise in the US 10-year yield as fears of strong inflation feed into a more rapid removal of central bank stimulus. PMI numbers for the US topped expectations.

The big macro event for the week is the jobs data out today. We got a preview from the ADP private payroll number out on Wednesday - coming in at 568k, above the 430k expectation and up on last month’s 340k print. Job growth rose across every sector with Leisure and Hospitality leading the charge. As the virus moves to the rear view mirror and stimulus cheques expire people will naturally come back into the workforce. This portends well for successive months’ jobs numbers. Initial claims beat expectations of 348k coming in at 326k, improving on last week’s 364k. The NFP number came in way below the 500k expectation at 194k, the average hourly earnings MoM beat expectations and the headline unemployment rate was better than expected (participation rate off very minorly). The majority of the slump in jobs was down to government payrolls with private payrolls only marginally missing. This is most likely why the dollar is only a tad weaker post the release. Despite this the November taper still looks on track with Fed Fund Futures still pricing in a December 2022 hike. The fundamentals and technicals still look solid for the dollar. We’ll have minutes out from September’s Fed meeting next week as well as CPI data which will be relevant given inflation is the hot topic at the moment.

(Source: TradingView - Past performance is not indicative of future performance)

The dollar has been on a tear, finally breaking out from its 93.2 - 89.65 range. Price has been moving higher and higher within its ascending channel, supported by the 21-day EMA as price dips lower. Both moving averages are pointing upwards showing momentum is bullish. The RSI has rebounded off the 55 level and is nearing overbought territory again, however, has rolled over slightly today. Targets wise - on the upside 94.5 would be my initial target, beyond there 95 would come into play. On the downside, zones I'd be paying particular attention to would be the 21-day EMA and the 93.2 former resistance just above the 50-day SMA.

EURUSD:

Europe got embroiled by the gas crisis and things were looking hairy until old Vlad Putin came to the rescue, announcing he’d be opening up the taps and letting more supply hit the market. A slightly more positive data release from the eurozone and its largest economy Germany indicated better than expected PMI numbers both composite and services. Retail sales and industrial production disappointed coming in weaker than expected though. As ever one of the most dovish central banks out there failed to disappoint as ECB Governing Council member Yannis Stournaras sent a message to the market that investors shouldn’t expect premature interest rate hikes. On the geopolitical front Armin Laschet, leader of the CDU/CSU is stepping down as coalition talks stumble.

(Source: TradingView - Past performance is not indicative of future performance)

The euro has been weak since the German Election results. Price tried to rally above the 1.16 level, but has again been pushed down lower to the mid 1.15 region. The moving averages all indicate bearish momentum for EURUSD. The RSI, however, is indicating negative divergence with price and is trying to climb out of oversold territory. Shorting the rallies to me seems like the best way to play EURUSD. On the upside I'd monitor 1.16 and 1.17 just above the 21-day EMA (been working well to cap rallies). On the downside, 1.15 would be the zone I'm looking towards.

GBPUSD:

The pound has been surprisingly resilient despite also seeing a meteoric rise in its domestic gas price and labour shortages. If one pulls up the chart for 2 -year Gilts then it becomes apparent what could be holding sterling’s head above water. Looking at the OIS market too, it’s clear investors are pricing in an accelerated timeline for hikes. On the data front compositive and services PMI data beat expectations, but construction failed to carry the baton. I think what really caught my attention this week was 10-year UK breakevens nearing 4% (yes, I know its priced of RPI, but this is still very punchy). On the geopolitical front we had two issues raise their head. The NI Protocol with the UK’s Frost taking a more hawkish line as a result of economic, societal or environmental difficulties as well as diversion to trade. He wants to see real change from the EU or he has made clear he will trigger Article 16. The EU commission has replied stating they will release their proposals next week Wednesday. So we’ll have to see how these are received by Downing Street. Secondly, France threatened to cut off electricity supply on the basis of disagreements over fishing rights. The EU didn’t offer their support in this regard with France acting unilaterally. Next week we’ll get labour and GDP data out from the UK.

(Source: TradingView - Past performance is not indicative of future performance)

The turn of the month to October brought with it strength for Cable as price rebounded from the low 1.34 region to just shy of 1.365. The 21-day EMA is doing well to provide some resistance as well as the horizontal resistance. The RSI has ramped up again and is nearing the 53.66 level which capped previous rallies. The shorter moving averages are both pointing downwards which will need to turn for the bulls. Targets wise, on the upside 1.366 resistance would need to be cleared first then then the 50-day SMA around 1.373 would be the next level to monitor. On the downside, 1.355 and the low of 1.34 would be prudent to keep an eye on.

USDJPY:

With all the action we’ve seen in bond land it would be remiss not to have USDJPY on your radar given its close correlation with US yields. With the robust rise we’ve seen in the US 10-year yield, USDJPY has ramped up aggressively coming very close to tagging the elusive 112 area. Price has rebounded off the 110.8 resistance now acting as support (21-day EMA also right on that level). There's still room for USDJPY to run further looking at where the RSI is currently. Targets wise, for bulls the former high of 112 would be a good target. On the downside, 110.8 with the 21-day EMA would be good to look out for.

(Source: TradingView - Past performance is not indicative of future performance)

Gold:

The yellow metal has been getting hit on multiple fronts with both nominal and real yields rising which feeds through into dollar strength creating a vicious circle for the popular commodity. Inflationary and risk-off concerns were likely providing some support, but certainly not enough on its own to reignite a bull trend. The jobs report provided bulls with something to chew on as a solid bid came in. We'll have to see if it can be sustained as we close into the weekend.

(Source: TradingView - Past performance is not indicative of future performance)

Gold has been under pressure now since it topped out at $1830. It doesn't look like conditions are going to improve for the shiny metal either any time soon. However, it really liked today’s jobs report and is up over a percent. The 21-day EMA has been capping price rallies, but price sliced through here. The RSI is just below the 55 level and is now heading higher. Targets to have on your radar are $1775 and $1800 on the upside (both near the 50-day SMA and 200-day SMA). On the downside if price breaches the $1750 level then $1725 would be next up.

Crude Oil:

Oil’s rally has been something else. The speed and strength of the move will have caught many off guard. The move was catalysed at the start of the week by OPEC+ sticking to their plan, only releasing 400k bpd for the month of November into the market not coming close to plugging the supply demand deficit. Then the stratospheric gas prices would have led to some commodity substitution away from gas to crude helping the demand side of the equation. That could be a strong bullish factor for oil as we head into winter if gas prices continue to push higher despite now falling quite a bit now. We saw a surprise build in US inventory, coming in higher than the expected drawdown – the second consecutive week. The Department for Energy put to bed rumours that they may tap into their strategic oil reserves giving another boost to oil prices. Iranian Nuclear talks seem to be moving at a glacial pace and an imminent supply of their crude seems highly unlikely.

(Source: TradingView - Past performance is not indicative of future performance)

The chart shows almost a straight line move higher. Momentum has been very strong, but I can't help but think maybe price is due a cooling off and a minor correction before another leg higher. Price is stretched beyond its 50-day SMA and 200-day SMA as well as being in overbought territory on the RSI. Could we see some mean reversion here? Targets wise, for the bulls - $85 would be the target to get to and on the downside - $80 and below there at $78 (21-day EMA there too) would be where I'm watching.