Investors Continue to Increase their Risk Exposure

EU and US indices continued to gain somewhat yesterday, while the US dollar stayed on the back foot. It seems that investors continued to cheer upbeat earnings, despite maintaining bets over tighter monetary policy by major central banks. The Fed is still expected to push the hike button in the last quarter of next year, but there are others who did it already, and others who are expected to do it later this year.

EU and US Shares Stay Supported, but Asian Ones Slide

The US dollar traded lower against all but one of the other major currencies on Wednesday and during the Asian session Thursday. It lost the most ground versus CHF and JPY, while the only currency against which it did not lost ground was EUR. EUR/USD was found virtually unchanged this morning.

The fact that the US dollar continued to broadly weaken suggests that the financial world continued trading in a risk-on fashion. However, the strengthening of the safe-havens yen and franc points otherwise. Therefore, in order to clear things up with regards to the broader market sentiment, we prefer to turn our gaze to the equity world. There, major EU and US indices were higher or unchanged, but the picture changed during the Asian trading today. Japan’s Nikkei 225 lost nearly 1.9%, and although China’s Shanghai Composite gained, Hong Kong’s Hang Seng and South Korea’s KOSPI slid.

It seems that better-than-expected earnings continue to be the main driver for the markets. Yes, they may not point to a skyrocketing global economy, but let’s not forget that entering the season, the bar was very low and thus, anything better than what was anticipated is happy music to investors’ ears. So, if this is the case, what was the reason for the softening in appetite during the Asian trading today? Maybe that was due to Evergrande’s failure to seal a deal on selling a USD 2.6bn stake in its property services unit. Yet, China’s Shanghai Composite was the only index in positive territory, and this may be due to the property giant securing an extension of more than three months on a defaulted bond, or due to Chinese officials reassuring investors that overall risks in the property market are controllable.

With long-dated yields around the globe also rising, it seems that investors have not scaled back their tightening bets, despite increasing their risk exposure lately. According to the Fed funds futures, they are anticipating an interest rate hike by the Fed to be delivered in the last quarter of 2022. A while ago, such a move was expected for the first three months of 2023. That said, there are other major Banks which have already hit that button, like the RBNZ, and others which are expected to do it later this year, like the BoE. Therefore, we would expect the US dollar to continue underperforming against the Kiwi and Sterling, especially if sentiment remains supported for a while more.

GBP/USD — Technical Outlook

GBP/USD traded higher yesterday after it hit support at 1.3742 However, the advance was stopped near the peak of October 19th, at 1.3835, and then the rate retreated. Overall, Cable continues to trade above the upside support line drawn from the low of September 30th, and thus, we would consider the near-term outlook to still be positive.

A clear and decisive break above the 1.3835 barrier would confirm a forthcoming higher high, but we would like to see a clear move above 1.3854, the peak of September 15th, before we get confident on larger advances. Such a move could pave the way towards the high of the day before, at 1.3913. That said, before the next positive leg, we see decent chances for the latest pullback to continue for a while more, perhaps for another test near the 1.3742 zone.

The move that would make us start examining a bearish reversal is a dip below 1.3675. This may confirm the break below the upside support line taken from the low of September 30th and could allow declines towards the 1.3575 zone, which supported the rate on October 12th and 13th. If the bears are not willing to stop there, then we may see them pushing the action towards the low of October 4th, at 1.3532.

NZD/JPY — Technical Outlook

NZD/JPY has been in a steep short-term uptrend since October 6th, as marked by an upside line taken from the low of that day. Having said that, the rate hit resistance at 82.50 during the Asian trading today, and pulled back. In any case, the rate remains well above the aforementioned upside line and as long as this is the case, we will stay positive.

The setback may continue for a while more, but the bulls may decide to shoot again from near the 81.22 level, marked by the inside swing high of October 17th. A rebound from there may result another test at 82.50, where a break could take the rate into territories last seen in 2017. The next resistance may be at 82.80, marked by the high of September 20th of that year, the break of which could carry larger bullish implications, perhaps towards the 83.90 zone, defined as a resistance by the peak of July 27th. 2017.

On the downside, we would like to see a dip below 80.17 before we start examining whether the bears have gained full control. The rate would already be below the pre-mentioned upside line, and we may see declines towards the 79.16 or 78.60 levels. If neither barrier is able to halt the slide, then the rate could slide towards the 77.93 zone, defined as a support by the inside swing high of October 6th.

As for Today’s Events

The only releases worth mentioning are the US existing home sales for September, with expectations pointing to a small increase, and the initial jobless claims for last week, which are forecast to have also increased fractionally.

We also have two speakers on today’s agenda and those are Fed Board Governor Christopher Waller and RBA Governor Philip Lowe.

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