Risk-off Prevails, AUD Tumbles, GBP Rallies

7 min readOct 15, 2020

Investors’ appetite remained subdued for another day as concerns over a delay in distributing a coronavirus vaccine and downbeat comments over a new US fiscal package continue to weigh on market sentiment. In the FX world, the Aussie was the main G10 loser following rate-cut remarks by RBA Governor Lowe, while the British pound was the big winner, following sanguine Brexit headlines.

Vaccine and Stimulus Concerns Continue to Weigh

The US dollar traded mixed against the other G10 currencies on Wednesday and during the Asian morning Thursday. It gained against AUD, NZD, NOK, and CAD in that order, while it lost ground versus GBP, CHF, and JPY. The greenback was found virtually unchanged against EUR and SEK.

The strengthening of the safe-havens franc and yen, combined with the weakening of the commodity-linked Aussie, Kiwi, and Loonie, suggests that markets continued trading in a risk-off fashion yesterday and today in Asia. Indeed, looking at the performance in the equity world, we see that, although major EU indices ended their sessions mixed, the US ones closed in negative waters, with the risk aversion rolling into the Asian session today. Even though China’s Shanghai Composite is nearly unchanged, Japan’s Nikkei 225, Hong Kong’s Hang Seng, and South Korea’s KOSPI are down 0.54%, 1.33% and 0.66% respectively.

It seems that concerns over a delay in distributing a coronavirus vaccine continued to weigh on market sentiment, with fresh downbeat comments over a new US fiscal package adding to those worries. Yesterday, US Treasury Secretary Steven Mnuchin said that “Getting something done before the election and executing on that would be difficult”, diminishing even further any hopes for a bipartisan deal before the election. Remember that on Tuesday, House Democrats rejected USD 1.8bn offer from President Trump.

As for our view, it has not changed. Looking at the charts, the technical picture of several stock indices, especially the US ones, remains relatively positive, which means that the latest retreat may be an opportunity for some buyers to jump back into the action. That said, we repeat for the umpteenth time that, even if we see a rebound in the next days, we are reluctant to trust a long-lasting recovery. We will stick to our day-by-day approach, especially with daily covid cases hitting a new record yesterday. On top of that, as we get closer to the US election day, we believe that investors will start getting more cautious, avoiding large positions that could result in major market moves.

Nasdaq 100 — Technical Outlook

Nasdaq 100 continues to move lower, after Monday’s test of the 12257 barrier. Given that the index is still trading above a short-term tentative upside line drawn from the low of September 24 th, the current slide might be seen as a temporary correction. Therefore, for now, we will take a somewhat positive approach.

A move further south could bring the price to the 11753 zone, marked by an intraday swing high of September 4 th, or to the aforementioned upside line for a quick test. If the index bounces, it might travel back to the 11845 obstacle, or even to the 12027 area, marked by an inside swing low of October 13 th. If the buying doesn’t stop there, the next possible target may be the current highest point of this week, at 12257.

Alternatively, if the aforementioned upside line breaks, that might lead to a change of the current short-term uptrend. More sellers may join in if the price falls below the 11613 hurdle, marked by the high of October 1 stand an intraday swing high of October 9 th. That’s when the index could slide to the 11504 obstacle, or even the 11380 hurdle, marked by intraday swing highs of October 5 thand 7 th. Initially, Nasdaq 100 may stall there for a bit, but if the sellers are still feeling confident, a break of that 11380 hurdle might clear the way to the 11212 level, which is the current lowest point of October.

RBA Gov. Hits the Aussie, Brexit Progress Lifts the Pound

Back to the currencies, the Aussie was the main loser among the G10s, coming under strong selling interest after RBA Governor Philip Lowe said that more stimulus is possible, with the options including bond buying and a small rate cut. At its latest gathering, the RBA kept its monetary policy settings unchanged, disappointing those looking for further easing after Deputy Governor Guy Debelle flagged the prospect. Now, Governor Lowe’s remarks may have revived speculation on that front, with the ASX 30-day interbank cash rate futures yield curve suggesting a 66% probability for a 25bps rate cut at the upcoming gathering.

The British pound was the main gainer, helped by headlinesthat the UK and the EU had made “some progress” in trade talks this week, while reports noted that the two sides are willing to continue negotiations past their mid-October deadline. Remember that EU chief Brexit negotiator Michel Barnier already said that talks could continue, but the UK’s position was not that clear. Thus, yesterday’s reports have cleared the picture as they suggest that the UK will not walk away from the negotiating table after the EU summit starting today. With all that in mind, we will pay close attention to the summit for clues as to how willing the two sides are in finding common ground. More positive remarks are likely to keep the pound supported, while the opposite may be true in case there is a disappointment, namely comments that the gap of differences is very hard to close.

GBP/AUD — Technical Outlook

After a brief drop below its short-term upside support line taken from the low of September 11 th, GBP/AUD was able to reverse from the area near the 1.7957 zone and travel back up, coming close to one of its key resistance barriers, at 1.8286. For now, we will take a bullish approach and continue aiming higher.

If the pair moves a bit higher, but finds it hard to break above 1.8286 barrier straight away, the rate may correct back down a bit. That said, if it is able to stay above the high of October 13 th, at 1.8197, the bulls might take charge again and lift GBP/AUD higher. If this time the 1.8286 zone surrenders and breaks, this would confirm a forthcoming higher high, potentially opening the door for a push to the 1.8410 level, marked by the highest point of August.

In order to examine lower areas, we would prefer to wait for the violation of the previously discussed upside line first and then a drop below the 1.8065 territory, marked by an intraday swing high of October 12 th. Such a move may invite more sellers into the game, potentially clearing the path towards the 1.7957 area, marked near the lows of October 9 thand 14 th, where the rate could stall for a bit. However, if that area is not able to withstand the bearish pressure and breaks, the next possible target might be the current lowest point of October, at 1.7846.

As for the Rest of Today’s Events

Today, besides the headlines surrounding the EU summit, we will also monitor the US initial jobless claims for last week, the New York Empire State manufacturing index for October, as well as the EIA (Energy Information Administration) weekly report on crude oil inventories. Initial jobless claims are expected to have declines somewhat, to 825k from 840k, while the NY index is forecast to have slid to 15.00 from 17.00. The EIA report is anticipated to show that oil inventories slid 2.835mn barrels after rising 0.501mn. That said, bearing in mind that the API (American Petroleum Institute) reported a 5.422mn barrels slide, we would see the risks surrounding the EIA forecast as tilted to the downside.

We also have five speakers on today’s agenda: ECB President Christine Lagarde, Dallas Fed President Robert Kaplan, Fed Board Governor Randal Quarles, BoC Deputy Governor Timothy Lane, and BoE Deputy Governor Jon Cunliffe.

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Originally published at https://www.jfdbank.com on October 15, 2020.