The RBA stick with their current monetary policy and risk markets take a breather.
The sell-off yesterday was on the back of uncertainty around the Evergrande situation and now we’re waiting for the Chinese markets to reopen tomorrow and the outcome of the company’s default on debt interest payments. The RBA has stuck to their current monetary policy, and the Canadian elections have returned Justin Trudeau for the 3rd term.
The markets have paused after yesterday’s correction due to increased bearish sentiment. In the overnight session, the leader of Canada’s opposition conceded defeat in the General Election, which gave the Canadian dollar a boost. Seems better the devil you know than the one you don’t.
Market analysts from ING and S&P are at odds with regards to the amount of intervention the Chinese authorities will give Evergrande. ING said they expect the Chinese government restructuring team to help the beleaguered Evergrande, whilst the Chairman of Evergrande said he was confident the company will ‘walk out of the darkest moment and deliver property projects’ and that the company would fulfill responsibilities to buyers, investors and partners. S&P says they do not expect the Chinese government to provide any support.
The US House Rules Committee did not reconvene yesterday but the Democrats are due to deliver their government spending bill which includes provisions for the debt ceiling, today. If the debt ceiling could be lifted before a government shutdown the banks would be able to buy Treasuries, which is effectively a reserve drain. This would allow them to hold on to their tradeable products like equities and derivatives and this could slow any further stock market declines. Currently, the leverage ratios are forcing banks and money managers to park $1.2trln with Fed in overnight reverse repose.
The RBA held off from a rate hike during the September meeting and reiterated the comments of no rate hike until 2024. They’ve reduced their asset purchases to A$4 billion a week and will continue at this rate until mid-February 2022.
China is once again on holiday and with the conclusion of the Canadian elections, the CAD is the strongest of the currencies this morning. The move out of the yen but not from the Swiss franc indicates that this composition is not fully risk-on but looking at the equities markets there has been a slight bounce at support levels. The US dollar has also reversed from key resistance and if the selling continues and we get a dovish Fed, there is a chance that we could correct back to the $91.50 level.
With the FOMC meeting and press conference tomorrow I am not expecting a big move in the US dollar today but marking up a possible head and shoulders type of pattern may highlight key levels to watch in the coming sessions. A break of the neckline and we can expect a visit to $90 again. A test of the moving averages and then a move back above the potential right-hand shoulder and we’re looking for stop runs to the upside.
Such is the power of the greenback to move the markets, the coming together of a weakening US dollar and a strengthening Canadian dollar could actually see the biggest moves today in the forex markets. The Canadian dollar is nicknamed the ‘Loonie’ as it has a tendency to rip several hundred pips in a day.
The USDJPY is still within a corrective wedge, so traders will have to wait for a clear breakout, retest, and continuation trade, with the probabilities of a rising trend remaining.
A lot of talks have been around the daily 50 ema on the S&P500 which had acted as support 9 times prior to the sell-off yesterday. Looking at the weekly chart the S&P500 is finding support at the 20-period ema which could act as better support due to its higher time frame. The chart above is the UK FTSE100 which has clearly tested the daily 200 ema and a move above yesterday’s higher should at least open trade back into the recent balance area between 7000 and 7091, which is capped by the daily 50 ema.