Euro set for upside risk

In focus today is the ever falling inflation picture which appears to be stemming predominantly from Europe and the UK, as well as the tapering debate and Chinese economy.

In US trade today Cleveland Fed member Sandra Pianalto (who steps down next year from the board) speaks, while traders will be preparing for narrative from Ben Bernanke, who speaks in Asia trade tomorrow. However, all eyes remain on the US ten-year and despite breaking the multi-year downtrend it should find buyers on moves above 2.9%, given the current low inflation expectations. A move to 3% can’t be ruled out and a subsequent break could be the single biggest catalyst to cause a 5% (or greater) correction in the S&P 500.

Dennis Lockhart’s comments in focus

Of the three 2014 Fed voters who spoke yesterday (Richard Fisher, Narayana Kocherlakota and Dennis Lockhart), Atlanta Fed president Dennis Lockhart’s comments seem to have stood out the most. This is because Lockhart has been fairly neutral on policy of late, while the other two stand at the extremities of the dovish/hawkish divide. However, Mr Lockhart suggests that a discussion around the merits of tapering could occur in the December meeting should be put in context given he would like to see inflation moving back to the target of 2%. These comments carry a strong degree of logic, but the massive ‘if’ is around the inflation argument and we will need to see a sizeable jump in the upcoming core PCE read for this to occur – which seems unrealistic.

China dragging Asia lower

China seems to have disappointed, with both domestic markets (CSI 300 and Shanghai Composite) and regional markets such as the Hang Seng under pressure. Market have seen the Third Plenary report summary and from all accounts likes what they have seen, but simply wants more meat to sink its teeth into. As always, the devil is in the detail and the full report should be released in the coming days. However, the talk on the floors today has been around the clear upgrade around the market’s ‘decisive’ role in resource allocation, which was previously described as having a ‘basic’ role. Any reforms in the market’s functions will target full implementation by 2020, so it’s going to be a slow moving ship. However, strategists, traders and investors alike will be keen to see how these policies will be enacted so they can position around this longer-term.

The falls in China have certainly done nothing to appease sentiment in the region, with the ASX 200 and Japan falling away. The price action in the ASX is looking more and more lethargic by the day and the buyers seem to be lacking any real impetus to push up prices, despite a number of good company earnings reports out today. The banks have once again been at the centre of the sell-off, although with 75% of companies lower on the day market breath has been poor, while the I.T sector is the only sub-sector in modestly positive territory.

A hard job ahead for the RBA

Australian consumer confidence increased 1.9%; however the expectations sub-index fell 2.4% which seems to fit with the recent falls in full-time jobs. Mix in Q3 wage growth, which at 2.7% is the slowest pace in decades, and record house prices, and you have an interesting conundrum for the RBA to manage. Life is never easy for global central banks; however the RBA will be comforted that the AUD/USD has lost over 50% of the gains from August to October and is targeting a deeper move to A$0.9200 in the short term.

AUD/USD, like EUR/USD and cable, seems a touch oversold right now, however I’d be a seller of cable and AUD/USD on rallies from here (although cable needs to close below the neckline of the double top at 1.5894 for a deeper move to the 1.55 area).

European markets look set to follow Asia with a weaker open expected, adding to yesterday’s losses. There is actually quite a bit for traders to focus on; however the currency markets are likely to be most affected by the unfolding events. Spanish CPI (final) is not expected to change, with inflation likely to fall 0.1% on the year. ECB member and head of the Bundesbank Jens Weidmann is due to speak in European trade and given he sits in conservative split in the ECB, his comments could put upside risks in the EUR, which is looking like it wants to break the September 27 pivot of 1.4560 against the AUD.

Sterling also takes centre stage, with jobless claims and the BoE inflation report in play, and with cable delicately poised after yesterday’s weaker-than-forecast CPI numbers, both these events could be very interesting.

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