EUR/USD and AUD/USD break key levels

After a strong US ADP private payrolls report, the market seems to have increased its conviction that we’ll see a strong non-farms payrolls report on Friday.

US jobs
Source: Bloomberg

Add in the strongest reading from the employment sub-component of the services ISM report since August 2005 (at 59.6) and once again we can see why we’ve seen a EUR/USD and AUD/USD break through recent lows, while USD/JPY has broken ¥115.00 today.

Friday’s jobs report will be of great interest to assess the psychology of the market. Throughout 2014 when we’ve seen a miss of 50,000 jobs or more on the payrolls report, the market has gained by an average of 0.6%. So, the mantra, ‘bad news is good news’ rang true, once again. Clearly, this was based on a view that the Fed could keep QE going for longer. True to their word though, the Fed stuck to the script and closed off its QE program. So, the safety net isn’t there anymore and fundamentals should matter more now. A poor number will really paint a clearer picture about whether the market is ready to revert to a more traditional stance and potentially sell-off on bad news and rally on good news.

Recall equities are supposed to reflect economics, however, whether it’s the Fed, RBA, ECB or BoJ it seems clear to me that central banks have used monetary policy to not only make up for the lack of government action, but to push stock prices higher. Stock markets are not supposed to drive economics, but this is what seems to be occurring. Lower rates and cheap money have encouraged record corporate buy backs and dividend increases, which is where all the earnings growth has come from over the years. Excess liquidity has made its way into the equity market (which invariably will happen in periods of low growth and low volatility). However, while we’re seeing signs that higher stock prices are driving discretionary spend around the world, it isn’t translating into the final and ultimate prize – inflation expectations.

So, the calls have resurfaced that monetary policy can only do so much have been widely talked about and invariably this will concern investors and savers. However, the trading opportunities are abundant.

Could the S&P 500 be headed to 2073?

The S&P 500 looks poised to trade as high as 2073 (the top of the rising channel), but the index will need a weekly close above 2019.26. The 14-week RSI has failed to follow the market’s price and has printed triple divergence (or a series of lower lows) and thus could be a warning sign that a major reversal could be on the cards. So again, price action this week is really important and the bulls will really want to see a weekly close above 2019.26. Interestingly some 86% of stocks on the S&P 500 are above their 20-day moving average. While last week this was 94%, this is a level where the index has traditionally peaked.

Asia has been in reactionary mode today and while energy names have done fairly well, at an index level there’s been cautious optimism. USD/JPY broke through the ¥115.00 level, while the Nikkei has reclaimed the 17,000 level and there is certainly a growing view that the Government Pension Investment Fund (GPIF) may have already purchased a large amount of the domestic and foreign equities it recently disclosed on Friday’s portfolio review. Still, there would be further capital flows to come and thus the Nikkei and Topix should continue to be bought on dips.

AUD/USD to test $0.8375?

AUD/JPY would be a pair to keep an eye on given its inverse correlation to volatility. Technically the pair tested the ¥100.00 level yesterday, but has since reversed and is struggling at the former swing high on 5 September (¥98.68). Today’s Australian employment data hasn’t really helped and despite a good net gain on the month, the major revisions to full-time and part-time jobs in September have just added to the confusion. I certainly can’t see the data changing the RBA’s view and tomorrow’s Statement on Monetary Policy (SoMP) could see upside revisions to the bank’s 2015 GDP forecasts. The key, however, will be whether they lower the mid-point for its June 2015 inflation estimate from 2.25% to 2%. AUD/USD has broken key horizontal support at $0.8640 and now targets the bottom of the channel at $0.8375.

Market scuttlebutt has also centred on talk that Chinese officials are in deep discussion around next year’s economic targets, with a view that benchmark interest rate cuts are now very low. This is another AUD negative. Iron ore futures (January) are 1.5% lower today and are dangerously close to printing new contract low below RMB537.

European markets will centre on the ECB meeting, although the open looks likely to be modestly weaker. Clients go into the meeting with a slight short bias in EUR/USD and the German DAX (58% and 55% of all open positions are held short respectively). There is a wide and varied playbook, but ultimately the market is interested in an increased sense of urgency around government bond purchases (full blown QE), a deeper concern around inflation staying at persistently low levels, new language around expanding its balance sheet and whether they lower the charge on loans for its December Targeted Long-term Refinancing Operation (TLTRO).

Elsewhere, we get US weekly jobless claims, UK industrial production and German factory orders. The BoE MPC meeting will be a non-event.

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