Key themes for the week

USD strength, central banks, gold, energy, global growth and geopolitical risk - Chris gives us a round up of the week ahead.

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Source: Bloomberg

Further USD strength

After Friday’s strong US payrolls report, traders should potentially focus on tonight’s Labor market conditions index (no release time set). This index is one the Federal Reserve’s key labour market indicators and one they focus on intently as the index effectively blends 19 various economic indicators (the methodology can be found here). We also get the FOMC minutes, as well as 14 various Fed speeches.

Increased commentary around currency moves from governments and central banks

Given the moves in the G10 currency complex, it has become apparent that both central bankers and government officials have started to talk more actively about exchange rates. This is most apparent in Japan, the US and New Zealand. However, if you look at the Australian real effective exchange rate (REER) in relation to the AUD’s adjusted terms of trade, it suggests the Aussie should be significantly weaker.  Will the RBA become more aggressive in currency fighting language?

This week’s RBA meeting could be interesting, given the falls in the AUD of late. Will there be a more positive outlook?

Gold testing key support

Spot gold is testing key support at $1180 to $1182. This is the June 2013 and December 2013 double bottom and a break of this support would be very bearish. Given the negative correlation with the USD, this break would naturally need to coincide with EUR/USD weakness. Technically, EUR/USD looks good for a move to the 200-month moving average at US$1.2211 over the medium term, and this level has seen strong support over the years.

Weakness in energy prices

The weakness of late seems partly driven by USD strength. However, we also know that supply has been a strong catalyst, with last week’s news that OPEC production has reached its highest level in two years. This supply has been driven by increased output from Saudi Arabia and Libya. Saudi Arabia has also cut its official selling price for crude, with the growing concern that the nation prefers to maintain market share, rather than supporting prices. The falls in energy prices are hurting European inflation expectations, given the ECB incorporates Brent crude into its inflation basket.

US earnings season

US Q3 earnings kick into gear this week, with names like Costco, Monsanto, PepsiCo and Alcoa in play. Strategists will focus most closely on levels of capital expenditure and corporate buybacks (Q2 buybacks slowed from a record level in Q1). Traders are also interested in seeing how USD strength and energy prices have impacted earnings. Given the moves in these variables, it seems logical that quarterly earnings (on an aggregate basis) could fall modestly relative to Q2.

Global growth concerns

These concerns are largely focused on Europe and, to a degree, China, but it is clear global growth is on the radar. Keep an eye on narrative on this subject when G20 finance ministers meet this week, while we also hear from the World Bank and IMF – who may cut forecasts. In Europe we’ve seen German and French manufacturing PMIs fall into contractionary territory. Italy cut its growth numbers last week, while France delayed plans to reduce its budget.

Geopolitical risks

Tensions in the Ukraine are clearly hurting growth figures in Europe, but traders are also focusing on protests in Hong Kong and the worrying rise in Ebola cases. The impact on the Hong Kong economy will largely be determined by the length of the protests, but it seems we are entering a potentially dangerous stage as officials lose patience.

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