Attack on the Fed
Donald Trump is becoming increasingly more vocal against the Fed’s policy of aggressive interest rate hikes. It has gotten to the point where he alleged a political motive behind their policy. The President criticized Fed Chair Jerome Powell saying “Every time we do something great, he raises the interest rates.” He went on to say that his predecessor Obama had zero interest rates when trying to improve the economy, while his own presidency is being almost intentionally undermined by the Fed’s interest rates. Casting doubts on the central bank’s objectivity undercuts their authority as it implies that their policy is politically motivated rather than impartial and professional. This conflict harms the credibility of both parties and weakens investor confidence.
Rising Volatility
Increased volatility is not unusual for Flash Report season, however, the volatility has been particularly high this time around and the market moved unpredictably on several occasions. Early yesterday US indices fell below their October 11 low, then suddenly corrected back upwards. It still wasn’t enough for it to move back to positive territory before closing. The Asian trading session inherited North America’s optimism, resulting in a 0.3% increase for both Nikkei and the Shanghai Composite. The Hang Seng and KOSPI on the other hand closed in the negative. Meanwhile oil had center stage on the commodities market due to its rapid decline. Yesterday it dropped 4% and today it showed no signs of slowing down. WTI is at approximately at 66.30 while Brent’s below 76.30 near its two month low.
S&P 500
Report season continues today for corporations part of the major indices. These reports include Boeing, AT&T, Microsoft, Visa and Ford. The financial sector’s Q3 reports have not been bad so far, however, the outlook of companies heavily dependent on overseas sales has declined. This could be one of the factors affecting the most recent wave of stock market sell-offs.
The market successfully consolidated following a sizable decline on October 10, although the rebound still lacked the momentum to retrace earlier highs. The turning point was 2823. From there the market turned bearish once again. The chart’s movements appear to match the drawn trendline, showcasing the formation of a downwards trend and yesterday’s new low seems to confirm this direction. The new low is 2692, making that line the the defining price level. Yesterday’s price increase following a rebound from this level could be interpreted as a good sign, although the fact that 40% of its gains were lost over the latter half of the Asian trading session does cast some doubts on it. In effect 2753 has become the resistance line that forms an upper limit for the potential trading range that’ll define the direction of today’s trading if broken.
USDCAD
Interest rate meetings are always a crucial event for the currency market. Bank of Canada holds it’s meeting today, making this a potentially exciting day for the Canadian dollar. The market clearly expects that Canada’s central bank will follow the example of its US counterpart and raise interest rates. The 25 base point increase seems a foregone conclusion, which makes one wonder why the USDCAD pair was at price levels near 1.3, a one and a half month high, in anticipation of the event. The USD’s relative strength seems unquestionable even though Canada’s central bank seems to be moving on a trajectory similar to that of the Fed.
Applying the Fibonacci tool to the pair’s October movements gives us some insight into how it may potentially be traded following the interest rate decision. At first sight the most probable outcome is the CAD’s short term strengthening. The pair’s trend on the other hand points upwards, making the most likely scenario that the pair will test the CAD trendline and presumably nothing more. This movement may bring price back down to where the trendline and the 25% Fibonacci retracement level intersect. The two will likely meet near 1.303 and that line will act as a powerful obstacle. From that point onward the USD will likely strengthen and perhaps even gain enough momentum to make another attempt at breaking the 1.3122 resistance line. The line already reversed three attempts to break it, making it obvious that it requires more momentum than a simple 30-40 pip correction before it’ll be successfully breached. The ideal setup for that happening would be a 80-100 point decline following the interest rate meeting, which could attract a sufficient number of buyers.
Sincerely,
Laszlo | Market Analyst
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