October always presents an interesting month for trading; the beginning of the fourth quarter brings about a few very important events all at once. This year, we have: increased concerns about global growth, rooted in China and Europe; a European sovereign debt crisis that is nowhere close to being resolved yet markets have treated it as if the definitive end is in sight (see: US equity markets; Italian and Spanish bond yields); third quarter earnings; and seasonally, the last portion of the bearish six-months of the year for US stocks.
Today, our attention is focused on earnings season, as two major US companies with heavy exposure to emerging markets and China have produced better than expected results. Alcoa Inc., the largest US aluminum producer, beat its EPS target, suggesting that near-term concerns out of China have been overblown. However, with the global demand outlook cut by -1%, there is still room for concerns that global growth will slow. Nevertheless, it is important to consider that Iron Ore, Australia’s main commodity export, surged by over +6% today, providing support for the Australian Dollar – this reinforces the view that concerns of a slowing China have been overblown in the near-term.
But even if infrastructure projects slow, perhaps consumption may still be elevated. Yum! Brands, whose 44% of revenue comes from China, said yesterday that “In China, our…competitive positions are stronger than ever.” The implication here is that the Chinese middle class, long foretold to be the key to future growth prospects, continues to strengthen – once again, perhaps concerns over a hard landing for China are overblown in the short-term.
With earnings underway and already producing some upbeat tones, the US Dollar has been muddling sideways to lower, which isn’t a surprise given the lack of positive economic data due out this week.
Taking a look at credit, peripheral European bond yields are mixed, underpinning meager Euro weakness. The Italian 2-year note yield has decreased to 2.288% (-0.6-bps) while the Spanish 2-year note yield has increased to 3.176% (+0.7-bps). Similarly, the Italian 10-year note yield has decreased to 5.076% (-0.9-bps) while the Spanish 10-year note yield has decreased to 5.777% (-1.0-bps); lower yields imply lower prices.
RELATIVE PERFORMANCE (versus USD): 10:33 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.02% (+0.55% past 5-days)
The economic docket is very light once again, with no major data releases due out during the European-North American crossover. However, at 14:00 EDT / 18:00 GMT, the USD Federal Reserve releases the Beige Book Economic Survey, which given the recent controversy surrounding the and the efficacy of the September labor market release, could prove to be more market moving than prior releases. If the view that the employment picture did drastically improve in September, the US Dollar could see a nice afternoon kick.
EURUSD: I remain neutral on the EURUSD as prices remain within our key levels. Resistance comes in at 1.2895/1.2900 (20-EMA), 1.2930/35 (61.8% Fibo on February 2012 high to July 2012 low), 1.3000, 1.3070/75 (October high), 1.3145, and 1.3165/75 (September high). Support comes in at 1.2820/30 (200-DMA, late-April swing high), and 1.2750/65 (ascending trendline off of July 24 and August 2 lows, 50-EMA).
USDJPY: No change from Monday: “Although price breached the 78.40/60 zone [on Friday], overhead resistance at 78.80/90 (100-DMA, descending trendline off of the April 20 and June 25 highs) proved too great to overcome. Thus, the downtrend from April remains. With the USDJPY holding near 78.10/20, this is the bull/bear line: a hold above gives scope for a rebound to 78.40/60, whereas a close below opens up room for a move towards 77.90, 77.65/70 (June 1 low), 77.40/45 (September 28 low), and 77.10/15 (September low).”
GBPUSD: Price has been upheld by major supported noted yesterday at 1.5975/95 (former channel resistance off of June 20 and August 23 highs, 50-EMA). Accordingly, price remains below the 20-EMA and the descending trendline off of April 2011 and August 2011 highs (confluence at 1.6100/20). Until the GBPUSD gets back above this trendline, we are neutral for the coming days. Support comes in at 1.5975/95 and 1.5770/85 (late-August swing lows). Resistance comes in at 1.6100/20, 1.6135, 1.6260 (the former April swing highs by close) and 1.6300 /10 (September high).
AUDUSD: Despite some muddling the past few days, the AUDUSD is carving out a short-term bottom. It is crucial that the pair closes above 1.0240/55 today, the descending trendline off of the September 12, September 20, and September 26 lows. Our outlook is unchanged as price has remained within our key levels. Resistance comes in at 1.0250/55 (100-DMA), 1.0255/75, 1.0330, 1.0405/25 (mid-August swing lows), and 1.0470/85 (former intraday swing levels). Support comes in at 1.0160/75 (mid-July and early-September swing levels), 1.0100/10, and 1.0000.
SPX500: For the first time since early-August, the 20-EMA been seen two-days of consecutive pressure, and that over this time frame, the daily RSI has moved below 50 for the first time. Support comes in at 1420/25 (the 61.8% Fibo retracement on June 2012 low to September 2012 high, ascending trendline off of the June 4 and July 24 lows, 50-EMA) and 1400. Resistance comes in at 1445 (20-EMA), 1458/60, 1475, and 1498/1504.
GOLD: The steep ascending trendline off of the August 15 and August 31 lows, at 1770, broke yesterday, though the 20-EMA at 1759/60 has held up. If this soft support breaks, 1750 is the next swing level lower to watch for. Resistance comes in at 1785/1805 (advances rejected in November 2011, February 2012, and October 2012 thus far) and 1840.
--- Written by Christopher Vecchio, Currency Analyst
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