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Andreas Zanin
Analysis | November 3, 2020

KTM FX Weekly: Increased risk aversion

The massive calendar of event risks and data releases still on tap for this week could provide this push, but we think the onus is now on the USD to perform on the election outcome. We believe its relative appeal is starting to give us a direction as the G10 FX has been trading in ranges against the dollar since September 2020.

Ahead of the U.S. election outcome, the dollar index has reaffirmed support since the other week. The whole world is waiting for the 2020 U.S. election outcome. The impact would be massive on the financial markets across the asset classes in the short-term. Most G10 currencies are being underperformed vs. the U.S. Dollar in October where all headlines say, “weak dollar”.

Logged six-day fall: What does it mean to EUR lovers? Our subject currency EUR has been trading Southwards for the sixth consecutive session. In February 2020, twice the price fell for six straight sessions and one time recorded in March. On both these occasions, the common currency placed a bottom and rallied strongly.

ECB: Last week’s ECB meeting was on a dovish tone, but the market is nearly priced in. Lagarde said, “headline inflation is likely to remain negative until early 2021”. So as the inflation looking South, so do the EURUSD. She also highlighted that “the risks surrounding the euro area growth outlook are tilted to the downside.”

Positioning: The latest IMM positioning suggested that “Investors reduce EUR/USD longs for the fourth consecutive week.”

EUR crosses: Along with the EURUSD, euro crosses too underperformed in October. The Japanese Yen was on top gear against the Euro, with 1.75%, followed by GBP with 1.35%. Besides, AUD lost 1.40%. Overall a mixed bag last month.

Fast-forwarding to the current month, the Euro opened on a bearish note. The new European lockdowns could lead to sharp economic contraction, but Biden win could push the EUR assets higher. Besides, the latest PMIs are more favorable than expected. The IHS Markit Eurozone Manufacturing PMI indicated a further improvement in manufacturing sector growth during October.

Data review: 

  • Euro area annual inflation is expected to be -0.3% in October 2020, stable compared to September according to Eurostat’s flash estimate.
  • The preliminary flash estimate for the third quarter of 2020 GDP was 12.7% in the euro area and by 12.1% in the E.U.

PMIs: The Eurozone Manufacturing PMI continued its upward climb in October, reaching 54.8 (Sep – 53.7) to record the most robust growth since July 2018. According to IHS Markit, Germany saw a sharp uplift, but there were only modest upturns in France & Ireland and a decline in Greece.

Source: IHSMarkit

In a press release, IHS Markit cited that “Eurozone manufacturing growth continues to strengthen in October.”

  • Flash Eurozone Services PMI Activity Index at 46.2 (48.0 in September). 5-month low.
  • Final Eurozone Manufacturing PMI at 54.8 in October (Flash: 54.4, September Final: 53.7)

 Data preview: It was a rough week and will be a massive week for global financial markets. We will see the 2020 U.S. election outcome (Tue), Federal Reserve interest rates decision (Thu), and U.S. NFP data (Fri). These massive events and data points could raise volatility in the short-term.

  • Moody’s Analytics said, “Risks to the labor market outlook are weighted heavily to the downside. Initial claims for unemployment insurance benefits fell more than we anticipated this week but remain very high. The unemployment rate stood at 7.9% for September.”

Outside the election, we still have plenty of heavy events lined up the week ahead. The EUR cross lovers focus on Bank of England and Reserve Bank of Australia’s policy meetings due this week. The BoE is likely to hold the rates, whereas RBA is likely to cut the rates.

RBA: After a dovish speech last month, some economists expect the RBA to cut the cash rate from 0.25% to 0.10% and unveil a large-scale asset purchase program at this meeting.

TECHNICAL OVERVIEW

The common currency is currently trading at 1.1640 against the dollar, representing a decline of 0.10% for the session. It briefly fell to as low as 1.1620, reflecting increased risk aversion. However, the price managed to hold the earlier swing low printed at 1.1615.

On the daily chart, the price printed a lower low pattern for the first time since March. And the price lost 100MA on the daily chart and 20MA on the weekly chart. The new profiles are consistent with a temporary drop in EUR/USD in the near-term and a return to EUR appreciation afterward. Since mid-September, we are advocating the bearish Euro, and we keep the same theme in the near-term.

EUR cross: EURAUD

The cross is traced out a medium-term bearish pattern via classic head & shoulder on the weekly chart. Since June, the price failed14 times to close above the 50MA. Shoulders spread between 1.6800-1.6825, flipside neckline located around 1.6030. We observe closely for the next couple of trading sessions.

It is important to always keep in mind the risks involved in trading with leveraged instruments.

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