Analysts at TD Securities provided their view on Friday's release of Eurozone/UK PMI prints, which resulted into a modest rebound for the EUR/GBP cross.
FX Strategists at UOB Group think the probability of a move higher in GBP/USD appears somewhat mitigated for the time being.
Karen Jones, Team Head FICC Technical Analysis at Commerzbank, suggests that occasional bullish attempts in the European cross are seen meeting initial hurdle at 0.8635 ahead of 0.8802.
FX Strategists at UOB Group note USD/JPY is seen grinding lower in the next weeks, with the next target at the 108.00-handle.
Karen Jones, the Team Head FICC Technical Analysis at Commerzbank, suggests GBP/USD continue its march north with the next target at 1.30 and possibly above.
In view of FX Strategists at UOB Group, extra weakness in the Aussie Dollar seems to have lost momentum, although a test of 0.6765 still remains on the table.
24-hour view: “AUD traded between 0.6783 and 0.6814, relatively close to our expected sideway-trading range of 0.6785/0.6820. The soft closing in NY (0.6787) suggests the immediate risk is on the downside. That said, in view of lackluster momentum, any weakness is unlikely to threaten the solid support at 0.6765. Resistance is at 0.6805 followed by 0.6820”.
Next 1-3 weeks: “AUD surrendered most of the gains from Tuesday (19 Nov) as it declined by -0.40% and closed at 0.6802 in NY. Despite the relatively soft price action, we continue to hold the view from yesterday (20 Nov, spot at 0.6820) wherein the “odds for further AUD weakness have diminished”. However, as highlighted, only a break of 0.6845 (no change in ‘strong resistance’ level) would indicate the current weakness has stabilized. Until then, another ‘down-leg’ to 0.6765 is not ruled out just yet”.
The Eurozone economy weakened further in November as services become more affected by the slowdown, and that's sparking more growth concerns, Bert Colijn – Senior Economist Eurozone at ING – commented following Friday's release of the flash version of Eurozone PMIs.
“Eurozone PMI decreased slightly in November, from 50.6 to 50.3. As a reading below 50 indicates contraction in the business economy, it seems that growth is slowing to a snail’s pace in the fourth quarter. Spillover effects from the manufacturing recession to the service sector are at the heart of the decline as employment growth is slowing, which is negatively affecting domestic demand. The service sector slowdown is, in turn, impacting price growth as businesses indicate that prices charged rose at the slowest pace in three years, which also reflectes weaker input costs. For the ECB, this means that little upside to the inflation outlook can be expected in the coming months. All in all, as risks to the global trade outlook remain; we still have no signatures under the phase one deal between the US and China and elections in the UK could determine the fate of the Brexit deal. Without some of these threats off the table, it is tough to see the Eurozone rebounding in the coming months. The winter months will, therefore, be a nail biter for Eurozone growth.”
Japan's government trimmed its assessment of the labour market in November for the first time in five years and also cut its view on corporate profits as slowing global growth weighs on the manufacturers.
The government left unchanged its overall assessment that the world's third-largest economy is recovering at a moderate pace, though prolonged weakness centred mainly on exporters has remained. The more subdued view on the employment and profit outlook for manufacturers could become a source of concern for policymakers.
"As...production activities are falling, demand for new people is somewhat slowing," a government official told.
However, the November report kept a positive overall view on the employment situation, saying it was "improving" compared to "steadily improving" previously, the first downgrade of employment since November 2014.
The government also took down a notch its view on corporate profits, largely due to weakening third-quarter profits among manufacturers, compared to the same period in the previous year.
But the government said profits were still at a high level and non-manufacturers' profits stayed largely steady. Capital expenditure due to strong corporate profits would continue, the official said.
British business this month suffered its deepest downturn since mid-2016 as the approach of a national election exacerbated uncertainty about Brexit, according to a survey which augured badly for the economy.
The first "flash" early reading of the IHS Markit/CIPS UK Purchasing Managers' Indexes (PMI) for Britain showed that the decline in both the services and manufacturing sectors has quickened in November.
The readings suggested the world's fifth-biggest economy is contracting at a quarterly pace of 0.2%, although the PMIs have overstated economic weakness recently in part because of higher government spending ahead of Brexit. Still, the outlook for next year looks doubtful: Brexit uncertainty is still weighing on business investment at home, while the U.S.-China trade war has stymied the world economy.
The PMI for the dominant services sector fell to 48.6 in November from 50.0 in October, its lowest level since July 2016, just after the Brexit vote. Readings below 50 denote contraction.
The manufacturing PMI dropped to 48.3 from 49.6 as a stockpiling drive before the aborted Oct. 31 Brexit deadline evaporated.
The composite PMI, which combines the services business activity and services and manufacturing output readings, fell to 48.5 from 50.0, also its lowest level since July 2016.
Pronounced wealth inequality that has built up for decades poses a major threat to a U.S. economy that is in otherwise “excellent” shape, former Federal Reserve Chair Janet Yellen said.
The central bank leader from 2014 to 2018 also said the U.S.-China tariff war is having a detrimental impact both on businesses and consumers through higher prices and a general air of uncertainty.
While she doesn’t see a recession on the horizon, she also noted that the risks are piling up. “I would bet that there would not be a recession in the coming year. But I would have to say that the odds of a recession are higher than normal and at a level that frankly I am not comfortable with. With three rate cuts this year, there remains “not as much scope as I would like to see for the Fed to be able to respond to that. So there is good reason to worry.” Yellen said.
One particular area she cited was inequality, specifically the extent to which benefits during the longest expansion in U.S. history have flowed mostly to top earners and those with post-high school education levels. Despite the central bank’s efforts to guide the economy, Yellen cited “a very worrisome long-term [trend] in which you have a very substantial share of the U.S. workforce feeling like they’re not getting ahead. It’s true, they’re not getting ahead.”
Robert Rennie, Head of Financial Market Strategy at Westpac, offered his take on the recent mixed messages over the prospects of a preliminary US-China trade deal.
“Back on the 11th October, US President Trump and China’s Vice Premier Liu He reached a truce in their trade war, after agreeing a limited deal which saw the US hold off on tariff increases that were due the following week in exchange for Chinese concessions on agricultural purchases. The deal was expected to be signed within 5 weeks and global equity markets rose strongly through October and November on expectations for a pickup in global growth. Six weeks have passed since the ‘phase-one’ deal was agreed in principle with no deal in place. Indeed only a week ago White House advisor Larry Kudlow claimed the two sides were down to “short strokes”, implying a deal was indeed close. Markets are showing some signs of tiring of the steady drip feed of upbeat comments from US officials and no signs of a final agreement looking likely.”
According to the report from IHS Markit, the Eurozone economy remained close to stagnant for a third successive month in November, losing growth momentum slightly again as new orders fell for a third straight month. The survey showed signs of the steep ongoing manufacturing decline spreading further to services. Employment growth meanwhile slipped to the lowest for almost five years as firms took an increasingly cautious approach to hiring. Price pressures also cooled further, running at the lowest for over three years.
At 50.3 in November, the ‘flash’ Eurozone Composite PMI fell from 50.6 in October to signal the second-smallest expansion of output across manufacturing and services since the current upturn began in July 2013. The past three months have consequently seen a continual nearstagnation of output, contrasting markedly with robust growth seen over the same period one year ago.
Weak output growth reflected a third successive monthly decline in new orders for goods and services, albeit with the rate of decline easing slightly for a second month running to register only a marginal drop in demand. The ongoing decline nevertheless represents the worst spell of demand since mid-2013.
Latest PMI data from IHS Markit pointed to sustained weakness in the underlying trend in German business activity during November. The Flash Germany Composite Output Index – which is based on approximately 85% of usual monthly replies – registered 49.2 in November, edging up for the second month running and from 48.9 in October, but still one of the lowest readings over the past six-and-half years. Elsewhere, employment levels steadied after falling in October, while expectations towards output edged back into positive territory. Manufacturing remained the main area of weakness in November. That said, the sector’s drag on overall output continued to ease as the rate of decline in factory production slowed for the second month running to the weakest since August. Germany Manufacturing PMI ticking up from 42.1 in October to a five-month high of 43.8.
Growth of services business activity meanwhile remained subdued. The increase in services output in November was in fact the weakest since September 2016 (Germany Services PMI Activity Index fell to 51.3 from 51.6 in October). Weighing on business activity in November was a fifth straight monthly decrease in total new orders.
TD Research discusses GBP outlook through next year and prefers to say mostly tactical and nimble through Q1 of next year.
"The sharp focus on UK political risks remains, but these should subside - particularly in H2 next year. There, we note a BoE rate cut is possible next year, but think this will be avoided. In any case, a cut is now fully priced into the curve. We think GBP stands to benefit modestly as these expectations are ironed out with time. Spot will remain choppy and headline driven in early 2020, but more attractive in H2. Stay nimble through Q1. With vol low and risk-reversals skewed to the downside, longer-dated GBPUSD calls may offer appealing risk/reward. Otherwise, we like to express GBP upside potential as part of a European basket with EUR & SEK," TD adds.
Michael Gordon, Analyst at Westpac, notes that “the Reserve Bank will be releasing its six-monthly Financial Stability Report (FSR) next Wednesday.
"We do not expect it to include any changes to policy settings. First, we note that the RBNZ will be announcing its final decisions on bank capital requirements on 5 December. It will probably steer clear of commenting on the outcomes ahead of that announcement. Instead, the main point of interest in the FSR will be around any changes to the loan-to-value ratio (LVRs) restrictions on mortgage lending. These have been loosened twice so far, in November 2017 and 2018. Market opinion is split as to whether the RBNZ will loosen them further this time. Our view that there will be no change. There has been speculation that last week’s on-hold OCR decision signalled an intention to loosen the LVR rules instead. That’s not generally the way it works at the RBNZ – each tool is assessed separately. And in any case, such a combo would shift the mix of credit conditions in the opposite direction to what we think the RBNZ would want.”
China on Friday revised up its nominal 2018 gross domestic product (GDP) by 2.1% to 91.93 trillion yuan, keeping it on track to achieving its goal of doubling the size of its economy by 2020 from 2010.
However, with the economy growing at its weakest pace in nearly three decades, the revisions could fuel scepticism about the credibility of Chinese data with some analysts suspecting authorities may be massaging the numbers to achieve Beijing's ambitious targets.
In a statement, the National Bureau of Statistics (NBS) said the change in the size of 2018 GDP will not significantly influence the calculation for the 2019 growth rate.
Yet some analysts suggest the nominal nudge may actually not be so nominal after all.
"Despite NBS stressing that the current round of revisions is the result of the census uncovering previously unrecorded activity, it's hard to ignore the fact that it will also help them meet official growth targets. In previous revisions real growth has almost always been revised upwards," said Julian Evans-Pritchard, Senior China Economist at Capital Economics, in a note.
Indeed, growth of about 6.2% is seen needed for the whole of this year and the next to meet the Communist Party's longstanding goal of doubling GDP and incomes in the decade to 2020. Such a rate of expansion would be a stiff ask given the 6.0% GDP growth logged in the third quarter - the slowest pace since 1992 - and with many analysts tipping the pace to slip below 6% in 2020.
According to the report from Federal Statistical Office (Destatis), the German economy grew slightly in the third quarter of 2019. The gross domestic product rose 0.1% on the second quarter of 2019 after adjustment for price, seasonal and calendar variations. German economic performance in the second quarter of 2019 had been down 0.2%. In the first quarter of 2019, the German economy had grown by 0.5%.
The quarter-on-quarter comparison (price, seasonally and calendar-adjusted) shows that positive contributions came from consumption, according to provisional calculations. Household final consumption expenditure increased by 0.4% on the second quarter of 2019 and government final consumption expenditure rose by 0.8%. Development of foreign trade made a positive contribution to economic growth, according to provisional calculations. Exports were up 1.0% (price, seasonally and calendar adjusted) on the second quarter of 2019, which had seen a sharp drop in goods exports. Imports in the third quarter of 2019 remained roughly at previous quarter's level (+0.1%).
Compared with a year earlier, the price-adjusted GDP rose 1.0% in the third quarter of 2019. After calendar adjustment, GDP was up by 0.5% on the third quarter of 2018 because there was one working day more than a year earlier.
Resistance levels (open interest**, contracts)
Price at time of writing this review: $1.1067
Support levels (open interest**, contracts):
- Overall open interest on the CALL options and PUT options with the expiration date December, 6 is 101374 contracts (according to data from November, 21) with the maximum number of contracts with strike price $1,1200 (5593);
Resistance levels (open interest**, contracts)
Price at time of writing this review: $1.2925
Support levels (open interest**, contracts):
- Overall open interest on the CALL options with the expiration date December, 6 is 31707 contracts, with the maximum number of contracts with strike price $1,3000 (5424);
- Overall open interest on the PUT options with the expiration date December, 6 is 33363 contracts, with the maximum number of contracts with strike price $1,2200 (2280);
- The ratio of PUT/CALL was 1.05 versus 1.10 from the previous trading day according to data from November, 21
* - The Chicago Mercantile Exchange bulletin (CME) is used for the calculation.
** - Open interest takes into account the total number of option contracts that are open at the moment.
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