Financial market research and analysis

The European Central Bank (ECB) meeting and President Mario Draghi’s speech are the major macro events of the day. The ECB is expected to announce details on its Quantitative Easing (QE) exit plans, yet the expectations are mixed due to the absence of guidance in the previous meetings. Economists surveyed by Bloomberg expect the QE program to continue at half speed (30bn euro per month) for nine more months. Bloomberg economists expect a tapering from 60 to 40 billion euro with a six-month extension. To us, it is also possible that the ECB aims for a softer and a gradual tapering starting from January.

The wide pallet of expectations hint at a two-sided volatility in the euro market. It is important to keep in mind that Draghi is certainly unwilling to trigger a euro rally, given that a stronger euro would move the ECB away from its 2% inflation target. The Fibonacci 50% level on the EURUSD’s September – October decline, 1.1880, has acted as a solid resistance following the last ECB meeting. Surpassing this level would require a sufficiently hawkish stance from the ECB and should pave the way to 1.2000/1.2090 (year-high level). Otherwise, traders should be prepared for a ‘sell-the-fact’ or a disappointment unwind in euro positions. According to the CFTC data, the net long speculative positions in euro futures stand at decade highs, hinting at a decent downside potential if a mass sell-off kicks in. The key support to the April – September positive trend against the US dollar stands at a distant 1.1509 (major 38.2% retracement).


Pound gains on rising rate hike expectations

The pound gained a decent positive momentum on the back of a slightly better-than-expected 3Q GDP data on Wednesday and extended gains to 1.3279 in the overnight session. The growth data gave a boost to the Bank of England (BoE) hawks by providing a stronger case for an interest rate hike before the end of the year. The probability of a November rate hike surged to 89% and the probability of a December hike reached 90%. Cable surpassed the 50-day moving average (1.3250) yet failed to consolidate gains above this threshold. More resistance is eyed at 1.3300/1.3342 (50% retracement on September - October decline), as the market prices out the possibility of rate tightening beyond a one-off action.

The FTSE 100 consolidates below the 7500p on stronger pound.


USD confused on tax overhaul plans, next Fed Chair

The US dollar weakened after the US 10-year yield bounced lower from 2.47% in New York. There are up and downs in the USD sentiment as investors await more clarity on tax reforms; most of them hope for a costly approval by the congress, but the divergent opinion among the Republicans could thwart the plan in the US House. Discussions on who will be the next Federal Reserve (Fed) Chair also occupy the headlines. Jerome Powell is seen as the front-runner, Janet Yellen and John Taylor are strong alternatives.

The USDJPY fell in Tokyo after having advanced to 114.24 on Wednesday. The divergence between the Fed and the Bank of Japan (BoJ) policy outlooks is supportive for a further rise, yet the US yields should give a hand to the bullish development. The sudden slide in the US yields sent the USDJPY below its intra-day Ichimoku cloud cover in Tokyo. Dip-buyers are eyed at 113.00 (200-hour moving average) for a consolidation within 113.62/113.94 (hourly Ichi cloud cover).


Twitter, Alphabet, Amazon, Microsoft results

The US stocks edged lower on Wednesday. Earnings from the US tech giants will likely set the tone at today’s session. Twitter, Alphabet, Amazon and Microsoft will release results.

Twitter’s core user base growth is key for the sustainability of its business. Lately, optimistic investors have taken a bet on an eventual turnaround in Twitter’s downtrend, yet Twitter is still a risky bet.

It is not a surprise that Alphabet made three attempts past the $1000 level in 2017. Google is well placed for benefiting in key futuristic growth areas including cloud-computing, self-driving vehicles, virtual & augmented reality and online video. With unlimited business potential, Google has everything to please the tech investors.

Amazon has performed poorly after the company announced that short-term profits could be sacrificed for more investment spending. The sentiment is mixed.

Microsoft is doing well despite the letdown on the Smartphone business and the slowing PC market. Microsoft is shifting its focus to the cloud computing business with well performing Office 365, LinkedIn and Skype, as a solid signal that the company is preparing well for a post-PC era.


Loonie falls as BoC’s NAFTA concerns could slow down rate tightening

US President Donald Trump told Fox News that 'terminating the NAFTA was the only way to make a fair NAFTA'.

The loonie tanked after the Bank of Canada Governor Stephen Poloz and his deputy Carolyn Wilkins delivered a dovish stance at yesterday’s monetary policy meeting, citing that the uncertainties on NAFTA have ‘negatively impacted private sector investment decisions’ and that the NAFTA decisions could take some time to impact the monetary policy given that it is ‘outside the model forecasts’. This means that the BoC would refrain from hiking rates in the coming meetings and monitor the economic data after having lifted the overnight lending rate from 0.50% to 1.00% at July and September meetings.

The USDCAD stepped in the bullish consolidation zone as it surpassed the critical Fibonacci resistance of 1.2720 (major 38.2% retrace on May – September decline). The rise could stretch to 1.2925 (50% level), 1.2976 (200-day moving average) before the 1.30 handle.


Lira under heavy selling pressure on financing risks, CBT to stay pat

The Turkish lira is having a bad week.

The lira trades under rising selling pressures on news that Germany, Turkey’s largest economic partner, is actively working to restrict financing for firms and banks which have solid ties with the Turkish government. Talks that the US blacklisted six Turkish banks and declined visa to Turkey’s Justice Ministry delegation have also caused panic at the beginning of this week.

The USDTRY tested 3.80-offers, the EURTRY advanced to 3.4964 on Wednesady. The GBPTRY traded past 5.00 level for the first time.

As Turkey’s difficult foreign relations translate into higher financial risks, the Central Bank of Turkey has no choice but to maintain the interest rates unchanged at today's meeting despite the lower rate pressures from President Recep Tayyip Erdogan and the government. This far, Erdogan's new monetary policy committee has successfully dealt with the lower rate pressures. Of course, any unanticipated move of a dovish nature could be a direct hit to the central bank’s credibility on independence. Therefore, the status quo is the safest and the most likely scenario at this week’s meeting.

On the back of the latest developments, the bank could opt for late liquidity lending rate tightening in anticipation of a further sell-off in lira and lira denominated assets. The late liquidity rate is an efficient instrument to temper the short-term panic in the lira markets.


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