Financial market research and analysis

The German election resulted in a disappointing win for Chancellor Angela Merkel’s grand coalition; her victory was spoiled by the rise of the far-right AfD (13%), which made its way to the government for the first time since the World War II. Though the presence of the AfD should not significantly impact German intentions regarding the EU in the immediate future, the rising populism dampened the mood in the euro markets. Martin Schulz’s SDP had the worst performance since the war.

The Catalan referendum (due on October 1st) is the next challenge on the European political agenda.

The EURUSD retreated to 1.1897 and recovered past 1.1900 as traders digested the German news. The pair could have hard time finding buyers above the 1.1950/1.2000 area. The post-German election decline could extend toward the 50-day moving average (1.1866).

The DAX opened downbeat, yet the kneejerk reaction remained very much contained. The DAX could reverse gains as the election uncertainty/volatility dissipates.


Cable diverges positively despite Moody’s rating cut

The USD kicked off the week mostly stronger against its G10 counterparts, except the pound. The GBPUSD is well bid above the critical 1.3448 level (major 38.2% retracement on post-Bank of England (BoE) rally). The EURGBP is paving its way toward the 200-day moving average (0.8741). Though the upside potential could be limited after Moody’s cut the UK's credit rating by one notch to Aa2 due to the Brexit. The UK-EU divorce bill is still a major caveat to the smooth continuation of the Brexit negotiations. According to the latest news, PM Theresa May could accept to pay up to 40 billion pounds ($54 billion) to leave the union and start negotiating a new trade partnership, whereas the EU demands 60 billion euros ($72 billion). The 25% gap will likely keep the tensions tight between the British and the European officials. UK’s David Davis rejected the news that PM May would accept the payment of 40 billion pounds to exit the EU.

The FTSE 100 has rare buyers above the 7300p and the index could see more resistance into its 200-day moving average (7337p) due to the strong pound. The downside risks prevail.


Goldman Sachs says, ‘oil backwardation likely to continue’

Oil is down on comments from Goldman Sachs and BP. Goldman Sachs said that the ‘oil backwardation is likely to remain in place in the coming months’ suggesting that the short-term futures prices are higher than longer term prices due to the ‘combination of stronger demand, potential greater cohesion among OPEC and growing pains for shale’. In this configuration, the short-term positions benefit from lower prices in duration and pressure the spot price downward.

Meanwhile, BP cited that the OPEC production cuts need to be ‘extended beyond the first quarter of 2018 for rebalancing’ and that the oil price above $60 is ‘unsustainable over 2018’.

WTI crude sees resistance pre-$51/barrel. We remind that the OPEC’s production cut agreement must address the issue of rising production in Libya and Nigeria and recovery in Iranian production. Suspicion that Russia could not be in favour of an extension of the current OPEC agreement is also a concern and could encourage a mean reversion toward the 200-day moving average ($49.75). In the absence of significant positive development, sellers should gradually creep in pre-$55/barrel.


Kiwi loses ground on political uncertainty

The kiwi has been the worst G10 performer against the US dollar, as the New Zealand’s ruling party failed to gain majority at Saturday’s election. The coalition talks should keep the political uncertainty high over the coming weeks and curb the NZD-appetite. Carry traders could prefer the Aussie, which carries less political risk in the wake of the NZ vote.

The NZDUSD could retreat toward its 200-day moving average (0.7160). Offers are eyed at 0.7290/0.7300 (including 50 and 100-day moving averages).


Japanese PM Abe could call for a snap election today

The USDJPY is on track to re-test the 112.70/113.00 area. The divergence between the Federal Reserve (Fed) and Bank of Japan (BoJ) policy outlooks and talks of a snap election in Japan play in favour of a further rise in USDJPY. Japanese PM Shinzo Abe could call a snap election on October 22nd as early as today (expected time is 10pm UK time). A fiscal boost could be on the menu and increase the selling pressure on the yen. The key USDJPY support is eyed at the daily Ichimoku cloud top (111.55).

EURJPY could challenge the 135.00 mark.


Gold in the bearish consolidation zone

Gold consolidates losses below the $1’300 mark. The precious metal is testing 50-day moving average ($1’290) on the downside, if broken could encourage a further slide toward $1’282 (Fibonacci 50% retracement on July – September rise).


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