Another good night to be an equity bull, with China leading the charge, which in turn put upside into European equity markets, and resulted in broad US financial conditions easing further and offering the Fed further incentive to hike in the December meeting. Although, the US interest rate markets are yet to be convinced on that.
Momentum portrays that the bias is to be long US equity indices here, although, ideally one would want to see a re-test and rejection of the all-time highs in the NASDAQ 100 and S&P 500 before jumping on as a trade. However, the bulls have firm control here, as a market breaking out of prior all-time highs is as bullish as it gets, especially if high yield credit is performing fairly well too. Sure, the bears can focus on valuation and fairly concentrated breadth, but the S&P 500 on 16.8x consensus forward earnings is lofty, but there is scope for the market to push this 18x before real vulnerabilities kick in. So I am happy to remain long here, with conviction increased on a weekly close through 2872, while ideally, one would want to see new highs in the Dow and Dow Transport index too.
Outside of equity markets, the USD is finding sellers easier to come by, helped to an extent by stable price action in USDCNH, and this is putting a modest bid in commodities such as copper, gold and crude. The USD index fell 0.4% on the session, which means it has dropped for eight of the past nine sessions, having lost 2.4% in the process, and has its sights set on a test and potential break of the 14 June uptrend, as well as the 94 handle. EURUSD is a key driver of this move, and the EUR has seemingly found its mojo here and, along with the DKK is the strongest performing currency in G10.
Technically, EURUSD has broken into the daily cloud, while closing above the 14 June downtrend and looks destined to hit my short-term target of $1.1750. 

Robust German data in the shape of the IFO survey, which gained for the first time in nine months, helped sentiment towards the EUR, as has the slight narrowing of Italian/German 10-year yield spread. By way of key inputs, we can see no real change in either the US/German 10-year yield spread or relative interest differentials between Eurodollar and Euribor futures (see Bloomberg chart below). So, while we have seen a nice upside move in the German 10-year bund (an EUR positive), we have also seen a rare bear steepening of the US Treasury curve, driven partially by a positive feel to the world thanks to developments around US-Mexico trade, and to a lesser extent US economic data, in the form of Dallas manufacturing. 
(Source: Bloomberg)
This very simplistic rates differential model requires some attention because the move in EURUSD is getting a little ahead of these key inputs and could be prone to mean reversion. That said, pullbacks in EURUSD should offer better levels to buy and if we focus purely on price action there really isn’t much in the way of supply kicking in on this move from $1.1400, and this suggests pullbacks could be limited and ultimately the path of least resistance over the near-term is higher.
Staying on the EUR theme, EURGBP also looks bullish on the 4-hour chart or daily timeframes and should be traded from the long side, while EURAUD has been my preferred trade of late, and here we can see price consolidating, with a higher probability (in my opinion) that we see buyers push this back above 1.5900, resuming the bullish trend seen since 20 August.
Another highlight of the session has been the whippy moves in the MXN, with a focus on the ‘preliminary agreement in principle’ on trade between Mexico and the US. USDMXN was offered into 18.6044 but has since given back all the losses with traders focused on whether Congress will pass the NAFTA replacement. Not to mention whether the deal is going to have any real benefit to the US economy. There is also some conjecture on relations between US and Canadian relations, given the deal agreed by Mexico and the US may not be trilateral. That said, Canada’s foreign minister is headed to Washington on Tuesday and perhaps they can be part of the agreement.
USDCAD has been sold in appreciation of the narrative, and the pair should be on the radar, with price trading through the August lows, and a daily close through 1.2962 would suggest this pair could be headed into 1.2850 to 1.2800.
Published by Chris Weston, Head of Research, Pepperstone