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We’ve seen a slight relief rally play out in European and US trade, and while most of Asia had its fun yesterday, there has been little follow-through buying today. For those positioning for a seasonal rally into year-end, it feels as though we have taken a step in the right direction, but we are by no means out of the woods.
The ASX 200 has modestly outperformed the broader Asia region, although Aussie SPI futures are looking vulnerable, with price finding good sellers into key resistance at 5727/31 (see chart below) – representing the 38.2% fibo of the 6% sell-off from mid-November and the 12 October spike low. The daily candle looks ominous, with the sellers looking to get the upper hand today.
(Source: Bloomberg) 
As we can see from the MT4 chart, the ASX 200 cash (AUS200) needs to break above the 5731 level for a re-test of the double-top, although, it is somewhat positive that momentum indicators are heading higher, with price just holding above the 5- and 8-day EMA. More work needed on the Aussie markets before we can look more favourably at a seasonal rally it seems as the bulls have no dominance.

In FX markets, the USD has held up well again. The weekly chart of the USD index defines my central USD bias, and I will trade in and out of this longer-term perspective. In my note yesterday, I talked up the idea that we are fundamentally getting to a point where the USD may struggle and the monthly chart is showing signs of a major structural change on the horizon. That said, when we look across the G10 spectrum, there is just a sheer lack of alternatives. So, where on earth do you put your money for now if not in the USD?
A look at the weekly chart (see below) suggests we may even be looking to add to long USD positions here, with the price having had every opportunity to close outside of the channel. A weekly close above 96.84 and the probability of a continued bullish extension would be in play, especially as all those who sold into the failed breakout in the week of 11 November would be offside and we can see that in that weekly candle.

The fact EURUSD failed yesterday to rally despite a better feel towards the Italian budget saga, with Italian BTP yields narrowing 15bp relative to German bunds. I will be watching to see if this yield spread (highlighted by the white line) can push through support and promote better EUR buying against the USD, and not just stronger buying in the Italian equity market.
One aspect to focus on was the overnight German IFO survey, which fell across all three surveys (the subindex of business climate, current conditions and expectations). This survey is arguably the most reliable predictor of German GDP reads over the past four decades and therefore commands respect. This is especially interesting as the 20bp contraction in German Q3 GDP was widely put down to transitory factors, with the consensus expecting to see a snapback to 0.5% growth in Q4 – well, this IFO survey read suggests downside to the consensus forecast and perhaps even a test of the bear case of 0.2%. Could we even see a technical recession play out? Either way, when the ECB stops its bond-buying program in December, I expect higher volatility in the EUR and EUR assets more broadly and the idea how the ECB is ever going to hike seems bizarre to me.
USDCAD looks interesting too, from both a technical and fundamental standpoint. Technically, I like longs here, although my conviction is low and will keep position sizing to a minimum and would flip to shorts through 1.3182. Momentum is crossing to a more bullish structure, and price is making another assault at the 1.3300 level, which has contained rallies since June. Price is holding above the 5-day EMA, and this is defining a bullish trend since September, so as long as the price is above 1.3182, then I’ll trade this from the long side.

Fundamentally, we can see rate hike expectations in Canada have diverged from those in the US. Some would say this favours a lower USDCAD, but I would argue that interest rate markets are mispriced, and the market is too bullish on Bank of Canada (BoC) rate hikes. Recall, both US and Canada are both big crude producing nations, but when we see Western Canadian Select some 50% lower from the BoC October meeting we have to feel business investment in Canada may suffer and the market is too optimistic on rate hikes, and this pricing differential may converge – favouring a higher USDCAD.
With Fed vice-Chair Clarida due to speak tonight at 00:30AEDT, ahead of Fed members Bostic, Evans and George (due 06:30), we could see US rates markets in play again, and perhaps this rates spread with Canada may become a factor. I will also be keeping a close eye on the US 2- and 5-year Treasury as a proxy of rates, as traders are starting to sell into the recent rally and a move higher in yield could further be a tailwind for the USD. Not to mention the US Treasury will be auctioning $40b in five-year Treasuries at 05:00AEDT.
On the subject of terms of trade, we can look at iron ore futures traded on the Dalian exchange (in China) and see futures 14% lower from late October and finding few buyers. For those selling the AUD on the consideration of the falls in Australis’s key terms of trade, it’s worth highlighting the lack of correlation here at present. That said, we should hear more about and how it affects the Liberal government’s outlook in the MYEFO on 17 December, ahead of the budget to be held in April. Yesterday’s candle (in AUDUSD) on the daily chart showed good supply coming into the market and shows traders happy to sell rallies here. A move through 0.7202 (the 21 November low) and I would jump on here for a move into 0.7130.
Oil is finding sellers in Asia too, with Brent eyeing a move back through $60 and WTI crude $51. The bounce hasn’t lasted long, and there isn’t the confidence to pile back into longs. Implied volatility in Brent has subsided a tad, after pushing into a sizeable 48% last week, but it will stay elevated ahead of the meeting between Saudi’s, Russia and US at the G20. Some have compared this meeting to the Russia/Saudi meet in September 2016, just before we had the formal agreement of production cuts in December 2016. It has been suggested Trump’s desire to have a lower oil price will backfire given the level of investment in the US that could decline as a result, at a time when we see CAPEX outlooks already in decline. That said, a continued decline in crude would likely appeal to Trump’s other demand – an end to Fed hikes and a weaker USD in 2019. The OPEC meeting on 6 December looks key.
Published by Chris Weston, Head of Research, Pepperstone