Primus Weekly - 21st September

The most important economic event of the month took place last week – the Federal Open Market Committee meeting. The FOMC is a committee within The Federal Reserve System that is in charge of determining the level of interest rates and money supply in the US. The committee meets 8 times during the year and their policy updates, as well as the minutes that are released three weeks later, are always closely scrutinized by market participants.

 

This particular meeting was widely anticipated as the Fed was expected to elaborate on their newly implemented Average Inflation Targeting policy which was announced during the Jackson Hole conference. The main takeaway was the updated language around employment level targeting since unemployment levels have reached a record high during corona crisis – around 25-30 million Americans are still unemployed. As the Fed carries a dual mandate of achieving stable prices (which is inflation rate) and ensuring maximum sustainable employment, they gave themselves more leeway to traverse the two – namely, going forward we should not expect the Fed to raise interest rates once we reach full employment. For background – the Fed had been incorporating a concept called the Phillips curve that states there is an inverse relationship between unemployment levels and inflation. This means that with low levels of unemployment, inflation is expected to be high. This concept has been proven wrong in recent history – unemployment was below 4% between 2018 and 2020, yet inflation, measured as CPI, was nowhere to be seen. We read from this statement that employment data will not carry the same level of significance in determining the interest rate levels, as it has in the past. Also, interest rates are expected to stay low for the next 3 years. Lastly, the Fed mentioned that they expect economic growth to reach pre-pandemic levels by the end of 2021.

 

US retail data published last Wednesday was quite disappointing, especially in the context of a positive retail data coming from China. August retail grew only 0.6% (vs 1.0% expected) and July’s numbers were revised down to 0.9% (from 1.2%). The losers were sporting goods and book stores (-5.7% compared to July 2020), food and beverage stores (-1.2%), and general merchandise stores (-0.4%). The main winners were food services and drinking places (+4.7%), clothes and accessories stores (+2.9%) and building material and garden suppliers (+2%). Compared to one year ago, August 2019, when the main winners have been building materials (+15.4%), food and beverage stores (+10%), online shopping (+22.4%) and sporting goods and hobby stores (+11.1%). The main losers compared to 1 year ago have been gasoline stations (-15.4%), clothing and accessories (-20.4%), departments stores (-16.9%) and restaurants (-15.4%). Definitely reflective of the Work-From-Home trend! We are looking out for US existing and new home sales data that is published this week on Monday and Thursday respectively, in order to gauge the situation and sentiment of US consumers.

 

Have a great trading week ahead!

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In The Spotlight

Date Currency Event Previous  Consensus 
September 22nd USD Existing Home Sales (MoM) 5.86* 5.95*
September 23rd EUR Euro Area PMI Composite 51.9 51.6
September 24th CHF SNB Monetary Policy Assessment and Interest Rate Decision -0.75%
September 24th USD Initial Jobless Claims 0.86* 0.82*
September 24th USD New Home Sales 0.90* 0.79*
September 25th USD Durable Goods Orders 11.40% 1.50%

*In USD millions

Impact

•US Existing and New Home Sales
Houses are a substantial source of household wealth in the US and housing construction as well as related services, provide a widespread employment. On an aggregate basis, housing accounts for around 15% of GDP. 80% of residential real estate are existing housing while the rest are newly built. There’s a significant number of services related with both existing and new home sales, hence these data points are always scrutinized by the analysts. Higher than expected existing and new home sales are generally bullish for USD.

• Durable Goods Orders
Durable goods are tangible goods that will last for more than a year. A higher number of durable goods orders indicates that people and businesses are willing to invest money to purchasing long-lasting products that may, in turn, support economic growth directly and through related services. Higher than expected durable goods orders number is generally bullish for USD.

Market Sentiment

EURUSD has been trading in a tight range of 1.1771 to 1.1940 for a month, consolidating around 21-day Moving Average level of 1.1823. A key support level of 1.1813 has formed at 24% Fibonacci retracement level, measured from June 2020 lows. The next resistance level has formed at 34-day Moving Average which is currently 1.1787. Given the price breaks below this level, we would expect 38% Fibonacci level of 1.1689 to act as a resistance. We believe EURUSD is ready to break out of the consolidation zone, looking at Bollinger band squeeze. Bollinger Bands (14) have been trading inside Keltner Channels (20, 1.5, 10) which can be interpreted as compressed volatility for the pair. The question remains – in what direction will the pair fire? Stacked moving averages (8, 21, 34, 50, 200) support stronger EURUSD, while stochastic and RSI indicators are neutral at this point.

Support: 1.1813
Resistance: 1.1940

AUDUSD has been in an upward trend since March lows, carried diagonally by a support level with 8 touch points. Moreover, the price has been getting support from 8-day and 21-day Moving Averages, indicating a very strong uptrend. Only once did the price break below, touching 34-day Moving Average on the 9th of September. RSI of 90 and stochastic of 76 indicate the pair is overbought, while moving average stacking would indicate a continuation of an upward trend.

Support: 0.7270
Resistance: 0.7413

This pair has crawling steadily lower, hitting a low closing price of 104.534 that was last seen on March the 12th. This is notable because USDJPY had been trading in the range of 105-107 since late July. Given the price has broken both 62% and 79% Fibonacci retracement levels, respectively 105.27 and 104.79, measured from July lows, we expect the next support level to be at 104.17.

Support: 104.17
Resistance: 105.29

USDCHF is another pair that has consolidated since early August, forming a support at 0.9030 and a resistance at 0.9198. 21-day Moving Average has acted as the key resistance and is currently at 0.9106 level. USDCHF has also been in a daily squeeze, measured as Bollinger trading inside Keltner bands since August 19. This means volatility has been compressed for the pair and we would expect it to explode at some point, potentially at the back of SNB announcement taking place next week.

Support: 0.9030
Resistance: 0.9198

Kaia Parv, CFA, is an experienced Portfolio and Investment Manager with exposure to both public and private markets. Before joining FXPRIMUS, Kaia was a Senior Investment Associate at EFA Group and a Vice President in Bank of America Merrill Lynch.

Any opinions, news, research, analyses, prices or other information contained here are provided as general market commentary and do not constitute investment advice. FXPRIMUS does not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.

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