Sentiments Lifted by Optimism on Brexit and US-China Trade Talks

Sentiments had a drastic turn yesterday as both Brexit and US-China trade talks appeared to show some lights. Sterling rebounded strongly on hope there would finally be a deal to orderly Brexit on October 31. The Pound is set to end the week as the strongest one. Euro is currently the second strong, but clearly overpowered by Sterling. On the other hand, stocks jump as the US-China trade talks went well. Yen and Swiss Franc are deeply sold off, followed by Dollar.

Technically, Sterling staged a strong come back against Dollar, Euro and Yen. Focuses are immediately back on 1.2582 resistance in GBP/USD, 135.74 resistance in GBP/JPY and 0.8786 support in EUR/GBP. Though, some more positive news is likely needed to push the Pound through these important near term levels. Australian and Canadian Dollar recovered against both Euro and Dollar today. But AUD/USD, EUR/AUD, USD/CAD and EUR/CAD are all seen as staying in consolidations only. Selloff in the two currencies could resume any time as consolidations complete.

In Asia, currently, Nikkei is up 1.11%. Hong Kong HSI is up 2.51%. China Shanghai SSE is up 0.66%. Singapore Strait Times is up 0.74%. Japan 10-year JGB yield is up 0.0290 at -0.183, back above -0.2 handle. Overnight, DOW rose 0.57%. S&P 500 rose 0.64%. NASDAQ rose 0.60%. 10-year yield rose 0.065 to 2.152.

First day of US-China trade talks went well, Trump to meet Liu on Friday

The first day of US-China trade negotiations in Washington appeared to have completed well, with positive mood. President Donald Trump said: “We just completed a negotiation with China, we’re doing very well, we’re having another one tomorrow. I’m meeting with the vice premier over at the White House, and I think it’s going really well. We’re going to see them tomorrow, right here, and it’s going very, very well.” Trump is scheduled to meet Chinese Premier Liu He at 1845 GMT on Friday.

Myron Brilliant, US Chamber of Commerce head of international affairs, appeared to be upbeat too after being briefed by both sides. He said he negotiators were “trying to find a path toward the bigger deal” with progress on market access and less controversial intellectual property and other issues. Also, “I believe that there’s even the possibility of a currency agreement this week. I think that could lead to a decision by the U.S. administration to not put forth a tariff rate hike on Oct. 15.”

Irish PM Varadkar: Possible for us to come to an agreement on Brexit

Sterling rebounded strongly overnight and would very likely end the week and the biggest winner. It was firstly lifted by the “constructive” talks between UK Prime Minister Boris Johnson and Irish Prime Minister Leo Varadkar. Then upbeat comments from Varadkar added more fuel to the Pound’s rally.

Varadkar told reporter: “I think it is possible for us to come to an agreement, to have a treaty agreed, to allow the UK to leave the EU in an orderly fashion and to have that done by the end of October.. Also, “I don’t think this should be seen in the context of who’s making concessions, or who the winners and losers are, I don’t think that’s the game any of us want to play.”

Earlier, they issued a joint statement, saying that “both continue to believe that a deal is in everybody’s interest”. More importantly, “they agreed that they could see a pathway to a possible deal. Their discussion concentrated on the challenges of customs and consent.” UK Brexit Secretary Steve Barclay and EU negotiator Michel Barnier will meet in Brussels on Friday. Officials will “continue to engage intensively” with each other in the search for a deal.

New Zealand BusinessNZ PMI unchanged at 48.4, stuck in a tight band of contraction

New Zealand BusinessNZ Performance of Manufacturing Index was unchanged at 48.4 in September, signaling same rate of contraction in the sector. The sub-index of new orders (50.1) recovered from its decline in August to just keep its head above water for September. Also, employment (50.0) showed no change following four consecutive monthly declines. However, the weak new order results in recent months meant production (46.2) fell to its lowest result since April 2012. In addition, deliveries of raw materials (46.4) fell to its lowest since March 2011.

BusinessNZ’s executive director for manufacturing Catherine Beard said that “Overall, while it is good to see the sector not declining further, it remains stuck in a tight band of contraction. The key to lifting it back into expansion will be a sustained boost to both new orders and production in the months ahead.” BNZ Senior Economist, Craig Ebert said that “if it’s a manufacturing recession then it’s an extremely mild one compared to what the industry went through in 2008/09”.

Elsewhere

Germany will release September CPI final. US will release import price index last today and U of Michigan consumer sentiment. But main focus will be on Canadian employment.

GBP/USD Daily Outlook

Daily Pivots: (S1) 1.2274; (P) 1.2372; (R1) 1.2538; More….

GBP/USD’s strong rebound and break of 1.2413 resistance suggests pull back from 1.2582 has completed at 1.2195 already. Intraday bias is back on the upside for 1.2582 resistance. Break will resume the whole rise from 1.1958 and target 100% projection of 1.1958 to 1.2582 from 1.2195 at 1.2819. For now, further rise is in favor as long as 1.2195 support holds, in case of retreat.

In the bigger picture, we’d remain cautious on medium term bottoming around 1.1946 (2016 low). Sustained trading above 55 week EMA (now at 1.2727) will extend the consolidation pattern from 1.1946 with another rise to 1.4376 resistance. Nevertheless, decisive break of 1.1946 will resume down trend from 2.1161 (2007 high) to 61.8% projection of 1.7190 to 1.1946 from 1.4376 at 1.1135.

Economic Indicators Update