Euro Waiting to Get Pass Catalonia Risk for Further Rally

Euro’s rebound continues today as supported by solid German data. There is some uncertainty ahead as Catalan leader Carles Puigdemont is set to address the regional parliament at 1600GMT. For the moment, Catalonia is seen as the major near term risk limiting Euro’s strength. On the background, recent comments from ECB officials are affirming the case of the announcement of stimulus recalibration later in the month. Meanwhile, Dollar is clearly losing upside momentum at the point. There is much upside potential for Euro in near term after getting past Catalan risk, one way or the other.

The situation in Catalonia could be tense there as it’s uncertain whether Puigdemont would declare independence there. If he does, the parliament, which is dominated by pro-independence politicians, would have 48 hours to vote. Barcelona mayor Ada Colau is trying to mediate and urged Puigdemont not to declare independence. She also called for Spanish Prime Minister Mariano Rajoy to open a "dialogue so independence is not declared".

German recorded strong exports and imports growth

Staying in Eurozone, German trade surplus widened to EUR 21.6B in August, much larger than expectation of EUR 20.1B. Exports jumped 3.1% mom while imports grew 1.2%, both solid. Export growth reading was also the strongest in 12 months. The set of data argues that despite some global political uncertainties and Euro’s appreciation, trade performed well. Also from Europe, Swiss unemployment rate dropped to 3.1% in September.

ECB officials agreed to start cutting asset purchases

ECB Executive Board Member Sabine Lautenschlaeger, a known hawk, urged that "we should begin reducing our bond purchases next year". But she also noted that "it is clear which sequence the exit will follow". That is, "bond purchases will come to an end, while interest rates will remain low, well past the horizon of net asset purchases". Governing Council member Klaas Knot also said the time has come to phase out monetary stimulus. And, "economic growth has been above potential for months and the threat of deflation is gone."

Sterling supported by data, by upside limited by politics

British pound remains firm along side Euro, as supported by strong dataflow. UK’s industrial production grew 0.2% mom in August, in line with expectations but mildly weaker than the upwardly revised 0.3% mom growth a month ago. From a year ago, IP growth accelerated to 1.6% yoy from the upwardly revised 1.1% yoy in July. The market had anticipated a weaker expansion of 0.9% yoy. Manufacturing production rose 0.4% mom in August, unchanged from July’s data which was revised slightly lower. On year-over-year basis, the reading improved to 2.8% yoy in August, beating expectations of 1.9% yoy and July’s 2.7% yoy. Construction output jumped 0.6% mom in August, after contracting -1% in the prior month. The country’s visible trade deficit widened to -14.2B pound in August, from -12.8B pound in the prior month. The market has anticipated it to narrow to 11.2B pound.

Another reason is bargain-hunting as the currency slumped to lowest level in a month against the greenback last week. We remained bearish over the pound’s outlook. The incumbent Conservative Party is losing support due to the poor leadership of PM Theresa May. It was reported that about 30 Tories MPs have agreed to sign a letter demanding her to quit. We do not see this would materialize, though, amidst the lack to a charismatic successor within the Conservative Party and the high risk of bringing about a Labor government in case of a snap election. However, political turmoil should continue to cause volatility in the pound. Moreover, the uncertainty of Brexit and weak economic developments should be limiting the pound’s strength.

BoJ governor Kuroda repeated economy expanding moderately

BoJ Governor Haruhiko Kuroda reiterated that "Japan’s economy is expected to continue expanding moderately in the future." And, after three years of massive quantitative easing, inflation is still struggling to come up. Kuroda noted that the central bank will maintain the stimulus program and he’s optimistic that inflation will gradually pick up towards the 2% target, thanks to closure of output gap and improvements in inflation expectations.

Japanese Prime Minister Shinzo Abe begins his election campaign by attacking the opposition for creating new parties. He said that "what creates our future is not a boom or slogan. It is policy that creates our future." Based on recent polls, Abe’s Liberal Democratic Party-led coalition is predicted to repeat the past landslide victories in this snap election on October 22.

Released from Japan, current account surplus widened to JPY 2.27T in August. Eco Watchers sentiment rose to 51.3 in September.

Business sector in Australia is doing very well

Australia NAB business confidence rose to 7 in September, up from 5. Business conditions remained at 14, close to triple of the historical average. NAB Chief Economist Alan Oster noted that "business conditions at these levels tell us that the business sector in Australia is doing very well." However, he pointed out that "the sustained weakness in retail conditions should justifiably be raising doubts around expectations for any imminent, and sustained rebound in consumer spending, although tough competition and other margin pressures are likely behind the result as well." Also, "elevated underemployment, an elevated Australian dollar, household debt and peaks in LNG exports and housing construction are all potential hurdles that will ensure that the Reserve Bank of Australia proceeds with caution."

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.1721; (P) 1.1738 (R1) 1.1758; More…

EUR/USD’s rebound form 1.1669 is still in progress and focus is now on 1.1832 resistance. Decisive break there will suggest that the correction from 1.2091 is completed at 1.1669, ahead of 1.1661 support. In that case, intraday bias will be turned back to the upside for retesting 1.2091 high. On the downside, break of 1.1669 will extend the correction to 1.2091 to 38.2% retracement of 1.0569 to 1.2091 at 1.1510. We’d expect strong support from 1.1510 to bring rebound.

In the bigger picture, rise from medium term bottom at 1.0339 is not finished yet. It’s expected to continue after pull back from 1.2091 completes. And, next target will be 38.2% retracement of 1.6039 (2008 high) to 1.0339 (2017 low) at 1.2516. However, it should be noted that there is no confirmation of trend reversal yet. That is, such rebound from 1.0399 could be a correction. And the long term fall from 1.6039 (2008 high) could resume. Hence, we’d be cautious on strong resistance from 1.2516 to limit upside.

Economic Indicators Update