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Asian equities fell on Chinese concerns, Fed: Hawkish vs Dovish, Switzerland shifts further to the right

- USD/JPY  printed a new 2-month low at 118.07 and this level will act as support now, while on the upside, the strong 121.33 level will continue to act as a resistance
- EUR/USD, we see further upside potential for the euro as the ECB will likely retains its “want-and-see” stance as  European central bank should therefore remain on hold at its next meeting on Thursday
- NZD/USD continues to push higher as New Zealand’s economy continue to send encouraging signals, lowering expectations of further rate cut by the RBNZ
 
Despite better-than-expected growth figures from China, investors stayed away from Asian equities as the shadow of weak global demand continues to weigh on investors’ moods. GDP expanded 6.9%y/y in the third quarter, down from 7% in the second quarter, but above market’s estimates of 6.8%. The fact that China used the new methodology in calculating its GDP will reinforce investor confidence in Chinese data. In spite of this good news, September’s industrial production disappointed, the gauge printed at 5.7%y/y versus the 6% median forecast. Finally, after bottoming in April, the positive momentum in retail sales did not weaken in September as it rose 10.9%y/y, more than consensus and the previous increase of 10.8%. The Shanghai Composite fell 0.21%, while the Shenzhen Composite rose 0.11%. Elsewhere, Japanese equities were down -0.88% on Chinese concerns, while Hong Kong’s Hang Seng dropped -0.30%.
 
USD/JPY and JPY crosses did little in Tokyo. USD/JPY is back within its 2-month range after breaking the 118.61 support on Thursday. The pair printed a new 2-month low at 118.07, this level will act as support now. On the upside, the strong 121.33 level will continue to act as a resistance.
 
***Yann Quelenn, Market Analyst: “The power struggle between the Fed’s dovish and hawkish members continues. Lael Brainard, dovish, and Jeffrey Lacker (Hawkish) will speak later today. It has been said that major divergence is first and foremost an ideological divergence. The hawkish members are strong believers of the Phillips curve, which states that there is an inverse relationship between inflation and unemployment. Better jobs data should provide inflation as there will be more competition for jobs, which would push wages higher and therefore consumption higher.
 
On the dovish side, there is the belief that the Phillips curve does not truly reflect reality and that there should be an additional “reserve army” of workers, which is not accounted for in the official data. Indeed, these workers gave up seeking unemployment since they lost their jobs. Therefore doves maintain the idea that job conditions are not sufficient for judging the inflation outlook. Nevertheless, these workers should flow back in the jobs market once economic conditions improve and for the time being no reserve army are coming back in. NFPs have confirmed this fact. Over the past two months NFPs have printed below expectations with a very weak read in September at 142k new jobs, while consensus expected at least 50k more.
 
From our vantage point, we believe that the jobs data effectively underestimates the true reality of the jobs market but we think that the U.S rate hike does not only depend on some economic concepts but also on Yellen’s credibility. The Fed’s Chairwoman is a hawkish member and while she still does not see any improvement in U.S. inflation, her credibility is at stake and a small rate hike could happen while conditions are not perfect, we think it would even be an error. This would show that her economic ideology actually prevails over other members and that dissidents remain a small minority.”***
 
After last week’s sharp correction, EUR/USD stabilised above the 1.1327 level (Fibo. 38.2% on August-September sell-off). We see further upside potential for the euro as the ECB will likely maintain its “want-and-see” stance. Many ECB council members hinted at further patience regarding a possible adjustment of the QE. The European central bank should therefore remain on hold at its next meeting on Thursday, as they await further information on the economy and especially the effects of QE on the pace of reflation.
 
NZD/USD continues to push higher as New Zealand’s economy continue to send encouraging signals, lowering expectations of further rate cut by the RBNZ. The performance services index grew at the fastest pace since November 2007. The gauge rose to 59.3 from a revised increase of 58.5 in September. NZD/USD printed a new 4-month high last Thursday at 0.6897 and is now consolidating above the $0.68 level. On the downside, a support can be found at 0.6619 (low from October 14th).
 
***Peter Rosenstreich, Head of Market Strategy: “In what was not a completely unexpected result the populist Swiss People's Party or SVP increased its position as the nation’s largest part. The SVP had campaigned on an anti-immigration platform, which has become a hot-button topic for the Swiss above the ailing economy. The reaction was a slightly weaker CHF against the USD and EUR. Given the contentious issue of the current refugee crisis in Europe, Switzerland’s anti-immigration stance will not be seen in a positive light. This will likely increase tensions between Switzerland and its largest trading partner and neighbor, Europe.”***
 
Today’s economic calendar is pretty light. However, traders will be watching SNB sigh deposits; NAHB from the US; PPI from South Korea; formal job creation and tax collection from Brazil. ECB’s Nowotny and Fed’s Lacker will also speak today.

Monday, 19 Oct, 2015 / 11:27

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Source : http://en.swissquote.com/fx/news

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