Recently, markets have been focused on UK elections and US-China trade deal. Those two issues received an answer late last week, after the UK Conservatives won a strong majority in the Parliament, while US and China accepted the Phase One deal, which improved the sentiment considerably last week. Safe havens turned bearish, with USD/JPY surging higher, while risk assets turned bullish. But, the sentiment faded eventually after the attention shifted in what’s coming next.

So, the Phase One deal is complete and will be official soon after both sides sign it, but it is just an agricultural deal, which will won’t change much in terms of Chinese purchases from the US, from the current levels. It doesn’t tackle the IP theft and forced technology transfer, which are the main issues.

In UK, Tories had a clean victory on Thursday, but now comes the hard part, since Boris Johnson doesn’t have a compact group. Although the main issue now is the trade deal with the EU, which will have to be reached by the end of next year,otherwise it will be just a no deal Brexit, with UK crashing out. That will be difficult and the GBP has given up most of the gains after the elections. The USD on the other hand, is finding some demand as traders are uncertain whether to run for safe havens or keep biding on risk assets.

The European Session

• UK Average Earnings Index – Earnings have been pretty strong in the UK, topping at 4.% in July, but they have softened in the last two months, falling to 3.6% in September,which was revised higher to 3.7% today. Today’s report was for October. it was expected another slowdown to 3.4% but earnings weakened further to 3.2%, which shows that earnings are having a negative impact from the slowing economy. The British Claimant Count Change soared to 28.8K vs. the forecast of 21.2K. On the other hand, the Unemployment Rate managed to perform better by falling to 3.8% vs. 3.9% forecast.
• ECB’s Rehn Accepts Inflation is Pretty Weak – ECB governing council member, Olli Rehn was speaking earlier on, saying that inflation is really subdued in Europe. Inflation rate is falling clearly below ECB target in the coming years. ECB has continuously monitored all side effects of negative rates. Conventional and unconventional monetary policy measures have overall had a clearly positive effect on the economy and in tackling the danger of deflation.
• No More Rate Cuts Soon for RBA’s Harper – RBA board member, Ian Harper said to the WSJ early this morning that rushing to cut raters further could have risked overstimulating the economy. Lags in monetary policy have always been long and variable. In this environment, you don’t want to jump the gun (with more rate cuts). You don’t want to be in a place where you are overstimulated. A lot of what we are seeing is globally induced. The minutes showed the RBA is prepared to cut again if necessary. The question is, is it necessary?  I suppose it isn’t right now.
• No More Brexit Extensions for the UK – UK PM spokesman, James Slack and he confirmed that there will be no more Brexit extensions. Slack said that the election manifesto was explicit in ruling out any extension of transition period. Government wants to start negotiating future trade relationship as soon as possible. Intend new relationship with EU to be ready to start by January 2021. In all circumstances, we are leaving EU customs union and single market.
• Fitch is Not So Confident on the Trade Deal – Rating agency Fitch said that US-China trade tensions have eased but not yet resolved. below are some of their main comments:
  • US-China trade tensions remain high
  • Renewed escalation remains a significant risk
  • Expects China’s economy to grow by close to 6% in 2020
  • China’s economic growth will support global economic outlook
  • That will help global growth stabilise next year
  • Says that the trend in China’s domestic demand may further complicate efforts to raise imports from the US

The US Session

• ECB Keeps Begging EU Governments to Increase Fiscal Spending – European Central Bank member Kazimir, said a while ago that better coordination of fiscal and monetary policies is needed. Kazimir also added that he is worried that unless the bloc uses all these tools properly, it won’t see any significant structural recovery any time soon.
• FED’s Kaplan Feeling Optimistic on Employment – Dallas FED president was speaking in New York earlier, saying that we’re at or past full employment, not much slack is left. Expects economy to grow by about 2% next year and for inflation pressures to remain muted. Power has shifted from the sellers of goods to the buyer, making it difficult for businesses to pass on higher costs. We can run a tighter labor force than we have historically without pricing pressure. Tech-enabled disruption is limiting the pricing power of business
• US Will Focus on Trade Deal With the UK Now – Lighthizer said on Fox Business earlier that US-UK trade deal is a priority. He expects US agricultural sales to China to double. Phase one of China deal is totally enforceable. Can’t get global grade deficit down without reducing trade deficit with Europe. We have a basic trade problem with Europe, we have to find ways to sell more goods to EU.

Trades in Sight

Bullish NZD/USD Again

• The trend has ben bullish for about 2 months
• The pullback lower is complete
• The 50 SMA is providing support

The 50 SMA is providing support today

NZD/USD has been bullish for more than two months. The sentiment improved in financial markets in September, after US and China dialed down their tones, following a heated summer. In October the sentiment improved further after comments regarding the Phase One deal. Moving averages have been doing a great job in supporting this pair during pullbacks, thus pushing the trend higher on the larger time-frames, such as the daily and H4 charts. Although, they have helped buyers on the H1 chart as well, as you can see from the chart above.

We have seen NZD/USD reverse higher at the 50 SMA (yellow), the 100 SMA (green) and earlier this week at the 200 SMA (purple). late last week, the situation improved further for risk assets after Donald Trump signed the Phase One deal, and the NZD surged higher. But, we heard some rumours earlier last week, which said that it meant that they were only postponing December tariffs. So the sentiment got dented a little and this pair retraced lower. But, we decided to buy the pullback, after Trump and China confirmed the deal. We saw a retrace lower again today, but the 50 SMA held as support on the H4 chart and buyers are pushing higher from there now, so we still remain long on this pair.

In Conclusion

The sentiment got dented yesterday, but it continued to remain slightly positive, after the Phase One deal and the clear Tory victory last week. But, the situation for next year remains still uncertain, regarding trade and politics, so the optimism of the last few days has eroded now and traders remain uncertain whether to run for safety towards safe havens or bet on risk assets.