While today is relatively uneventful in terms of major economic news around the world, this will not be the case for long. There is a chance that the forex market could witness a Kiwi Dollar spike tomorrow due to the Reserve Bank of New Zealand (RBNZ) announcing their latest interest rate hike at 8 pm ET. With market forecasts currently expecting the Official Cash Rate to increase by 75 basis points, hitting 4.25% (surpassing the United States’ Federal Funds Rate), all eyes will be on NZD to see if it retains its bullish momentum. With the RBNZ set to issue a Monetary Policy Statement in conjunction with their rate hike, and a press conference to follow an hour later at 9 pm ET, how the markets interpret the RBNZ’s commentary will help decide the fate of the New Zealand Dollar.
Three Pairs to Watch
The EdgeFinder, A1 Trading’s market scanner, currently holds NZD in high esteem: all the pairs with the strongest buy and sell signals are NZD pairs, with biases that corroborate Kiwi Dollar bullishness. Three of these pairs are listed below with their respective ratings, biases, and corresponding charts.
1) GBP/NZD - Receives a ‘-9’ Rating, or a ‘Strong Sell’ Signal
2) AUD/NZD - Receives a ‘-9’ Rating, or a ‘Strong Sell’ Signal
3) NZD/JPY - Receives a ‘5’ Rating, or a ‘Buy’ Signal
As many of you already know, the EdgeFinder, A1 Trading’s market scanner software, can be incredibly helpful for discerning which securities are especially worth watching for potential trade setups. Whether you are planning on buying or selling a currency pair, commodity, bond, or more, EdgeFinder analysis is so robust that its ratings and biases can be a go-to supplement for traders. However, one feature of the EdgeFinder’s that is little mentioned, yet quite meaningful, is its generation of ‘0’ ratings and ‘Neutral’ biases. Most days, there are a small handful of pairs or securities that earn these reviews; rather than being irrelevant, these ratings can be quite convenient to keep in mind, as they can alert traders to risks in terms of lack of signals. With that in mind, here are 4 pairs to be wary of next week, as they currently earn such ‘0’ ratings, indicating that an extra measure of caution could be helpful.
1) GBP/CAD - Earns a ‘0’ Rating, or a ‘Neutral’ Signal
2) USD/CHF - Earns a ‘0’ Rating, or a ‘Neutral’ Signal
3) XAU/USD (Gold) - Earns a ‘0’ Rating, or a ‘Neutral’ Signal
4) GBP/USD - Earns a ‘0’ Rating, or a ‘Neutral’ Signal
This morning at 8:30 am Eastern Time, the Bureau of Labor Statistics revealed the latest figures for a key measure of inflation in the United States. The Producer Price Index (PPI), which tracks changes in the prices of goods and services sold by producers, was expected to increase by 0.4% month-over-month in October; instead, it only rose by a mild 0.2%. Likewise, Core PPI (which excludes volatile food and energy prices), was forecast to increase by 0.3% month-over-month, but remained static, changing exactly 0% instead. These surprising PPI numbers today offer yet another instance of American inflation dropping following the recent low CPI report, building a bearish case for USD and a bullish one for stock market indices as the need for a hawkish Fed ostensibly lessens. However, I am personally skeptical of this development as many underlying economic fundamentals have not changed, as we will discuss below.
Markets to Watch
My bias remains bullish on USD, and bearish on the US stock market, for three primary reasons: A) None of the crises the world is contending with have evaporated: an energy crisis still looms with winter around the corner, and many markets are still hot with artificial demand following quantitative easing mid-pandemic. B) The Democratic Party in the US, which tends to be seen as a pro-stimulus party, recently outperformed expectations in last week’s midterm elections, which I predicted could create short-term rallies in the stock market (but longer-term bullishness for USD). C) One month’s worth of data on inflation is not enough to mark a trend; October’s low numbers could easily be outliers, perhaps due to tapping into oil reserves to alleviate cost-of-living increases.
For those who remain bullish on USD and anticipate the Fed further hiking interest rates at a historic pace to quell high inflation, the following markets will be key to watch. They are listed below with their respective EdgeFinder ratings, signals/biases (which diverge from mine), and corresponding charts.
1) EUR/USD (Receives a -2, or ‘Neutral’ Signal)
2) US30 (Receives a 4, or ‘Buy’ Signal)
3) USO (Receives a -5, or ‘Sell’ Signal)
As we wait for major economic news releases this week (such as monetary policy meeting minutes from the Reserve Bank of Australia tonight at 7:30 pm ET, United States Producer Price Index numbers tomorrow at 8:30 am ET, and Consumer Price Index updates from the UK on Wednesday at 2 am ET), it can be helpful to consider what pairs the Edgefinder already signals to be particularly worth watching. With this in mind, here are the EdgeFinder’s current 3 strongest pairs to buy this week, listed below with their respective ratings, signals/biases, and corresponding charts. Additional comments on fundamentals and technical analysis will also be provided.
1) CHF/JPY (Receives a 5, or ‘Buy’ Signal)
2) USD/CAD (Receives a 5, or ‘Buy’ Signal)
3) NZD/CAD (Receives a 4, or ‘Buy’ Signal)
While the A1 EdgeFinder can aid traders and investors by compiling analysis for currency pairs and stock market indices, it also offers great insight into bond markets as well. This can be helpful to remember considering that US Treasuries, debt securities backed by the US government, often become more enticing for buyers as interest rates rise. This is because Treasury prices fall, and yield rates rise, in conjunction with increases in the Federal Funds Rate; for example, the yield on the 10 Year Treasury Note has risen from about 1.5% to over 3.8% since the beginning of 2022. With the Federal Reserve continuing their aggressive rate hike campaign of historic proportions, and the EdgeFinder issuing bullish signals for certain government bonds, it is worth asking: is it time to buy Treasuries?
10 Year Treasuries or 'T-Notes' are reviewed particularly favorably for traders and investors by the EdgeFinder. They are listed below with their respective rating, signal/bias, and corresponding EdgeFinder breakdown chart. The ten years number within their name refers to their maturation period, one decade over which fixed interest will be paid to the owner; for more information, read here.
US10Y - Earns a 4, or ‘Buy’ Signal
This morning at 8:30 am Eastern Time, the United States Bureau of Labor Statistics revealed October’s Consumer Price Index (CPI; a proxy for inflation) numbers. Included in this report was month-over-month CPI, year-over-year CPI, and month-over-month Core CPI, which cuts out volatile food and energy prices. Rather than exceeding market expectations as USD bulls have become so accustomed to, last month’s inflation rather decelerated, and by large margins too. Month-over-month CPI was a meager 0.4%, a far cry from the 0.6% forecast, and month-over-month Core CPI only increased by 0.3% instead of 0.5%. The shocking US inflation data this morning is bearish for USD at face value, painting a picture of a US economy that is beginning to cool, implying less urgent need for Fed aggression while providing encouragement for stock markets.
Three Pairs to Trade
Despite this news, a bullish USD bias can still be meaningfully tied to fundamentals, because Fed Chair Powell made it clear that the Federal Reserve will not reduce rate hike goals based on one or two occurrences of lower-than-forecast inflation data. Thus, the bearish USD price action that arises from this news grants USD bulls potential opportunities for trade setups. With this in mind, here is a selection of pairs that the EdgeFinder, A1 Trading’s market scanner, still views favorably for USD bulls; they are listed below with their respective ratings, signals/biases, and corresponding charts.
1) USD/CAD (Earns a 6, or ‘Strong Buy’ Signal)
2) USD/CHF (Earns a 3, or ‘Buy’ Signal)
3) EUR/USD (Earns a -3, or ‘Sell’ Signal)
For those trading stocks or the US Dollar this week, we would like to encourage caution: US midterm elections tonight may become fundamental catalysts, creating volatility across markets. With hundreds of millions of potential voters going to the polls across the United States today to decide who they want to represent them in government, these decisions will ostensibly have significant impacts on financial market activity, especially with federal elections. With Democrats projected to lose their current majority in the House of Representatives and a slew of close races to determine a new Senate majority locked in a dead heat, the policy-making landscape in the US could be quite different in January 2023, when those newly elected take office.
What Impacts Might This Have?
If Democrats manage to beat expectations and keep both chambers of Congress, even adding to their current majorities, this will likely pave the way for more federal spending packages over the next two years, potentially adding to both GDP growth and inflation. On the other hand, if Republicans take one or both chambers, this could effectively nullify President Biden’s future agenda by preventing new spending packages from passing over the next two years, reducing potential GDP growth and inflation.
Thus, my personal guess is that a) a sweeping Democrat victory would create shorter-term stock rallies and longer-term USD bullishness (due to increased stimulus), and b) one or more chambers being won by Republicans would cause longer-term stock support and slight bearishness/neutrality for USD (due to increased austerity). However, this is only speculation; we will have to wait and see how the markets respond. This reaction may take some time to culminate, as some states take longer than others to tally votes and report election victories, meaning some results may not be known for days.
Two Potential Pairs to Watch
If you are bullish on USD and looking for potential trade setups as midterm results emerge, the following two pairs are currently rated favorably by the A1 EdgeFinder for those interested in going long on the Greenback. They are listed below with their respective ratings, signals/biases, and corresponding charts.
1) USD/JPY (Earns a 5, or ‘Buy’ Signal)
2) USD/CHF (Earns a 3, or ‘Buy’ Signal)
Tomorrow morning at 8:30 am Eastern Time, the Bureau of Labor Statistics (BLS) will be reporting the latest data for three major measures of US labor market activity. Average Hourly Earnings is forecast to increase by 0.3% month-over-month, Non-Farm Employment Change (NFP) is expected to see net 197,000 jobs added last month, and the new unemployment rate is anticipated to clock in at 3.6%, increasing by 0.1%. However, these market expectations are thrown into question by the Automatic Data Processing NFP estimates released yesterday: 178,000 jobs were forecast, whereas the final estimation was a whopping 239,000 Non-Farm Payrolls added last month. If this same hot labor upset plays out in the BLS’ data on NFP and more tomorrow, we could experience yet another bullish fundamental catalyst for USD, lending even more credibility to the Fed’s concerns that high inflation is far from dealt with.
Three Potential Pairs to Sell
For those interested in going long on USD, here are three pairs to watch for selling opportunities. They are reviewed favorably for USD bulls by the EdgeFinder, A1 Trading’s handy market scanner. They are listed below in order of favorability, along with their respective ratings, signals/biases, and corresponding charts.
1) XAU/USD (Gold) - Earns a -8, or ‘Strong Sell’ Rating
2) AUD/USD - Earns a -6, or ‘Strong Sell’ Rating
3) EUR/USD - Earns a -6, or ‘Strong Sell’ Rating
Yesterday afternoon, the Federal Open Market Committee (FOMC; the Federal Reserve’s policy making body) met market expectations by implementing another 75 basis point interest rate hike. With this now being the fourth time in a row such a large hike has occurred, this was not the central story of the day; rather, it was Fed Chair Powell’s shocking press conference afterwards. While answering reporters’ questions, he repeatedly explained that, while the size of the rate hikes could grow slimmer soon, the Federal Funds Rate must now increase to a level previously thought unnecessary. He also mentioned preferring to err on the side of over-tightening monetary policy, since it would be easier for the Fed to lift the US economy out of contraction than to stamp out overheating. With the Federal Funds Rate now at 4% and the Fed doubling down on hawkishness, USD seems primed to continue its historic climb once again as US equities suffer.
Three Potential Pairs to Buy
According to the EdgeFinder, A1 Trading’s market scanner which offers traders an array of supplemental analysis, the following three pairs are viewed quite favorably for USD bulls. They are listed below with their respective ratings, signals biases, and corresponding charts. Tomorrow morning’s big US labor news, which will be discussed in a subsequent article today, will likely provide yet another fundamental catalyst that will influence price action for these pairs.
1) USD/CAD (Earns a 7, or ‘Strong Buy’ Rating)
2) USD/CHF (Earns a 6, or ‘Strong Buy’ Rating)
3) USD/JPY (Earns a 5, or ‘Buy’ Rating)
This week has been fascinating for financial markets: stock markets have performed quite well despite global interest rate hikes and some disappointing tech earnings in the US, while the US Dollar Index continued to decline from late September’s highs. These movements are perhaps only more surprising considering that key data on the US economy was released both yesterday and today, and the chances of it further emboldening the Fed are plausible. With the Federal Reserve scheduled to adjust the Federal Funds Rate (a key interest rate in the US) on Wednesday next week, and full-blown recession still looming in the minds of investors, it is worth unpacking this fresh data in order to ask: what will the Fed do?
Consideration #1: Surprising GDP Growth
Yesterday morning at 8:30 am Eastern Time, the US Bureau of Economic Analysis released some shocking information. Quarter-over-quarter Gross Domestic Product (GDP) in the US, a measure of economic output, was estimated to have grown by a whopping 2.6% from July through September, even more impressive than the 2.3% which had been forecasted. This is a welcome respite for a country that had just met the criteria for a technical recession (two consecutive quarters of negative GDP growth). However, this remarkably positive growth may leave the Federal Reserve only feeling more at peace with their monetary tightening regiment, since GDP contractions may have kept them somewhat cautious about the severity of their rate hikes.
Consideration #2: High Core PCE Index
This morning at 8:30 am ET, the Bureau of Economic Analysis also released new inflation data. The month-over-month Core Personal Consumption Expenditures (PCE) Index, which measures the cost of goods and services purchased by consumers (excluding volatile food and energy prices), rose by 0.5%, perfectly meeting market expectations. While not bullish in the sense of exceeding forecasts, context is crucial: not only are these figures high, but they are also identical to last month’s increase. Considering that the Core PCE Index is the Fed’s preferred measure of inflation, it seems likely that the FOMC, the Fed’s policy-making committee, could interpret these numbers as an indication that recent rate hikes have been insufficient for quelling inflation.
Consideration #3: High Personal Spending
The Bureau of Economic Analysis also reported higher than expected personal spending this morning, clocking in at 0.6% month-over-month, much higher than the 0.4% forecast. Though not holding the same significance as other indicators and measures of inflation, this increase marks a pattern, with personal spending similarly beating market expectations with a 0.6% increase the previous month. Considering that the intention behind the Fed’s interest rate hikes is to curb consumer demand by limiting borrowing and spending, hot personal spending numbers help indicate that their goals have yet to be realized.
Likelihood of Fed Decisions
In light of these latest developments in economic fundamentals, the odds of continued Fed hawkishness seem only more likely. Between a return to positive economic growth, persistently high changes in core prices, and historically hot labor markets and consumer spending, a 75 basis point rate hike seems all but certain next week. A full 100 basis point hike, while not currently forecasted, may not be off the table either, though they may refrain due to concerns about inflation data as lagging indicators (rendering current data somewhat unreliable for exhaustive Fed decision-making).
Conversely, some analysts are predicting the Fed easing up on their contractionary monetary policy aggression soon. The Employment Cost Index (ECI), administered by the US Department of Labor, revealed that wages in the private sector grew by 1.2% in Q3; though still remarkable, it is a decline from the 1.6% increase in the previous quarter. While these slower increases in pay could theoretically bring core inflation a bit lower soon, these numbers are still incredibly hot. Considering that the Fed has made it clear that they are willing to err on the side of hawkishness for the sake of returning annual inflation to 2% (down from the current rate of 8.2%), the notion that a Fed pivot towards smaller hikes will be coming soon seems rather premature.
Personally, I am anticipating further bouts of Fed hawkishness, and a corresponding return to bullish momentum for USD across major pairs. Likewise, I am expecting that the bear market for equities is not over, and that the recent rally will only make the Fed more comfortable indulging in rate hikes. Regardless, this coming Wednesday’s FOMC Statement and press conference will keep us updated on the Fed’s vision for the near future. The Statement and rate hike will be made known at 2 pm ET on Wednesday, November 2nd, with the press conference immediately to follow. The EdgeFinder, A1 Trading's market scanner which aids traders by providing supplemental analysis, is currently bullish on both USD and the S&P 500.