Asian Open: Fed Announce ‘Flexible’ Taper Plan, EUR/JPY Ready to Pop?

Asian Futures:

• Australia's ASX 200 futures are up 37 points (0.5%), the cash market is currently estimated to open at 7,429.70
• Japan's Nikkei 225 futures are up 20 points (0.07%), the cash market is currently estimated to open at 29,540.90
• Hong Kong's Hang Seng futures are up 72 points (0.29%), the cash market is currently estimated to open at 25,096.75
• China's A50 Index futures are up 39 points (0.25%), the cash market is currently estimated to open at 15,451.09

UK and Europe:

• UK's FTSE 100 index fell -25.92 points (-0.36%) to close at 7,248.89
• Europe's Euro STOXX 50 index rose 13.39 points (0.31%) to close at 4,309.61
• Germany's DAX index rose 5.53 points (0.03%) to close at 15,959.98
• France's CAC 40 index rose 23.62 points (0.34%) to close at 6,950.65

Wednesday US Close:

• The Dow Jones Industrial rose 104.95 points (0.29%) to close at 36,157.58
• The S&P 500 index rose 29.92 points (0.65%) to close at 4,660.57
• The Nasdaq 100 index rose 172.009 points (1.08%) to close at 16,144.50

Don’t confuse tapering with balance sheet reduction

• The Fed are set to taper at $15 billion per month ($10 billion reduction in treasuries and $5 billion of mortgage-backed securities. Currently they are purchasing $120 of assets per month.
• Level of tapering is flexible – but at the current rate it still means the Fed’s balance sheet will still reach $9 trillion next year.
• The Fed can be patient on rates, although they’re ready to act if need be (and the risks are tilted towards higher inflation).
• Powell does not think the Fed are behind the curve, but it would be premature to raise rate today.

Whilst the Fed are indeed tapering, it does not equate to balance sheet reduction as they are simply slowing down the rate of their asset purchases. Their current rate of $120 billion of purchases are trimmed by $15 billion to ‘only’ $105 billion of QE ($120bn – $15bn = $105bn). The following month, purchases would drop to $90bn assuming they don’t use their ‘flexibility’ to change the rate of tapering. At the current rate of -$15 billion it means they’re currently on track to cease purchases from June 2022. And then maybe they might start to think about raising rates.

Wall Street were clearly happy with the outcome given their response of breaking to new highs, as plenty of liquidity shall remain in the system. The Russell 2000 surged 1.8% to a new high, with the Nasdaq leading large caps higher with a 1% gain. The S&P 500 and Dow rose 0.6% and 0.3% respectively.

The ASX 200 made minced meat of any short bias we had yesterday. It gapped higher in the open and therefore failed to trigger the required break of the prior day’s low or present a bearish setup beneath resistance zone. A bullish outside day formed at the 100-day eMA and futures point to a higher open today, so we switch to a bullish bias for this session. Key support levels today include the 7395 – 7400 zone and 7357.

ASX 200 Market Internals:

ASX 200: 7392.7 (0.93%), 03 November 2021

• Materials (1.44%) was the strongest sector and Information Technology (-0.19%) was the weakest
• 10 out of the 11 sectors closed higher
• 3 out of the 11 sectors outperformed the index
• 140 (70.00%) stocks advanced, 48 (24.00%) stocks declined
• 68.5% of stocks closed above their 200-day average
• 62.5% of stocks closed above their 50-day average
• 57.5% of stocks closed above their 20-day average

Outperformers:

• + 9.3%-AMP Ltd(AMP.AX)
• + 6.71%-Orocobre Ltd(ORE.AX)
• + 5.43%-Pilbara Minerals Ltd(PLS.AX)

Underperformers:

• -15.02%-Tyro Payments Ltd(TYR.AX)
• -3.88%-Redbubble Ltd(RBL.AX)
• -3.59%-Uniti Group Ltd(UWL.AX)

Forex: Dollar underwhelmed, NZD finally embraces strong employment report

The lack of any hawkish twist (or tapering surprise) weighed on USD, pushing the dollar index (DXY) -0.24% lower. It is by no means an aggressive selloff, but the weaker dollar did allow NZD to finally rally and enjoy New Zealand’s strong employment report. NZD was broadly higher, rising 0.56% against the dollar and 0.62% against the yen.

AUD/USD held above the monthly pivot, meaning no breakout of a bear flag was seen. And its bullish engulfing candle on the four-hour chart tested the lower bound of the 0.7450 / 76 resistance zone. Given the dovish RBA and underwhelmingly hawkish Fed meeting we prefer to step aside for now.

We have been tracking the corrections on yen pairs and it appears they may be nearing completion. CAD/JPY is holding above 91.18 support although we may want to see OPEC+ out the way before expecting it to break higher. GBP/JPY formed a bullish engulfing candle at 155.55 support so remains of interest. But today we’ll look at EUR/JPY as it looks keen to move.

EUR/JPY’s retracement stalled at the 38.2% Fibonacci level and 20-day eMA, and yesterday produced a bullish engulfing candle. The four-hour chart shows several lower wicks holding above 131.50 and bullish momentum is apparent on the most recent candle as they accelerate away from the 100-hour eMA.

Commodities:

Bullish pinbar appeared on silver charts, although its correction was deeper than we’d have liked so we would prefer to step aside for now. That said it does appear to have decent support at $23, so we’ll continue to monitor it.

Gold accelerated lower and pierced 1760 support. Our bias remains bearish below 1780 after its break of its bullish channel last week.

A build-up of US inventories saw oil fall over 3%, with WTI enduring its most bearish day in over 3-months. We are finally in a corrective phase after monitoring this very potential over the past 2 or so weeks. As they say, “tops are a process, bottoms are an event”.

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