Several themes we have been following have matured and new ones have emerged that will be worth keeping an eye on this quarter.
The two biggest losers since the end of September have been gold and the British pound. At the time of writing, gold was 5 per cent lower on the Dubai Gold & Commodity Exchange (DGCX), while the pound contract was 5.84 per cent lower on the month.
The bearishness in the pound trade was expected, but the sell-off, which started in the early hours of October 7, caught many traders off guard. In a five-minute window, sterling tanked more than 6 per cent to breach multi-decade lows.
While it is difficult to pinpoint the exact reason for the flash crash, there were several factors which contributed to the move.
With the pound already under immense selling pressure, on the eve of the move the French president François Hollande delivered a tough rhetoric, establishing a less than amicable EU negotiating stance towards Britain's exit.
Further exacerbating the downward move was selling pressure from high-frequency algorithms, sophisticated trading software amplifying the selling momentum by ramping up volumes, which was magnified in a highly illiquid session – between the US closing and Asian opening.
The pound eventually recovered 50 per cent of this sell-off. It remains under pressure as Theresa May, the UK’s prime minister, intends to invoke Article 50 by March next year.
Weakness will persist as a result of the political posturing between the UK and the EU as they continue to suss each other out in the lead-up to the invoking of Article 50. We expect strong resistance in the pound-dollar pair at 1.26 levels with a move towards 1.18 followed by 1.15 in the months ahead.
Across the pond, the Federal Reserve Open Market Committee will gear up for its next policy meeting on November 2. As we have maintained, the earliest the Federal Reserve could hike rates would be in December, and that remains the case.
With the US presidential election looming large in November, the outcome would put the FOMC in a far better position for a hike in December.
The recent flow of data from the US has been average to say the least – and has not done anything to either bolster the rate hike chatter or take away from it. September’s payrolls came in at 156,000, below forecast, and the overall unemployment rate increased to 5 per cent from a previous 4.9 per cent as a result of an increasing labour force participation rate.
More crucially, there was wage growth with hourly average earnings increasing to 0.2 per cent from 0.1 per cent. Along with the employment scenario, the dual mandate of the Fed includes inflationary targets, which are in line with its projections.
The market’s reaction to the latest non-farm payrolls report were largely muted and are now pricing in an 8 per cent chance of a rate hike on November 2.
We expect conditions for the Dollar Index to remain largely stable in the lead-up to this vote. However, we could see some selling pressure in the immediate short term for the dollar in the event of the Fed holding fire until December.
Along with the maturing pound and dollar themes, which will come to a head in the final months of the year, two new themes will also be worth tracking.
Gold snapped through several key support levels to fall to four-month lows this month. The commodity’s short-term run above US$1,300 levels seems to have come to an end as hawkish comments from Fed members and interest rate expectations mature throughout November and December.
We expect bullion to stabilise in the current $1,250 channels, with upsides capped at $1,300 and support coming in the channel between $1,180 and $1,200.
And finally, the euro was back in the news this month as several top ranking European Central Bank officials hinted at a taper to their current quantitative easing programme.
While we are yet to receive a formal confirmation of the same from Mario Draghi, the ECB’s president, the impending US hike will no doubt lead to a windfall of coordinated action from central banks around the globe.
The ECB’s next rate-setting meeting is on Thursday.
Gaurav Kashyap is the head of futures at Axitrader in Dubai.
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