Market Considerations and Analytics

Key Notes

• The market’s outlook is as follows: USDJPY bearish below 137; GBPUSD bullish over 1.2300; S&P 500 bearish under 4,030
• During the most recent session, the central banks of Canada, India, and Brazil changed their policies, although the volatility was confined to the local markets and fx.
• The S&P 500 maintained its support despite the VIX’s recent rally; monitoring of adjacent technical limits may intensify until the remainder of the week.

This past session saw a few important fundamental headlines, like the Bank of Canada raising interest rates by 50 basis points and bank CEOs expressing concerns about a recession. However, neither of these events would alter the fundamental course of market conviction.

We are transitioning away from the strong influence of the NFPs, Powell’s remarks, and the ISM service sector activity report this past week and into the pull of anticipation for the FOMC rate decision and a plethora of other important events scheduled for the coming week.

This focus is crucial because it will have an impact on the market’s overall volatility and, more importantly, the capacity to establish and maintain trends. In the case of the VIX’s – implied volatility, the index’s recovery from its seven-month low last week continued, but the pace significantly slowed.

It appears to be more of a genuine revision to a mean than a flurry of activity. It appeared that this loss of momentum was easily transferred to risk-sensitive assets. Participants in the market have a tendency to give greater credence to prominent technical barriers when there isn’t a strong drumbeat of optimism or pessimism.

It is important to point out that the S&P 500 has a very strong inversion correlation with the VIX. However, the index has been stuck at the floor of the range for the past three weeks, which was made worse by the midpoint of the range from August to October and the 100-day SMA.

However, in the event of a crisis, fear is more powerful than greed. The “risk assets” crude oil, the DAX in Germany, the FTSE 100 in the UK, the Hang Seng Index in Hong Kong, the EEM emerging market ETF, and the DAX all fell this session; Be wary of the possibility of self-immolation brought on by fear itself.

On the other hand, if the markets follow the macroeconomic docket’s schedule, there won’t be much in the upcoming Thursday session that could easily cause a localized trend tremor, much less a global one. Second-tier and lower central bank rate decisions dominated this session. The Bank of Canada (BOC) received the most attention because it raised rates by 50 basis points, bringing the country’s benchmark rate to 4.25 percent. In light of that standard, it is the highest rate among the major central banks, matching the Reserve Bank of New Zealand.

Having said that, NZDCAD would not be deterred from continuing on its remarkable bullish course over the past few months. In addition, the CAD would not benefit from the news in any meaningful way when compared to less controversial pairs like EURCAD or CADJPY, which have a distinct yield advantage.

The most important thing to keep in mind is that this was to be expected, and the BOC’s rhetoric would suggest that future rate hikes would be heavily influenced by data. When overnight index swaps are taken into consideration, it appears that the BOC has reached its end-of-period rate, whereas the FOMC and RBNZ are anticipated to continue tightening into 2023.

The RBA bulletin or ECB President Lagarde’s remarks may provide some insight for the upcoming session (the ECB decision is next week), but the market is not very sensitive to subtleties.

Even though there wasn’t much of a fundamental basis for the Canadian dollar to mount a full-blown reversal, the conditions are still the kind that would suggest moderation is the way to go.

For something like the S&P 500, that develops the heaviness of the limited reach the record has cut out these previous weeks. Alternately, it might result in a halt to extraordinary trends like those in the NZDCAD.

Despite the fact that this charge is more of a Canadian Dollar slide than a New Zealand Dollar rally, the overall outcomes are remarkable. While the more extended term yield differential in light of the intermediary of the 10-years might be breaking higher, the super 20-day pace of progress from this pair is an exception in this climate. This does not necessitate a full-tilt reversal, but a stall appears increasingly likely, particularly if risk appetite fails to sustain the nascent carry trade.

Further, moderation is not restricted to carry trades and risky assets alone. Despite having direct exposure to the FOMC meeting, the dollar-based crosses are extremely sensitive to interest rate speculation for the coming week.

Having said that, the technical and volatility levels behind the majors are closely monitored by us. For the DXY Dollar File, there isn’t much of unmistakable specialized boundaries which the graph watchers will craftily pick at; However, major crosses such as EURUSD, GBPUSD, and USDJPY do have more obvious obstacles.

Below, the USDJPY’s recovery from its 200-day SMA test brought the market back to the previous support level of 137.50, where it remained as new resistance. Even though these aren’t huge ranges to deal with, it’s important to change with the market’s pace if that’s the case.