BRL Under Pressure, Market To Focus On U.S. Data And Fed Speakers

Forex News and Events

Brazilian real takes a hit after weak industrial data

After rallying strongly for the first seven months of the year – rising more than 30% against the USD – the Brazilian real has started to reverse those gains as the excessive optimism surrounding Dilma Rousseff’s removal fades away. Michel Temer is now Brazil’s new head of government and has plenty of work ahead to put the country back on the growth track and fix its fiscal problems. The issue is that the market has put the political aspect of Brazil on the backburner and is now more sensitive to the economic data and the risk embedded in Brazilian assets. Since mid-August, the stock market has been losing momentum with the iBovespa stuck below the 60,000 level. The spread for five-year credit-default swaps has reversed trends and turned north, rising 18% from 245.5bps to 285.74bps during the month of September as rating agencies cut Brazil’s credit rating to junk.

On the data front, good news has been pretty thin lately. The industrial output, released yesterday, contracted 5.2%y/y in August after a contraction of 6.4% in the previous month. The manufacturing sector is still under substantial pressure as the PMI printed well below the 50 threshold that separates expansion from contraction, coming in at 46 in September versus 45.7 in the previous month. Finally, on the inflation front, the latest report showed that the BCB should not drop its guard as inflationary pressures remained elevated during the second half of the summer with the IPCA gauge ticking up to 8.97%y/y in August from 8.74% in July.

All in all, we expect the Brazilian real to remain under pressure as investors continue looking for other high yielding assets, especially now that the Federal Reserve has made it clear that it is on the path to lifting lending rates. On Tuesday, the real fell 1.47% against the greenback as it erased the previous day’s gains. In the medium-term, risk is definitely on the upside in USD/BRL.

Focus back on Fed speak and US data

USD traders have been focused on other drivers outside of US economic fundamentals and Fed policy (DB, Brexit) since the last meeting. However, Richmond Fed Lacker’s comments that there was a strong case for raising interest rates sent markets spinning (especially gold which fell 3%).

“While inflation pressures may seem a distant and theoretical concern right now, prudent preemptive action can help us avoid the hard-to-predict emergence of a situation that requires more drastic action after the fact,”

Lacker stated. While Chicago Fed President Evans speaking in New Zealand stated that he expected the Fed to raise rates once by year-end, with December the most likely meeting. US front end yields have steadily risen in response to the two-day fed speak pickup. However, the limited effect, due to the Fed’s much eroded credibility suggests that for expectations to increase above 55-60% December probability, we will need collaborating economic data.

Today’s economic release will help provide clarity while also testing the hypothesis that US-centric news is back in the driving seat. Today’s ADP employment report should indicate 165k growth in private payrolls. ISM non-manufacturing should rise to 53 from 51.4 with traders watching the employment component carefully. Finally, Durable goods orders should come in flat, while factory orders are expected to decline -0.2% from a solid 1.2% prior read. We anticipate a slight pause in USD bullish momentum as economic data fails to support the hawkish Fed speak. EUR/USD clearance of the 1.1200 resistance, suggests a short term extension to 1.1280. Volatility continues to pick-up in equities, yet in FX it remains subdued indicating that EM and carry based trades remain attractive.

Gold- Demand disappears.

Gold Chart

Today’s Key Issues

The Risk Today

EUR/USD has bounced near the key support support at 1.1160 (rising trendline). A further decline towards the support at 1.1123 favoured as long as prices remain below the resistance at 1.1288 (declining trendline). Strong support can be found at 1.1046 (05/08/2016 low). In the longer term, the technical structure favours a very long-term bearish bias as long as resistance at 1.1714 (24/08/2015 high) holds. The pair is trading in range since the start of 2015. Strong support is given at 1.0458 (16/03/2015 low). However, the current technical structure since last December implies a gradual increase.

GBP/USD has broken the support at 1.2789, confirming strong selling pressures. There is no real support below 1.2775, with marginal intraday demand around 1.2720. Resistance is located at 1.2873 (03/10/2016). Expected to show continued downside pressures. The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.

USD/JPY continues to recover with the break of resistance at 102.30 (declining trendline), negating bearish technical structure. Hourly resistance is given at 102.83 (21/09/2016 high). Psychological support at 100 is not far away. A key support lies at 99.02 (24/06/2016 low). Expected to further weaken. We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).

USD/CHF is fading near the resistance at 0.9820. A break of this level is needed to open the way for further short-term strength. Key resistance lies at 0.9956 (30/05/2016 high). Support can be located at 0.9750 (04/10/2016 base) then 0.9662 (26/09/2016 base low). In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.

Resistance and Support

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