EU and US indices traded in the green yesterday, on hopes that Senate Democrats and Republicans will agree in lifting the debt ceiling until December. Indeed, the vote took place overnight with lawmakers passing the bill. Now, the proposal will go to the House, which will vote on it on Tuesday. Today, the main event on the agenda may be the US employment data for September, where decent numbers may add even more credence to the case of a November tapering by the Fed.

US Senate Votes to Raise Debt Limit, US NFPs to Determine the Fed’s Next Move

The US dollar traded mixed against the other major currencies on Thursday and during the Asian session Friday. It gained against JPY, CHF and slightly against EUR, while it underperformed versus AUD, CAD, NZD, and GBP.

The weakening of the safe-havens yen and franc, as well as the strengthening of the risk-linked Aussie, Kiwi, and Loonie, suggest that markets may have traded in a risk-on manner yesterday and today in Asian. Indeed, looking at the performance in the equity world, we see that EU and US shares were a sea of green, with the positive morale, although somewhat softer, rolling into the Asian session today. At the time of writing, the only index — among the ones we monitor — which is in slightly negative territory is South Korea’s KOSPI.

European shares may have taken the torch from the Asian ones on Thursday, after Senate’s top Republican, Mitch McConnell, said his party would support an extension of the federal debt ceiling into December. Sentiment remained supported during the US session as well, perhaps as US Senate Majority Leader Chuck Schumer announced that indeed Senate leaders have agreed on that. The official voting took place overnight, with Senate member voting 50–48 in favor of the bill. The proposal now will go to the House of Representatives, the lawmakers of which must also approve it before President Biden can sign into law. The House vote is scheduled to be held on Tuesday, October 12th.

Given that Democrats hold a majority in the House, we believe that getting the bill through will be an easy task. That said, although a catastrophic government shutdown could be avoided for now, the chances of that happening in December are far from low. Therefore, a fresh standoff between Democrats and Republicans in the aftermath of passing the current bill, could weigh again on investors’ morale. After all, the other ingredients of the cocktail that resulted in the latest equity sell off are well on the table. Those are concerns over persistently high inflation and thereby, faster tightening by major central banks, as well as worries over a Chinese economic slowdown due to regulatory changes, the likelihood of Evergrande’s default, and a recent power crunch.

Speaking about central bank tightening, today, we get the US employment report for September, which could prove determinant on whether the Fed will begin tapering its QE purchases next month. Nonfarm payrolls are expected to have accelerated to 500k from 235k, while the unemployment rate is expected to have ticked down to 5.1% from 5.2%. Average hourly earnings are forecast to have slowed to +0.4% mom from +0.6%, but barring any deviations to the prior monthly prints, this is anticipated to take the yoy rate up to +4.6% from +4.3%.

Overall, all this points to a more decent report than the one we got for August, which, combined with Powell’s recent remarks that inflation remains elevated for longer than they have estimated, may encourage market participants to add to bets over a November QE tapering by the Fed, and perhaps even bring forth their expectations over when the first interest rate hike could take place. According to the Fed funds futures, the first 25bps rate hike is priced in for January 2023. Increasing tightening bets could be translated into USD strength, and another correction in equities. The opposite could be true if we get a disappointing set of numbers.

Nasdaq 100 — Technical Outlook

The Nasdaq 100 cash index traded higher yesterday, but hit resistance at 15015, and then it started moving lower. Despite the sharp recovery since Wednesday, the index remains below the downside resistance line drawn from the high of September 7th, and thus, we would consider the rebound to still be a corrective move.

The bears may take charge again soon and push the action back below the 14770 territory, which is Tuesday’s inside swing high. This may see scope for larger declines, perhaps towards Wednesday’s low of 14435, the break of which may extend the fall towards the 14320 zone, or even the 14210 barrier, defined as a support by the inside swing high of June 18th.

On the upside, we would like to see a break above the 15245 barrier before we start examining whether the bulls have gained the upper hand again. This may also confirm the break above the downside line drawn from the high of September 7th, and could initially target the 15410 zone, marked by the high of September 27th. If market participants are not willing to stop there, we may see the climbing towards the 15545 barrier, marked by the high of September 17th, or even towards the index’s record peak of 15710, hit on September 6th.

USD/CAD — Technical Outlook

USD/CAD is one of the very few currency pairs in which the latest dollar strength is not reflected. And this is because the Loonie receives a log of support from the surging oil prices. Therefore, as long as oil prices stay in a rally mode, USD/CAD may continue drifting south. For now, we will stay negative for a while more.

The pair may rebound somewhat if the NFPs come in on the strong side, but the bears may jump back into the action from near the 1.2600 zone, or from near the downside line taken from the high of September 20th. We could then see another test near the 1.2518 barrier, marked by the low of September 7th, the break of which could pave the way towards the 1.2475 level, marked by the low of August 5th. Another break, below 1.2518, could extend the fall towards the low of July 30th, at 1.2420.

We will consider a trend reversal signal, only a break above the 1.2650 zone. This will not only confirm the break above the aforementioned downside line, but also a forthcoming higher high. The bulls could then climb towards the 1.2740 barrier, marked by the high of October 1st, or the peak of September 29th, at 1.2775. If neither hurdle is able to stop the advance, then we may experience extensions towards the 1.2845 zone, near the high of September 21st.

As for the Rest of Today’s Events

At the same time with the US employment report, we get jobs data for September from Canada as well. The unemployment rate is expected to have slid to 6.9% from 7.1%, while the net change in employment is forecast to show that the economy has added 65.0k jobs during the month, after adding 90.2k the month before.

At its prior gathering, the BoC kept its policy untouched, and maintained the guidance that the economic slack would be absorbed sometime in H2, 2022, which means this is when they expect to start raising interest rates. Following the economic contraction in Q2, many participants may have been expecting the Bank to announce a delay in its tapering plans. However, that was not the case. Even Governor Tiff Macklem said that he and his colleagues are moving closer to a time when continuing to add stimulus through QE won’t be necessary. Therefore, another round of decent employment numbers could add to the case of an October tapering and could support the Loonie, which has been enjoying an easy journey north recently due to the rising oil prices.

As for the speakers, we have two on today’s agenda and those are ECB President Christine Lagarde and ECB Executive Board member Fabio Panetta.

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