Signals · theoretical, educational setups
Brazil After the Upset, the Aussie Before the CPI, and Gold at $4,000
Three theoretical setups for the Monday of Fed week: the iShares MSCI Brazil ETF, which closed at $42.59 on Friday before Lula's runoff win sent the real about 8% lower overnight; the Australian dollar, flat near 70.3 US cents while the odds of an RBA hike on November 3 passed 60%; and gold, back at $4,000 after its worst week since June.
EWZ · iShares MSCI Brazil ETF — Bearish, Short-term (days). EWZ closed at $42.59 on Friday, October 23, still carrying most of the premium Brazilian assets gained after Flávio Bolsonaro won the first round on October 4, when the Ibovespa rose 7.70% in a day. On Sunday President Lula won the runoff with 51.79% of valid votes, the opposite of what the market had priced. The overnight evidence points one way: on Binance the dollar rose from 4.974 to as high as 5.477 reais and stood about 8% higher at 06:00 UTC, CME dollar-real futures rose about 10%, and a Tokyo-listed Ibovespa ETF fell more than 11% at the open, according to The Rio Times. EWZ is priced in dollars, so it takes both the currency hit and the equity hit. The setup is that the repricing has further to run in the first sessions while Flávio Bolsonaro contests the result and no economic team has been named. The risks are an early, market-friendly finance minister or Brazilian buyers stepping in at the open, since Sunday-night markets often overshoot. A daily close above $42.59, Friday's close, would mean the whole move had been retraced and would invalidate the setup.
AUD/USD · Australian Dollar / US Dollar — Bullish, Short-term (days). The Australian dollar was flat at 70.32 US cents on Monday afternoon even as the market's odds of a Reserve Bank of Australia hike on November 3 rose above 60%, from below 20% a week earlier, after Deputy Governor Andrew Hauser called the inflation outlook "materially worse" and chief economist Sarah Hunter said inflation was "not quite yet" tamed. Australia's 10-year yield, at 5.17%, already sits 20 basis points above the US equivalent. The setup is that the currency has lagged the rates market and catches up if Wednesday's third-quarter CPI confirms the forecasts of a trimmed mean near 1.0% for the quarter, above the RBA's 0.8% projection. The risks are on both sides of the Pacific: a soft CPI print, or a Federal Reserve on the same Wednesday that sounds firmer about a December hike, which would lift the US dollar against everything. A daily close below $0.6919, the October 15 close and the lowest of the month, would invalidate the setup.
XAU/USD · Gold — Neutral, Short-term (days). Spot gold ended Friday at about $3,996, its first close below $4,000 since mid-July, after a 4.1% weekly fall, its worst since June, as higher oil lifted the odds of a December Fed hike to about 78% and the 10-year Treasury yield approached 5%. On Monday it was back near $4,017 in Asian trade. Both directions have a case. The bearish one is that the reason for the fall, rising real yields, is still in place and the Fed meets on Wednesday; the bullish one is that some of last week's selling was forced, with Jim Wyckoff of American Gold Exchange telling Reuters that margin calls from the tech sell-off led investors to sell metals to raise cash, and that kind of selling tends to end abruptly. With the Fed statement, GDP and the PCE price index all due by Thursday, there is no edge in choosing before the data. The levels define the decision: a daily close above $4,075, the resistance Kitco flagged, would point to a recovery; a close below $3,946 would open the way to the next support near $3,890.