The Aussie tumbled overnight, feeling the heat of Australia’s disappointing inflation data, which may have encouraged investors to increase bets with regards to an RBA rate cut in the months to come. As for today, the spotlight is likely to turn to the BoC rate decision. No change in policy is expected and thus, attention is likely to fall on the accompanying statement, the updated economic projections and the Governor Poloz’s press conference. Tonight, during the Asian morning Thursday, the central bank torch will be passed to the BoJ.
The dollar traded higher against all but one of the other G10 currencies yesterday and during the Asian session today. It gained the most against AUD, NOK and NZD, while the currency against which it failed to eke out gains was JPY, with USD/JPY found virtually unchanged this morning.
At first glance, the pattern suggests a risk-off trading environment, but looking at the equity-market performance, we can realize that this was not the case. Most major EU indices closed in positive territory, driven by energy shares, which gained following Monday’s surge in crude prices. The US indices performed even better, aided by upbeat earnings results, which further eased fears with regards to the performance of the world’s largest economy. Both the S&P 500 and Nasdaq rallied to just a breath away from their all-time peaks, realizing record closing highs. The reduced concerns over the US economy may have also been the fuel behind the dollar’s strength. During the Asian morning today, China’s Shanghai closed 0.09% up, but Japan’s Nikkei slid 0.35%.
Back to the currencies, the Aussie was the main loser, getting hit hard by Australia’s disappointing CPI data for March. The headline rate fell to +1.3% yoy from +1.8%, missing a smaller slide to +1.5%, while the trimmed mean CPI rate declined to +1.6% yoy from +1.8%, instead of ticking down to +1.7% as the consensus suggested. Now, both rates are, not only below the lower end of the RBA’s 2-3% target range, but also below the Bank’s own projections for the first half of 2019, which are +1.4% for the headline CPI and +1.8% for the trimmed mean rate.
The message we got from the latest RBA policy meeting is that he current policy stance may not be consistent with the Bank’s goals and that a rate cut could be possible in the months to come. The minutes of that meeting added more credence to how we interpreted the meeting statement, revealing that members agreed that the likelihood of a hike was low and that a rate cut would be appropriate if inflation does not move higher and the unemployment trends up.
So, having all that in mind, we believe that the overnight inflation data may have prompted market participants to raise more bets with regards to a rate-cut in the months to come and that’s why the Aussie fell off the cliff. The next RBA gathering is scheduled for May 7th, and while we don’t expect policymakers to act so early, we see the case for downside revisions to the inflation forecasts, published on May 10th in the quarterly Statement on Monetary Policy.
During the Asian morning today, after Australia released its worse-than-expected inflation numbers, AUD sold off against all of its major counterparts, including the US dollar. AUD/USD was already on a slide after peaking last week, but today’s bad CPI figures added more downward pressure on the Aussie. Looking at the 4-hour chart of AUD/USD, we can see that the pair is now trading well below its tentative upside support line taken from the low of March 8th, which paints a negative picture for now. That said, given that AUD/USD looks quite oversold on the shorter timeframe, we may see a small correction back up, before another leg of selling.
This morning, AUD/USD found support near the 0.7027 hurdle, which could act as a good bouncing ground for the rate to try and recover some of its losses. The pair might travel a bit higher, maybe even test the 0.7053 barrier, marked by the low of April 2nd, which now could play the role of resistance that might hold the rate down. If that resistance area succeeds in doing that, the bears could step in again and drive the pair back down, potentially bypassing the 0.7027 obstacle and aiming for the psychological 0.7000 zone, which is slightly below the March 8th low.
Alternatively, in order to start examining the upside again, we would need AUD/USD to travel back above the aforementioned upside line and the 0.7100 barrier. If the buying starts picking up strongly, the rate might continue accelerating, potentially ignoring the 0.7115 obstacle and rushing all the way to the 0.7140 hurdle, marked by the high of April 22nd. This is where the pair could stall for a bit, or even retrace back down. But if then AUD/USD continues to trade above that upside line, the bulls could take it as a good sign to jump in again and lead the pair higher. A break above the 0.7140 barrier may allow the rate to rise slightly higher towards the 0.7155 level, marked near the intraday swing high of April 19th.
The Canadian dollar was also lower against its neighboring greenback, despite further gains in oil prices. Both Brent and WTI gained another 0.43% and 0.50% respectively, following reports that OPEC producers could decide to increase production in order to compensate for the lost Iranian oil only if there was enough demand.
As for today, CAD-traders are likely to lock their gaze on the BoC monetary policy decision. This will be one of the “bigger” meetings and thus, if rates are left untouched as expected, the focus will turn to the meeting statement, the updated economic projections and the press conference by Governor Poloz.
When they last met, Canadian policymakers altered their interest-rate guidance. They removed the part saying that “the policy interest rate will need to rise over time into a neutral range to achieve the inflation target” and instead noted that “the outlook continues to warrant a policy interest rate that is below its neutral range”. They also highlighted the uncertainty surrounding the timing of future rate increases and said that they will be closely watching developments in household spending, oil markets, and global trade policy.
Latest inflation data showed that the headline CPI rate rose to +1.9% yoy from +1.5%, while the core one ticked up to +1.6% yoy from +1.5%. Most importantly, the median CPI rose from an upwardly revised +1.9% yoy to +2.0%, which is the BoC’s inflation aim. This may have been pleasant news for BoC policymakers but taking into account the disappointing BoC Business Survey for Q1, we believe that they are unlikely to appear confident with regards to future rate increases at this meeting. We believe that they may prefer to wait for more improvement in data before they start examining whether the case for further hikes has strengthened again. In other words, we don’t expect any change to the Bank’s interest-rate guidance today.
That said, bearing in mind the “further progress” narrative in the US-China trade talks, the easing concerns over the global economy (due to better-than-expected data from China and the US), and the further rise in oil prices, we see the case for a somewhat less cautious language with regards to the nation’s economic outlook. Something like that could slightly support the Loonie, but should officials reiterate that there is still uncertainty with regards to their future plans, such gains are likely to stay limited and short-lived.
Tonight, during the Asian morning Thursday, the central bank torch will be passed to the BoJ. At their previous meeting, BoJ officials kept their ultra-loose policy unchanged, maintaining short-term interest rates at -0.1% and the target of 10-year JGB yields around zero. They also repeated that that they intend to keep the current extremely low levels in interest rates for an extended period of time. That said, policymakers downgraded their economic assessment. They restated that the Japanese economy is expanding moderately, but they added that exports and production have been affected by the slowdown in overseas economies.
Latest inflation data showed that headline inflation rebounded to +0.5% yoy in March from +0.2%, while the core rate ticked up to +0.8% yoy from +0.7%. Although both rates moved in the desired direction, they remained well below the Bank’s objective of 2%. Even the Bank’s own core CPI for March just ticked up to +0.5% yoy from +0.4%. Last week, Governor Kuroda said that there is still room for further monetary easing if needed, but he added that this is not necessary at this stage. Thus, we don’t expect the Bank to proceed with any policy changes at this gathering, but we see the case for downside revisions in the inflation forecasts.
Overall, EUR/CAD is still trading within a wide range between roughly the 1.4880 and 1.5215 levels. The rate is currently around the middle of that range and the pair is now trying to decide its next big move. Given that both the euro and the Loonie are slightly on the weaker side against the others right now, we will remain neutral and wait for a confirmation break through one of the key barriers, before examining any further directional move.
The rate could slide a bit lower to test the 1.5060 hurdle, or even break slightly below it. But as long as the rate remains above the 1.5012 key support, we would still see a decent chance for the bulls to step into the action again and drive EUR/CAD back up, towards the 1.5093 zone, which is today’s high. A push above that area could open the door to a slightly higher resistance obstacle, at 1.5105, a break of which could lead the rate all the way to the highest point of last week, near the 1.5155 level.
On the downside, if EUR/CAD travels all the way to its key support area, at 1.5012, and eventually breaks below it, we may start considering further and deeper extensions to the downside. For a better confirmation though, we would like to see a drop below the psychological 1.5000 hurdle. This could attract even more sellers, who could drag the pair towards the 1.4970 obstacle, a break of which might send the rate even lower, potentially testing the 1.4925 zone, marked by the low of April 3rd.
Apart from the BoC decision, today’s agenda also includes Germany’s Ifo survey for April. Expectations are for the current assessment index to have declined slightly, to 103.6 from 103.8, while the business expectations one is anticipated to have risen to 96.0 from 95.6. This would drive the business climate index up to 99.9 from 99.6. The case for a declining current assessment index and a rise in the business expectations one is supported by the ZEW indices for the month, which moved in a similar fashion.
With regards to the energy market, we get the EIA (Energy Information Administration) inventory data for the week ended on April 19th. Expectations are for a 1.16mn barrels fall following a 0.36mn slide the week before. That said, yesterday, the API report showed a 6.9mn increase and thus, we view the risks surrounding the EIA forecast as skewed to the upside. This could encourage some oil bulls to lock some profits and thereby trigger a corrective setback in crude prices.
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