The week started in a risk-off mode, as US President Trump threatened China with more tariffs. However, investors' appetite improved somewhat during the day as China’s willingness to still hold more talks this week may have kept hopes over a trade deal alive. Elsewhere, the RBA kept interest rates on hold overnight and the Aussie gained, perhaps as, ahead of the decision, there was some speculation for a cut. Tonight, it’s the RBNZ’s turn to decide on monetary policy with the forecast pointing towards a rate decrease.
The dollar traded lower against most of the other G10 currencies on Monday and during the Asian morning Tuesday. It gained slightly only against CHF and JPY, while it traded virtually unchanged versus GBP and NZD. The biggest gainers were AUD, CAD and NOK.
The performance in the FX sphere suggests that the risk environment improved somewhat during the day, despite market participants returning to their desks in a “risk off” mood. The trigger behind the risk-off start of this week may have been fresh tariff threats by US President Trump against China, in the midst of talks between the two nations. On Sunday, the US President tweeted that the negotiations continue “too slowly”, and that he would raise the tariff rate on USD 200bn worth of Chinese goods, to 25% from 10%, on Friday. He also threatened that USD 325bn of additional imports will be taxed shortly, at a 25% rate.
Asian equity indices were a sea of red on Monday, with China’s Shanghai Composite sliding 5.6%. The negative sentiment rolled over into the EU and US sessions as well, with major bourses closing in the red. That said, Wall Street indices closed well above their session lows, while most Asian ones managed to gain somewhat today.
Early on Monday, the WSJ said that China was considering cancelling the talks due to the threats, but later in the day, China’s foreign ministry disregarded the reports, confirming that they will be still sending a delegation for further negotiations. This is when the battered risk appetite started to improve somewhat, as China’s willingness to hold talks may have kept hopes over a trade deal alive. Also, investors may have taken second thoughts over Trump’s threats. They may have eventually saw this as a tactic to speed up the negotiations towards a final accord. That said, it still remains to be seen whether those threats have indeed jacked up pressure for a deal to be reached soon, or whether the progress made so far will fall apart.
Back to the currencies, the AUD was the main gainer, receiving a strong boost following the RBA decision during the Asian session today. The Bank decided to keep interest rates unchanged, with the tone of the accompanying statement little changed from the previous one. In our view, the Aussie rallied at the time of the announcement, perhaps as, heading into the meeting, there was some speculation for a rate cut.
The Aussie could continue gaining somewhat on the RBA’s decision to refrain from acting today, but we prefer to take a more cautious approach moving forward. The minutes of the previous gathering revealed 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. Thus, we prefer to wait for the minutes of this meeting to see whether officials continued to emphasize the cut case. Alongside, we will keep monitoring Australia’s data closely to see whether a rate decrease could materialize at one of the upcoming meetings.
After AUD/JPY experienced a decent downside gap during the early hours of the Asian morning on Monday, the pair retraced back up and filled that empty space this morning, after the RBA decision. The rate had also tested and temporarily broken above its short-term downside resistance line taken from the high of April 18th, but quickly got back below it. Although AUD/JPY is now back below that downside line, still, the current increased buying momentum could get a follow-up and push the pair higher. Also, our oscillators seem to be in support of the upside idea, as both, the RSI and the MACD are showing positive divergence. That said, before we could examine any further upside, we would like to see another strong push above the above-mentioned downside line.
As we already said, a strong break above that downside line and another push through the 77.90 barrier could increase the pair’s chances of moving further up, where it could test the 78.10 obstacle, marked near the low of April 25th. We could see the rate stalling near that obstacle for a while, but if the buying is still strong, a break above it could drive the pair towards the 78.47 zone, which is the high of May 2nd.
On the other hand, a strong reversal back below the aforementioned downside line and a rate-drop below the 77.40 could encourage us to look for some lower levels. This could open the door to the 77.05 hurdle, a break of which may send AUD/JPY lower, to test the 76.78 barrier, marked by yesterday’s low.
Tonight, during the early Asian morning Wednesday, the central bank torch will be passed to the RBNZ. The forecast is for this Bank to cut rates to +1.50% from +1.75%, with market participants assigning a nearly 60% chance for such a move, according to New Zealand’s OIS (Overnight Index Swaps). This would be one of the bigger meetings, where apart from the decision and the accompanying statement, we also get the quarterly Monetary Policy Statement and a press conference by Governor Adrian Orr.
When, they last met, officials decided to keep interest rates unchanged, but in the accompanying statement, Governor Orr noted that “the more likely direction of our next OCR move is down”. Since then, inflation data for Q1 disappointed, with the yoy CPI rate sliding below the Bank’s forecast, while the employment report for the same quarter revealed job losses, despite the tick down in the unemployment rate. Combined with a Q4 GDP growth rate below officials’ estimates, this data may have prompted NZD-traders to increase their bets with regards to a rate cut at this meeting.
In our view, the New Zealand dollar could slide in case of a rate cut, but a lot of its aftermath direction may depend on whether officials will keep the door open for more rate cuts, or whether they will decide to take the sidelines after a potential cut today. If the former is the case, the Kiwi is likely to stay under selling interest, and perhaps underperform most of its major peers. The ECB, the Fed, and the BoC have abandoned hike-plans for this year, but they have not yet turned their eyes to the cut-button. The RBA could still cut in the months to come, but today’s decision to stand pat may allow the Aussie to continue outperforming the Kiwi. As far as the BoE is concerned, although its rate path will depend on the Brexit outcome, it reiterated its view for an ongoing tightening last week, with Governor Carney noting that if the Bank’s forecasts are right, policymakers are likely to hike more times than the market currently anticipates. With latest headlines suggesting that the Conservative and Labour Parties are pushing for Brexit deal as soon as possible, we believe that GBP/NZD may be one of the best exchange rates to exploit any possible Kiwi weakness.
Alternatively, in case RBNZ policymakers decide to hold off from acting at this meeting, judging by the market pricing, the Kiwi is likely to skyrocket. The question then will be whether it could hold onto those gains in the foreseeable future. In our view, it could do so for a while, but not for long. The Bank would most likely keep a rate decrease on the table for one of its upcoming gatherings, something that could keep NZD-buyers in check.
Overall, GBP/NZD is still above its medium-term upside support line taken from the lowest point of December. Last week, the pair showed some good performance, which resulted in the rate accelerating strongly and allowed GBP/NZD to gain around 500 pips. In our view, there is a chance to see a small retracement back down, as our oscillators are showing signs of topping on the 4-hour chart. But the downside might be short-lived, if the RBNZ cuts rates tomorrow, during the Asian session. For now, we will examine the scenario of a possible correction lower, before another leg of buying.
A rate-drop below the 1.9785 hurdle, which held the pair from moving lower yesterday, could invite more sellers into the field and drag GBP/NZD towards the 1.9715 area, marked near last Thursday’s high. If the pair struggles to overcome that zone, the bulls could take advantage of the lower rate and drive GBP/NZD back up again. Such a move might take the pair all the way back to the 1.9913 obstacle, defined by yesterday’s high, a break of which could open the door for a further move to the upside, potentially reaching the 1.9970 level. That level is marked by the intraday swing low of October 16th.
Alternatively, if the above-mentioned 1.9715 area fails to withhold the bear-pressure, a break below it could raise concerns over the short-term upside scenario. But in order to get slightly more comfortable with a larger downside correction, we would like to see the rate sliding below the 1.9620 obstacle, marked by the low of May 3rd. This way, GBP/NZD might have a good chance of traveling further south, towards the support zone between the 1.9490 and 1.9513 levels, which may initially hold the rate from falling more. The pair might rebound a bit higher, but if the bears are still feeling stronger, then a break of that zone could lead the rate to the 1.9425 hurdle, marked by the intraday swing high of April 29th, or even to a test of the aforementioned upside support line.
Between the RBA and the RBNZ policy decisions, the calendar appears relatively light. The only releases worth mentioning are the US JOLTs Job Openings form March and Canada’s Ivey PMI for April. The US JOLTs print is expected to come in at 7.350mn, slightly higher than February’s 7.087mn, while Canada’s Ivey index is forecast to have declined to 51.1 from 54.3.
With regards to the energy market, we get the API (American Petroleum Institute) weekly report on crude oil inventories for the week ended on May 3rd, but as it is always the case, no forecast is available.
We also have four speakers on today’s agenda: BoE Chief Economist Andy Haldane, BoE Deputy Governor for Financial Stability Jon Cunliffe, Dallas Fed President Robert Kaplan, and Fed Board Governor Randal Quarles.
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