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by Charalambos Pissouros

AUD the Main G10 Winner, BoC Decides on Monetary Policy

The US dollar traded lower once again, with the Aussie being the main gainer among the G10s as investors continued adding to bets over a global economic recovery as governments around the globe continue to ease their restrictions. As for today, the BoC announces its monetary policy decision, but bearing in mind that this will be the first meeting headed by a new Governor, we don’t expect any action to be delivered.

USD Continues to Tumble, AUD Shines

The US dollar continued trading lower against all but two of the other G10 currencies on Tuesday and during the Asian morning Wednesday. It underperformed the most versus AUD, NZD, and NOK in that order, while it eked out some gains only versus JPY. The greenback was found virtually unchanged against CHF.

USD performance G10 currencies

The strengthening of the risk-linked Aussie and Kiwi, combined with the weakness of the safe-havens dollar, yen, and franc, suggests that investors continued increasing their risk exposures for another day. Indeed, looking at the performance in the equity world, we see that major EU and US indices continued marching higher, with the positive morale rolling into the Asian session today.

Global major stock indices performance

It seems that investors are still looking past the US-China tensions and the civil unrest in the US. Yesterday, the US Department of Defense has moved around 1600 army troops in Washington after several nights of violent protests, and yet, market participants preferred to maintain bets over a global economic recovery as governments around the globe continue to ease their lockdown measures, despite the violent incidents risking to halt such a recovery in the US. A report that China continues to purchase soybeans from the US may have also helped the broader appetite. Remember that on Monday, news that China would stop such purchases hit the wires, tempering, even temporarily, market optimism.

All this comes in line with our view over further recovery in equities and risk-linked assets, as well as further declines in safe havens. Yesterday, we noted that barring any fresh and more serious tensions between the US and China, investors were likely to continue increasing their risk exposure. Even if the unrest in the US constitutes a risk, it is a domestic risk, and may barely have an impact on the broader global recovery. Overnight, China’s Caixin services PMI returned to the expansionary territory, hitting its highest since late 2010, suggesting that the world’s second largest economy is approaching full healing. We repeat that one of the currency pairs that is benefiting the most from the overall optimism is AUD/JPY and indeed, yesterday we saw the pair emerging above the 75.00 mark for the first time since the 24th of January. Another pair we expect to continue performing fairly well is AUD/USD. With the Australian economy contracting by less than other major ones during Q1, the risk-linked Aussie may continue shining, even against other commodity-linked currencies, while the US dollar which has been wearing its safe-haven suit recently, is likely to keep trading on the defensive.

AUD/USD – Technical Outlook

Over the past couple of days, AUD/USD has accelerated sharply to the upside. The pair continues to trade above a short-term tentative upside support line taken from the low of May 15th, however, the rate has distanced itself quite a bit from that line. Although we may see a small correction lower, still, if the buyers are feeling a bit more comfortable, the pair may get pushed further north.

If AUD/USD corrects slightly lower, but remains above the 0.6898 area, marked by yesterday’s high, this could help the bulls get back into the action and raise the rate up again. The pair might then travel to the 0.6983 obstacle, a break of which could set the stage for a test of the 0.7032 level, marked by the highest point of December 2019.

Alternatively, if the pair makes its way lower and falls below the 0.6813 hurdle, which is the high of June 1st, this could open the door for a larger correction lower. AUD/USD may slide to the 0.6774 obstacle, a break of which might send the rate to the 0.6715 level, marked by an intraday swing low of June 1st. Around there, AUD/USD could also test the aforementioned upside line, which may provide additional support.

AUD/USD 4-hour chart technical analysis

S&P 500 – Technical Outlook

The S&P 500 continues to slowly grind higher, while balancing above a short-term tentative upside support line taken from the low of May 14th. As long as that upside line stays intact, we will remain positive and aim for slightly higher areas.

A further push north could bring the price closer to the 3138 hurdle, which is the high of March 3rd. The index might stall there temporarily, or even correct slightly lower, to test the aforementioned upside line. If that line is still able to withstand the downside pressure, the bulls may step back into the game and try to lift the S&P 500 up again. If this time, the 3138 barrier surrenders and breaks, the next potential resistance level could be at 3183, marked by the high of February 26th.

Alternatively, if the previously-discussed upside line fails to provide decent support and breaks, that could make the bulls worry, especially if the price falls below the 3038 hurdle, which is yesterday’s low. Such a move may trigger some further selling, possibly sending the index even lower, where the next potential support may be seen near the 2980 and 2969 levels, marked by the high of May 20th and the low of May 27th respectively. Initially, the S&P 500 might get held there for a bit, but if the bears are still feeling a bit more comfortable, a further drop could send the price towards the low of May 22nd, at 2909.

S&P 500 4-hour chart technical analysis

Will the BoC Expand its QE Today?

Apart from developments surrounding the broader market sentiment, today, CAD-traders are also likely to pay attention to the BoC interest rate decision. When they last met, policymakers of this Bank kept interest rates unchanged at 0.25%, and announced an expansion of their QE purchases. A couple of weeks ago, inflation numbers for April missed estimates, with the headline rate falling to -0.2% yoy, while last week, GDP data showed that the economy contracted 8.2% qoq (annualized rate).

Bank of Canada interest rates

With this Bank saying that interest rates have reached their effective lower bound, no further cuts are expected, but the disappointing data may have increased chances for policymakers to expand even further their QE purchases. The willingness for more stimulus if required was highlighted by Governor Poloz last week, at his testimony before the Senate National Finance Committee, where he noted that “if further monetary stimulus is required to meet our inflation targets, the Bank has tools available to deliver that stimulus.”

However, at this point, we need to note that this will be the first meeting headed by a new Governor, Tiff Macklem, and although recent data and talks may have increased the chances for additional stimulus, officials may not proceed with any action at this meeting, as the new Governor may want to wait for a while more before he starts considering hitting the easing button. He may prefer to wait for upcoming data to reveal whether there has been any improvement following the peak of the coronavirus, or whether there is a risk for the downturn to worsen.

As for the Rest of Today’s Events

The final Markit services and composite PMIs for May from the UK, the Eurozone and the US are coming out, but as it is always the case, all the indices are expected to confirm their preliminary estimates.

From the US, we also get the ADP employment report for May and the ISM non-manufacturing PMI for the month. After losing 20.24mn jobs in April, the private sector is now expected to lose another 9mn, which could raise speculation that the NFP number, due to be released on Friday, may also come near that figure. Indeed, the forecast for the NFP currently stands at 8.25mn. As for the ISM index, the forecast points to an increase to 44.0 from 41.8.

ADP vs NFP employment

With regards to the energy market, we get the EIA (Energy Information Administration) weekly report on crude oil inventories, and the forecast points to a slowdown to 3.038mn bpd from 7.928mn the week before. That said, bearing in mind that, yesterday, the API (American Petroleum Institute) report revealed a 0.500mn slide in inventories, we would consider the risks surrounding the EIA forecast as tilted to the downside.

As for tonight, during the Asian morning Thursday, Australia’s retail sales and trade balance for April are coming out. Retail sales are forecast to have tumbled 17.9% mom after rising 8.5% in March, while the nation’s trade surplus is expected to have declined to AUD 7.5bn from AUD 10.6bn.

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