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by Charalambos Pissouros

BoE’s New Rate Setter Holds a Dovish Stance; RBNZ Policy Meeting Takes the Spotlight

Market 01

BoE Replaces an Ultra-Hawk with a Dove

The pound ended the day virtually unchanged against all but three of the other G10 currencies. It gained only against NZD, which came under selling interest following the slide of the ANZ business confidence index (see below), while it lost ground against USD and CAD in that order.

GBP perf 270618

Although the British currency ended the day virtually unchanged against most of its major peers on Tuesday, its ride was not so quiet as it seems. During the European morning, sterling came under selling interest following comments by Jonathan Haskel, an economics professor at London’s Imperial College and the person who is due to replace Ian McCafferty as a BoE MPC member in September. The pound recovered against most of its major counterparts in the next few hours.

In his appointment hearing, the incoming rate-setter said: “The first risk involved in raising interest rates would be if this is done too quickly, disturbing investment and borrowing plans by more than would have been expected”. He also added that, “It would weaken the case for an interest rate rise were one to think there were more slack in the economy.”

At around the same time, speaking at the Official Monetary and Financial Institutions Forum in London, Ian McCafferty said that the BoE shouldn’t dally on interest rates and that waiting too long to hike could create bigger shocks.

The fact that they both spoke on the same day and at around the same time highlights the difference between their views and makes the message clear: The BoE replaces an ultra-hawk with a dove. Although the Bank could still raise rates in August, at McCafferty’s last gathering, his replacement with Haskel suggests the next hike may come at a later stage than previously thought, as the probability for such an action to gain majority could now be lower.

GBP/CHF – Technical Outlook

GBP/CHF is currently forming a descending triangle, where it is slowly moving towards the apex. This means that the chance for a strong break through one of the sides is increasing. On one hand, the downwards moving trendline, taken from the peak of the 27th of April, still remains intact. This is still seen as a bearish sign. On the other hand, the 1.3060 zone continues to show signs of strength and is acting as very good area of support. For now, we will stay neutral and wait for a break through either of the sides.

If, eventually, a break of the aforementioned support line happens, then this could lead to further declines. The next potential area of support could be at 1.2985, marked near the low of 7th of March. Certainly, if the selling remains, then a further drop could test the 1.2945 zone, a break of which could send GBP/CHF all the way to 1.2865, which was the lowest point of March.

On the upside, a break through the previously mentioned downwards moving trendline and the 1.3180 could be a good sign for some recovery, perhaps towards the 1.3270 barrier, which acted as a strong resistance recently. That said, in order to get more bullish on this pair, we would need to see a strong break through that resistance. Such a move could initially aim for the next obstacle of 1.3320, which if broken, could set the stage for the 1.3435 zone.

2018.06.27 GBPCHF 240 Logo

RBNZ Meets to Decide on Monetary Policy

The Kiwi was the biggest loser among the major currencies, as it came under pressure following the slide in the ANZ business confidence index. Although trade data came out better than expected, a survey by the ANZ bank showed that the nation’s business confidence fell to a 7-month low in June. The headline index declined further into the negative territory, to -39 from -27.2 in May, which means that a net 39% of respondents expect the economy to deteriorate over the next 12 months.

Now, Kiwi traders are likely to turn their eyes to the RBNZ monetary policy decision tonight. This will be one of the “smaller” meetings that is not accompanied by updated economic projections or a press conference by Governor Adrian Orr. Expectations are for the Bank to keep interest rates unchanged at +1.75% and thus, if this is the case, we expect market attention to quickly turn to the accompanying statement.

NZ interest rates 270618

When they last met, RBNZ officials decided to keep interest rates untouched as was widely anticipated, but in the accompanying statement, the new Governor noted that “The direction of our next move is equally balanced, up or down”. What’s more, in the quarterly Monetary Policy Statement, the Bank downgraded its inflation projections, and also pushed back the timing of when it expects interest rates to start rising. That timing was pushed from June 2019 to September 2019.

Since that gathering, the most important release we got was GDP for Q1. The release showed that economic growth slowed to +0.5% qoq from +0.6% in Q4 2017, which is below the Bank’s latest estimate of +0.7% qoq for the quarter. Thus, we expect the Bank to keep the prospect of a rate cut on the table and repeat that the next move in rates could equally be up or down. As for the overall tone of the statement, it could be more or less the same as in May, or somewhat more dovish, given that economic growth stood below the Bank’s projections in the first three months of the year.

NZD/JPY – Technical Outlook

NZD/JPY continues to drift lower as investors are slowly buying the yen. Looking at the bigger picture, the pair continues to trade above its long-term upwards moving trendline, drawn from the lowest point in March 2011, which keeps the long-term outlook of NZD/JPY somewhat positive. But from a near-term perspective, the pair continues to run below the short-term downside resistance line, which is currently marking the short-term direction. Another important thing to mention from the short-term perspective, which is in favour of the bears, is that the pair has broken the short-term tentative upside support line, drawn from the low of the 29th of May.

For now, we stay with the bears and aim for lower levels. Because the key area of support at 75.35 was broken already, this indicates that there is some potential for NZD/JPY to move lower towards the 75.00 level. If this level is not able to withhold the rate from dropping lower, then the pair could make its way to the 74.55 zone, marked by lowest point of May. Slightly below that lies the aforementioned long-term upwards moving trendline, where the rate could stall for a while, before the bulls and the bears decide who dictates the rules from there onwards.

Alternatively, a move back above the previously mentioned tentative upside support line could give the bulls some hope, and they could eventually drive NZD/JPY towards the recent higher levels. The first area of resistance could be seen at around 75.90, a break of which could lead to a test of the 76.20 level. If the pair doesn’t stop there, then we could start aiming for the 76.45 area, which is near the 200 EMA.

2018.06.27 NZDJPY 240 Logo

As for Today’s Events

In the UK, the BoE releases its semi-annual Financial Stability Report, which Governor Carney will present at a press conference.

From the US, durable goods orders for May are coming out. Expectations are for headline orders to have slid 0.6% mom after declining 1.6% in April. Something like that is likely to drive the yoy headline rate lower as the May 2017 monthly print that will drop out of the calculation was -0.1%. As for orders excluding transportation, they are expected to have slowed to +0.4% mom from +0.9%, which would drive the core yoy rate slightly lower. Having said that though, bearing in mind that the New Orders Sub-index of the ISM manufacturing PMI for May rose to 63.7 from 61.9, we view the risks surrounding the forecasts as tilted to the upside. The US pending home sales for May are also coming out and they are expected to have risen 0.6% mom after declining 1.3% in April.

US Dur 270618

As for the speakers, besides BoE Governor Carney, we have three more on the agenda: Bank of Canada Governor Stephen Poloz, Fed Board Governor Randal Quarles and Boston Fed President Eric Rosengren.



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