The Canadian dollar was yesterday’s main loser, tumbling after the BoC business survey pointed to a moderation in sales growth, which, in our view, suggests that the Bank is nowhere close to start thinking about hikes again. The Aussie fell as well, after the minutes from the latest RBA meeting placed more emphasis to the rate-cut case. Tonight, during the Asian morning Wednesday, the spotlight is likely to fall on New Zealand’s inflation data, as well as China’s GDP, both for Q1.
The dollar traded higher against all but one of the other G10 currencies on Monday and during the Asian session Tuesday. It gained the most against CAD, AUD and NZD, while it gained the least versus EUR and GBP. The currency against which the dollar failed to capitalize was JPY, with USD/JPY trading virtually unchanged.
At first glance, the weakening of the commodity-linked currencies and the strengthening of the safe-havens USD and JPY, suggests that risk appetite has eased at some point yesterday. Indeed, most EU indices closed slightly in the green, but the US ones slid somewhat weighed on by disappointing bank earnings. During the Asian morning Tuesday, investors hit the risk-on button again, with Japan’s Nikkei 225 and China’s Shanghai Composite closing 0.24% and 2.39% up respectively.
Having said all that though, the commodity-linked currencies felt the heat of individual stories more than the ease in risk appetite. The Canadian dollar, which was the first loser in line, tumbled after the BoC Business Outlook Survey for Q1 pointed to a moderation from previously high levels of domestic and foreign demand for firms. Specifically, the indicator of past sales growth has moved down to -6% from 22%. This indicator reflects the percentage of firms reporting faster growth minus the percentage of those reporting slower growth. Firms expectations for future sales remained positive but have softened due to uncertainty in Canada’s energy sector, weakness in housing-related activity, as well as the impacts of global trade tensions.
In our view, the survey suggests that the BoC is nowhere close to start thinking about hikes again. Remember that at their latest meeting, policymakers altered their interest rate guidance. They removed from the statement the part saying that “the policy interest rate will need to rise over time” 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.
Overall, USD/CAD keeps on trading above its long-term upside support line taken from the low of January 31st. But from a shorter time-perspective, the price action is still contained roughly between 1.3300 and 1.3390 levels. Yesterday, USD/CAD was hit with high volatility during the trading hours of the US session, where the pair tested the lower side of that small range, at 1.3300, and then quickly rebounded and made its way to test the 1.3390 barrier. The rate now flirts with the upper bound of that range, which may lead to a break. That said, we will remain somewhat flat for now and wait for that break to happen before we aim higher.
A strong push through the 1.3390 barrier and also a break above the 1.3400 hurdle, could invite a few more buyers into the game. Such a move could allow the rate to accelerate towards the 1.3425 area, marked near the intraday swing low of March 29th. If that area fails to withhold the bull-pressure, a break above could lead to a re-test of the 1.3450 level, which is near the high March 28th.
On the downside, if USD/CAD travels back down below the 1.3365 support area, marked by yesterday’s intraday swing low, this could be a sign that traders want to keep the rate within the aforementioned range for a while more. The pair might then make a move to the 1.3340 obstacle, a break of which could open the door to the lower side of the range, at 1.3300, which may halt the bears from pushing the pair lower.
The Australian dollar was the second worst performing currency. It came under selling interest after the minutes of the latest RBA meeting placed more emphasis to the rate-cut case. While previous minutes revealed that members saw scenarios where interest rates could go up or down, with the probabilities equally balanced, these ones showed that members agreed that the likelihood of a scenario where the cash rate would need to be increased in the near term was low. Policymakers also noted that if inflation does not move higher and the unemployment trends up, a rate cut would be appropriate.
In our view, the minutes add more credence to the message we got from the meeting statement, namely that the current policy stance may not be consistent with sustainable growth and achieving the inflation target, and that a cut could be needed in coming months. Following recent remarks by Deputy Governor Debelle that decent economic growth could prevent a rate decrease, investors may have scaled back some bets with regards to a rate cut, but the minutes may have well prompted them to return those bets back on the table.
As for the Aussie, the currency could stay under selling interest for a while more due to speculation of an RBA rate decrease in the months to come, but let’s not forget that this currency is also sensitive to changes in the broader market sentiment. Overall, risk appetite has been supported recently, with the latest fuels for investors’ upbeat morale being encouraging economic data from China, as well as upbeat rhetoric in the global trade arena. On Saturday, US Treasury Secretary Steven Mnuchin said he hoped that the US and China are “close to the final round” of negotiations, while yesterday, the European Trade Commissioner Cecilia Malmstrom said that the EU is ready to start negotiating with the US, and that the aim is for an accord to be sealed before the end of the year.
So, having all that in mind, we prefer to avoid exploiting any Aussie weakness against currencies that tend to weaken during periods of market euphoria, like USD, JPY and CHF. We believe that the Australian currency has more chances to correct lower against EUR. Although the ECB maintained a dovish language at its latest meeting and discussed the case of mitigating the possible side effects of negative rates, its stance was far from suggesting that interest rates could be lowered in the months to come.
EUR/AUD continues to move sideways between the 1.5715 and 1.5845 levels from the beginning of April. Since the start of the year, the pair is also seen to be stuck within a much wider range between the 1.5715 and 1.6060 areas. Last week, once again we saw the rate rebounding from the lower side of the range and traveling a bit higher. But by the end of the week, EUR/AUD failed to maintain some of those gains and moved back south. During the Asian morning today, the pair had another burst to the upside, due to the weaker AUD, which took a hit after the RBA meeting minutes were released. Overall, the pair is still on the neutral side, but from the very short-term perspective, we may see the bulls trying to push the pair a bit higher in the few upcoming days.
In order to aim a bit higher, EUR/AUD would have to exit its small sideways area through the upper bound of it, at 1.5845. Such a move might finally attract more buyers, at least in the short run. The pair could then travel towards the 1.5880 hurdle, marked by the high of April 3rd, which if broken may open the door to the 1.5915 resistance area. That area is near the high of March 27th.
Alternatively, even if EUR/AUD reverses and travels back down towards the 1.5725, or even the 1.5715 barriers, we will remain somewhat neutral still. Only if the 1.5715 support zone fails to withhold, we will target the downside, because such a move would confirm a forthcoming lower low and also signal the downside exit out of the bigger range. The next pit-stop for the rate might be near the 1.5675 obstacle, a break of which could bring the pair even lower, to test the 1.5620 area, marked by the high of November 28th.
During the European day, the UK employment report for February is due to be released. The unemployment rate is forecast to have rebounded back to +4.0% from a 44-year low of 3.9%, while average weekly earnings including bonuses are anticipated to have accelerated to +3.5% yoy from +3.4%. The excluding-bonuses rate is expected to have held steady at +3.4% yoy, the fastest pace since November 2008. According to the IHS Markit/KPMG & REC Report on Jobs for the month, data pointed to a further sharp rise in salaries, but the latest increase was the softest in seven months, while temporary wage inflation eased to a 13-month low. In our view, this tilts the risks surrounding both the wage growth rates to the downside.
From Germany, we get the ZEW survey for April. The current conditions index is anticipated to have declined for the seventh consecutive month, to +6.6 from +11.1, but the expectations index is forecast to have exited the negative territory, after staying there for 12 months. Specifically, it is expected to have risen to +0.9 from -3.6.
In the US, industrial production for March is due to be released. The forecast suggests that IP accelerated somewhat to +0.2% mom from +0.1%, but this is likely to drive the yoy rate lower as the March 2018 print, which will drop out of the yearly calculation, was at +0.7% mom. That said, bearing in mind that the ISM manufacturing PMI for the month rose to 55.3 from 54.2, we view the risks surrounding the IP forecast as tilted to the upside.
As for tonight, during the Asian morning Wednesday, New Zealand’s CPI for Q1 is coming out and expectations are for the yoy rate to have moved further below the midpoint of the RBNZ’s 1-3% target range. Specifically, it is expected to have slid to +1.7% yoy from +1.9%. At its latest meeting, the RBNZ kept interest rates unchanged at +1.75%, but the statement accompanying the decision was even more dovish than previously. Officials changed the part saying that the “next OCR move could be up or down”, noting that “the more likely direction of our next OCR move is down”. According to New Zealand’s OIS (Overnight Index Swaps), there is a nearly 30% probability for a rate cut at the Bank’s upcoming gathering, scheduled for May 8th. Yes, a +1.7% yoy rate would still be above the Bank’s own projection for the quarter, which is at 1.6%, but combining it with the GDP growth rate for Q4, which was below officials’ estimates, it may prompt market participants to increase their bets with regards to a May cut.
From China, we have GDP data for Q1, alongside the fixed asset investment, industrial production and retail sales, all for March. The qoq growth rate is forecast to have ticked down +1.4% from +1.5%, which will drag the yoy rate slightly lower, to +6.3% from +6.4%. That said, fixed asset investment, industrial production and retail sales for March, are all anticipated to have accelerated in yoy terms, entering the basket of data supporting a stabilization in the world’s second largest economy during the last month of the quarter. Thus, a 6.3% yoy growth rate by itself is unlikely to spark fresh fears. Unless of course the actual print comes in below consensus, and/or the other three releases disappoint as well. In case the forecasts are met, we believe that market participants may prefer to pay more attention to data pointing to how the economy has entered the second quarter, in order to better evaluate whether the bad days are behind us or not.
We also have two speakers on today’s agenda: ECB Governing Council Member Ewald Nowotny and Dallas Fed President Robert Kaplan.
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