The dollar gained against all but one of its major peers, even in the midst of a risk-on environment, with risk appetite perhaps boosted by optimistic remarks over a US-China trade deal, as well as news that US lawmakers reached a deal in order to avert another government shutdown. Tonight, the RBNZ decides on monetary policy, and while no change in rates is expected, we believe that Governor Orr will keep the prospect of a cut well on the table. We also see a decent chance for policymakers to push back the timing of when they expect rates to rise.
The dollar traded higher against all but one of the other G10 currencies. It gained the most against NOK, JPY and GBP in that order, while the currency that managed to resist the greenback’s strength was CAD, with USD/CAD trading virtually unchanged.
Although not clear by the performance in the FX world, Monday was a risk-on day and this is evident in the equity sphere. All major EU indices closed their sessions in positive territory, and although US markets traded on a somewhat softer note, shares in Asia also edged north on Tuesday. Investors’ morale may have been boosted by headlines surrounding the US-China trade saga, as well as overnight news that US lawmakers reached a tentative deal in order to avert another government shutdown at the end of this week. That said, the accord still needs approval in Congress and Trump’s signature.
With regards to the US-China sequel, a US delegation led by US Tr. Secretary Steven Mnuchin and Trade Representative Robert Lighthizer travelled to China for another round of trade negotiations this week. Low-level talks began on Monday, while Mnuchin and Lighthizer are scheduled to meet with China’s Vice Premier Liu He on Thursday and Friday. Yesterday, China expressed hopes for a breakthrough, while overnight, US President Trump said that they are going to make great trade deals with China. However, we stick to our guns and we don’t expect a final deal this week. We believe that if that happens, it will be at a meeting between Trump and his Chinese counterpart Xi Jinping. Yes, such a meeting may take place after March 1st, but we assume that Trump could postpone any tariff increases if the chances for a final accord are high in the aftermath of this week's round of talks.
Now back to the markets, yes, most stock indices performed well yesterday, but so did the dollar, which is often considered a safe-haven asset. But, why is that? Shouldn’t the greenback weaken in periods of increased risk appetite? Shouldn’t it be trading south after the Fed turned patient with regards to its future policy moves? In our view, the greenback’s outperformance, even after the latest Fed decision, may be owed to even more dovish narratives by other major central banks. Both the RBA and the RBNZ keep the prospect of a rate cut on the table, while the ECB downgraded its language over Eurozone’s economic outlook amid weak economic data coming out from the bloc, which may have raised speculation that the Bank is unlikely to raise interest rates this year.
The pound was the third loser in line, not far behind the Norwegian krone and the Japanese yen. The British currency came under selling interest yesterday after data showed that the UK economy slowed by more than anticipated in the last three months of 2018, with December marking a contraction month. What’s also worth mentioning is that business investment fell for the 4th consecutive quarter. Following the disappointment in the PMIs for January, this data set adds to evidence that Brexit uncertainty is taking a toll on the UK economy. All this combined with no concrete plans by UK officials on how to move forward in order to secure a Brexit deal, increase fears that a disorderly withdrawal from the EU would have a severe negative impact on the economy. Focus now turns to PM May’s speech in Parliament, where she will update lawmakers on her progress so far with regards to her plans. On Thursday, MPs will debate on the matter, with a chance of another round of voting on proposed amendments.
On Wednesday, last week, AUD/USD broke below its short-term upside support line, taken from the low of January 3rd. The pair continued to print lower lows until it found good support near the 0.7055 hurdle, from which the rate rebounded. What’s more interesting now is that AUD/USD seems to be stuck between the 0.7055 and the 0.7110 levels. The US dollar showed some strength yesterday and that could drag into today’s trading day as well, which means that the pair has a chance to slide again. But looking at our oscillators, the RSI and the MACD, we can see that a positive divergence is forming, which may signal a possible push higher. Therefore, in order not to rush into conclusion, we rather sit aside and wait for a confirmation break of one of our key levels first.
A drop below the 0.7055 area could interest more bears, because the move could open the door towards the key support zone at 0.7020, marked by the high of January 3rd. If that zone fails to withstand the bear pressure, then a break of it could lead AUD/USD to a test of the 0.6993 hurdle, which is the low of January 4th.
On the other hand, if the rate travels back above the 0.7110 barrier, this may clear the path towards slightly higher resistance levels. The first good one to watch out for might be the 0.7145 obstacle, a break of which could push AUD/USD towards the 0.7180 level, which is the intraday swing low of January 30th.
Tonight, during the Asian morning Wednesday, it’s the turn of the RBNZ to decide on interest rates for the first time this year. This would be one of the “bigger” meetings, where apart from the decision and the accompanying statement, we will get updated economic projections and a conference by Governor Adrian Orr.
When they last gathered, policymakers decided to keep the official cash rate unchanged at +1.75% as was widely anticipated, while in the statement accompanying the decision, Governor Orr repeated that rates are expected to stay at this level through 2019 and into 2020. What appeared interesting at first glance was that the Governor removed from the statement the part saying that the next move could be up or down. However, at the press conference, he said that a rate cut is not off the table and that he would consider such a move if GDP falls short of the Bank’s projections.
Since then, GDP data showed that the economy slowed to +0.3% qoq in Q3 from +1.0% in Q2, well below the Bank’s own estimate of +0.7%, and although inflation data for Q4 came in somewhat better than expected, the employment report for the quarter disappointed, with the unemployment rate rising to 4.3% from 3.9% and the employment changed slowing to +0.1% qoq from +1.1%. Officials may not be tempted to cut rates at this meeting, as they may prefer to wait for evidence as to whether the softness in the data was temporary or not, but we expect Governor Orr to keep the prospect well on the table.
Given that the gathering will be also accompanied by the quarterly Monetary Policy Statement, which includes the Bank’s updated forecasts, we also believe that there is a decent likelihood for policymakers to push back the timing of when they expect interest rates to start rising. According to the previous quarterly report, interest rates are expected to start rising in the second half of next year and hit 2.0% during the last quarter. Thus, we see the case for a 25bps increase to be pushed into 2021.
Last week, after breaking the short-term upside support line taken from the low of January 3rd, NZD/CHF continued to experience the pressure from the bears. Since Thursday the pair is trading in a sideways manner, but this may be seen as an opportunity for the sellers to refuel and then drive NZD/CHF lower. For now, we remain somewhat bearish over the short-term outlook, as we wait for a confirmation break through one of our support areas.
In order to get comfortable with the downside again, we need to see the rate dropping below the 0.6735 hurdle, which could clear the path towards lower support levels. That’s when NZD/CHF could go ahead and test the 0.6719 obstacle, marked by the low of January 25th. If the selling continues, a break below that obstacle may increase the chances of a further slide, where the next potential support zone could be seen around the 0.6682 mark, which acted as a good support level between January 14th and 22nd.
Alternatively, a push back above the 0.6775 barrier, could invite some bulls to the table, who in their case could lift the rate towards the 0.6800 level, marked near the peak of the spike we saw during the Asian morning Monday. But the level may be just taken as a temporary pit-stop for the bulls, as the further pressure from them might push NZD/CHF to its next potential resistance zone, at 0.6820, marked by the high of January 28th.
As for Today’s Events
Tuesday appears to be a relatively light day in terms of economic releases. The only noteworthy one is the API (American Petroleum Institute) weekly report on crude oil inventories, but as it is always the case, no forecast is available. Thus, we expect investors to stay focused on headlines and developments surrounding the US-China trade negotiations, but also keep an eye on speeches by BoE Governor Mark Carney and Fed Chair Jerome Powell. ECB Governing Council member and Bundesbank President Jens Weidmann is also scheduled to speak.
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