The euro came under selling pressure yesterday after preliminary Euro-area PMIs disappointed, prompting investors to bring forth their bets with regards to further action by the ECB, and increasing the need for governments to provide fiscal support. As for tonight, the spotlight will turn to the RBNZ, which decides on monetary policy. Following the “double cut” at the prior meeting, we don’t expect officials to act again at this gathering, but we expect them to maintain their easing bias.
The dollar traded mixed against the other G10 currencies on Monday and during the Asian morning Tuesday. It gained the most against GBP and EUR, while the main winners were NZD and JPY.
With no clear catalyst behind its tumble, the pound was yesterday’s main loser, with its traders also awaiting the Supreme Court’s ruling on whether UK PM Johnson’s decision to suspend Parliament was lawful or not.
The second in line loser was the euro. The common currency came under strong selling interest after the French and German preliminary PMIs for September disappointed, with the German manufacturing index falling further below the 50 boom-or-bust mark, to its lowest since May 2009, and the nation’s composite print slipping below 50 for the first time in six years. Following the economic contraction in the second quarter, these numbers raise concerns that Q3 may follow suit, something that would signal a technical recession in Eurozone’s powerhouse. With regards to bloc’s indices, the manufacturing index fell to 45.6 from 47.0, instead of rising to 47.3, while the services one declined to 52.0 from 53.5, instead of sliding to 53.3. This brought the composite PMI down to 50.4 from 51.9, raising fears that Euro-area economy as a whole may be flirting with contraction as well.
At its latest meeting, the ECB cut its deposit rate by 10bps and decided to restart its QE program, with President Draghi adding that the Governing Council “continues to stand ready to adjust all of its instruments as appropriate to ensure that inflation moves towards its aim in a sustained manner.” However, although the Bank remains ready to ease further if needed, at the press conference, Drahgi also stressed the need for governments with fiscal space to act in an effective and timely manner. “Now it’s high time I think for the fiscal policy to take charge,” the President said. Thus, yesterday’s PMIs may have not only prompted market participants to bring forth their bets with regards to another 10bps cut in the deposit rate, but they may have also increased the need for governments to provide fiscal support. As far as another cut by the ECB is concerned, according to Eurozone’s money markets, investors are almost fully pricing in 10 more basis points to be cut in March.
Yesterday, after breaking below its key support zone, at 1.0910, EUR/CHF made its way lower, where the bulls found refuge near the 1.0856 hurdle, from which they’ve managed to push the pair back up a bit. Given the steep down-move that we saw from September 19th, there is a chance to see a bit of correction to the upside. That said, the correction might be short-lived, as there are still no clear signs of a potential change of direction to the upside, at least in the short run. This is why for now, we will remain cautiously-bearish.
As mentioned above, the pair could make a curve before moving back down again. If the rate accelerates a bit higher, but fails to move above the 1.0910 barrier, marked near the lows of September 11th and 20th, this may invite the sellers back into the game and lead EUR/CHF to the 1.0874 hurdle. That hurdle acted as an intraday swing low yesterday, a break of which could open the door to the 1.0856 zone, which is near the low of yesterday. If the selling doesn’t end there, a further move down could bring the rate closer to the 1.0835 level, marked by the lows of August 14th and 15th, and also by an intraday swing low of September 5th.
On the upside, for us to start considering slightly higher areas again, we need to see at least a push back above the 1.0930, marked by yesterday’s high. This way, the pair would also get placed above its 200 EMA on the 4-hour chart and the next potential resistance area to watch out for could be the 1.0954 zone, which is the low of September 19th. If EUR/CHF gets a hold-up around there, or even corrects back down a bit, as long as it stays above the 1.0930 hurdle, we will remain somewhat positive. We will once again target the 1.0954 obstacle, a break of which could set the stage for a possible move to the 1.0989 level, marked by an intraday swing low of September 18th.
As for tonight, during the Asian morning Wednesday, the main event is likely to be the RBNZ monetary policy decision. When they last met, policymakers of this Bank decided to cut interest rates by 50bps, to a record low of 1.00%, surprising the financial community which has been positioned for a 25bps decrease. The key takeaway we got from the statement and the minutes was that officials remained willing to ease further if needed, and this was made crystal clear by Governor Adrian Orr at the press conference following the decision.
Last week, data showed that New Zealand’s economy slowed to +0.5% from +0.6%, which was better than the +0.4% forecast, but in line with the Bank’s latest projection for the quarter. In our view, this keeps the door for more easing in the months to come open. That said, we don’t expect officials to rush into cutting again at this meeting. In an interview from the Jackson Hole economic symposium in the end of August, Governor Orr said that the prior “double cut” lowers the chances of having to do more later, which suggests that there is no urgency for delivering another cut for now. Indeed, this appears to be the view held by the financial world as well. According to New Zealand’s OIS (Overnight Index Swaps), the probability for a 25bps cut this week stands at around 22%. We just expect the Bank to maintain its easing bias, and we will look for clues and hints as to whether another cut may be delivered.
As for the Kiwi, clear signals that another cut may be delivered before the end of the year, namely in November, could bring the currency under renewed selling interest. On the other hand, anything suggesting that the Bank is able to wait for longer may wake up some NZD-bulls, who could extend yesterday’s corrective rebound.
NZD/CAD continues to trend lower, trading below its short-term tentative downside resistance line taken from the high of July 22nd. But after finding good support at around 0.8297 on September 20th, the pair reversed to the upside and is now moving in the northern direction, towards that downside line. Our short-term momentum studies are showing signs of a possible further move up, as they have recently bottomed and are now pointing slightly higher. That said, this whole potential move higher could still be seen as part of a correction, where the upside could be limited due to the above-discussed downside line. If it holds, we may see another leg of selling, possibly bringing the rate to the recent lows again.
A push up and a break of the 0.8360 zone, which is marked near the low of August 30th and near the high of September 20th, could lead the rate a bit higher and test the aforementioned downside line. If that line holds, the bears might see it as an opportunity to take advantage of the higher rate and drive it back down. NZD/CAD could then slide below the 0.8360 territory again, this way potentially clearing the path for itself to the 0.8297 level. That level was not only the low of September 20th, but it is also marked near the low of September 2015.
Alternatively, a break of the previously mentioned downside line and a rate-rise above the 0.8425 barrier, marked by the high of September 17th, could increase the pair’s chances of drifting further north. We will then examine the 0.8470 hurdle as our next possible resistance area, a break of which could push NZD/CAD towards the psychological 0.8500 mark, which is near the current high of September.
The only releases worth mentioning are the German Ifo survey, and the US Conference Board consumer confidence index, both for September. With regards to the German Ifo survey, the current assessment index is expected to have declined to 97.0 from 97.3, while the business expectations one is forecast to have risen to 91.8 from 91.3. This would drive the business climate index slightly up, to 94.5 from 94.3. The case for a lower current assessment index and higher business expectations is supported by the ZEW indices which moved in a similar fashion. Namely, the current conditions ZEW index slid more than anticipated, while the economic sentiment one rose more than expected. As for the US CB consumer confidence index, it is forecast to have slid to 134.0 from 135.1.
As for tonight, during the Asian morning Wednesday, apart from the RBNZ decision, we also get New Zealand’s trade balance for August, which is expected to show that the nation’s deficit has widened. The BoJ’s own core CPI is also coming out, but no forecast is available.
With regards to the speakers, we have one on today’s agenda: ECB Vice President Luis de Guindos.
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