Safe havens came under selling interest yesterday, while equities rose after Fed officials started leaning towards policy easing in order to prevent a steep economic slowdown. Following Bullard’s remarks that a rate cut may be “warranted soon”, Fed Chair Powell said that the Committee would respond “as appropriate” to the risks posed by a global trade war. In Australia, data showed that GDP accelerated in Q1, but the yoy growth rate declined, keeping the door open for more RBA cuts. The Kiwi rallied after RBNZ Assistant Gov. Hawkesby said that interest rates will stay unchanged in the foreseeable future.
The dollar continued trading lower against most of the other G10 currencies on Tuesday and during the early European morning Wednesday. The main gainers were NZD, CAD and AUD in that order, while the only currency against which the greenback managed to eke out some gains was JPY. The dollar was found virtually unchanged against NOK.
The strengthening of the commodity-linked currencies and the weakening of the safe-havens suggests that risk sentiment was positive yesterday. Indeed, major EU and US indices ended their sessions well in the green, with all three of the US ones gaining more than 2.0%. The upbeat morale rolled over into the Asian trading as well. Although China’s Shanghai Composite closed virtually unchanged, most other Asian bourses ended positive, with Japan’s Nikkei 225 gaining 1.80%.
Investors may have felt a bit confident after Fed officials, including Fed Chair Jerome Powell yesterday, started leaning towards policy easing in order to prevent a steep economic slowdown. Following Bullard’s remarks on Monday that a rate cut may be “warranted soon”, the Fed Chief said that the Committee would respond “as appropriate” to the risks posed by a global trade war. At the press conference following the latest FOMC meeting, Powell said there is no strong case for moving in either direction, which makes yesterday’s remarks a clear dovish tilt.
With the Fed seem to be paying more attention to market pricing, market participants felt confident to buy stocks again, and abandoned safe havens, like the yen, the swiss franc, and government bonds. The latter was evident by higher yields, with the US 10-year Treasury rate gaining 2.22%. Apart from Fed remarks, news that US Treasury Secretary Steven Mnuchin will meet with PBOC’s Governor at the G20 finance leaders meeting this weekend in Japan may have also helped the broader market environment, by reviving hopes that this could pave the way for a Trump – Xi Jinping meeting later in the month.
As for our view, investors could continue in a risk-on mode for a while more on the back of signals that the Fed has eventually decided to fight against the possibility of a sharp economic downturn. However, news over potential meetings between US and Chinese officials are far from suggesting a clear resolution to the trade spat between the world’s two largest economies. Just a couple of months ago, official remarks around the negotiations were pointing towards a final accord, but everything fell apart during the first days of May. Thus, we repeat for the umpteenth time that we would like to see concrete “truce” signals before we trust a long-lasting recovery in risk appetite. In other words, we would like to see handshakes and signatures.
USD/JPY continues to slowly drift lower, trading below its short-term tentative downside line, drawn from the high of April 24th. That said, because USD/JPY is quite oversold on the shorter timeframes, there may be a chance to see a small correction to the upside, before another leg of selling, hence why we will stay cautiously-bearish for now.
As we mentioned above, USD/JPY could move a bit higher, but if it fails to drive above the 108.45 barrier, marked by Monday’s high, this could trigger another round of selling. The slide may bring the rate closer to yesterday’s low, at 107.85, a break of which could send the pair to the 107.50 hurdle, which acted as a good support level on January 3rd.
On the upside, If USD/JPY breaks above the previously-mentioned 108.45 barrier, this may caution the bears a little, as there might be a chance of seeing a larger correction to the upside in the short run. But in order to get comfortable with that scenario, ideally, we would like to see a push above the 108.72 zone, which is the low of February 1st. This way, more buyers could join in temporarily and lift the rate to its potential resistance area between the 109.00 and 109.13 levels, marked by the lows of May 13th and 29th respectively. If that area is not able to withstand the bull-pressure, a further rate-acceleration could bring USD/JPY closer to the previously-discussed tentative downside line, which may provide some additional resistance.
Overnight, Australia released its GDP data for Q1, revealing accelerating growth in quarterly terms, but a declining yoy rate. Specifically, the nation’s GDP grew +0.4% qoq in the first three months of 2019, up from just +0.2% in the last quarter of 2018, but this brought the yoy rate down to +1.8% from +2.3%. Yes, this is still above the RBA’s forecast of +1.7% for the first half of this year, but in order for the yearly rate to stay near that projection, the economy would have to grow +0.9% in Q2, a low-probability scenario in our view, given the escalation in trade tensions during the quarter.
Thus, even if the GDP data have not increased the chances for an immediate second rate decrease at the RBA’s upcoming gathering, the door for such an action in the foreseeable future remains open. According to the ASX 30-dayinterbank cash rate futures implied yield curve, another rate cut is nearly fully priced in for September. The Aussie slid somewhat at the time of the release, but was quick to rebound, recover the losses, and even trade slightly higher, perhaps aided by the broader upbeat sentiment.
Flying from Australia to New Zealand, the Kiwi was the main gainer among the G10s, coming under strong buying interest after RBNZ Assistant Governor Christian Hawkesby said that interest rates will “remain broadly around current levels for the foreseeable future”. At its latest meeting, the RBNZ cut interest rates to 1.50% from 1.75%, and signaled willingness to reduce rates further if needed. Its projections were pointing to lower interest rates at around March next year, but this was before the latest dispute between China and the US, which may have sparked speculation for an earlier cut. Thus, Hawkesby’s remarks that the Bank could be willing to hold off from acting for a while came as a surprise to Kiwi-traders, and that’s why the currency surged.
Both the Aussie and the Kiwi are likely to stay sensitive to developments surrounding the broader market sentiment, but given that this force is largely offset in AUD/NZD, the directions in the cross could be mainly the result of speculation around the RBA’s and RBNZ’s future plans. Thus, with the RBA expected to reduce rates just after summer, and the RBNZ to stand pat for longer, AUD/NZD may be poised to trade south for a while.
Overall, AUD/NZD is still trading within its wide range, roughly between the 1.0525 and 1.0731 levels. Last week, we saw the pair struggling to get above the mid-point of that range. Such activity allowed the bears to step in again and drive AUD/NZD back down, closer to the 1.0525 zone. Although, at the time of this analysis, the pair is pointing to the downside and seems to be willing to move further down, before we get comfortable with lower areas, we need to see a clear break below the lower bound of that range.
A break below the 1.0525 hurdle would confirm a forthcoming lower low and could send the rate towards the 1.0495 obstacle, or even the 1.0475 zone, marked near the high of April 3rd and by the low of April 4th respectively. The pair might initially stall around the latter zone, or even retrace slightly to the upside. But if it continues to trade below the lower side of the aforementioned range, this could trigger another round of selling. The rate-depreciation might bypass the 1.0475 mark and lead AUD/NZD to the 1.0453 level, which is near the low of April 3rd.
Alternatively, a sharp reversal back above the 1.0570 barrier, which is yesterday’s low, could interest a few more bulls to join in again. This move could allow them to lift the rate a bit higher, potentially aiming for the 1.0608 hurdle, marked by yesterday’s high. If the buying activity then remains strong, we may see AUD/NZD pushing above that hurdle and aiming for last week’s highest area at 1.0631.
During the European day, we have the final services and composite PMIs for May from the European nations of which we got the manufacturing prints on Monday, as well as from the Eurozone as a whole. Once again, the final prints are expected to confirm their preliminary estimates. The UK services index for the month will be released as well and the forecast suggest a small rise to 50.6 from 50.4. Eurozone’s PPIs and retail sales, both for April are also on the agenda. The yoy PPI rate for the month is expected to have increased to 3.2% from 2.9%, but bearing in mind that we already have the preliminary CPIs for May in hand, we don’t expect the PPIs to prove a market mover. Retail sales are anticipated to have slid 0.3% mom after stagnating in March.
From the US, we get the ADP employment report for May. Expectations have changed and now suggest that the private sector gained 180k jobs, less than April’s stellar 275k, but still a decent number. This could raise speculation that the NFP print, due out on Friday, may also come in below previous figure, which was 263k. That said, we repeat for the umpteenth time that, even though the ADP is the only major gauge we have for the non-farm payrolls, the correlation between the two time-series at the time of the release (no revisions are considered) has been low in recent years. Taking into account data from January 2011, that correlation now stands at 0.45%. The final Markit services and composite PMIs for May, as well as the ISM non-manufacturing index for the month, are also due out.
With regards to the energy market, we get the EIA (Energy Information Administration) weekly report on crude inventories for the week ended on May 31st. The forecast is for a 0.85mn barrels decrease, after the 0.28mn slide reported for the week before. That said, overnight, the API report revealed a 3.55mn barrels jump and thus, we see the risks surrounding the EIA forecast as tilted to the upside.
As for the speakers, we have three on today’s agenda: Fed Vice Chair Richard Clarida, Fed Board Governor Michelle Bowman, and Atlanta Fed President Raphael Bostic.
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