Today, investors are likely to lock their gaze on the FOMC decision. The Committee is widely anticipated to keep rates unchanged, so market attention is likely to fall on the updated economic projections, especially the new “dot plot”, as well as any announcement over the reduction of its balance sheet. With regards to Brexit, UK PM Theresa May is likely to send a letter to EU Council President Donald Tusk today, explaining why the UK wants to extend Article 50.
The dollar traded higher or unchanged against most of the other G10 currencies. It gained versus AUD, NZD, JPY and GBP, and traded virtually unchanged against EUR and CAD. The greenback lost some ground only against SEK, CHF and NOK.
Although it's not clear by looking at the FX performance, the equity-market performance suggests a risk-on activity during the European trading, but a more subdued one in the US and Asia. Major EU indices were a sea of green, while in the US, Nasdaq was slightly up (+0.12%), the S&P closed virtually unchanged, and Dow was fractionally down (-0.10%). In Asia, Japan’s Nikkei 225 was 0.12% up, but China’s Shanghai Composite Index closed unchanged.
The trigger behind the subdued appetite may have been headlines that China is pushing back against demands from the US in trade talks. That said, bearing in mind that US Trade Rep. Robert Lighthizer and Treasury Secretary Steven Mnuchin plan to travel to China next week for another round of negotiations, we still see the case for a final deal to be struch as more likely than not, even if the anticipated meeting between US President Trump and his Chinese counterpart Xi Jinping is delayed. The two leaders were expected to hold a summit later this month, but weekend media reports suggested that this may be pushed back to June.
As for today, investors will be probably sitting on the edge of their seats in anticipation of the FOMC decision. This would be one of the “bigger” meetings, where apart from the statement and Fed Chief Powell’s press conference, we also get updated economic forecasts. In January, the Committee switched to a “patient” stance with regards to future adjustments in interest rates and also issued a separate statement noting that officials are prepared to alter the size and composition of their balance sheet, if needed. Thus, conditional upon officials keeping rates unchanged as it is broadly anticipated, we believe that most of the attention is likely to fall on the updated economic projections, especially the new “dot plot”, as well as any announcement with regards to the balance sheet normalization.
Following January’s switch to a “patient” stance, we believe that the “dot plot” is likely to be revised down, but the big question is: How much? According to the Fed funds futures, market participants are 75% confident that policymakers will refrain from acting this year, while there is a 25% chance for cutting rates. The probability for a hike is still at 0%. That said, even if the dots are revised down to point only one hike by year end, this would still be more hawkish than the market’s already pessimistic view and may thereby prove positive for the dollar. We believe that the dollar could gain even if a 2019 hike would be the only one pointed throughout the whole forecast horizon, namely even if the 2020 projection of 1 more hike is revised down to zero. After all, the market expects rates to drift lower during forecast horizon, with a 25bps rate cut fully priced in for January 2021. For the dollar to weaken, the plot may have to be revised down to no hikes, at least for 2019.
As for which case is more likely, we believe the former one. The minutes of the prior meeting revealed that several members suggested that a hike would be necessary only if inflation accelerates higher than their baseline outlook, while several others argued that they see the case of raising rates later this year as appropriate, even if the economy evolves as expected, which means that the chances for a revision to zero might be slim. What’s more, data had not been that bad since the previous meeting. Economic growth slowed to 2.6% qoq SAAR in Q4 2018 from 3.4%, but not as much as many have been afraid. After all, according to its December projections, the Fed itself anticipates a slowdown throughout the whole forecast horizon, with the qoq SAAR rate averaging at 2.3% in 2019 and 1.9% in the longer run. Employment slowed in February, but wages accelerated, which combined with rising oil prices may help inflation to pick up somewhat in the months to come.
As far as the reaction in the stock market is concerned, a downside revision to 1 hike may prove somewhat negative for the equities as higher (than currently expected) interest rates mean higher borrowing costs for companies, something that could erode their profitability. However, we would treat such a slide as a corrective phase, if this is accompanied by a relatively optimistic view with regards to the US economy. Further progress in the US-China trade saga could also prove supportive.
Moving to the Brexit land, UK PM Theresa May is planning to send a letter to EU Council President Donald Tusk, explaining why the UK wants to extend Article 50. According to a Bloomberg report, EU officials are likely to tell May that a deal must be approved by mid-April or she will have to decide whether to extend the process to 2020 or leave without a deal in three months. The report comes after a Reuters article cited EU diplomats as saying that leaders may not proceed with a final decision on any Brexit delay at this week’s summit.
Although this probably removes the risk of a disorderly withdrawal next week, there is only one word that could characterize the situation: chaos. With the EU staying adamant that it will not reopen the withdrawal agreement and Bercow rejecting another vote over the already rejected agreement, we see the case of another meaningful vote taking place and passing through as a difficult task. With the information we have in hand now, and UK lawmakers voting against a no-deal Brexit under any circumstances, an extension into 2020 appears the most probable outcome in our view.
Since its reversal on March 7th, USD/CHF continues to drift south, forming a falling wedge pattern. According to textbooks, such formations tend to break out to the upside. Given the fact that the pair is already quite stretched to the downside on the 4-hour chart and continues to run above its short-term upside support line taken from the low of January 14th, we will stay cautiously-bullish for now.
For a better confirmation of a potential upside, we would like to see a break of the upper side of the wedge first and then a push back above the psychological 1.0000 barrier. This way, we may start looking into a possible change of the short-term trend, which could result in the pair reaching levels that were tested in the beginning of the month. We will then aim for the 1.0015 hurdle, marked by one of the intraday swing highs of Monday, which also coincides with the 200 EMA. If the bulls continue to dictate the rules, another push higher might test the 1.0030 obstacle, or even the 1.0053 level, which acted as good resistance on March 15th.
Alternatively, if USD/CHF continues to slide and eventually breaks below the aforementioned short-term upside support line, this might prevent the bulls from entering once again, as the door would be open for the rate to test some lower areas. The next potential support zone could be near the 0.9962 level, marked by the lows of February 27th and March 1st. If that area is just seen as a temporary pit-stop for the pair, then a further slide lower might drag USD/CHF to the 0.9925 area, marked by the low of February 28th.
Yesterday, Nasdaq 100 managed to spike higher and reach the 7392 hurdle but failed to remain near that high and moved lower. The S&P 500 was virtually unchanged, the Down Jones Industrial Average closed fractionally in the red, but Nasdaq 100 was the one that remained slightly positive. That said, there is a possibility for a small correction lower today, which may allow more buyers to join in later on.
A move below yesterday’s low, near the 7322 hurdle, could push the index for a slightly deeper correction, where the next potential support area could be seen near the 7293 obstacle, marked by the low of Monday and the high of March 13th. Given that it is a strong level, if the price struggles to close the day below it, the bulls might pick up on that quickly and lift the index back to yesterday’s levels. This is when we will aim for the 7392 barrier again, which marks yesterday’s peak. If Nasdaq 100 continues to travel in the northern direction, a break above 7392 could lead to a test of the 7432 level, marked by the high of October 9th.
On the other hand, if the 7293 support area fails to withhold, the index could enter this neutral territory, between the 7239 and 7293 levels. This is where we will remain side-lined and wait for a confirmation break below the 7239 zone, in order to start examining lower levels in the short run. The 7239 hurdle is marked near the low of March 14th, a drop below which could lead Nasdaq 100 towards the 7200 obstacle, the high of March 4th and March 12th. If this obstacle is no match for the bears, a further slide may put the 7160 zone back on the radar, as it supported the index on March 12th from moving lower.
During the European morning, we get the UK CPIs for February. The forecasts are for both the headline and core rates to have remained unchanged at +1.8% yoy and +1.9% yoy. In the midst of all these developments surrounding Brexit, barring any major deviations from the forecasts, we expect these inflation numbers to attract little attention. The UK CBI industrial trends orders index for March is also coming out and expectations are for a tick down to 5 from 6.
With regards to the energy market, we get the EIA (Energy Information Administration) inventory data for the week ended on the 15th of March. Expectations are for a 0.3mn barrels increase following a decline of 3.9mn barrels the week before. That said, yesterday, the API report showed a 2.1mn decline and thus, we view the risks of the EIA data as skewed to the downside.
As for tonight, during the Asian morning Thursday, New Zealand’s GDP for Q4 is coming out. Expectations are for the qoq rate to have doubled to +0.6% from +0.3% in Q3. That said though, a quarterly rate of +0.6% would still be below the RBNZ’s own forecast for the last quarter of 2018, which is at +0.8%. At its latest meeting, the RBNZ kept interest rates unchanged at +1.75%, with Governor Orr reiterating that the direction of the next move could be either up or down. At the meeting statement, the Governor noted that lower interest rates and government spending are expected to support a pick-up in GDP over 2019, but at the conference he repeated that if growth does not pick up, a cut may be appropriate. Thus, a growth rate below the Bank’s own projections may prompt participants to add to their rate cut bets.
The Australian employment data for February are also due to be released. The unemployment rate is anticipated to have remained unchanged, while the net change in employment is forecast to show that the economy added 15.2k jobs, after gaining 39.1k. Despite the potential slowdown in jobs growth, the unemployment rate is forecast to have stayed at its lowest since June 2011. That said, we don’t expect this to alter market expectations with regards to the RBA’s future rate-steps, especially following the Q4 GDP slowdown notably below the RBA’s own projection for the quarter. After all, RBA officials have put the prospect of a rate cut on the table, already acknowledging the strength of the Australian labor market.
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