The dollar traded lower against most of its major peers yesterday as market sentiment improved somewhat. As for today, USD-traders will turn their attention to the FOMC decision. The Fed is widely expected to hike rates, so if this is the case, the focus will fall on the statement, the new projections, and Powell’s press conference. Tonight, the central bank torch will be passed to the RBNZ, which is expected to remain on hold.
The dollar traded lower against all but two of the other G10 currencies on Tuesday. It lost the most ground against GBP, NZD and AUD in that order, while the two currencies that failed to gain against the greenback were SEK and JPY.
The weakening of the dollar and the yen suggest that following Monday’s setback in risk appetite, market sentiment improved yesterday, which supports our view that escalating trade tensions between the US and China may continue to have diminishing market effects if any new measures are already flagged well ahead of the official announcements. The improvement in investors’ morale is also evident by the performance of global equity indices. Almost all major EU indices ended their session in the green, while in Asia today, Japan’s Nikkei 225 and China’s Shanghai Composite Index closed 0.36% and 0.92% up respectively. The US was the exception. Nasdaq closed Tuesday positive, but both the S&P 500 and the Dow Jones finished slightly down.
As for today, USD-traders are likely to shift attention back to monetary policy and the FOMC gathering that concludes today. This is one of the “bigger” meetings, where, besides the rate decision and the statement, we get updated economic projections and a press conference by Fed Chair Jerome Powell.
According to the Fed funds futures, market participants are almost certain that the Committee will raise rates by 25bps to the 2.00-2.25% range, with the implied probability for such an action currently standing near 95%. They also assign a near 80% chance that another hike will follow in December. Thus, a hike by itself and an unchanged 2018 median dot pointing to another one in December are unlikely to result in any major market reaction. We believe that most of the attention may fall on the 2019 dots as well as the first forecast for 2021. Investors may be eager to find out whether the Fed continues to anticipate 3 more hikes in 2019 and whether the 2021 median will be above or below the Fed’s long run estimate.
Recently, some participants may have been skeptical whether the Fed will remain willing to keep hiking rates when interest rates reach their neutral level, the level at which monetary policy is viewed as neither accommodative neither restrictive. The Fed currently sees that level close to 3.00%. That said, the stellar performance of the US economy has prompted some Fed doves, like Brainard and Evans, to take a hawkish turn and support the idea for the Committee to keep raising rates.
Having all these in mind, and also given that the market is almost fully pricing in only two hikes for 2019, an unchanged 2019 median estimate, combined with a 2021 forecast above the Fed’s long run estimate would confirm that officials remain willing to push rates above their neutral level and keep them within restrictive territory for a longer period that previously thought. This could prompt the market to adjust its forecasts closer to the Fed’s, and thereby bring the dollar under buying interest.
At one point last week, it looked like the bulls were ready to capitulate to the bears and give them the control over USD/CHF. But on Friday, they managed to show some strength and did not allow the pair to drop further. This was quickly picked by more buyers on Monday, and USD/CHF managed to get back into the short-term falling channel, where it was trading in since the last few days of August. All this leads to the idea that we could see a follow-through of this recent buying activity and hence, we will stay more on the bullish side for now.
Looking at the current picture, there is a chance to see USD/CHF bouncing off from the lower bound of the aforementioned channel and pushing back up again towards the 0.9670 resistance, marked by yesterday’s high. A break of that line could set the stage for a move to the 0.9700 hurdle, as more bulls could be picking up on this idea of lifting the pair higher. That hurdle was last tested on the 19th of September, when it held the rate from moving upwards. If this time, USD/CHF ploughs through it, the move could lead the pair to test the upper bound of the channel, which could initially stall the rate for a while.
The RSI and the MACD are both within their bullish territories, but the first has already peaked, while the latter, although above both its zero and trigger lines, shows signs of slowing down. These signs suggest upside momentum, but they keep us cautious that a minor retreat may occur before the next positive leg. As we already noted, such a setback may challenge the lower end of the abovementioned channel.
On the downside, a break below the lower bound of the channel could open the way towards the recent good support zone near the 0.9575 level, marked by the low of the 23rd of September. If the bear-pressure remains, a drop to the 0.9543 barrier could be inevitable. That area was the lowest point of last week.
The New Zealand dollar was among the main gainers against its US counterpart, spiking up after the ANZ survey for September showed that business confidence rebounded from its 10-year low. Specifically, the business confidence index rebounded from -50.3 to -36.3, the best print since May.
Now, NZD-traders are likely to fix their gaze on the RBNZ monetary policy decision scheduled for tonight, during the early Asian morning Thursday. Expectations are for this Bank to keep rates unchanged at +1.75%. The meeting will not be accompanied by updated economic projections, neither a press conference by Governor Adrian Orr, and thus the focus will be only on the statement.
When they last met, policymakers stood pat, reiterating that the direction of the next move could be up or down. They also pushed well back the timing of when they expect interest rates to start rising, from September 2019 to September 2020. At the press conference following the decision, Governor Orr said that if growth slows further below its potential rate, then officials would have to cut rates. Since then, the only top-tier economic data set we got was New Zealand’s GDP for Q2. The release showed that economic growth accelerated to +1.0% qoq from +0.5% qoq in Q1, well above the Bank’s estimate for the quarter, which was also at 0.5% qoq.
In our view, this may have eased concerns with regards to a near-term rate cut, but we don’t expect it to result in any major changes in the statement accompanying the decision. In August, officials noted that “While recent economic growth has moderated, we expect it to pick up pace over the rest of this year and be maintained through 2019.” Thus, the latest GDP figure, although accelerating earlier and more than the Bank’s forecasts suggested, it just confirms that view. We expect officials to acknowledge this and perhaps remove the part saying that there is the risk for the moderation in growth to last longer than their forecasts suggest, but we also expect them to repeat that the next rate move could be up or down and that interest rates are expected to stay at this level through 2019 and into 2020.
NZD/JPY, since finding good support in the beginning of September, finally has shifted steeply to the upside. The pair broke to the upside the medium-term downside resistance line taken from the peak of the 13th of April and continues to trade above it. For now, we will remain bullish and aim for higher levels, especially if we see a close above last week’s high.
As mentioned above, the pair is now aiming for a test of its last week’s highest level near the 75.55 zone, a break of which could open the path for the bulls to drive NZD/JPY higher towards the 75.90 resistance area, which was the high of the 2nd of August. Of course, if that area won’t be enough for the bulls, we could see the pair climbing to the 76.30 level, marked by the high of the 31st of July. This is where the rate could stall for a bit, until the bulls and the bears figure out who takes control from there.
Alternatively, for us to get comfortable with the downside scenario, at least for the short-run, we would need to see NZD/JPY moving back down below the aforementioned downside line. This way we could start examining the levels that we have seen in mid-September. The first good potential area of support could be around the 74.10, which acted as a nice bouncing ground for NZD/JPY during its continued move higher on the 19th of September. Slightly below lies another good potential support level for the pair, at 73.80, that acted as both support and resistance on the 18th and the 14th of September respectively. Certainly, if the pair gets to the last-mentioned level, we will have to examine the possibility of seeing further declines.
Apart from the FOMC and the RBNZ decisions, the only other releases worth mentioning are the US new home sales for August and the Energy Information Administration (EIA) crude oil inventory data for the week ended on the 21st of September. US new home sales are expected to have rebounded 0.5% mom after sliding 1.7% in July, while the EIA release is forecast to show a 1.3mn barrels slide following a decline of 2.1mn barrels the week before. That said, yesterday, the API report showed a 2.9mn increase in inventories, and thus, we view the risks of the EIA data as skewed to the upside.
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