The greenback stayed on the back foot yesterday, still feeling the heat of the FOMC’s signals for lower interest rates. The Norwegian Krone was yesterday’s main gainer among the G10s, after the Norges Bank hiked rates and signaled further tightening. The BoE maintained its tightening bias as well, but downgraded its GDP estimate for Q2, and acknowledged increased downside risks to economic growth. The pound slid at the time of the release. As for today, following Draghi’s dovish remarks on Tuesday, investors will likely turn their gaze to Eurozone’s PMIs as they try to figure out whether and when the ECB could cut rates.
The dollar continued trading lower against the other G10 currencies on Thursday and during the Asian morning Friday. The main gainers were NOK, CHF, AUD, and JPY in that order, while the currency against which the dollar depreciated the least was GBP.
The greenback stayed on the back foot due to the FOMC's willingness to reduce rates in order to avert an economic downturn. Remember that on Wednesday, the Committee dropped its “patient” language, noting that they will “act as appropriate” to sustain economic expansion. What’s more, according to the new dot plot, 7 out of the 17 members were in favor of two quarter-point rate decreases by year end. This prompted investors to fully price in a rate decrease as early as next month, with another one nearly priced in for September.
Apart from weighing on the dollar, the heightened expectations with regards to lower rates in the US kept equities in a rally mode, with most major EU and US indices closing Thursday in positive territory. It is worth mentioning that the S&P 500 even managed to hit a new all-time high. That said, sentiment softened during the Asian morning today, with most Asian bourses trading in the red.
Back to the currencies, the big winner was the Norwegian Krone, coming under strong buying interest after the Norges Bank decided to hike rates as expected, with Governor Oystein Olsen saying that the policy rate will most likely be increased further in the course of 2019. Despite the slowdown in GDP for mainland Norway, officials reiterated the view that growth in their economy is solid and added that the policy rate forecast indicates a slightly faster rate rise in the coming year than projected in March, though the path is little changed further out. This may have come as a surprise to those (including us) expecting the hike to be accompanied by a more conservative language, and perhaps a slower rate path, and that’s why NOK surged.
Apart from the Norges Bank gathering, we also had a BoE meeting yesterday. The Bank decided unanimously to keep monetary policy unchanged and maintained the view that an ongoing tightening, at a gradual pace and to a limited extent, would be appropriate. Officials also repeated that the appropriate path of monetary policy will largely depend on the nature and timing of the EU withdrawal. However, they downgraded their Q2 estimate to 0.0% from +0.2% previously, acknowledging that downside risks to growth have increased since May as global trade tensions intensified.
The pound slid somewhat at the time of the release, despite the BoE staying one of the very few central banks willing to hike, instead of cutting rates. It could be due to the Bank’s downside revision to its estimate for Q2 GDP and the increasing downside risks, or because, given the very hawkish remarks by Haldane and Saunders recently, some investors may have been expecting to see a dissenter.
Looking ahead, we expect GBP traders to turn their gaze back to UK politics. Yesterday, Boris Johnson and Jeremy Hunt emerged as the final two candidates in the battle of succeeding Theresa May. Johnson maintained his strong lead, gaining 160 out of the 313 votes, with Hunt getting 77. With Johnson almost certain to win the contest, we stick to our guns that the chances of a no-deal Brexit remain decent. Yes, the Parliament pledged to block a chaotic exit, but haven’t they voted against such an outcome in the past? They did, and yet the chances are still there. Johnson wants to exit the EU by October 31st, with or without a deal, which combined with the EU’s stance to not renegotiate May’s multi-rejected accord, keeps a disorderly divorce as the default option for now.
GBP/CAD traded lower yesterday just after the BoE rate decision, hit support at 1.6674, and rebounded to trade briefly above 1.6770. That said, the pair came under renewed selling interest during the European afternoon and slid back below that level. Overall, the price structure on the 4-hour chart remains of lower peaks and lower troughs below all three of our moving averages and thus, we would still see a negative picture with regards to this exchange rate.
We believe that the move back below 1.6770 could allow the bears to aim for another test near the 1.6674 level, the break of which could target the 1.6600 zone, which provided strong support back on August 15th and 29th, as well as on October 2nd, last year. If the 1.6600 hurdle fails to stop the rate from drifting lower, its break may encourage the bears to put the psychological number of 1.6500 on their radars.
Our short-term momentum studies detect strong downside speed and enhance our view for further declines, at least in the near term. The RSI lies below 50, points down, and looks to be heading towards its 30 line. The MACD lies below both its zero and trigger lines, pointing south as well.
On the upside, we would like to see a clear recovery above 1.6884 before we abandon the bearish case. Such a move would signal a forthcoming higher high on the 4-hour chart and may initially target the peak of June 12th, at around 1.6960. Another break, above 1.6960, could carry more bullish implications, perhaps paving the way towards the 1.7070 area, or the 1.7125 obstacle, which provided strong resistance between May 24th and June 3rd.
As for today, the spotlight is likely to turn to Eurozone’s preliminary PMIs for June. Both the manufacturing and services indices are expected to have risen somewhat, to 48.0 and 53.0, from 47.7 and 52.9 respectively. However, the composite index is anticipated to have remained unchanged at 51.8.
At the latest ECB meeting, the Bank pushed back its guidance on interest rates, noting that they are expected to stay untouched “at least through the first half of 2020”. Yet, the euro surged back then, due to expectations of a more dovish stance. After all, investors were already pricing in a 10bps cut in the deposit rate early next year. That said, on Monday, ECB President Marion Draghi said that additional stimulus will be required if a sustained return of inflation to the ECB’s aim is threatened, prompting investors to increase their cut bets, with a 10bps cut in the deposit rate now almost fully priced in for this September.
His remarks were echoed by other policymakers thereafter, with ECB Vice President de Guindos noting yesterday that they are prepared to act if the deterioration continues. Thus, another disappointment in the Euro-area PMIs could prompt market participants to bring even closer the timing of when they expect a rate decrease by the ECB, and thereby hurt the euro.
However, with most major central banks cutting rates or signaling that they will do so, it seems that their respective currencies may enter a race to the bottom. Thus, we would prefer to exploit any potential euro weakness against currencies the central banks of which are expected to hold off from acting for longer. Following the strong Canadian CPIs on Wednesday and the latest rebound in oil prices, we believe that one candidate is the Loonie. Recent remarks by RBNZ Assistant Gov. Hawkesby that rates would stay unchanged in the foreseeable future, combined with New Zealand’s decent GDP data for Q1, put the Kiwi on the list as well. Despite the BoE’s stance for an ongoing tightening, we will not include the pound due to the uncertainty surrounding the UK’s future relationship with the EU.
EUR/NZD traded in a consolidative manner yesterday, between roughly the 1.7125 support and the resistance of 1.7178. At some point during the Asian morning today, the rate tried to move pass the 1.7125 level, but failed to do so and quickly returned back above it. In our view, Tuesday’s tumble suggests that the prevailing recovery may have come to an end, while the consolidation thereafter make us believe that the bears are willing to stay and fight. Thus, we will hold a cautiously-negative stance for now.
In order to get more confident on the prospect of further declines, we would like to see a decisive drop below 1.7100, a support marked by the inside swing high of June 4th. Something like that could open the door towards the 1.7035 barrier, which is near the inside swing peak of June 7th. Another dip, below 1.7035, could encourage more bears to join the action and perhaps set the stage for the low of that day, at around 1.6975.
Looking at our short-term oscillators, we see that the RSI lies below 50, but has now ticked up, while the MACD, although below both its zero and trigger lines, has started to flatten. These indicators point to weak downside momentum and support our choice to wait for a dip below 1.7100 before we trust larger declines.
On the upside, we would like to see a decent recovery above 1.7210 before we start examining whether the bears have started abandoning the battlefield. Such a move could allow the rate to drift further north and perhaps challenge the 1.7300 zone, which is fractionally below Tuesday’s peak. A break above that peak would confirm a forthcoming higher high on the daily chart and might pave the way towards the 1.7365 obstacle, defined by the high of October 31st.
Apart from the Euro area PMIs, we get the preliminary Markit indices for June from the US as well. The manufacturing index is expected to have held steady at 50.5, while the services one is anticipated to have ticked up to 51.0 from 50.9. Existing home sales for May are also coming out and the forecast suggests a 1.2% rebound after a 0.4% slide the month before.
As for the speakers, we have three on today’s agenda: BoE MPC member Silvana Tenreyro, Fed Board Governor Lael Brainard and San Francisco Fed President Mary Daly.
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