The pound was the big winner among the G10 currencies, with Cable surging nearly 1.3% and breaking back above the psychological barrier of 1.3000. The Swedish Krona was the main loser, tumbling after Sweden’s disappointing inflation data for January. As for today, the Fed releases the minutes of its latest gathering. We believe that investors will dig into the minutes for clues with regards how long the Committee could stay patient, as well as any information with regards to the balance sheet normalization.
The dollar traded lower against most of the other G10 currencies on Tuesday. The big gainer was GBP, with NOK taking the second place, but still well behind the British currency. The greenback gained only against SEK and JPY, while it traded nearly unchanged against NZD.
Although the commodity-linked currencies failed to capitalize notably, someone could stay that the weakening of both the dollar and the yen suggests an improvement in the broader market sentiment. However, taking a look at the performance of the equity market, we see that most major EU indices ended their session in the red, while following Monday’s holiday, the US ones closed slightly positive. In Asia, Japan’s Nikkei and China’s Shanghai Composite were slightly up as well.
The overall picture suggests that investors maintained a somewhat cautious stance (compared to Friday) in the midst the new round of trade talks between US and China. We also stick to our guns that one of the reasons behind the softer risk appetite may be concerns over a potential escalation between the US and the EU with regards to auto tariffs. Thus, although the safe-haven yen has been weak due to an improvement in the broader sentiment recently, this was probably not the case yesterday. The Japanese currency may have traded on the back foot, driven by BoJ Kuroda’s remarks during the Asian morning Tuesday, who said that his Bank is ready to ease further if a potential yen appreciation hurts the economy and derail the path towards achieving the 2% inflation aim.
The pound was yesterday’s big winner, with Cable surging nearly 1.3% and breaking back above the psychological barrier of 1.3000. Although according to market chatter, some suggest that this may be a combination of still-strong wage growth and hopes that UK PM Minister Theresa May could secure changes to her Brexit bill, we are skeptical on both occasions. First, the pound did not react at the time the employment numbers were out, and second, with the EU still adamant that it will not reopen the withdrawal agreement, it’s hard to see increasing chances that May could indeed secure a breakthrough. It could be just a combination of USD weakness and GBP short covering.
Today, May is scheduled to meet with EU Commission President Jean-Claude Junker and thus, GBP traders may keep their gaze locked on any related headlines. As for our view, despite yesterday’s rally in the pound, it has not changed. May’s defeat in Parliament last week suggests that with no backing from UK MPs, the EU may be even less willing to listen to her proposals. Thus, the chances for May coming back with a broadly accepted accord by February 26th remain very slim in our view. We will have to wait for February 27th, when the Parliament may have the option to vote for legally binding amendments. Approval of any proposals including extending Article 50 have the potential to help the pound gain more. However, until then, with no signs of how a no-deal Brexit can be averted, it’s hard to trust that yesterday’s rally could lead to a longer-term healthy uptrend.
The Swedish Krona was the main loser, tumbling after Sweden’s disappointing inflation data for January. The CPI rate ticked down to +1.9% yoy from +2.0%, while the CPIF metric slowed to +2.0% yoy from +2.2%. Most importantly, the core CPIF, which excludes the volatile items of energy, slowed as well, with the yoy rate ticking back down to +1.4% from +1.5%. This may have raised concerns with regards to the Bank’s plans to increase interest rates again during the second half of the year, and that’s why the Swedish currency may have tumbled. However, we believe that it is too early to start examining whether the world’s oldest central bank will alter its hiking plans. Its upcoming gathering is scheduled for April 25th, and up until then, we have the February and March inflation data. Thus, we prefer to wait for these inflation numbers before we start examining whether officials will decide to delay bringing interest rates to zero.
The British pound suddenly got a boost during yesterday’s European trading session, when the currency gained against all of its major counterparts. With the swiss franc being no exception, GBP/CHF pushed higher, broke the short-term downside resistance line taken from the high of January 27th and travelled higher to find good resistance near the 1.3080 barrier. The pair is now trading above a steep short-term upside support line, taken from the low of February 14th, which if not broken, could support the bulls in pushing GBP/CHF further up.
Even if the pair retraces slightly lower, as long as the aforementioned short-term tentative upside line remains intact, we will consider the move lower only as a correction before another leg of buying. This is when we will keep a close eye on the 1.3080 resistance level, which also marks the high of February 4th. If the bulls manage to keep hold of the steering wheel, the rate might get lifted to the 1.3124 hurdle, marked by the high of January 27th.
On the other hand, a break of the previously-mentioned upside line and a rate-drop below the 1.3015 obstacle might spook the bulls from the field. But this would only put everything on hold, as the pair would enter our neutral territory. In order to start examining lower areas, we would like to see the rate moving below the previously-mentioned short-term downside line and the 1.2950 hurdle. Such a move may open the door to the pair’s next potential area of support, at 1.2905, a break of which could lead GBP/CHF towards the low of last week, near the 1.2850 support zone.
Back to the dollar, today USD-traders are likely to fix their gaze on the minutes of the latest FOMC gathering. At that meeting, the Committee kept interest rates unchanged as was broadly anticipated, but in the statement accompanying the decision, officials decided to remove the part suggesting that “some further gradual increases” are warranted and instead noted that they will be “patient” in determining what future adjustments to interest rates may be appropriate. What’s more, the Committee issued a separate statement, in which they announced that they would be prepared to use their full range of tools, including altering the size and composition of their balance sheet, if needed. At the press conference following the decision, Fed Chair Jerome Powell said that the case for rate increases has “weakened” and that they decided to adopt a “patient, wait-and-see approach”.
According to the Fed fund futures, the market is around 87% confident that the Committee will not proceed with any further rate increases this year. Investors assign only a 1% chance for such a move by December, while they see a nearly 12% probability for a rate cut. We believe that investors will dig into the minutes for clues with regards to how long the Committee could stay patient, as well as any information with regards to the balance sheet normalization. Even if the minutes confirm an early stop to the balance sheet reduction process, anything suggesting that officials could raise interest rates even once more by the end of the year could prompt investors to put some hike bets back on the table, something that could slightly support the dollar, at least temporarily. On the other hand, hints that the Committee is not planning to move this year, or any discussion with regards to a rate cut, may have the opposite effect.
As for our view, we don’t expect any signals that the Committee is done hiking. Yes, almost all Fed officials agree with staying patient for now, but up until now, only three of the most dovish ones suggested that no more increases are needed (Bullard, Kashkari and Daly). Even Philadelphia Fed President Patrick Harker, who is also considered a dove, said last week that one hike in 2019 and another in 2020 are appropriate.
Yesterday, NZD/USD was driven higher by a strong buying activity after initially sliding to find support near 0.6815. The pair managed to reach Monday’s highs, near the 0.6885 barrier, where it found good resistance. Overall, NZD/USD keeps trading above its medium-term upside trendline taken from the low of October 8th, at the same time the pair is sitting above a short-term tentative upside line, drawn from the low of January 3rd. For now, even though we may see a small retracement back down, in our view, there could still be steam left in the bulls and we might see another push higher. We will take a more cautious approach for now and wait for a confirmation break through one of our key levels.
In order to get comfortable with the upside, we would like to see a push above the 0.6885 barrier first, as it would confirm a forthcoming higher high on the 4-hour chart, which may drag the rate towards the 0.6905 hurdle, which is the high of February 6th. If the buying doesn’t ease off there, NZD/USD could travel higher to test the February high, near the 0.6940 level.
Alternatively, if NZD/USD goes all the way lower and breaks the 0.6815 obstacle, this may invite more sellers into the game and the rate could slide further, to test the 0.6790 area, or even the 0.6774 zone, marked by the high of November 11th. Of course, we may see a small pullback, but if the pair remains below the 0.6815 barrier, then we may see another leg of selling, which may bring NZD/USD to the aforementioned short-term tentative upside line, which could provide a hold-up for the pair.
Besides the FOMC meeting minutes, the calendar appears relatively empty with regards to economic releases. The only worth mentioning relates to the energy market and it is the API (American Petroleum Institute) weekly report crude oil inventories, but as it is always the case, no forecast is available.
As for tonight, during the Asian morning Thursday, Australia’s employment data for January is due to be released. The unemployment rate is anticipated to have stayed at 5.0%, while the net change in employment is expected to show that the economy gained 15.2k jobs, less than December’s 21.6k. Even if we get a minor positive surprise, which may support the Aussie at the time, we stick to our guns that labor-related releases are unlikely to prove game changers. After all, the Bank has put the likelihood of a rate cut on the table, already acknowledging the strength of the labor market.
We also have two speakers on today’s schedule: ECB chief economist Peter Praet and Dallas Fed President Robert Kaplan.
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