Market sentiment improved yesterday, with EU and US indices ending their trading in positive territory. EU investors may have continued to cheer headlines over a potential delay in auto tariffs, while Wall Street was driven by upbeat earnings and positive US data. In the FX sphere, the pound was once again among the main losers, as uncertainty surrounding Brexit continues to increase. In Australia, voters will head to the ballots tomorrow for the nation’s federal election. That said, we don’t expect a huge market reaction from the Aussie, as its traders appear to have kept their gaze locked on the increased US-China tensions, end even more on expectations over the RBA’s future policy plans.
The dollar traded higher against all the other G10 currencies on Thursday and during the Asian morning Friday. The main losers were NOK, GBP and AUD in that order, while the currencies against which the dollar capitalized the least were CHF and JPY.
This suggests that market sentiment remained subdued yesterday, but the performance of the equity markets suggests otherwise. Yes, that was the case during the Asian morning Thursday, following the US government’s decision to blacklist Huawei. However, European investors started and ended their day in a positive mood, perhaps concentrating more on headlines that hit the wires on Wednesday afternoon, suggesting that the White House may push back by six months the May 18th deadline for imposing tariffs on EU cars and auto parts. The recovery in investors’ morale continued during the US session as well, with Wall Street indices closing higher on upbeat earnings by Walmart and Cisco Systems, as well as by positive US economic data, namely, initial jobless claims and building permits. As for today, Japan’s Nikkei 225 closed 0.89% up, but China’s Shanghai Composite fell 2.48%, as its investors may have remained concerned over the nation’s trade spat with the US.
As for our view, despite yesterday’s rebound during the EU and US sessions we are still reluctant to trust a long-lasting reversal in risk appetite. With the US keep attacking China, and China willing to respond to any actions taken by the US, we cannot assume that the worst is behind us. As we noted on Wednesday, we would like to see concrete “truce” signals before we get confident that equities could scale back their recent losses. For now, we would treat the latest recovery as a corrective rebound.
Back to the currencies, the pound was once again among the main losers, taking the 1st place among this week’s worst performers. It seems that the only driver in town for the British currency is developments surrounding the UK political landscape, with the uncertainty increasing day by day. Yesterday, Graham Brady, chair of the 1922 Committee said that he agreed with PM May that after the vote over the withdrawal agreement, which May said will take place in the week starting June 3rd, they will meet again to decide a timetable for the election of a new leader.
In the past May has pledged to step down if her deal passes through Parliament, but recently, many in her party want her down even if the agreement is rejected, while others are asking for her to quit immediately. With media suggesting that May’s Brexit deal is doomed to be rejected for a fourth time, and also taking account that several of her potential replacements are hardline Brexiteers, we expect the pound to stay under selling interest, as all this increases the chances of a no-deal exit. We believe that any solution put forward by a pro-Brexit PM will be harder than the existing one, and if Parliament doesn’t like it, he or she may have no problem pulling the UK out of the EU with no agreement at all.
The British pound continues to weaken against its Japanese counterpart. Form the beginning of this month, the pair is approximately on a 45-degree slide, sitting below its short-term downside resistance line drawn from the high of May 3rd. At the time of the analysis, the rate is balancing around its key support zone at 140.20. For now, we will stay somewhat bearish, as we still need to see a clear break below the 140.20 hurdle, before getting comfortable with further downside.
As we said above, a drop below the 140.20 zone could attract more bears into the game, as such a move would confirm a forthcoming lower low and could send the pair towards the 139.50 hurdle, which is the low of January 17th. Even if we see a bounce back to the upside from that hurdle, as long as the rate remains below the previously mentioned downside line, we will continue aiming lower. GBP/JPY could then make its way back to the 139.50 obstacle, a break of which may push the pair towards the 138.95 area, which is marked by the intraday swing lows of January 14th and 15th.
Alternatively, if GBP/JPY breaks the aforementioned downside resistance line and travels above the 141.20 barrier, this could signal a change in the short-term trend and may invite more buyers into the action. The pair could then move towards the 142.17 obstacle, a break of which might increase the chances of seeing a further rate-acceleration, potentially bringing GBP/JPY to the 143.00 zone, which kept the pair from closing above it between May 9th and 10th.
Flying from the UK to Australia, tomorrow, Aussie voters will head to the ballots to elect a new government. According to the polls, the current governing Liberal/National Coalition and the Labor Party are leading the battle, with the margin suggesting that it will be a close call. So, how Australian markets may react on the outcome at Monday’s open?
The Liberal-led ruling coalition has been promising a series of tax cuts, while the Labor Party pledges to close major tax loopholes and increase wages. Also, one of their goals is to tighten banking regulation and tax the country’s largest banks. In our view, this suggests that the more “market friendly” outcome is a Liberal/National victory, something that could prove positive for Australia’s ASX index and may allow the Aussie to rebound somewhat. On the other hand, a Labor victory may result in the opposite effect. Apart from its taxing banks, its wage policies have raised concerns that businesses may be forced to reduce their staff, or the working hours, which could weigh on the economy.
Having said all that though, we don’t expect any election related reaction on Monday to be huge. Aussie traders appear to have kept their gaze locked on changes to the broader market sentiment, and even more on expectations surrounding the RBA’s future course of actions. This is evident by the fact that despite yesterday’s recovery in risk appetite, the Aussie remained among the main losers. It seems that Thursday’s disappointing employment data prompted market participants to bring forth the timing of when they expect the RBA to cut rates. Indeed, according to the ASX 30-day interbank cash rate futures implied yield curve, they are now fully pricing in a rate decrease in July, while there is more than 50% for that to happen at the upcoming gathering, scheduled for June 4th.
As for our view, we expect the Aussie to continue drifting lower, even if it rebounds somewhat post-election. Expectations for an RBA rate cut are likely to continue keeping a lid on any possible recoveries, while, as we noted above, China and the US are nowhere close to resolving their differences. Further escalation in tensions between the world’s two largest economies is likely to add more weigh to the already wounded Aussie.
From the end of April, AUD/CHF has been moving lower, trading below its short-term downside resistance line taken from the high of April 23rd. Yesterday, the pair found good support near the 0.6945 hurdle, from which it rebounded slightly. This morning, the rate had already tested that hurdle again and even dropped fractionally below it but was quick to retrace above it. At the time of this report, AUD/CHF sits marginally above that level. Even thought the pair looks quite oversold on the shorter timeframes, still, we believe there could be some room for a bit more downside, especially if the 0.6945 zone gets broken again.
As mentioned above, another drop below the 0.6945 support area might lead AUD/CHF towards the 0.6924 obstacle, which acted as an intraday swing low of January 4th. The rate may stall there for a bit, or even bounce back up. But if the bulls won’t have enough strength to bring the pair above the 0.6960 mark, this could allow the bears to take advantage of the higher rate and drive AUD/CHF to the downside again, potentially aiming for the 0.6924 zone again. If that zone fails to withhold the bear-pressure, a break of it could send the pair lower, possibly to test the 0.6894 level, marked by the low of January 4th.
If AUD/CHF suddenly makes a move higher and breaks above the 0.6995 barrier, which is the intraday swing high of May 15th, this could give the bulls some hope to see a larger correction to the upside. This is when we will target the resistance area between the 0.7013 and the 0.7023 levels, a break of which may lift the rate a bit higher. The pair could travel all the way to the 0.7058 obstacle, which marks the low of May 9th. Just slightly above that runs the aforementioned downside line, which may provide additional resistance for AUD/CHF.
We only get Eurozone’s final CPIs for April and the preliminary UoM consumer sentiment index for May. As it is usually the case, Eurozone’s final inflation numbers are expected to be the same as the initial estimates, while the UoM index is forecast to have risen to 97.8 from 97.2.
We also have two speakers on today’s agenda: Fed Vice Chair Richard Clarida and New York Fed President John Williams.
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