Risk sentiment took another hit yesterday, with major global bourses ending their sessions in the red. Despite the minor improvement in investors’ morale late Monday, market participants may have turned skeptical over whether two days of talks are enough for China and the US to reach consensus over trade. On the central bank front, the RBNZ decided to cut rates by 25bps and signaled that further reduction may be possible, which brought the Kiwi under selling interest at the time of the announcement.
The dollar traded higher against most of the other G10 currencies on Tuesday and during the Asian morning Wednesday. It lost ground only against the safe-haven JPY, while it traded virtually unchanged versus EUR and AUD. The main losers were NZD, GBP and CAD in that order.
Judging from the performance in the FX world, it seems that despite the minor improvement in investor morale late Monday, risk appetite took another hit on Tuesday. Indeed, major EU and US indices were a sea of red yesterday, with the negative sentiment rolling into the Asian trading today. Both Japan’s Nikkei 225 and China’s Shanghai Composite index closed 1.46% and 1.12% down respectively.
Yesterday, we noted that the battered risk appetite improved somewhat on Monday, perhaps after China’s foreign ministry confirmed that they will be still sending a delegation to the US for another round of trade talks, despite Trump’s threats to increase tariffs on Friday. Yesterday, Beijing confirmed that Vice Premier Liu He will also travel to the US for the negotiations, but on Thursday, nstead of today as was initially planned.
Although this adds more credence to China’s efforts to find common ground with the US, investors may have turned skeptical over whether two days are enough for the world’s two largest economies to reach an accord. The switch back to “risk off” suggests that they are pricing in a high chance for the US to proceed with tariff increases on Friday, which according to media reports could take effect in the morning, even before the talks conclude.
As for our view, we see the case of an accord in just two days as a hard task as well. We believe that eventually the US may indeed raise the tariff rate on USD 200bn worth of Chinese goods, to 25% from 10%, on Friday. However, as we noted yesterday, it still remains to be seen whether Trump’s threats have jacked up pressure for a deal to be reached soon, or whether the progress made so far will fall apart.
Marketwise, fears of a tariff-increase on Friday may keep market sentiment subdued, but a lot of what happens next will depend on the outcome of the talks. Signs that a deal could be sealed in the weeks to come may allow risk assets to rebound somewhat and bring the safe havens under some selling interest, on hopes that additional tariffs (besides Friday’s hike) may be avoided. On the other hand, anything suggesting that there is still a long way to go could add to concerns of further escalation in the foreseeable future, and thereby keep investors’ risk appetite subdued for longer.
The equity markets took a dive yesterday, closing heavily in the red. The DJIA index travelled south as well, where it found good support near the 25795 zone. This is also where the price met the short-term upside support line, taken from the low February 8th, and then bounced from it. The index closed below the 26000 barrier, but the futures market then recovered some of those losses. Now the DJIA cash index is back above 26000 level and could invite a few more buyers to push the index a bit higher towards the 200 EMA, or even to the downside line drawn from the high of May 1st. For now, we will remain somewhat neutral, as the index might continue moving between the above-mentioned lines for a few days.
If the price pushes higher, above the 26060 hurdle, this may lead DJIA to the 26170 obstacle, marked near the low of May 2nd. If the index continues to climb further, this is where it could meet the 200 EMA, or even test the previously-mentioned downside line. If that line holds, we may see the sellers stepping in again and driving DJIA back down. We will then target the 26000 level, a break of which could send the index further down, to re-test the aforementioned upside support line.
Alternatively, if the DJIA index breaks through the downside line and pushes above the 26310 barrier, this may spook the sellers, at least for a while. The price could then travel higher, potentially testing the 26480 hurdle, marked by the Monday’s high. Slightly above that sits another possible resistance area, near the 26540 zone, which is Friday’s high. We may see the price sliding back down for a small correction, but if the buyers are still strong, the slide might be short-lived and the index could move higher again. If this time the above-mentioned two resistance areas are not able to withhold the bull-pressure, a break above them could send DJIA in the direction of the 26710 level, which is the high of May 1st.
Back to the currencies, the Kiwi was the main loser, coming under strong selling interest following the RBNZ decision. The Bank decided to cut interest rates to an all-time low of +1.50% from +1.75%, the first cut since 2016, noting that “a lower OCR now is most consistent with achieving our objectives and provides a more balanced outlook for interest rates.”
Officials also noted that global economic growth has slowed since mid-2018 and that there is still uncertainty over the global outlook. They acknowledged the slowdown in domestic growth and added that the outlook for employment growth is more subdued and that inflationary pressure is projected to rise only slowly. Most importantly, officials decided to lower their rate-path projections, signaling that another rate cut may be possible during the forecast horizon. Specifically, officials see the OCR hitting 1.4% in March 2020, staying there until June 2021, and then rebounding slowly towards 1.9% by June 2022.
With regards to the Kiwi, there was already speculation with regards to a rate cut at this meeting, so the action by itself did not came as a huge disappointment. What may have triggered the dip at the time of the release may have been the Bank’s willingness to reduce rates further if needed. Moving forward, we see the case for Kiwi to stay under pressure and to underperform most of its major peers, especially currencies the central banks of which have not turned their eyes to the cut button yet.
The New Zealand dollar sold off overnight after RBNZ cut its interest rate by 25bps. NZD/USD experienced a sharp spike lower, reaching the 0.6525 hurdle and establishing a new level of support there. The pair quickly retraced back up and continues to move in that direction. That said, eventually, further upside might be limited due to the short-term downside resistance line taken from the high of March 26th. Even though the rate may rise a bit more, as long as that downside line remains intact, we will continue aiming lower.
As we mentioned above, a push higher could send NZD/USD towards the 0.6605 area, or slightly above that, to test the previously-discussed downside resistance line. If that line continues to hold the rate, we could see the bears stepping in again and pushing the pair back down, initially aiming for the 0.6580 hurdle, a break of which may open the door to the 0.6556 level, marked by the intraday swing high of October 31st. Slightly below that sits the newly-established low, at 0.6525, which might get tested again if the rate depreciates further.
In order to shift our view to the upside, at least in the short run, a break of the aforementioned downside line is required. But for a better confirmation of a further move north, we would like to see NZD/USD breaking above the 0.6630 barrier, marked by yesterday’s high. This way, the pair may clear the path towards the 0.6654 obstacle, a break of which could send the rate higher, where the next potential resistance area might be seen at 0.6680. That area held the pair from closing higher between April 26th and 30th.
During the European day, the ECB will publish the minutes from its latest policy meeting. At that meeting, Draghi and co. reiterated their guidance that interest rates are likely to stay at present levels “at least through the end of 2019”, with the ECB Chief noting again that the risks surrounding the Euro area economic outlook “remain tilted to the downside”. He also added that policymakers will consider “whether the preservation of the favorable implications of negative interest rates for the economy requires the mitigation of their possible side effects, if any, on bank intermediation”.
We will scan the minutes for further details on that front, but we don’t expect any material information as to whether further action is needed and/or what instruments could be used. At the Q&A session after the meeting, Draghi noted that the Council just had a consensus on the need of further analysis. “We need further information that will come to us between now and June, and in a sense the projections that we'll have in June by the staff of the ECB will be an important part of this information set”, he said. Thus, having all that in mind, we don’t expect the minutes to prove a major market-moving event. We prefer to pay more attention to President’s Draghi speech ahead of the minutes, were we could get more up-to-date information with regards the ECB’s future plans. If not, we will focus on upcoming data in order to assess what kind of announcements we may get in June.
With regards to the energy market, we get the EIA (Energy Information Administration) weekly report on crude inventories for the week ended on May 3rd. The forecast is for a 0.75mn barrels increase, less than the 9.94mn reported for the week before. Yesterday, the API report revealed a 2.8mb barrels increase and thus, we see the risks surrounding the EIA forecast as tilted somewhat to the upside.
As for tonight, during the Asian morning Thursday, we get China’s CPI and PPI for April. The CPI rate is forecast to have risen further, to +2.5% yoy from +2.3% in March, while the PPI is set to have accelerated to +0.6% yoy from +0.4%.
Besides Draghi, we two more speakers on today’s agenda: Fed Board Governor Lael Brainard and BoE MPC member Dave Ramsden.
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