Markets continued trading in a “risk on” mode, perhaps due to the easing fears over a global economic downturn, as well as “further progress” remarks after last week’s round of US-China trade talks. The pound came under selling interest, as UK MPs failed once again to break the Brexit impasse. The Aussie tumbled during the Asian morning today after the RBA adopted a softer language in the statement accompanying its monetary policy decision.
The dollar traded higher against most of the other G10 currencies on Monday, as reduced concerns about the global economy pushed US treasury yields higher. It underperformed only against GBP and CAD, while it was found virtually unchanged versus NOK. The greenback gained the most against NZD, AUD, CHF and EUR in that order.
Although the risk-linked currencies NZD and AUD traded on the back foot, the broader market sentiment continued to be supported on Monday and this is evident by the performance of the equity market. Most major global stock indices were a sea of green yesterday, although the positive investor morale eased somewhat during the Asian session Tuesday. China’s Shanghai Composite ended 0.20% up, but Japan’s Nikkei closed virtually unchanged.
What fueled further investors’ risk appetite may have been the “further progress” headlines and remarks after last week’s trade talks between US and Chinese officials in Beijing, as well as positive manufacturing data from both nations, which may have eased fears over a global economic downturn. On Sunday, China’s official manufacturing PMI rebounded back within the expansionary territory (50.5 from 49.2), following three months of contraction, while on Monday, the US ISM manufacturing index rose to 55.3 from 54.2, beating expectations of a more modest rise, to 54.5. The UK manufacturing PMI was also better than expected, hitting a 13-month high, which combined with hopes that lawmakers could eventually break the Brexit impasse may have kept the pound on the front foot.
Yes, the pound was found higher against the majority of the other G10s, but it could have stored more gains if the second round of indicative votes in the UK Parliament had been successful. After rejecting for the third time PM May’s Withdrawal Agreement on Friday, MPs failed once again to find a way on how the nation could move forward with Brexit, with no alternative gaining majority. The pound tumbled as a result, erasing a decent portion of the previously earned ground. The option that was the closest in passing through, losing by only three votes, was one suggesting a customs union with the EU, while a proposal to hold a referendum on any Brexit deal lost by 292-280.
After the results were announced, Brexit Minister Steven Barclay hinted that there may be another vote this week on May’s deal, in an attempt to avoid a disorderly exit next Friday, while market chatter over the weekend suggested that there could be a “run off” vote between May’s deal and the most popular alternatives. Today, May will hold a cabinet meeting in order to discuss and plan how the government will proceed from now onwards.
As for our view, with no progress in sight and a day closer to April 12th, the new Brexit date, we may see the pound staying pressured for a while more, as the risks for a no-deal Brexit happening by accident may have increased somewhat. However, we repeat that with all the outcomes still on the table, we prefer to avoid drawing any conclusions with regards to the currency’s next trending path, as just a headline may be enough to change the whole picture.
GBP/CHF continues to drift lower as it keeps on trading below its short-term downside resistance line taken from the highest point of March. At the same time, we can see that the rate is balancing below its 200 EMA, which could also be interpreted as bearish signal, at least in the short run. This is why we remain somewhat bearish for now, at least for a short while.
If the pair continues to slide lower, it may re-visit the area around yesterday’s intraday swing low, at 1.3010, which may provide some good support again for a small bounce. If GBP/CHF continues to trade below the above-mentioned downside line, the bears could stay in control and might lead the pair even lower, bypassing the 1.3010 hurdle, potentially targeting the 1.2920 support zone, marked near the lows of March 21st and 29th.
In order to examine the upside again, we would like to see GBP/CHF pushing, not only back above the aforementioned downside resistance line, but also breaking above the 1.3200 barrier, marked near the high of last week. This way we could start looking at higher resistance areas, like the 1.3240 obstacle, a break of which could open the door to the 1.3305 level, marked by the high of March 19th.
The Aussie was the second loser in line among the G10s, coming under selling interest in the aftermath of the RBA interest rate decision. The Bank kept interest rates unchanged at +1.50% as was broadly anticipated, but the accompanying statement had a softer tone than the previous one, despite the absence, once again, of any mention to a possible rate cut.
The Bank reiterated that the outlook for the global economy remains reasonable, although growth has slowed and downside risks have increased, while with regards to the domestic economy, officials acknowledged the recent softness in GDP data, also dropping their previous assessment that the central scenario is for the economy to grow by around 3% this year. With regards to the labor market, they repeated that it remains strong, and that continued improvement is expected to see some further lift in wage growth. The most important point in our view though is that officials did not repeat that holding policy unchanged would be consistent with sustainable growth and achieving the inflation target. They noted that it was “appropriate to hold the stance of policy unchanged at this meeting”, and that they will set policy in the future in order to achieve the aforementioned aims.
In our view, this means that the current policy stance may not be consistent with sustainable growth and achieving the inflation target, and that a change could be needed in coming months. Judging by the softer language, the chances for a rate cut may have increased from the previous meeting, but we would have to wait for the minutes to confirm something like that. Although the last few statements did not include any reference with regards to a rate cut, the respective minutes revealed that members saw scenarios where interest rates could increase or decrease, with the probabilities more evenly balanced than they had been over the preceding year, when an eventual hike had appeared more likely. Now, they may reveal that members have placed more weight to the cut case, something that will echo the RBNZ’s latest shift.
Back to the Aussie, we cannot confidently say that it could underperform all its major peers. Taking into account that it is also a risk-linked currency and that the broader market sentiment has been supported recently, it could still gain against some of its counterparts, like the safe-haven yen, which comes under selling interest during periods of market euphoria. We do, however, expect the Aussie to underperform the Canadian dollar, which is also a commodity-linked currency. Specifically, the Loonie tends to benefit from rising oil prices, which is the case lately, while from a monetary policy perspective, even though the BoC turned more dovish at its previous policy meeting, Canadian officials did not mention the likelihood of a rate cut.
The Australian dollar is taking a hit this morning, against all of its major counterparts, including the Canadian dollar, which recently started strengthening. From the technical side, AUD/CAD had broken its short-term upside support line taken from the low of March 1st and continues to drift south. Also, the pair is trading below its short-term downside line drawn from the highest point of March. Thus, for now, we will remain bearish on this pair.
AUD/CAD had also broken one of its support zones on the way lower, at 0.9447, and it could now be aiming for the 0.9410 hurdle, marked near the lows of March 19th and 20th. We may see a potential rebound near that area, but if the buyers are not strong enough to place the rate above the 0.9447 barrier, then we may see another leg of selling. This time, if the 0.9410 support zone gets broken, the sellers might drag the pair towards the 0.9385 level, marked by the low of March 14th.
Alternatively, a push back above the 0.9465 barrier could spark some hope in the eyes of the bulls, as AUD/CAD might have a chance to climb a bit higher. But in order to get comfortable with the upside again, we would like to see a break of the previously-mentioned downside resistance line and a push above the resistance zone at 0.9490, which is today’s high. This way more buyers could start entering the field and lifting the rate to the 0.9525 barrier, marked near the high of April 1st, or even the 0.9535 level, which is the high of March 29th.
Today, the calendar appears relatively light in terms of data releases. In the US, durable goods orders for February are coming out. Headline orders are expected to have declined 1.1% mom after rising 0.3% in January, but core orders are forecast to have rebounded 0.3% mom after sliding 0.2%. We also get the API (American Petroleum Institute) weekly report on crude oil inventories, but as it is always the case, no forecast is available.
As for tonight, during the Asian morning Wednesday, Astralia’s trade balance and retail sales for February, as well as China’s Caixin services PMI for March are on the agenda. Australia’s trade surplus is expected to have narrowed, while retail sales are forecast to have accelerated somewhat, to +0.3% mom from +0.1%. China’s Caixin index is anticipated to have risen to 52.3 from 51.1, something supported by the official non-manufacturing PMI, which rose as well.
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