After two days of anxiety, Tuesday was marked by some market calmness. In the FX sphere, the Kiwi was the main loser among the G10s, tumbling after the RBNZ said that a rate cut is more likely than a hike. As for today, investors will keep their gaze locked on the Brexit land, as the UK Parliament holds “indicative votes” on plans over how to move forward.
The dollar traded higher against all but two of the other G10 currencies. The main loser was NZD, which tumbled after the RBNZ decision (see below), while the currencies against which the greenback failed to capitalize were GBP and CAD.
After two days of anxiety and risk-off trading, Tuesday was marked by some calmness, with investors keeping a close eye on the bond market and the inversion of the US treasury yield curve. On Friday, they abandoned the equity market, after the 10-year US treasury yield slid below the 3-month rate for the first time since 2007, something that may have sparked fresh fears with regards to a future recession. The further inversion of the yield curve came just two days after the Fed scrapped from its “dot plot” the 2 previously-suggested hikes for 2019 and noted that that economic activity has slowed from its solid rate in the fourth quarter. According to the Fed funds futures, market participants are now only 33% confident that the Fed will refrain from acting this year, while they see a 67% chance for the rates to be lower.
The rout continued on Monday as well, with major EU and US bourses closing in the red. However, the picture got somewhat brighter on Tuesday, with most equity indices rebounding to recover some of the previously recorded losses, as the 10-year US treasury yield rebounded somewhat. Asian markets were also relatively calm today. Japan’s Nikkei 225 was 0.23% down, but China’s Shanghai Composite gained 0.85%.
Back to the currencies, the Kiwi was the main loser, coming under massive selling interest overnight following the RBNZ rate decision. The Bank kept interest rates unchanged at +1.75% as was broadly anticipated, but what may have not been expected was a further dovish shift in the accompanying statement. In February, it was noted that the “next OCR move could be up or down”. Now, officials noted that “given the weaker global economic outlook and reduced momentum in domestic spending, the more likely direction of our next OCR move is down”. They also noted that the balance of risks to New Zealand’s economic outlook has shifted to the downside, adding that the risk of a more pronounced global downturn has increased, and low business sentiment continues to weigh on domestic spending.
The RBNZ appears to be the first G10 central bank signaling that its next move is more likley to be a cut, instead of a hike. Yes, the Fed and the ECB turned dovish at their latest meetings, dismissing any hikes this year, but they have not yet turned their eyes to the cut-button. The RBA did, but according to the minutes of its latest meeting, the probabilities of rates moving up or down are equally balanced. So, having all that in mind, we expect the Kiwi to stay under selling interest for a while more, even against its Australian counterpart.
AUD/NZD blasted off into the sky during the Asian morning, gaining around 150 pips, which is a lot, comparing to the pair’s average daily trading activity. On its way higher, the rate managed to overcome not only the short-term tentative downside resistance line drawn from the high of February 12th, but also the 200 EMA on the 4-hour chart. Given that the pair is overextended to the upside from the short-term perspective, we might see a bit of correction before another leg of buying.
AUD/NZD might move a bit lower towards the 1.0430 hurdle, where the rate might find temporary refuge. If the pair struggles to get clearly below that hurdle, then we may see the bulls stepping into the game again and pushing the rate back up to the 1.0453 obstacle, where the pair got held this morning. If this time the pair breaks that obstacle, the next potential target might be the 1.0475 zone, or even the 1.0490 barrier, marked by the highs of February 21st and 22nd.
Alternatively, if AUD/NZD continues sliding and drops below the 1.0395 support zone, marked near the highs of March 7th and near the lows of March 1st and 4th, this could also place the rate below its 200 EMA and force the pair to continue drifting further south. The next target on our radar could be the 1.0370 obstacle, which just recently (on March 18th and 20th) acted as good resistance. Now, it could take the role of a potential support. But if that area is no match for the bears, another move lower could lead the rate to the 1.0345 zone, which is the high of March 21st.
The pound was found virtually unchanged against its US counterpart this morning, which means that it traded in a similar fashion against its other G10 peers. It gained the most against NZD, while it gained the least against AUD and SEK. Apart from USD, the British currency traded virtually unchanged against CAD as well.
Following Monday’s slide, the pound received some support yesterday, after three hardline Conservative MPs hinted that they may back May’s Brexit deal rather than risk not leaving at all, a sign that the prospects of a softer Brexit or no-Brexit at all, may have prompted some Eurosceptics to soften their stance. However, with the DUP noting that it prefers a lengthy delay over May’s deal, still, it’s hard to envision a case where the existing accord gathers the necessary support. It’s even not clear yet whether the accord will have a third chance in Parliament.
Today is the day lawmakers will have control over the Brexit process in order to find alternative ways on how the UK could move forward, by holding “indicative votes” on several proposals, ranging from a no-deal Brexit to revoking Article 50. Given that there are several options on the table, the results could show no majority for a single one, and thus lawmakers noted that they plan to take control of the parliamentary business again on April 1st, in order to narrow down the options. As we noted yesterday, the results will not be legally binding, with PM Theresa May already making clear on Monday that she will not follow through a with a proposal that is against her election manifesto. That said, a Conservative lawmaker said that if the government is reluctant to proceed in the chosen path, MPs may seek a legislation that forces it to do so.
As for our view with regards to the pound, it has not changed since yesterday. The picture has yet to get clearer and thus, it is hard to confidently assess where the currency may be headed next. We still expect it to stay headline driven, with anything suggesting that a disorderly withdrawal is becoming less likely having the potential to provide support, and vice versa.
Since the second half of February, GBP/JPY has been trading sideways within an approximately a 500-pip range, between the 143.75 and the 148.30 levels. For now, it looks like that the pair could stick around there for a while, hence why we will remain somewhat neutral for now, until we see a clear break through either of the range’s boundaries. But let’s not forget that Brexit developments might affect the pair, so big spikes are possible.
If GBP/JPY slides further below the area at 145.75, this might lead the pair back to Monday’s support zone, near the 145.55 hurdle. This is where the rate might bounce around for a bit, but if the bears remain behind the steering wheel, then GBP/JPY could easily travel further south, aiming for the lower bound of the aforementioned range, at 143.75.
On the upside, if the pair makes a strong move north and breaks above the 146.45 barrier, marked by yesterday’s high, then we may see the rate accelerating again, potentially aiming for the 147.35 obstacle. This is marked near the lows of March 14th and 15th. If the bulls see this area only as a temporary obstacle on their way higher, a break of it may lead GBP/JPY to the upper bound of the range, at 148.30.
Apart from the votes in the UK parliament we also have some economic data and several speakers on the agenda. In the US, the trade balance for January is coming out, as well as the current account balance for Q4. The forecasts have changed and now suggest that the nation’s trade deficit has narrowed somewhat, to USD 57bn from 59.80bn, while the current account deficit is expected to have slightly widened, to USD 130bn from USD 125bn. We get trade data for January from Canada as well. Canada’s deficit is anticipated to have narrowed to CAD 3.5bn from CAD 4.6bn.
With regards to the energy market, we get the EIA (Energy Information Administration) inventory data for the week ended on March 22nd. Expectations are for a 0.90mn barrels slide following a decline of 4.1mn barrels the week before. That said, yesterday, the API report showed a 1.9mn increase and thus, we view the risks of the EIA data as skewed to the upside.
As for the speakers, we have six from the ECB and one from the Fed. With regards to the ECB, President Draghi, Vice President Luis De Guindos, Chief Economist Peter Praet, ECB Executive Board member Sabine Lautenschlaeger, and Governing Council members Ewald Nowotny and Yves Mersch. From the Fed, Kansas City President Esther George will step up to the rostrum.
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