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by Charalambos Pissouros

NZD Tumbles on Inflation Miss, UK and Canada CPIs on Today’s Agenda

The Kiwi was the main loser among the G10s, coming under massive selling interest due to New Zealand’s disappointing CPI for Q1. The wounded currency recovered some of those losses a few hours later, aided by China’s better-than-expected GDP for the quarter. The pound was also lower, feeling once again the heat of Brexit related headlines. Specifically, sterling slid following reports that Corbyn said talks with the government have stalled. As for today, we have the UK and Canadian CPIs on the agenda.

Kiwi Falls on Disappointing Inflation, China’s GDP Beats Expectations

The dollar traded mixed against the other G10 currencies on Tuesday. It gained against NZD, CHF and GBP, while it underperformed versus AUD, SEK, CAD and NOK in that order. The US currency traded virtually unchanged against EUR and JPY.

USD performance G10 currencies

The main loser was the Kiwi, which tumbled on New Zealand’s disappointing inflation data for the first quarter of 2019. Specifically, the qoq CPI rate remained unchanged at +0.1%, instead of rising to +0.3% as the forecast suggested, something that pulled the yoy rate down to +1.5% from +1.9%. The forecast was for the yoy rate to have slid to +1.7%. The yoy CPI rate is now, not only below the midpoint of the RBNZ’s 1-3% target range, but also below the Bank’s forecast for Q1, which was at +1.6% yoy.

New Zealand CPIs inflation

At its latest meeting, the RBNZ kept interest rates unchanged at +1.75%, but the statement accompanying the decision was even more dovish than previously. Officials changed the part saying that the “next OCR move could be up or down”, noting that “the more likely direction of our next OCR move is down”. Thus, combined with the GDP growth rate for Q4, which also came in below officials’ estimates, the disappointment in the inflation data may have prompted NZD traders to have placed more bets with regards to a rate cut in the months to come, perhaps as soon as at the Bank’s upcoming gathering, scheduled for May 8th.

A few hours later, the wounded Kiwi recovered some of its CPI-related losses, aided by China’s GDP data for Q1. The data revealed that the yoy growth rate remained unchanged at +6.4%, beating expectations of a tick down to +6.3%. On top of that, fixed asset investment, industrial production, and retail sales for March, all accelerated, with the latter two exceeding their forecasts. The upbeat prints enter the basket of data suggesting that the Chinese economy may have started to stabilize and give investors another reason to stay in risk-on mode.

The Chinese data was cheered by Aussie traders as well, with the Australian currency trading higher against all the other major currencies. The Aussie got an earlier boost, during the European day, from RBA watcher at the Australian Herald-Sun, Terry McCrann, who wrote that an RBA “rate cut is not imminent”. This comes somewhat in contrast with the message we got from the RBA meeting minutes. In our view, the minutes showed that the Bank placed more emphasis to the cut case than it did in previous meetings, and thus, we cannot rule out something like that happening later this year, if upcoming data suggests so.

In any case, monetary policy signals from both the RBA and the RBNZ have weighed on their currencies lately, but a risk-on environment has provided support. Thus, bearing in mind that during periods of market euphoria investors also tend abandon safe-havens, like then yen, we cannot rule out further recovery in AUD/JPY and NZD/JPY. After all, AUD/JPY has already recovered the losses triggered by the RBA minutes, and gained even more. NZD/JPY could also recover some more of the CPI-related gains, and perhaps test the upper bound of its recently-established sideways range.

NZD/JPY – Technical Outlook

During the Asian morning today, the New Zealand currency took a strong hit after the country’s worse than expected CPI figures came out. Initially, we saw a lot of NZD selling against its major counterparts, but then the bulls jumped in after the Chinese GDP data release and brought the New Zealand dollar back on track. This is what happened with NZD/JPY, which sold off at first, rebounded from the lower side of the range, which is roughly between the 74.77 and 75.95, and recovered about 60% of its CPI-related losses. Even though we saw NZD/JPY selling off sharply, we believe there might still be some room for more recovery, due to the current “risk-on” trading activity in the markets. But we have to point out that in our view, the rate could be contained within the above-mentioned range, at least for a while more.

A push back above the 75.50 barrier, marked by yesterday’s intraday swing low, could increase the pair’s chances for some more recovery. Such a move might bring the rate to the next resistance area, at around 75.82, which may temporarily hold NZD/JPY from moving higher, or even push it back down a bit. But if the bulls remain confident, a strong move in the upwards direction could bypass the 75.82 hurdle and take the pair to the 75.95 zone, which is the upper bound of the aforementioned range.

Alternatively, if NZD/JPY slides back below the 75.25 area, or even the 75.17 obstacle, this may open the door to the psychological 75.00 zone, which acted as a good temporary support on April 2nd, 8th, 11th and also this morning. But if the selling activity stays strong, a break of that zone could force the rate to re-visit the lower side of the previously-discussed range, at 74.77.

NZD/JPY 4-hour chart technical analysis

GBP Down on Brexit-related Headlines, UK CPIs on the Calendar

The pound traded lower against all but two of the other G10 currencies yesterday. It underperformed the most against AUD, SEK and CAD, while it gained slightly only versus NZD and CHF.

GBP performance G10 currencies

The British currency came under selling interest yesterday after the Guardian reported that Labour leader Jeremy Corbyn said that Brexit talks with the government have stalled and that there is no agreement on a customs union, neither on environment and workers’ rights. The report was later denied by a Labour Party spokesperson, but the pound failed to recover. Even the robust UK employment data for March was not enough to prompt market participants to buy pounds, who apparently preferred to keep their gaze locked on Brexit related headlines, instead of economic data. Just for the record, the unemployment rate remained unchanged at its 44-year low of 3.9%, while average weekly earnings including bonuses rose 3.5% yoy, the same robust and upwardly revised pace as in January. The excluding bonuses rate ticked down to +3.4% yoy from +3.5%, but this was inline with the consensus and still a strong rate.

As for today, the UK CPI data for March are due to be released. Following the EU’s decision to grant the UK another extension up until October 31st and also that lawmakers are off for an Easter break, GBP-traders may decide to pay some attention to this data set, if we don’t get any new headlines with regards to the talks between the government and the Labour Party. Both the headline and core rates are anticipated to have ticked up to +2.0% yoy and +1.9% yoy, from +1.9% and 1.8% respectively. However, bearing in mind that the yoy change rate of Brent oil for the month has declined somewhat, returning into the negative territory, we believe that if the core rate is poised to tick up, the headline one may stay unchanged. In other words, we see the risks surrounding the headline forecast as tilted somewhat to the downside.

UK CPIs inflation

With all eyes turned to the Brexit landscape, the latest BoE policy meeting passed unnoticed. Policymakers kept interest rates unchanged at +0.75%, reiterating that an ongoing tightening at a gradual pace and to a limited extent would be appropriate. According to the minutes, they also maintained the view that whatever form Brexit takes, the policy response will not be automatic and could be in either direction. With the Brexit out of the equation, an uptick in the CPIs could have encouraged GBP-traders to bring forth their expectations with regards to a BoE rate hike, and thereby support the pound. However, with Brexit into the equation and considering the new extension to Article 50, which could last up until October 31st, we prefer to wait for the upcoming BoE gathering to shed some light on the Bank’s future plans. Specifically, we would like to find out whether the Bank’s hands would stay tied up until the Brexit riddle is resolved, or whether officials are thinking to act before that happens, and if so, to which direction.

GBP/AUD – Technical Outlook

Once again, GBP/AUD took a strong hit, after AUD accelerated on the better-than-expected Chinese data, released during the Asian morning. The pair fell below its key resistance, at 1.8195, and continues to trade there. The rate is still running below its short-term downside resistance line taken from the high of March 27th, which means that until that line is violated, the pair might continue with its journey south.

As mentioned above, the near-term trend is still to the downside, but given that GBP/AUD looks slightly oversold on a shorter timeframe, we may get a small correction back up towards 1.8195, or even the 1.8235 level, where the last one is near the aforementioned downside line. If the bulls struggle to overcome that area, this might invite the bears back into the game and bring GBP/AUD lower, aiming for the 1.8095 obstacle, or even the 1.8035 mark, which is the low of February 18th.

On the upside, in order to target higher levels, we would need to see, not only a break of that downside resistance line, but also a push above the 1.8325 barrier, marked near yesterday’s high. This way, the pair would confirm a higher high and could clear the path for itself towards the 1.8360 obstacle, which marks the highs of April 9th, 10th and 11th. If that obstacle fails to hold down the rate from accelerating, this might lead GBP/AUD to the 1.8435 level, which is the high of April 8th.

GBP/AUD 4-hour chart technical analysis

As for the Rest of Today’s Events

During the European morning, Eurozone’s final CPIs for March and the bloc’s trade balance for February are due to be released. As it is usually the case, the final inflation numbers are expected to confirm their preliminary estimates, while the Euro area trade surplus is anticipated to have rebounded to EUR 12.3bn after falling to just 1.5bn in January.

We get CPI data for March from Canada as well. Expectations are for the headline rate to have risen to +1.9% yoy from +1.5%, while no forecast is available for the core print. Although January’s GDP came in better than expected, the soft employment report for March and the disappointing BoC business survey for Q1 suggest that the BoC is nowhere close to start thinking about hikes again. Thus, although accelerating headline inflation could come as a relief for BoC officials, and thereby support the Loonie, we doubt that it could tempt them to turn hawkish again at their upcoming gathering.

The US and Canadian trade balances for February are also coming out. The US deficit is forecast to have widened to USD 53.50bn from 51.10bn, while the Canadian one is forecast to have narrowed somewhat.

With regards to the energy market, we get the EIA (Energy Information Administration) inventory data for the week ended on April 12th. Expectations are for a 1.2mn barrels slide following a 7.0mn increase the week before. That said, yesterday, the API report showed a 3mn decrease and thus, we view the risks surrounding the EIA forecast as skewed to the downside.

As for tonight, during the Asian morning Thursday, Australia’s employment report for March is coming out. Expectations are for the unemployment rate to have rebounded back to 5.0% from 4.9%, but the net change in employment is anticipated to show that the economy gained more jobs than it did in February. Specifically, it is expected to show that 15.2k jobs were added in March, up from 4.6k the previous month.

We also have four speakers on today’s agenda: BoE Governor Mark Carney, ECB Executive Board member Sabine Lautenschlaeger, Philadelphia Fed President Patrick Harker, and St. Louis Fed President James Bullard.

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