The dollar traded mixed against the other G10s, while most equity indices stayed within a ±0.20% range, as investors stayed put ahead of tomorrow’s FOMC decision. The Aussie was the main loser, coming under selling interest after the minutes from the latest RBA meeting revealed that, just after hitting the cut button, policymakers remained willing to do it again. The pound slid as well as Boris Johnson remains the front-runner for replacing Theresa May. Today, we have the second round of the elimination process towards finding May’s successor.
The dollar traded mixed against the other G10 currencies on Monday and during the early morning Tuesday. It gained against AUD, GBP, NOK and NZD in that order, while it underperformed against JPY, CHF, EUR and SEK. The greenback traded virtually unchanged against CAD.
At first glance, the strengthening of the safe-havens yen and franc, combined with the weakening of the risk-linked AUD and NZD, suggests a risk-off trading environment. However, looking at the equity markets, we see that investors just stayed put ahead of tomorrow’s FOMC decision. Yes, some indices rose and some declined, but most of them stayed within a ±0.20% range.
Following recent hints by several Fed policymakers that interest rates could be lowered in order to avert a steep economic slowdown, investors will be looking into this meeting for official and clear signals on that front. According to the Fed funds futures, the market is nearly 80% confident that the Committee will not act tomorrow, and thus, if this is the case, the spotlight will turn to the statement, Powell’s conference, and the updated economic projections, especially the new “dot plot”.
In March, the dots were pointing to no action this year, one hike in 2020, and again no action in 2021. But following the latest round of trade tensions between the US and China, the aforementioned cut hints, as well as slowing inflation and soft employment data, we see the case for the plot to be revised down. However, the big question is by how much. With the market fully pricing in 2 cuts by the end of the year, we doubt that a plot pointing to one cut by December would be enough to push the dollar off the cliff. It could even support it somewhat. For the greenback to come under strong selling interest and the equities to resume their latest recovery, we believe that the plot would have to point to at least 2 cuts in 2019.
The Aussie was the biggest loser, accelerating its latest slide after the minutes from the latest RBA meeting revealed that, just after hitting the cut button, policymakers remained willing to do it again. Specifically, the minutes revealed that “Given the amount of spare capacity in the labour market and the economy more broadly, members agreed that it was more likely than not that a further easing in monetary policy would be appropriate in the period ahead”. Officials also noted that the factors limiting inflation and wage growth are expected to last for some time, and that one of the main channels through which lower rates would support the economy is a lower value of the Australian dollar.
After that gathering, GDP data showed that the economy accelerated somewhat in quarterly terms, but the yoy rate slid to +1.8% from 2.3%. Yes, this is still above the RBA’s forecast of +1.7% for the first half of this year, but in order for the yearly rate to stay near that projection, the economy would have to grow +0.9% in Q2, a low-probability scenario in our view, given the escalation in trade tensions during the quarter. What’s more, although the employment data showed accelerating job gains in May, this was mainly due to part-time jobs, while the unemployment rate held steady at 5.2%, above the 4.5% mark, which the RBA believes would start generating inflationary pressures. According to the ASX30-day interbank cash rate futures implied curve, the data prompted investors to price in a rate decrease in August, with the probability of that happening in July nearly at 50%. Thus, the fact that officials discussed further rate reductions, even ahead of the aforementioned data, add credence to investors’ view and could allow them to keep selling the Aussie.
AUD/USD traded lower yesterday, breaking below the key support zone of 0.6865, which stopped the rate from falling lower between May 17th and 23rd. The pair took another hit today, during the Asian session, after the minutes of the latest RBA meeting showed that policymakers remained willing to cut rates further. The pair has been trading in a short-term downtrend since June 7th and thus, we would consider the near-term outlook to be negative for now.
We believe that the bears will stay in the driver’s seat for a while more, and perhaps challenge the 0.6825 level soon, a support marked by the lows of January 15th, 18th and 20th, 2016. They could take a small break after that, allowing the rate to rebound somewhat. However, as long as a potential recovery stays below the short-term downside line drawn from the high of June 7th, we would see a decent chance for the bears to jump back into the game, aiming for another test near 0.6825. A dip below that hurdle could set the stage for extensions towards the “flash crash” low of January 2nd, at around 0.6775.
Looking at our short-term oscillators, we see that the RSI stands within its below-30 zone and points south, while the MACD lies below both its zero and trigger lines. These indicators detect strong downside speed and support the case for AUD/USD to continue drifting lower for a while more.
In order to start examining whether the bears have abandoned the action, at least in the near-term, we would like to see a decent recovery above the 0.6905 resistance zone. Such a move could initially aim for the 0.6935 barrier, the break of which may allow upside extensions towards the 0.6965 zone, or the downside resistance line drawn from the high of April 17th.
The pound was the second loser in line, with Cable falling below the low of May 31st, at around 1.2560, to trade in territories last seen back on January 3rd. Today, we have the second round of the elimination process towards finding Theresa May’s successor. Last week, Conservative MPs gave 114 votes to Boris Johnson, with Foreign Secretary Jeremy Hunt taking the second place with 43 votes. The last three contenders, Andrea Leadsom, Esther McVey and Mark Harper were eliminated. What’s more, after dropping out of the race on Friday, Health Secretary Matt Hancock said he would back Johnson. According to an article of The Times newspaper, Hancock said that Boris Jonson was the best candidate to lead the party, and that it was time to “unite behind him” as soon as possible. In today’s voting, candidates would have to secure at least 33 votes in order to make it to the next round. In case all of them manage to get more than 32 votes, the one with the fewest will be eliminated.
With 114 votes in support from the first round, as well as Hancock’s backing, we see the case for Johnson to be taken down from the first place as a hard task. This keeps the probability of a no-deal Brexit decent in our view. Yes, last Wednesday, Johnson said that he is not aiming for such an outcome, but he did not rule it out either. He remains willing to do whatever it takes in order to ensure that the UK leaves the EU on October 31st, which means that if no accord is found on time, he may not hesitate to pull the plug.
As for the pound, fears of a disorderly exit could keep the path of least resistance to the downside. However, we don’t expect an immediate selloff in case Johnson holds on to the first place today. After all, this appears to be the expected outcome, judging by yesterday’s slide in the pound. The currency could even bounce somewhat at the time the results are announced, in a “buy the fact” response. Remember that this was also the case on Thursday, just after the results of the first round were announced.
GBP/CHF had been trading in a sideways mode between 1.2540 and 1.2680 since May 31st. However, this was up until yesterday, when the rate dipped below the range’s lower end, thereby confirming a forthcoming lower low and perhaps signaling the continuation of the prevailing downtrend. So, having all these technical signs in mind, we will adopt a bearish stance with regards to this exchange rate.
We believe that the dip below 1.2540 may have opened the way towards the 1.2420 hurdle, a support defined by the low of January 10th. After that, the rate could rebound and perhaps challenge the 1.2540 zone as a resistance this time, but as long as the price action stays below that barrier, we would still see a decent chance for the bears to take charge again and push lower, perhaps breaking the 1.2420 support. Such a move could carry more bearish implications, probably paving the way towards 1.2300, fractionally above the low of January 2nd.
Our short-term oscillators detect negative momentum and support the notion for further declines. The RSI edged lower and just crossed below 30, while the MACD lies below both its zero and trigger lines, pointing down.
In order to start assessing whether the outlook has turned positive, we would like to see a clear break above 1.2680, the upper bound of the aforementioned range. This would confirm a forthcoming higher high on the 4-hour chart and could open the path towards the 1.2800 obstacle, near the highs of May 27th and 28th. Another break, above 1.2800, could prompt the bulls to drive the battle towards the 1.2938 area, defined by the peak of May 21st.
During the European morning, we get the German ZEW survey for June, as well as Eurozone’s final CPIs for May and trade balance for April. Both the current conditions and economic sentiment ZEW indices are expected to have declined, while Eurozone’s final CPIs for May are forecast to confirm their preliminary estimates. With regards to the bloc’s trade data, it is anticipated to show a narrowing surplus.
Later in the day, US building permits and housing starts for May are coming out. Building permits are expected to have stagnated after rising 0.2% mom in April, while housing starts are anticipated to have slid 0.4% mom, after rising 5.7%.
As for tonight, during the Asian morning Wednesday, the API (American Petroleum Institute) weekly report on crude oil inventories is due to be released, but as it always the case, no forecast is available. We also get New Zealand’s current account balance for Q1 and Japan’s trade data for May.
With regards to the speakers, there are two on the agenda: ECB President Mario Draghi and BoE Governor Mark Carney.
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