The Swedish Krona was yesterday’s main loser, coming under strong selling interest after the Riksbank decided to push back the timing of when it expects interest rates to rise further and also announced that it would extend its bond purchases. NOK came under some selling interest as well, perhaps as the Riksbank’s decision raised fears that the Norges Bank may follow suit. As for today, investors are likely to lock their gaze on the 1st estimate of the US GDP for Q1. They may be eager to find out whether indeed the US economy has performed better than they have previously feared.
The dollar traded mixed against the other G10 currencies on Thursday and during the Asian morning Friday. It gained the most against SEK, with NOK and EUR taking the second and third place, but well behind SEK. The greenback underperformed against NZD and JPY, while it was found virtually unchanged against GBP, AUD, CAD and CHF.
The biggest loser was the Swedish Krona, which came under strong selling interest following the Riksbank monetary policy decision. The world’s oldest central bank kept its key repo rate at -0.25% as was widely anticipated, but decided to push back the timing of when it expects interest rates to rise further. While they have previously noted that the next rate increase will be “during the second half of the year”, this time, Swedish policymakers said that “The repo rate is expected to be raised again towards the end of the year or at the beginning of next year”. On top of that, they lowered their repo rate path, noting that future increases are expected to occur at a somewhat slower pace. The Bank also announced that it would extend its bond purchases to December 2020, but at a slower pace than previously.
In our view, the delay in the timing of the next hike may have not come as a surprise, if we take in to account the latest disappointment in Euro-area data. Remember that yesterday we noted that in previous years, the Riksbank has been usually following the footsteps of the ECB. What may have caught traders of guard may have been the extension of the Bank’s bond purchases. In our view, the massive slide in SEK suggests that some investors may have been expecting purchases to end yesterday.
The Norwegian Krone tumbled as well at the time of the Riksbank decision. Perhaps this was due to fears that the Norges Bank may follow suit and also push back the timing of when it expects to lift interest rates again. At its latest meeting, the Norges Bank increased interest rates to +1.00% from +0.75% and noted that its “policy rate will most likely be increased further in the course of the next half-year”. Its next gathering is scheduled for May 9th and it will be interesting to see whether policymakers of this Bank remain willing to hike again this year, or not. In any case, the Norwegian currency recovered a decent portion of its Riksbank-related losses later in the day, which means that investors had second thoughts with regards to Norges Bank’s plans. Indeed, with the Norwegian economy expanding at a solid pace, and inflation above the Bank’s objective, the Norges Bank could stay as the only G10 central bank planning a hike later this year.
NOK/SEK surged yesterday following the Riksbank’s decision to push back its hiking plans. The rally came after the rate found support near the crossroads of the 1.0895 support and the short-term uptrend line drawn from the low of March 29th. The pair also broke above Tuesday’s high of 1.0965, that way confirming a forthcoming higher high. As long as the pair continues to print higher peaks and higher troughs above the aforementioned uptrend line, we would consider the near-term picture to be positive.
The rally was stopped near the 1.1020 level and then, the rate retreated somewhat. However, we would expect the bulls to jump back into the action soon and if they manage to overcome the 1.1020 hurdle, then we may see them driving the battle towards the 1.1070 area, marked by an intraday swing low formed on October 10th. Another break, above 1.1070, may allow extensions towards the high of that day, at around 1.1115.
Looking at our short-term oscillators, we see that the RSI topped slightly above 70 and slid back below that level, while the MACD, although above both its zero and trigger lines, shows signs of topping. These indicators suggest slowing upside speed and make us cautious that some further retreat may be in the works before the next positive leg, perhaps for the rate to test the 1.0965 level as a support this time, or even to test the uptrend line drawn from the low of March 29th.
That said, in order to start examining a bearish trend reversal, we would like to wait for a clear dip below 1.0875. Such a break would confirm a forthcoming lower low and may initially aim for the 1.0845 barrier, which is fractionally above the high of April 9th. If that level fails to stop the rate from drifting lower and breaks, then we may experience declines towards the 1.0785 zone, near the low of April 10th.
As for today, the center of attention is likely to be the 1st estimate of the US GDP for Q1. Ahead of last week’s retail sales for March, the forecast was pointing to further slowdown in economic activity, with the qoq SAAR rate expected to have declined to +1.8% from +2.2%. That said, the strong retail sails prints led to upside revisions in estimates and now the consensus is for the US economy to have grown 2.2%, the same pace as in the last three months of 2018. The Atlanta Fed GDPNow forecast was revised up to +2.8% after the retail sales data, but now points to a 2.7% qoq SAAR growth. On the other hand, the New York Nowcast still points to a +1.4% growth rate. The case for a slowdown is also supported by the slide in the 3-month rolling average of a weighted composite index we built based on the ISM PMIs. So, having all that in mind, it’s hard to say where the risks of this release are tilted to.
Anything notably below the Fed’s latest projection for 2019, which is at +2.1%, may raise speculation that Fed officials could sound even more dovish at their upcoming gathering, which concludes on May 1st, and therefore, is likely to heighten speculation with regards to lower interest rates by year-end. On the other hand, a growth rate above +2.1% could ease further concerns with regards to the performance of the US economy and may allow investors to take some rate-cut bets off the table. According to the Fed funds futures, market participants are 40% confident that the FOMC will not act this year, while there is a 60% for rates to be lower.
The US dollar and equity markets are likely gain on a decent outcome, but we would like to stay a bit more cautious with regards to equities ahead of Japan’s “Golden Week”. Japanese markets will be closed for six straight sessions from Monday onwards, and according to market chatter, market participants have started worrying that with liquidity likely to dry up, another “flash crash” could be possible during the early Asian morning hours. Thus, investors may decide to reduce their risk exposure from today, which could keep any GDP-related gains in equity markets limited, in our view.
EUR/USD traded lower yesterday, after it found resistance near the 1.1162 level. That said, the slide was stopped near the 1.1117 barrier and then, the rate recovered somewhat. The pair has been in trading in a falling mode since April 18th, while on Wednesday, it dipped below the key support (now turned into resistance) of 1.1190, as well as below the somewhat upside support line drawn from the low of March 7th. In our view, this paints a negative near-term picture.
If the bears are willing to stay in the driver’s seat, then we may see them pushing the rate further south. A break below 1.1117 could open the path towards the 1.1075 zone, defined by the low of May 18th 2017, the break of which could extend the fall towards the inside swing high of the 7th of that month. Having said that though, bearing that the pair’s recent slide appears overstretched, we would stay careful of a possible corrective bounce before, and if, the bears decide to shoot again, perhaps for the rate to test yesterday’s high again, at around 1.1162.
The case for a small bounce is also supported by our short-term oscillators. The RSI has just exited its below-30 territory, while the MACD, although below both its zero and trigger lines, shows signs of bottoming.
Nevertheless, in order to start examining whether the bears have abandoned the battlefield, at least in the short run, we would like to see a decent recovery back above the 1.1190 hurdle. This would also bring the rate back above the aforementioned slightly-upside line taken from the low of March 7th and may initially aim for the 1.1225 obstacle, defined by the inside swing low of April 18th. Another break, above 1.1225, could carry more bullish implications, perhaps setting the stage for the highs of April 22nd and 23rd, at around 1.1262.
Apart from the US GDP, we also have the final UoM consumer sentiment index for April, which is expected to have been revised up to 97.1 from 96.9. As usual, alongside the sentiment index, we get the 1-year and 5-year UoM inflation expectations, but no forecasts are currently available.
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