Risk sentiment improved yesterday after three central banks surprised markets with aggressive cuts, enhancing speculation that the Fed may indeed ease more than it hinted last week. Besides the RBNZ, which delivered a “double cut” during the Asian morning yesterday, the RBI cut by 35bps instead of 25bps, which was the consensus, while the BOT delivered a quarter-point cut at a time when expectations were for no action.
The dollar traded mixed against the other G10 currencies on Wednesday and during the Asian morning Thursday. It gained against SEK, NOK and JPY in that order, while it underperformed against AUD, NZD and CAD, with Aussie and Kiwi being the standouts. The greenback traded virtually unchanged against EUR, GBP and CHF.
The rebound in the commodity-linked currencies, combined with safe havens' soft performance suggests that risk appetite improved yesterday. Indeed, most major EU indices broke their three-day losing streak, closing in the green, while in the US, both Nasdaq and S&P 500 gained 0.38% and 0.08% respectively, but Dow Jones slid somewhat (-0.09%). The positive sentiment rolled over into the Asian trading today, with both Japan’s Nikkei 225 and China’s Shanghai Composite rising 0.37% and 0.93% respectively.
It seems that the driver behind the notable recovery in investors’ morale was the aggressive easing by three central banks yesterday, which may have added to expectations that the Fed may need to do more than it hinted last week. Besides the RBNZ, which cut rates by 50bps, double the amount markets have been expecting, the RBI (Reserve Bank of India) moved in a similar fashion, cutting rates by 35bps instead of 25bps, which was the consensus. This was the fourth cut of the RBI this year, resulting in the lowest repo rate since 2010. On top of that, the BOT (Bank of Thailand) also surprised the markets, cutting rates by 25bps at a time when the consensus was for no change.
Even US President Trump was alarmed by those actions, saying via hits twitter account that the Fed must cut rates “bigger and faster”. Although last week, when they cut rates by 25bps, the Committee ruled out a long series of rate cuts, the escalating trade conflict between the US and China prompted market participants to increase their already elevated bets with regards to more stimulus by the Fed. According to the Fed funds futures, another quarter-point cut is now fully priced in for September, while a third one is factored in for October. There is also a 21% chance for policymakers to cut by 50bps at their upcoming gathering, in September.
Apart from the aggressive easing, Asian equities may have received extra boost by the better-than-expected trade data from China, as well as by the PBOC’s decision to set the onshore USD/CNY reference rate at 7.0039 from 6.9996 yesterday. Although this is still higher, and most importantly above 7.00, it was below market estimates of 7.0205. This resulted in a setback in the offshore USD/CNH rate and some JPY-selling.
As for our view, we find it hard to trust that yesterday’s improved risk appetite will lead to a long-lasting recovery. Despite both the US and China keeping the door for September talks, the latest developments suggest that that the world’s two largest economies have a very long way to go before, and if, they reach common ground. Just one negative headline may be enough to spook investors again. Thus, for now, we would treat yesterday’s rebound as a corrective move of the latest short-term downtrend.
The Aussie was the main gainer among the G10 currencies, but we stay reluctant to trust any further recovery in this risk-linked currency, especially against the safe-haven yen, for the reasons we already mentioned. Apart from the risk of fresh US-China tensions, expectations around the RBA’s future plans may also weigh on AUD. Although a 25bps rate cut remains fully factored in for October, following the RBNZ’s surprise, the probability for such an action to take place in September has now risen to 55% from 44% on Tuesday morning, just after the Bank announced its latest policy decision.
After a strong sell-off on Monday, the Nasdaq 100 index is now on its way of recovering almost all of this week’s losses. That said, even though there might be some more upside, still, the current tensions between China and the US could keep the pressure on the equity markets, and any negative news surrounding trade talks might force the indices to slide again. The price continues to trade below the 200 EMA on the 4-hour chart, which means that there could still be some sellers, who are waiting for a good opportunity to step in and drive the index lower. Hence why, we will remain cautiously-bearish, at least for now.
A push a bit higher could bring the index to the 7640 hurdle, the break of which may extend the recovery towards the 7696 mark, which is the high of this week. This would mean that the index recovered everything what it lost during the first half of this week. We may see the price stalling around there, and the bears might take charge again and bring Nasdaq 100 to the downside, aiming for the 7519 zone, which is today’s low of the cash index. If that zone is just seen as a temporary obstacle on the way lower, a break of it could clear the path to the 7444 area, marked by the intraday swing low of July 7th.
Alternatively, if Nasdaq 100 continues rising and makes its way above the 200 EMA, this may give hope for more buyers, especially if the price moves above the 7793 barrier, marked by the high of August 2nd. The index could then be lifted back to the 7906 obstacle, a break of which could send Nasdaq 100 to the psychological 8000 level, marked near the high of August 1st.
AUD/JPY sold-off heavily this week, due to the increased yen-buying caused by the market participants fleeing into safe-havens, as equity markets took a hit. The pair travelled all the way to the 70.74 zone, which kept the rate up – the same as it did in July 2009. We saw the pair climbing back up again and recovering some of this week’s losses, but as the picture shows us now, the rate is getting held below the 21 EMA. At the same time, AUD/JPY is trading below a short-term tentative downside resistance line taken from the high of July 23rd, which still keeps the downside on the table. Given the current tensed atmosphere in the markets, the pair has a chance to move back down again, this is why for now, we will remain cautiously-bearish. However, we will wait for a confirmation break through one of our support levels before examining further declines.
A drop below the 71.56 hurdle, marked by today’s low, could invite more bears into the field again, potentially aiming for the next support area, at 71.24. That area was the low of August 5th and an intraday swing low of yesterday. The rate might stall there initially, but if the sellers are still strong, a break of the 71.24 obstacle may force the rate to slide to the 70.74 level, marked by the low of this week, and as mentioned above, also the low of July 2009.
On the other hand, if AUD/JPY suddenly moves above the 21 EMA and at the same time pushes above 72.10, which is the current high of today, this may attract a few more buyer to join in and lead the pair to a larger correction. We will then examine the 72.71 hurdle as our next resistance zone, which if broken could lift the rate to the 73.18 level, marked by the intraday swing high of August 1st. Around there, AUD/JPY could also test the aforementioned downside resistance line, which could help keep the pair down for a while.
The calendar appears rather light, with the only data worth mentioning being the US initial jobless claims for last week, and Canada’s new housing price index for June. Initial jobless claims are forecast to have held steady at 215k, while Canada’s housing index is expected to have rebounded 0.1% mom, after sliding by the same percentage in May.
As for tonight, during the Asian morning Friday, Japan’s preliminary GDP for Q2 is due to be released. Expectations are for the qoq rate to have declined to +0.1% from +0.6%, which will drive the yoy rate down to +0.4% from +2.2%. At last week’s meeting, BoJ policymakers kept their policy and guidance unchanged, but noted that they will not “hesitate to take additional easing measures if there is a greater possibility that the momentum towards achieving the price stability target will be lost”. With all inflation metrics well below that objective, a notable slowdown in economic activity may increase the need for fresh stimulus by the BoJ. From China, we get the CPI and PPI rates for July, and both of them are expected to have remained unchanged at +2.7% yoy and 0.0% yoy respectively.
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