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by Charalambos Pissouros

Spotlight Turns to the FOMC Decision, AUD Gains After CPIs

Risk aversion eased yesterday, with equities rebounding, despite that the coronavirus continued spreading at a fast pace. Today, apart from news concerning the virus, investors may also pay attention to the FOMC decision. The Committee is widely expected to stand pat, so the focus might fall on the language of the accompanying statement, as well as at Chair Powell’s press conference. The Aussie gained somewhat, aided by Australia’s better-than-expected CPIs for Q4.

Risk Aversion Eases, Eyes Turn to FOMC, AU Inflation Beats Estimates

The dollar traded mixed against the other G10 currencies on Tuesday and during the Asian morning Wednesday. It gained against CHF, GBP, NZD and JPY in that order, while it underperformed versus NOK, CAD, SEK and AUD.

USD performance G10 currencies

Although not crystal clear by the performance in the FX sphere, the weakening of the franc and the yen suggests that the latest round of risk aversion has eased somewhat, although the coronavirus continued spreading at a fast pace. Indeed, major EU and US indices rebounded yesterday, with easing concerns reflected on the performance of the Asian indices as well.

Major global stock indices performance

According to China’s National Health Commission the number of deaths rose to 132, while the total cases nearly hit the 6000 mark, and still, investors kept a calmer stance than on Monday. Yesterday, we noted that the recent round of risk aversion due to the virus has caused some overstretched moves, and that we would be careful of a corrective bounce. We believe that this is what is happening now.

In our view, it’s too early to say that everything is priced in and that equities will resume their longer-term uptrends. After all, with the virus spreading quickly, it’s hard to predict when all this will end, where the number of deaths will stop, and to which extend this will affect economic activity. Therefore, if headlines and news continue to point to further spreading, risk aversion may intensify again, with equities and risk-linked currencies being sold in favor of the safe havens. What could also have an important effect on investors’ appetite may be China’s official PMIs for January which are expected to be released on Friday. Market participants could be on the lookout for clues as to whether the virus has already left its marks on the world’s second largest economy.

As for today, while still on the edge of their seats in anticipation of new headlines surrounding the coronavirus, investors will also pay attention to the first FOMC gathering for 2020. At its previous meeting, the Committee decided to keep interest rates unchanged, reiterating that the “current stance of monetary policy is appropriate to support sustained expansion of economic activity”. What’s more, the “dot plot” pointed to no action in 2020, one hike in 2021 and another one in 2022. However, at the press conference, Chair Powell said that "in order to move rates up, I would want to see inflation that’s persistent and that’s significant."

That said, market participants remained unconvinced that the Committee is done cutting rates. Despite the easing tension between the US and China and the “Phase One” trade deal, weak economic data, like the ISM manufacturing PMI and the jobs report for December, allowed investors to keep bets for another cut by year-end well on the table. The coronavirus had also an impact on the pricing, bringing the cut timing closer, to September from November.

Fed funds futures market vs FOMC rate expectations

That said, with headline inflation rising to +2.3% from 2.1%, and the core rate staying unchanged at 2.3%, we don’t expect Fed officials to start hinting at fresh cuts. However, we don’t expect them to start considering hikes either, despite the CPIs being above their 2% target. After all, their favorite inflation metric is the core PCE index, the yoy rate of which slid from 1.7% to 1.6% in November. We expect the Committee to maintain their neutral stance, reiterating that the current policy remains appropriate.

US CPIs vs core PCE inflation

Having said all that though, it would be interesting to see whether they will comment on the spreading of the Chinese virus, and how this could affect (or not) the US economy. A slightly more-dovish-than-previously flavor in the statement may cause the greenback to correct lower, but we don’t expect this to last for long. If officials stick to their guns that more cuts are not on the table, decent economic data moving forward could make investors start believing them and thereby cancel some of their cut bets. This may allow the US currency to rebound again.

The Aussie was among the gainers against the US dollar, albeit the last one. Apart from the easing risk aversion, the currency was also benefited by Australia’s better-than-expected CPIs for Q4. The headline rate ticked up to +1.8% yoy from +1.7%, instead of staying unchanged as the forecast suggested, while the trimmed mean CPI rate held steady at +1.6% yoy, confounding expectations of a slide to 1.5%. Both rates are now above the RBA’s latest projections, but still below the lower end of the Bank’s target range of 2-3%.

Australia CPIs inflation

This allowed investors to maintain cut bets. They just pushed the timing slightly back, from May to June. The RBA meets next week, and although it is not expected to act at this gathering, they may appear concerned over the effects of the devastating bushfires on the domestic economy. Something like that could be interpreted as if indeed economic data confirm that the economy felt the heat of the fires, policymakers may, after all, not be so comfortable staying sidelined for long. Combined with further spreading of the Chinese virus, a more dovish RBA next week may bring the Aussie under renewed selling interest, especially against the yen, which tends to attract flows during risk-off periods.

ASX 30-day interbank cash rate futures yield curve

USD/CHF – Technical Outlook

Yesterday, USD/CHF got a good boost from the bulls, which helped it to rise above one of its key resistance barrier, at 0.9729, marked by the high of January 22nd. After yesterday’s uprise, we can now draw a short-term tentative upside support line taken from the low of January 16th. That said, the rate seems to be struggling to overcome the 200 EMA on the 4-hour chart. But it may be a temporary occurrence, because as long as the pair trades above the above-mentioned upside line, we will stay somewhat positive, at least in the near term.

If, eventually, USD/CHF pushes away from the 200 EMA to the upside, this may invite a few more bulls into the field. But such a move might only last up until the rate hits the 0.9762 barrier, marked by the current highest point of January. Initially, the pair could stall around there temporarily, or correct back down a bit. But as we mentioned above, as long as USD/CHF stays above the aforementioned upside line, we will remain positive, at least in the short run. Another uprise could send the rate to the 0.9762 hurdle again, a break of which would confirm a higher high and the next potential resistance level might be at 0.9797, marked by the inside swing low of December 26th.

On the downside, if the short-term upside line breaks and the rate falls below the 0.9678 hurdle, which is yesterday’s low, this may spook the buyers from the arena temporarily and allow the sellers to take control for a while. That’s when the pair could drift to the 0.9646 territory, a break of which might set the stage for a move to the 0.9613 level, marked by the lowest point of January.

USD/CHF 4-hour chart technical analysis

AUD/JPY – Technical Outlook

On Monday, AUD/JPY moved below the 73.75 hurdle, which was the lowest point of January at that time, thereby creating a new low for the month, near the 73.29 hurdle. From there, the pair rebounded back to the upside, but still remains below its short-term downside resistance line drawn from the high of January 17th. Although we may see another small push towards that downside line, as long as the rate stays below it, we will continue targeting lower areas.

As mentioned above, another small uprise could push the rate above the 74.00 barrier and test the aforementioned downside line. If that line holds, the pair may end up sliding again and more sellers could be joining in, especially if AUD/JPY drops below the 73.75 zone, which is the low of January 8th. Such a move might clear the path to the 73.29 hurdle, a break of which could set the stage for a push to the 73.00 level. That level is marked near the low of October 14th.

Alternatively, if the downside line gets broken, this may raise concerns in the bear-bloc, especially if the rate travels back above the 75.17 mark, which is the high of January 24th. AUD/JPY would already be placed above all of its EMAs on the 4-hour chart, which could attract more buying interest, as more bulls could see it as a good opportunity to join in. That’s when we will start considering a possible rise to the 75.49 hurdle, a break of which may clear the path to the 75.89 level, marked by the high of January 20th. Around there, the pair might also test another short-term downside resistance line, drawn from the high of December 27th.

AUD/JPY 4-hour chart technical analysis

As for the Rest of Today’s Events

Besides the FOMC decision, from the US, we also get pending home sales for December which are expected to have slowed to +0.5% mom from +1.2% in November.

With regards to the energy market, we get the EIA (Energy Information Administration) report on crude oil inventories for last week, which is expected to show a 0.482mn barrels build following a 0.405mn barrels slide the week before. However, bearing in mind that yesterday, the API report estimated an inventory draw of 4.27mn barrels, we see the risks of the EIA forecast as tilted to the downside.

As for tonight, during the early Asian morning Thursday, we get New Zealand’s trade balance for December, though no forecast is currently available.

Disclaimer:

The content we produce does not constitute investment advice or investment recommendation (should not be considered as such) and does not in any way constitute an invitation to acquire any financial instrument or product. The Group of Companies of JFD, its affiliates, agents, directors, officers or employees are not liable for any damages that may be caused by individual comments or statements by JFD analysts and assumes no liability with respect to the completeness and correctness of the content presented. The investor is solely responsible for the risk of his investment decisions. Accordingly, you should seek, if you consider appropriate, relevant independent professional advice on the investment considered. The analyses and comments presented do not include any consideration of your personal investment objectives, financial circumstances or needs. The content has not been prepared in accordance with the legal requirements for financial analyses and must therefore be viewed by the reader as marketing information. JFD prohibits the duplication or publication without explicit approval.

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