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by Charalambos Pissouros

Strategic Report, 2019 Newsletter 16

Technical Analysis

 1. AUD/JPY WEEKLY OUTLOOK

REVIEW

After three months of sideways activity, trading between the 77.40 and 79.85 levels, AUD/JPY has finally exited the range through its upper side. In our view, this creates a positive outlook for the pair, at least in the short run, where more bulls could join in and lift the rate higher. 

OUTLOOK (SCENARIO A / B)

AUD/JPY broke above its 79.85 barrier and closed the weekly candle above the psychological 80.00 zone on Friday, which has now opened the path to the 80.70 hurdle, marked by the low of December 9th. If that area gets hit, but the rate struggles to move higher, we may see a small retracement back down. If AUD/JPY continues to trade above the upper bound of the previously-mentioned range, the bulls might see this as an opportunity to take control of the pair and drive it back up again. A break above the 80.70 barrier could lead the rate to the 81.50 mark, which acted as strong resistance on December 17th.

On the downside, a rate-drop back below the 79.85 level would place the pair back inside the aforementioned range, which could force us to forget about the upside scenario in the near term. But in order to get comfortable with further downside, AUD/JPY would first have to break below the short-term upside support line taken from the low of March 25th, and then drop below the 78.95 hurdle, marked by the low of April 10th. This way, the bears might clear the path for themselves towards some lower areas, like the 78.45 obstacle, or even the lower side of the above-mentioned range, at 77.40.

AUD/JPY daily chart technical analysis

 2. EUR/GBP WEEKLY OUTLOOK

REVIEW

After finding support near the 0.8470 zone around mid-March, EUR/GBP made its way back up again and seems to be willing to continue traveling higher, as in the short-term timeframes, it keeps printing higher peaks and higher troughs. Our oscillators suggest that the upside momentum is picking up, which supports the idea of seeing further up-moves from EUR/GBP. 

OUTLOOK (SCENARIO A / B)

But in order to get comfortable with higher areas, we would need to wait until EUR/GBP breaks above the 08673 barrier, marked by the high of March 22nd. If such a move happens, the next potential target for the rate could be around the 0.8725 hurdle, which is the peak of March 21st. The rate might get held there, or even retrace back down a bit. If the pair continues to trade above the 0.8673 zone, then the bulls could once again try and take advantage of the lower rate and drive EUR/GBP up, bypassing the 0.8725 obstacle and potentially hitting the 0.8765 level, marked by near the high of February 18th.

On the downside, if the rate falls back below the 0.8590 hurdle, this might increase the chances for the bears to take control of the steering wheel and drive the pair to the 0.8555 obstacle, or even further, towards the 0.8500 area. That area held the rate from moving lower on April 3rd and could be a good bouncing ground once again. But if EUR/GBP fails to get back above the 0.8590 level, then the pair might experience another leg of selling, which could take the rate below the 0.8500 obstacle and push it towards the 0.8470 zone, marked near the lowest point of March.

EUR/GBP daily chart technical analysis

 3. NZD/USD WEEKLY OUTLOOK

REVIEW

NZD/USD is still trading within a wide range, between the 0.6705 and 0.6940 levels. Last week, the pair tested the lower side of that range and then rebounded strongly from there, which means that NZD/USD is probably not ready yet to get out of that range. From the short-term perspective, the rate might travel a bit more to the upside inside the range and thus, we will hold a cautiously bullish stance for now.

OUTLOOK (SCENARIO A / B)

Given that NZD/USD had a strong bounce back up from the 0.6720 zone, we may target slightly higher areas, especially if the rate accelerates above the 0.6800 hurdle, marked by the high of April 3rd. That’s when the pair could travel further north, towards the 0.6838 mark, which is the high of April 1st. A further push higher could invite even more buyers, who might lift the rate to the 0.6864 barrier, marked by the low of March 22nd and by the high of March 14th.

Alternatively, in order to shift our near-term view to the downside, we would wait until we see NZD/USD falling below the lower side of the aforementioned range, at 0.6705. This way, the bears may clear the path for themselves to travel all the way to the 0.6670 obstacle, which is the low of January 4th. The pair could rebound back up again, but if it continues to trade below the 0.6705 zone, the bears might take advantage of the higher rate and initiate another leg of selling, bypassing the 0.6670 area and testing the 0.6630 hurdle, which held NZD/USD from closing lower on January 2nd and 3rd. 

NZD/USD daily chart technical analysis

 4. EUR/CAD WEEKLY OUTLOOK

REVIEW

EUR/CAD started showing good signs of ranging activity, roughly between the 1.4880 and 1.5215 levels. Last week, the pair showed decent gains, despite having a down-day on Friday. Our oscillators suggest there might be some more room to go higher. But for now, we will only aim towards the upper side of the range, as EUR/CAD might continue moving sideways on the broader scale.

OUTLOOK (SCENARIO A / B)

A move higher and a break above the 1.5100 barrier could signal a forthcoming higher in the shorter timeframes and may allow the pair to travel towards the important 1.5145 zone, which is the inside swing low of March 24th. If there is nothing that could stop the rate acceleration, then a further uprise might lift the pair to test the upper side of the range, at 1.5215, which also marks the highs of March 7th and 22nd. 

Alternatively, in order to aim for lower areas, we would wait until we see a rate-drop below the 1.5015 hurdle, which is the low of April 11th, as this could open the path towards 1.4970, marked by the low of April 9th. If that level fails to halt the slide, this is when the pair could make its way to the 1.4900 hurdle, which is the lowest point of April for now. Slightly below sits the 1.4880 area, which marks the low of February 22nd.

EUR/CAD daily chart technical analysis

 5.  XAG/USD WEEKLY OUTLOOK

REVIEW

Silver experienced a strong sell-off on Thursday, where it managed to reach the previous week’s lows, near the 14.88 hurdle. On Friday, the commodity closed the week below the psychological 15.00 level, which makes us believe that the bulls are struggling to keep silver afloat. Combined with the fact that the metal is also trading below the downside line drawn from February highs, we will remain somewhat bearish, at least for a short while.

OUTLOOK (SCENARIO A / B)

A further move down and a break below last week’s low, near the 14.88 zone, could invite more sellers into the game. This could drive the price further south, aiming for the 14.80 obstacle, which acted as good resistance around mid-December. A break below that level could raise more concerns about silver’s upside potential in the near term. That’s when we will target the 14.55 zone again, which last time was tested on December 20th, as it played the role of a good support area.

In terms of the upside, because silver is now trading below a short-term downside resistance line, taken from the high of February 20th, we would need to see that line getting broken first, before aiming higher. Also, for a better confirmation, we would like to see a strong move above the 15.33 barrier, which is last week’s high. This way, silver could make its way higher towards the 15.47 obstacle, a break of which could increase the chances for a further price acceleration and could bring the commodity to test the high of March 21st, near the 15.63 area.

XAG/USD silver daily chart technical analysis

 6. BRENT CRUDE OIL WEEKLY OUTLOOK

REVIEW

Brent oil continues to gradually climb higher. Since its reversal back to the upside at the end of December, the commodity gained almost $20 in value and it seems that it may continue traveling further in the upwards direction, given the OPEC-led production cuts, as well as the political instabilities in a few major oil-exporting countries.

OUTLOOK (SCENARIO A / B)

A strong push through the 71.95 barrier would confirm a forthcoming higher high and would allow investors to aim for the 73.55 area, which is marked by the November 7th high. We may see the price getting held there for a bit, but if that area is just seen as a temporary pit-stop for the “black gold”, then  a break above it may drive Brent oil to the 75.00 hurdle, which is near the low of October 24th and at the high of November 1st.

On the other hand, in order to start examining lower levels in the near term, we would like to see a break below the psychological 70.00 hurdle. This could also bring the price below the tentative upside support line drawn from the lowest point of December and may initially allow the commodity to make its way to the 68.60 support zone, which held the price from moving lower between mid- and end of March. If this time the sellers are able to drag Brent below it, then a further slide could open the door to the 65.89 obstacle, marked by the lows of March 22nd and 28th.

Brent crude oil daily chart technical analysis

 7. DAX WEEKLY OUTLOOK

REVIEW

After declining on Monday and Tuesday, DAX reversed back up on Wednesday and kept moving north. On Friday, the German index reached the previous week’s highs and managed to close slightly above the psychological 12000 barrier, around the 12030 zone. Overall, the index continues to trade above the upside support line drawn from the lowest point of December and thus, we would consider the near-term outlook to be positive.

OUTLOOK (SCENARIO A / B)

A break above the 12030 barrier would confirm a forthcoming higher high and open the door for DAX to move towards the 12187 hurdle, which is the inside swing low of September 28th. The price might get a hold up around there, or even depreciate slightly. But if it continues to trade above the psychological 12000 level, we may see another leg of buying, bypassing the 12187 obstacle and pushing further up. In such a case, we may see the index climbing towards the 12384 zone, which is the highest point of October. This is where the bulls might find good resistance, which may temporarily halt the further price acceleration.

Alternatively, if DAX reverses back down and drops below last week’s low, near the 11830 zone, this might signal the completion of a short-term double top and may trigger the beginning of a downside correction. The next possible support area could be seen near the 11740 obstacle, which acted as good resistance on March 20th. If the buyers are not able to pick up the index around that price, this might still be a sign of weakness and it could drive DAX lower, potentially testing the 11630 level, which marks the inside swing low of March 18th and the high of March 21st.

German DAX daily chart technical analysis

 FX Weekly Market Preview 

Weekly Outlook: April 15 – April 19: RBA Meeting Minutes; UK, NZ, Canada and Japan CPIs

We don’t have any central bank meetings scheduled for this week, but we get the minutes from the latest RBA meeting, with investors eager to find out whether the case for a rate cut has increased or not. In the UK, following the EU’s decision to grant the UK another extension, Brexit could take the back seat, especially with UK MPs off for an Easter break. GBP-traders may pay some attention to UK data, with the employment report for February, the CPIs and retail sales, both for March, on this week’s agenda. We get inflation data from New Zealand, Canada and Japan as well, while from China, Q1 GDP is coming out.

Monday is a very light day, with no major economic indicators or events scheduled on the agenda. The only one worth mentioning is the New York Empire State Manufacturing index for April, which is expected to rise to 8.10 from 3.70.

On Tuesdayduring the Asian morning, the RBA releases the minutes of its latest policy decision. At that meeting, the Bank kept interest rates unchanged as was broadly anticipated, but the accompanying statement had a softer tone than the previous one, despite the absence of any mention to a possible rate cut. Officials acknowledged the recent softness in economic growth and dropped the view that the central scenario is for the economy to grow by around 3% this year. Most importantly though, they did not repeat that unchanged rates would be consistent with sustainable growth and achieving the inflation target. Instead, they said that they will set future policy in order to reach those goals.

RBA interest rates

Back then, the message we got was that the current policy stance may not be consistent with sustainable growth and achieving the inflation target, and that a change could be needed in coming months. Judging by the softer language, we noted that the chances for a rate cut may have increased from the previous meeting. However, just last week, RBA Deputy Governor Guy Debelle noted that their expectation is for decent growth in the economy, which may prevent a rate decrease, encouraging investors to push back the timing of such an action. According to the ASX 30-day interbank cash rate futures implied yield curve, the market now expects a cut in October, and not in August as was the case a few days ago. So, having all that in mind, we will scan the minutes to find out whether the likelihood for a cut has not increased as Debelle’s comments suggested, or whether most members have placed more weight to the cut case, in-line with how we interpreted the meeting statement.

During the European day, the UK employment report for February is due to be released. The unemployment rate is forecast to have rebounded back to +4.0% from a 44-year low of 3.9%, while average weekly earnings including bonuses are anticipated to have accelerated to +3.5% yoy from +3.4%. The excluding-bonuses rate is expected to have held steady at +3.4% yoy, the fastest pace since November 2008. According to the IHS Markit/KPMG & REC Report on Jobs for the month, data pointed to a further sharp rise in salaries, but the latest increase was the softest in seven months, while temporary wage inflation eased to a 13-month low. In our view, this tilts the risks surrounding both the wage growth rates to the downside.

UK average weekly earnings vs CPI real wage growth

From Germany, we get the ZEW survey for April. The current conditions index is anticipated to have declined for the seventh consecutive month, to +6.6 from +11.1, but the expectations index is forecast to have exited the negative territory, after staying there for 12 months. Specifically, it is expected to have risen to +0.9 from -3.6.

In the US, industrial production for March is due to be released. The forecast suggests that IP accelerated somewhat to +0.2% mom from +0.1%, but this is likely to drive the yoy rate lower as the March 2018 print, which will drop out of the yearly calculation, was at +0.7% mom. That said, bearing in mind that the ISM manufacturing PMI for the month rose to 55.3 from 54.2, we view the risks surrounding the IP forecast as tilted to the upside.

On Wednesdayduring the early Asian morning, New Zealand’s CPI for Q1 is coming out and expectations are for the yoy rate to have moved further below the midpoint of the RBNZ’s 1-3% target range. Specifically, it is expected to have slid to +1.7% yoy from +1.9%. 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”. According to New Zealand’s OIS (Overnight Index Swaps), there is a nearly 30% probability for a rate cut at the Bank’s upcoming gathering, scheduled for May 8th. Yes, a +1.7% yoy rate would still be above the Bank’s own projection for the quarter, which is at 1.6%, but combining it with the GDP growth rate for Q4, which was below officials’ estimates, it may prompt market participants to increase their bets with regards to a May cut.

New Zealand CPIs inflation

From China, we have GDP data for Q1, alongside the fixed asset investment, industrial production and retail sales, all for March. The qoq growth rate is forecast to have ticked down +1.4% from +1.5%, which will drag the yoy rate slightly lower, to +6.3% from +6.4%. That said, fixed asset investment, industrial production and retail sales for March, are all anticipated to have accelerated in yoy terms, entering the basket of data supporting a stabilization in the world’s second largest economy during the last month of the quarter. Thus, a 6.3% yoy growth rate by itself is unlikely to spark fresh fears. Unless of course the actual print comes in below consensus, and/or the other three releases disappoint as well. In case the forecasts are met, we believe that market participants may prefer to pay more attention to data pointing to how the economy has entered the second quarter, in order to better evaluate whether the bad days are behind us or not.

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.

In the UK, we have the CPIs for March. 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 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. The UK OIS suggest that there is a decent – compared to other central banks – 23% probability for rates to be higher by the end of the year and under normal circumstances, an uptick in the CPIs would have pushed that number higher.

That said, with the EU granting a second extension to the 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. If this delayed uncertainty is expected to leave more marks on the UK economy, it could prompt policymakers to abandon the view that an ongoing tightening remains appropriate.

We get CPI data for March from Canada as well. Expectations are for the headline rate to have risen to +1.8% 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 allowed market participants to keep bets with regards to a rate cut by year-end on the table. According to Canada’s OIS, they assign a 20% chance for that to happen. Remember that at their latest gathering, BoC officials turned dovish and highlighted the uncertainty surrounding the timing of their future actions. So, having all that in mind, accelerating headline inflation, especially if accompanied by a rising core rate, could be pleasing news for BoC policymakers and may reduce the chances for a rate cut.

Canada CPIs inflation

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.

On ThursdayAsian time, 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.

During the European morning, we get preliminary manufacturing and services PMI data for April from several European nations and the Eurozone as a whole. The bloc’s manufacturing index is expected to have rebounded to 48.1 after hitting 47.5 in March, while the services print is forecast to have declined to 53.1 from 53.3. This would drive the composite index a tick higher, to 51.7 from 51.6, but it would still be far from suggesting that the Euro area economy has turned the corner.

Eurozone PMIs

Last week, Draghi and co. reiterated their guidance that interest rates are likely to stay at present levels “at least through the end of 2019”, with the ECB Chief noting again that the risks surrounding the euro area economic outlook “remain tilted to the downside”. He also added that policymakers will consider “whether the preservation of the favorable implications of negative interest rates for the economy requires the mitigation of their possible side effects, if any, on bank intermediation”. Thus, although the PMIs would still be far from exciting, they could lessen somewhat the need for additional policy measures beyond the new round of TLTROs, which is expected to begin in September.

We also get retail sales data from the UK, the US and Canada. The UK and US data are for March, while Canada’s release is for February. Getting the ball rolling with the UK prints, both headline and core sales are forecast to have declined -0.3% mom, after rising +0.4% and +0.2% respectively. That said, this would drive both the yoy rates higher, to +4.6% and +4.0% from +4.0% and +3.8% respectively. In the US, both the headline and core rates are forecast to have rebounded to +0.9% mom and +0.7% mom, from -0.2% and -0.4% respectively, while in Canada, the headline rate is expected to have risen to +0.5% mom from -0.3%, and the core one is anticipated to have ticked up to +0.2% mom from +0.1%. 

Finally, Friday is Good Friday for most of the G10 nations and thus, their respective markets will be closed. That said, we get a couple of data sets: Japan’s CPIs for March and the US housing starts and building permits for the same month.

With regards to Japan’s inflation, the headline rate is expected to have risen to +0.5% yoy from +0.2%, while the core one is anticipated to have held steady at +0.7% yoy. The case for a rebound in the headline print and stable core rate is supported by the Tokyo CPIs for the month, which moved in a similar fashion. A potential rebound in the headline rate could be somewhat encouraging news for BoJ policymakers, but bearing in mind that all Japan’s inflation metrics remain well below the Bank’s objective of 2%, we stick to our longstanding view that Japanese officials have still a long way to go before they start examining whether they should alter their ultra-loose policy.

Japan CPIs inflation

Passing the ball to the US, building permits are expected to have increased 0.3% mom, after sliding 2.0% in March, while housing starts are forecast to have rebounded 6.5% mom following an 8.7% mom tumble.

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