The greenback was lower or unchanged against the other G10 currencies, still weighed on by the elevated expectations with regards to US interest-rate cuts. Today, USD-traders are likely to pay attention to a speech by Fed Chair Powell, as they may be eager to find out whether the Fed will indeed push the cut button at its upcoming gathering in July. As for tonight, focus will turn to the RBNZ rate decision. Following May’s cut, Kiwi traders will likely be looking for clues as to whether another decrease at one of the upcoming gatherings is looming.
The dollar traded lower or unchanged against the other G10 currencies on Monday and during the Asian morning Tuesday. It underperformed versus CHF, SEK, NZD, JPY and EUR in that order, while it traded virtually unchanged against GBP, AUD, CAD and NOK.
It seems that the greenback continued feeling the heat of the FOMC’s decision to lay the groundwork for interest rate cuts. Remember that at last week’s meeting, the Committee dropped its “patient” stance and instead noted that it will “act as appropriate” to sustain the economic expansion. With 7 of its 17 members also favoring two quarter-point rate cuts by year end, market participants have ramped up their expectations with regards to lower US rates, with a 25bps cut fully priced in for the next gathering in July. A second one is priced in for September, while yesterday, investors fully factored in a third one at the December meeting.
Having all this in mind, dollar-traders are likely to pay extra attention to Fed Chair Powell’s speech today. Although we already heard from him at the press conference following last week’s decision, investors may look for hints as to whether indeed the Committee plans to hit the hiking button at its upcoming gathering, or whether officials will decide to wait for a while more, especially if we get positive remarks on trade at the G20 summit later this week.
If the former is the case, the greenback could slide somewhat further, but given that the markets are already extremely pessimistic, we are skeptical as to how much downside room is left. Now, in case Powell backtracks somewhat, leaving the impression that a July cut is not a done deal, investors may start doubting as to whether the Fed could indeed cut 3 times by year end, and thereby allow the dollar to rebound.
Passing the ball to the equity markets, most EU and US indices closed their session in the red yesterday, with the negative sentiment rolling, and intensifying, into the Asian morning today. Both Japan’s Nikkei 225 and China’s Shanghai Composite slid 0.43% and 0.87% respectively. This could be due to some profit-liquidation ahead of Friday’s G20 summit, or it could be the result of escalating tensions between the US and Iran.
With regards to the G20 summit, where the US and Chinese Presidents are expected to meet and discuss trade, latest headlines were not very supportive. Although Chinese officials said that both sides need to compromise in order to reach common ground, US officials kept a hard line, saying that they are not prepared to compromise. Now, as for the US-Iran tensions, Trump cancelled planned air strikes against Iran for shooting a US navy drone, but he proceeded with further sanctions against the nation yesterday. Iran responded by saying that the door to a diplomatic solution with the US has closed.
In a combination of a relatively risk-off trading and a weakening dollar, gold was one of the main beneficiaries, gaining around 1.80% from yesterday’s open and up until the time of writing. It seems that in periods when the US currency weakens, the dollar-denominated precious metal becomes cheaper for those holding other currencies and thereby demand increases. During the Asian morning today, gold traded briefly above 1434, which is the peak of August 2013, to test territories last seen in May of that year. We believe that it could continue trading north for a while more, with our next resistance being the 1488 area, marked by the highest point of May 2013.
USD/JPY continues to drift south, trading below its short-term downside resistance line drawn from the high of April 24th. Today, the pair broke below its support at 107.00, which marks the low of last week, this way signalling that it is still willing to continue with its path down. For now, we will hold a bearish stance and we will target slightly lower areas.
By breaking the 107.00 zone, USD/JPY confirmed a forthcoming lower low, opening the path to the next potential support area could be seen at around 106.73, marked by the low of January 3rd. If that area fails to withhold the bear pressure, a drop below it could send the rate to the 106.45 hurdle, which is the intraday swing high of April 2nd, 2018. This is the place where we could see the pair stalling, or even retracing back up a bit. If USD/JPY remains below the 107.00 hurdle, this could trigger another round of selling, which might lead the pair to the downside again. If the previously-mentioned 106.45 zone fails to withstand the sellers, a break of it could push the rate to the 106.00 level, marked by the low of April 4th, 2018.
On the other hand, if USD/JPY makes a run higher, breaks the aforementioned downside resistance line and the 108.15 barrier, which marks the lows of June 13th and 14th, and also the high of June 20th, then we will target the 108.80 level, marked by the highest point of June. That area could be seen as temporary pit-stop for the bulls, but if it eventually surrenders to them, then the next resistance hurdle might be near the 109.15 obstacle, which marks the lows of May 15th and 29th.
As for tonight, during the Asian morning Wednesday, NZD-traders are likely to lock their gaze on the RBNZ monetary policy decision. This would be one of the “smaller” meetings that are not accompanied by updated economic projections, neither a press conference by Governor Adrian Orr. Thus, if the Bank keeps interest rates unchanged as it is expected, attention is likely to fall on the meeting statement.
When they last met, RBNZ officials decided to cut rates by 25bps, to +1.50% from +1.75%, and lowered their rate-path projections, signaling that another rate cut may be possible during the forecast horizon. Specifically, the projections showed the OCR hitting 1.4% in March 2020, staying there until June 2021, and then rebounding slowly towards 1.9% by June 2022.
Last week, data showed that the economy grew 0.6% qoq in Q1, more than the RBNZ’s +0.4% qoq projection for the quarter, which added credence to early June remarks by RBNZ Assistant Governor Christian Hawkesby that interest rates will “remain broadly around current levels for the foreseeable future”. Having said that though, the data were referring to a period before the latest escalation in tensions between the US and China. Thus, we will dig into the statement to see whether Hawkesby’s view is shared among other policymakers as well, or whether another rate decrease at one of the upcoming meetings is looming.
According to market chatter, there are decent expectations that the Bank will cut by another 25bps in August, given that the latest escalation in trade tensions has led most of the other major central banks to start considering additional stimulus. Thus, if the statement echoes Hawkesby’s remarks that a cut is not imminent, or at least is written in a less-dovish-than-expected language, the Kiwi is likely to add to its recent gains. On the other hand, a statement paving the way towards an August cut could result in some NZD-selling, but bearing in mind the aforementioned expectations, we don’t expect a big slide. What’s more, given New Zealand’s export-oriented economy, as well as its close trading ties with China, the Kiwi is likely to stay sensitive on the outcome of the Trump-Xi meeting in Japan later this week. Thus, even if it slides somewhat due to a dovish RBNZ tonight, it could recover those loses if at the G20, Trump and Xi make important steps towards finding common ground.
At the end of May, GBP/NZD entered a wide range, roughly between the 1.9065 and 1.9415 levels. Yesterday, the pair moved below the mid-point of that range and seems to be willing to slide further. Our oscillators are showing negative momentum, which supports the downside idea, at least in the short run. Also, to add a bit more scepticism about the upside, the pair is trading below a short-term tentative downside line drawn from the high of June 14th. This is why, for now, we will target slightly lower areas and aim for the lower side of the above-mentioned range.
Given that GBP/NZD had already broken below its key support area at 1.9185, marked by the low of June 18th, this move had opened the path to some lower areas. The next potential support zone to watch out for could be the 1.9120 hurdle, which is the low of June 10th. We might see the rate stalling around there, or even retracing back up a bit. But if the pair remains below the 1.9185 obstacle, then we may get another round of selling, which could lead GBP/NZD below the 1.9120 zone and clear the path to the 1.9065 level, marked by the low of June 9th.
Alternatively, if GBP/NZD reverses sharply and travels above the aforementioned downside line, this may increase the pair’s chances to move a bit further up, especially if the rate climbs above the 1.9313 level. That level marks yesterday’s intraday swing high. More bulls could start joining in and if that happens, it might lift GBP/NZD to the 1.9360 obstacle, a break of which could send the pair to the 1.9415 barrier, marked by the high of June 14th. That barrier also marks the upper side of the previously-discussed range.
The calendar appears to be relatively light during the EU and US sessions, with the only data worth mentioning being the US Conference Board consumer confidence index for June and new home sales for May. The CB index is expected to have declined to 131.2 from 134.1, while new home sales are forecast to have rebounded 2.2% mom after falling 6.9% in April.
As for the speakers, apart from Fed Chair Jerome Powell, we have four more Fed officials on the agenda: New York President John Williams, Richmond President Thomas Barkin, Atlanta Fed President Raphael Bostic, and St. Louis President James Bullard.
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