The dollar has been in a sliding mode since Friday, which suggests that the currency started to feel the heat of the elevated expectations over lower interest rates in the US. Yesterday, St. Louis Fed President Bullard said that a rate cut may be “warranted soon”, reducing further hopes over a “patient” Committee. This morning, the RBA cut interest rates to 1.25% as was broadly anticipated, while the main message we got from the statement is that the Bank will stay data dependent.
Following Friday’s slide, the dollar continued underperforming against the other G10 currencies on Monday and during the Asian session Tuesday. The main winners were EUR, NOK and CHF, while the currencies which gained the least were JPY and GBP.
With regards to the equity markets, it seems that risk aversion eased somewhat during the European trading, with most EU bourses closing their sessions in the green. That said, Wall Street indices painted a different picture. The DJIA traded virtually unchanged, the S&P 500 was 0.28% down, while Nasdaq tumbled 1.61%, driven by concerns that US regulators have put Facebook, Alphabet, Apple and Amazon under their radars. As for today’s Asian session, Japan’s Nikkei closed virtually unchanged, while China’s Shanghai Composite slid 0.96%.
In our view, the path of least resistance for stock indices remains to the downside, while for the safe havens is still north. The trade tensions that have been the catalyst for the latest round of risk aversion are far from dissipated and as we noted in the past, we would like to see material signals pointing towards a resolution before we start examining the case of a long-lasting recovery in investors’ morale. On Friday, China announced that it will draft a list of foreign companies, organizations and individuals that considers “unreliable” in terms of harming its own firms, while over the weekend, the nation put FedEx under investigation, also issuing a White Paper blaming the US for the escalation.
Back to the dollar, it has been suffering since Friday, even when there is a risk-off mood. Before that, the greenback had been standing tall during periods of risk aversion, despite the increasing expectations over lower rates by the Fed. In previous reports, we said that this could be due to investors’ belief that if the Fed was to act, other major central banks would have to adopt an even more accommodative stance. That said, this may not be the case anymore. Yesterday, St. Louis Fed President James Bullard said that a rate cut may be “warranted soon”, reducing even more the already few hopes over a “patient” Fed. According to the Fed funds futures, a single rate cut is now priced in for September, while another one if almost factored in for November.
Yesterday, after a strong push to the upside, EUR/USD ended up testing the upper side of the range that it is trading in from around the second half of April. That range is roughly between the 1.1110 and 1.1260 levels. But in order to continue aiming higher, we need to see a clear break above the upper bound first. Although we saw good performance from the pair yesterday, we will remain cautious and stay put, for now, as we await for the confirmation break.
If, eventually, the upper side of the above-mentioned range surrenders to the bulls and EUR/USD moves above it, this could clear the path to some higher areas. This is when we will target the next potential strong resistance zone, at 1.1304, marked by the high of April 14th. This is where the rate could get a hold-up and stall for a bit. There even might be a chance to see a small correction back down. But at that point, if pair continues to trade above the upper side of the range, this could result in another leg of buying. If this time the 1.1304 hurdle fails to withstand the bull-pressure and breaks, EUR/USD could make its way slightly higher, to test the 1.1325 level, marked near the highs of April 12th and 17th.
Alternatively, if the rate slides back below the 1.1225 hurdle, or the 1.1215 zone, which is marked by the high of May 27th, this could spook the bulls from the field again. The pair may then travel towards the 1.1190 obstacle, a break of which could open the door for a further move lower to the 1.1160, marked by yesterday’s low.
The Aussie was also higher against its US counterpart but failed to assume a clear direction in the aftermath of the RBA decision. The Bank decided to cut interest rates for the first time since August 2016, to a record low of +1.25%. That said, this was all but expected and thus, the cut itself did not prove to be a market mover.
Investors paid more attention to the accompanying statement, where officials noted that the decision to reduce rates will “assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target.” Officials also noted that they will continue monitoring developments in the labor market and adjust policy accordingly in order to support growth and achievement of the inflation target over time. The immediate reaction in the Aussie was to the upside, perhaps as there were not strong hints with regards to more rate reductions in the months to come. However, policymakers did not close the door either, and that’s why the Aussie was quick to return those gains. The key takeaway we got from the meeting is that the Bank is in a wait-and-see mode and that it will decide how to implement policy as new data arrive.
In that respect, tonight we get Australia’s GDP data for Q1. Expectations are for the nation’s growth to have accelerated to +0.4% qoq from +0.2% in Q4 2018, but this will drive the yoy rate down to +1.7% from +2.3%. In any case, this will be in line with the RBA’s latest forecasts and is unlikely to raise concerns over another rate cut so soon. We believe that investors may prefer to wait for indicators regarding more recent months before they start examining how strong the case for another cut in the upcoming months is.
For now, the Aussie could stay mainly driven by changes in the broader market sentiment. Even if the currency continues to recover for a while more against its US counterpart, which eventually felt the heat of rising expectations over lower rates in the US, further tensions in the global trade arena could bring it under some pressure, especially against the yen and the swiss franc, which have been the main beneficiaries lately due to safe-haven inflows.
For the whole month of May, AUD/JPY has been drifting lower. Even though from the end of May the pair started to flatten the slide, still, a small incline to the downside remains, as the rate is trading below a short-term tentative downwards moving resistance line drawn from the high of May 20th. Lately, we have seen some good AUD performance against some other major currencies, nevertheless it remains subdued against the Japanese yen. There is a possibility to see another small recovery, which could bring AUD/JPY a bit higher, but if it continues to stay below the above-mentioned downside line, we will remain sceptical about any larger extension to the upside.
A push above the 75.45 barrier could lift the rate a bit higher, as the move might clear the path towards the aforementioned downside line. If that line shows good resistance, the control of the pair might get taken over by the bears again and we could see AUD/JPY sliding back below the 75.45 hurdle. If such a move occurs, this may increase the pair’s chances to continue drifting lower, potentially testing yesterday’s low at 74.95, a break of which could send the rate even further down. This is when we might aim for the 74.30 obstacle, marked by the closing and opening levels of January 2nd and 3rd respectively.
On the upside, if the aforementioned downside line gets broken and the rate climbs above both, the 76.16 hurdle and the 76.40 barrier, where the last one is marked by the high of May 20th, this would confirm a forthcoming higher high and allow more buyers to join in. AUD/JPY could then make its way towards the 77.10 obstacle, a break of which could lead the rate to the 77.40 level, marked by the high of May 8th.
During the European day, the UK construction PMI for May is due to be released and expectations are for the index to have held steady at 50.5. We also get Eurozone’s preliminary CPIs for the same month and the forecasts suggest that both the headline and core rates slid to +1.3% yoy and +1.0% yoy, from +1.7% and 1.3% respectively. Something like that could add to speculation for a more dovish ECB on Thursday, and may bring the euro under some selling interest. However, any slide could stay short-lived. Following the slowdown in German consumer prices, investors may already be aware that this could be the case with the Euro area prints. What’s more, even after the slowdown in German inflation, the euro took advantage of the greenback’s weakness, and headed north, while yesterday, the common currency was the best performer among the G10s. Thus, with a wounded dollar, EUR/USD could continue gaining for a while more ahead of Thursday’s ECB policy gathering. Eurozone’s unemployment rate for April is coming out as well and is expected to have held steady at 7.7%.
With regards to the speakers, we have four on the agenda: During the European trading, we will get to hear from RBA Governor Lowe, who could shed some more light over the Bank’s decision. Later on, Fed Chair Jerome Powell, New York Fed President John Williams, and Fed Board Governor Lael Brainard will step up to the rostrum.
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