The dollar continued to gain, while major global indices closed their Monday sessions in negative territory, as following Friday’s strong NFP print, market participants scaled back bets with regards to aggressive easing by the Fed. With today’s agenda being relatively light in terms of economic releases, it is likely that investors will be sitting on the edge of their seats in anticipation of Fed Chair Powell’s testimony before the House of Congress, scheduled for tomorrow. They may get some early monetary policy hints though, as some Fed officials are set to deliver remarks today.
The dollar continued trading north on Monday and during the Asian morning Tuesday, outperforming all of the other G10 currencies. It gained the most versus AUD, CHF and JPY, while the currencies it outperformed the least were NZD, GBP and EUR.
Although not crystal clear in the FX world, risk sentiment was subdued yesterday, with major EU and US indices closing in the red. Most Asian indices followed suit today, although Japan’s Nikkei 225 ended its trading fractionally up. China’s Shanghai Composite slid 0.19%, while at the time of writting, Hong Kong’s Hang Seng Index is down 0.76%.
With no major events on yesterday’s agenda, the strengthening of the dollar and the slide in equities suggest that investors kept their gaze locked on the Fed and the potential path of its future monetary policy actions. Going back to the latest FOMC meeting, then, policymakers decided to drop their “patient” language and instead noted that they will “act as appropriate” to sustain economic expansion. With also 7 out of the Committee’s 17 members voting in favor of two quarter-point cuts by the end of this year, investors ramped up their already elevated bets with regards to lower US rates, fully pricing in a 25bps decrease at the upcoming gathering, and another 2 by December. There was also a decent chance for an immediate 50bps cut when policymakers meet next.
However, in a speech after the meeting, Fed Chair Powell said that policymakers are “grappling” with whether lower rates are warranted, after which the probability for a “double cut” in July has started to slide. Following the strong NFP print on Friday, that probably fell further and now stands only at 6%, while , although a 25bps cut is still fully priced in for the Fed’s next gathering, investors have also pushed back the number of quarter-point decreases they have been anticipating by the end of the year, from 3 to 2.5. A third one is now fully priced in for May 2020.
Recently, we have been saying that we are skeptical as to how much the dollar could tumble on expectations of lower rates in the US. Yes, it did after the latest Fed gathering, but investors increased their cut bets so much, making the case for the Fed to match them a hard task. It seems that following Powell’s remarks, the trade ceasefire between the US and China, and especially Friday’s strong NFPs, markets went through a reality check and that’s why the greenback has strengthened, and stock indices slid. We believe that the dollar could continue gaining, and equities may stay under selling interest, at least until Powell’s testimony before the House Financial Services Committee of the US Congress, scheduled for tomorrow, where market participants are likely to get extra clues on how the Fed is planning to implement monetary policy in the months to come.
The Aussie was the main loser, perhaps feeling the heat of the NAB Business Confidence index for June, which fell from 7 to 2. Although this is usually not a major market mover, investors may have paid some attention this time around, as it refers to the period just after the RBA decided to cut rates for the first time since August 2016. That said, the labor costs sub-index, which we monitor more closely given the RBA’s emphasis on the labor market, showed that wages accelerated to +1.5% qoq from +1.1% in May. This enhances our view that the RBA, although it kept the door open for more cuts when it last met, is unlikely to rush into a third one when it meets next. Market participants seem to agree with us, as according to the ASX 30-day interbank cash rate futures implied yield curve, they almost fully pricing in a third decrease in December. For more hints on whether and when the RBA may act again, investors could pay extra attention to the minutes of the July gathering, which are coming out next Tuesday.
AUD/USD continues to drift lower, trading below a short-term tentative downside resistance line taken from the peak of July 4th. We might also say that the pair has formed something like a double top pattern and currently sits at its neckline, at 0.6955. Our oscillators have also started shifting somewhat to the downside, but before we get comfortable with further declines, we need to see a clear break below the 0.6955 zone. Thus, for now, we remain cautiously-bearish over the short-term outlook.
A drop below the 0.6955 hurdle would confirm a forthcoming lower low on the shorter timeframes and could send the pair further south, aiming for the 0.6941 area, marked by the low of June 25th. Initially, we may see the rate stalling there, or even rebounding back up. But as long as AUD/USD continues to trade below the aforementioned downside line, we will aim for lower levels. If the bears take control again and send the rate below the 0.6941 obstacle, such a move could open the door for a push to the 0.6911 mark, which is an intraday swing low of June 21st.
On the other hand, if suddenly the bulls take charge and push AUD/USD above the previously-mentioned downside line, the bears may start worrying about their capabilities to lead the pair lower. But if the rate climbs above the 0.6994 barrier, marked by the high of July 8th, this is when more buyers could join in and drive the pair higher. The could then test the 0.7016 obstacle, which marks the inside swing low of July 4th. If the buying doesn’t stop there, that obstacle could be seen as a temporary pit-stop for the bulls to refuel, in order to drive the rate higher, where the next potential resistance zone could be seen near the 0.7029 level, marked by the high of July 5th.
After the Nasdaq 100 cash index hit its all-time high, near the 7882 level on July 5th, the price reversed back down and broke its short-term upside support line taken from the low of June 13th. The index is currently balancing around its support area at 7732, which is also the low of July 1st. For now, we remain cautiously-bearish over the short-term outlook and we will wait for a clear break below the above-mentioned support area, before getting comfortable with further declines.
A drop below the 7732 support zone could open the door to another slide, which may take the price slightly below the psychological 7700 mark, to the 7684 hurdle, which is the intraday swing low of June 25th and near the intraday swing high of June 28th. The index might stall around there, but if the sellers are still in control and push Nasdaq 100 below that mark, this may confirm another forthcoming lower low and the price might slide to the 7637 area, which is the low of June 28th.
On the upside, if the price suddenly climbs back up above the 7773 obstacle, marked by the low of July 5th, this would place the index back above the aforementioned upside line. Such a move could attract the buyers back into the field and we may see the price accelerating again. Nasdaq 100 may then travel all the way back to the 7855 hurdle, marked by the intraday swing high of July 5th. Slightly above that hurdle lies the high of last week, at 7882, which is also the all-time high.
The calendar appears relatively light today. From the US, the only worth mentioning indicators are the US JOLTs Job openings for May, where expectations are for a slight increase, and the NFIB Small Business Optimism index for June, for which no forecast is available.
In Canada, housing starts are expected to have increased to 210k in June from 202.3k in May, while building permits for May are forecast to have slid 2.5% mom, after rising 14.7% in April.
As for tonight, during the Asian morning Wednesday, we get China’s CPI and PPI for June. Expectations are for the CPI rate to have held steady at +2.7% yoy, but the PPI one is anticipated to have declined further, to +0.3% yoy from +0.6%.
With regards to the speakers, Fed Chair Powell is scheduled to speak, just a day ahead his testimony before the House of the US Congress. However, he will be delivering opening remarks at a Boston Fed conference, with the topic being the effectiveness of stress tests for large banks. Given the theme and that the speech will be only 15 minutes, we doubt that we will get any important remarks on monetary policy ahead of his Congress testimony. We will also get to hear from St. Louis Fed President James Bullard, Atlanta Fed President Raphael Bostic and Fed Board Governor Randal Quarles. Bullard was the lone dissenter at the latest FOMC meeting, voting in favor of a rate decrease and thus, any dovish remarks by him are unlikely to come as a surprise for the markets. We believe that for early hints on the Fed’s future plans, ahead of Powell’s testimony, investors may pay more attention to what Bostic and Quarles have to say.
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