The dollar gained yesterday, even after the Fed revised down its 2019 median dot to suggest 2 hikes, instead of 3 as was the case in September. The Committee appeared less dovish than investors may have expected, which hurt the broader market sentiment as well. The commodity-linked currencies NZD and AUD were the worst G10 performers, and equity indices tumbled. As for today, it’s the turn of the BoE and the Riksbank to decide on policy. We expect both Banks to stand pat, although given its guidance, there is the chance for a hike by the Riksbank.
The dollar traded higher against most of the other G10 currencies, with NZD and AUD leading by far the losers’ list. The greenback traded virtually unchanged, within a ±0.10% range, against EUR and JPY.
Although the dollar did not end the day significantly higher against its major peers, except NZD and AUD, its ride was not a quiet one. The currency was trading on the back foot ahead of the FOMC policy decision and rebounded as soon as the decision was released.
The Committee decided to raise interest rates by 25bps to the 2.25-2.50% range as was widely expected, and thus all the attention fell to the updated “dot plot” and the accompanying statement. According to the new plot, officials now expect two hikes in 2019, instead of three as the September plot suggested. Although still a downside revision, this proved positive for the dollar as the market was pricing in only half a quarter-point rate increase for 2019 ahead of the decision. As for the projections for the following years, policymakers still expect 1 hike in 2020 and none in 2021. With regards to the long-run median estimate, it was also revised lower, to 2.75% from 3.00%.
In the accompanying statement, officials added the word “some” in front of “gradual increases”, which suggests a slightly more cautious approach on interest rates. They also repeated that the risks to the economic outlook are roughly balanced, but they added that they “will continue to monitor global economic and financial developments and assess their implications for the economic outlook”. In our opinion, with this part, the Committee wanted to make clear that it will not be on autopilot any more, placing more emphasis on economic and financial developments.
Apart from the surge in the dollar, the outcome also triggered a “flight to safety” broader market reaction given that, after all, the Committee was not as dovish as investors may have expected. The commodity linked currencies NZD and AUD were the worst performers, with the Kiwi getting an extra hit after the disappointment in New Zealand’s GDP data for Q3. All three major US equity indices tumbled as well, with the negative sentiment rolling into the Asian trading Thursday.
The yen gained on the less-dovish-than expected Fed, due to safe haven inflows, but reacted very little at the time the BoJ announced its own policy decision. As was broadly anticipated, this Bank kept its ultra-loose policy unchanged via a 7-2 vote, maintaining short-term interest rates at -0.1% and the target of 10-year JGB yields around 0%. Despite the disappointing GDP data for Q3 and fears of slowing global growth, the Bank reiterated that Japans economy is expanding moderately and that it will continue to do so.
Moving ahead, we believe that the US dollar could continue to gain further if US data keep coming in on the bright side. According to the Fed fund futures, the market is still not fully pricing in even a single hike for 2019, and thus, despite the downside revision in the dot plot, there is still room for the market to get closer to the Fed’s estimates. As for the broader market sentiment, it could stay subdued for a while more, at least until we start getting new headlines suggesting that the US and China are getting closer into sealing a “truce” deal over trade.
NZD/USD sold off heavily yesterday on the FOMC decision, and took another hit overnight following the disappointment in New Zealand’s GDP data for Q3. NZD/USD is trading below its short-term downside resistance line, drawn from the high of the 4th of December. But, on a slightly bigger picture, the pair sits above its medium-term tentative upside support line taken from the low of 8th of October. That said, given that there is a quite a big distance from that upside line, there is a good chance that NZD/USD could travel further down in the near term.
But before NZD/USD could continue its path south, we might see a bit of retracement back up, due to the overstretched tumble yesterday and overnight. If the pair moves higher, but fails to overcome the 0.6755 barrier, marked by the low of the 25th and the 27th of November, the bears may take advantage of the higher rate and push NZD/USD lower again, towards the 0.6705 hurdle, which was the low of the 12th of November. If the sellers remain strong, slightly below lies another potential area of support that could be tested, at 0.6685, which acted as good resistance on the 2nd and the 6th of November.
Alternatively, even if NZD/USD moves above the aforementioned 0.6755 level, in order to get more comfortable with seeing higher areas getting hit, we would like to wait for a break above the 0.6780 obstacle. Only then we may consider the pair shifting higher towards the 0.6810 resistance zone, a break of which could clear the way to the 0.6840 hurdle, marked by the inside swing low of the 18th of December. This is where NZD/USD could also meet the previously-mentioned downside resistance line, which might stall the rate.
As for today, we have two more G10 central banks deciding on monetary policy: the BoE and the Riksbank.
So, let’s get the ball rolling with the BoE. Expectations are for policymakers to keep interest rates unchanged at +0.75%. This will be one of the “smaller” meetings that are not accompanied by a press conference and updated economic projections, and thus any market reaction is likely to come from the accompanying statement and the meeting minutes. When they last met, officials noted that the nature of the UK’s departure from the EU is not known at present and that the Bank’s response will not be automatic. It could be in either direction, meaning that rates could go up even in case of a no-deal Brexit. Thus, it would be interesting to see whether officials continue to hold that view, especially following the latest developments surrounding the Brexit landscape.
According to the forward curve of the UK OIS (overnight index swaps), following the recent turmoil surrounding Brexit, market participants have pushed back their expectations with regards to a BoE rate hike. Just after the November meeting, a hike was almost fully priced in for December 2019 or January 2020, but now the curve suggests that investors expect a hike around the summer of 2020. Therefore, if the Bank reiterates that interest rates can move in either direction even in case of a disorderly Brexit, this could prompt market participants to bring somewhat forth their bets and the pound may slightly strengthen. That said, we expect any gains to be limited as the main driver for the British currency is still UK politics and the Brexit sequel. Now, in case officials remove that part from the minutes, the currency could slide as this could mean that they have changed their mind and they don’t see a hike as a good idea in case of a disorderly divorce.
Passing the ball to the Riksbank, at its latest policy gathering, the world’s oldest central bank kept interest rates unchanged at -0.50% as was expected, and repeated that the repo rate will be raised by 25bps either in December or February.
Since then inflation prints for both October and November disappointed, with the core CPIF rate, which excludes energy, sliding to 1.4% yoy, after rising to 1.6% in September. So, it would be interesting to see whether the Bank will decide to refrain from hiking at this meeting, and note that interest rates could rise in February, or whether it will ignore the latest softness in inflation and proceed with pushing the hiking button. In our view, the first is the most likely outcome. Apart from the softness in inflation, GDP data showed that the Swedish economy contracted 0.2% qoq in Q3 and thus, we believe that officials will not rush into any action at this moment. Instead, they may prefer to wait and see how data evolve from here onwards and if all this weakness proves to be temporary, they may feel more confident to act in February.
GBP/CHF has been trading sideways between the 1.2500 and the 1.2580 levels since the 12th of December. The current range could be seen as a small bullish flag pattern, which might open the door towards higher areas. However, because the pair is still below its short-term downside resistance line, the upside may be limited. From the short-term perspective, even though there could a be a bit of upside, still, the negativity surrounding this pair puts us in a more cautiously-bearish position.
As mentioned above, if GBP/CHF decides to break the upper bound of the short range, the rate could go higher, but not far from the 1.2645 area, it might meet good resistance from the downside line. If the pair fails to move above the line, the bears could quickly pick up on that and pull the rate back down again. This is when we will aim for a re-test of the 1.2580 hurdle, this time from above, a break of which could send GBP/CHF further down towards the 1.2500 obstacle, which is the lower side of the above-mentioned range. Just a few pips lower, the pair has another potential area of support, at 1.2485, marked by the inside swing high of the 11th of December.
On the other hand, if GBP/CHF moves above that short-term downside resistance line and breaks the 1.2645 barrier, this is when it could become more interesting for the bulls, as this might open the horizon of higher levels that were last tested in the beginning of December. The next potential resistance zone on our radar could be the 1.2700 level, a break of which may lead to the 1.2765 area, marked near the high of the 5th of December.
During the European morning, ahead of the BoE decision, we get the UK retail sales for November. Expectations are for both headline and core sales to have rebounded +0.3% mom and +0.2% mom after sliding 0.5% and 0.4% respectively, but this would still drive the yoy rates lower. The case for declining yoy rates is also supported by the tumble in the yearly rate of the BRC retail sales monitor for the month. In any case, we expect this release to pass unnoticed due to the BoE decision.
Later in the day, in the US, initial jobless claims for the week ended on 14th of December are due to be released and expectations are for a rise to 219k from 206k the week before.
As for tonight, during the Asian session, Japan’s National CPIs for November are due to be released. Expectations are for headline inflation to have slowed to +0.8% yoy from +1.4% in October, while the core rate is anticipated to have remained unchanged at +1.0% yoy. These results are likely to confirm our longstanding view that BoJ policymakers still have a long way to go before considering a meaningful step towards normalization.
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