The Aussie was the main loser among the G10 currencies, tumbling after RBA Governor Lowe said that the next move in interest rates could be in either direction, putting the rate-cut option officially on the table, although yesterday’s meeting statement did not provide such hints. The pound was the second underperformer in line, with the initial trigger behind its slide being the disappointment in the UK’s services PMI for January. Technical selling in Cable for breaking below the psychological zone of 1.3000 may have added extra pressure.
The US dollar continued outperforming most of the other G10 currencies, gaining the most against AUD and GBP in that order. The greenback traded virtually unchanged only against JPY, CHF and SEK.
The main loser was by far the Australian dollar, which came under massive selling interest overnight after RBA Governor Philip Lowe used his first speech for 2019 to put a rate cut on the table. The Governor said that interest rates could now move in either direction, depending on inflation and the labor market’s strength. “Over the past year, the next-move-is-up scenarios were more likely than the next-move-is-down scenarios. Today, the probabilities appear to be more evenly balanced,” the Governor said.
During the Asian morning Tuesday, the Aussie rallied as the less-dovish-than-expected RBA statement may have prompted investors to reduce their rate-cut bets. Thus, Low’s remarks may have caught them off-guard and that’s why the Aussie tumbled, breaking below the 0.7200 hurdle against its US counterpart. Yesterday, after the RBA statement was out, we noted that the Aussie was likely to stay mainly driven by changes in the broader market sentiment rather than monetary policy. However, Low’s remarks proved us wrong, and with a rate cut now officially on the table, we would monitor Australia’s domestic economic data even more closely.
Now, with Lowe officially discussing the possibility of a rate cut, the RBA is on the same page as the RBNZ. Remember that Governor Orr has been arguing that interest rates could move in either direction since he took the job. That said, bearing in mind that investors have already digested the RBNZ’s stance to a large extent, but not yet the RBA’s shift, we would expect AUD/NZD to continue drifting south in the foreseeable future. Yes, the Aussie could receive some support due to increased optimism over a US-China trade deal, but also could the Kiwi. Remember that both are risk-linked currencies and that both Australia and New Zealand have strong trade ties with China.
The Australian dollar took a strong hit overnight, selling off against all its G10 rivals. The New Zealand dollar got beaten as well, but still, it performed better against its neighbouring Aussie. This led AUD/NZD to break through a few of its key support areas and forced it to rush further down. Although we might see some correction back to the upside, AUD/NZD could continue traveling lower, at least in the short run.
We may see AUD/NZD moving a bit lower towards its next potential area of support at 1.0395, marked by the low of July 7th, 2017. The area might be considered as a possible bouncing ground for the pair in order to complete a small correction to the upside. But if the bears remain strong and the rate fails to get back above the 1.0430 hurdle, this could trigger another leg of selling, which might lead AUD/NZD back to the 1.0395 zone. If this time the zone is not capable of withholding the rate from moving lower, a break below could send the pair for a test of the 1.0369 obstacle, marked by the low of June 25th, 2017.
Alternatively, a push back above the 1.0450 barrier might interest the bulls again and we may see the rate getting lifted to 1.0485 hurdle, which could be a temporary pit-stop before another leg higher. The next resistance zone we will keep a close eye on is around the 1.0350 level, which is near yesterday’s high.
Taking the second place among the losers was the British pound, though still far behind the Aussie. The slide in the pound started after the UK services PMI for January fell from 51.2 to 50.1, just a tick above the 50 barrier, which separates expansion from contraction. The forecast was for a fractional slide to 51.1. According to the report, concerns about the economic outlook weighed more heavily on staff recruitment, with an overall reduction in payroll numbers for the first time in just over 6 years. In the report it was also noted a decline in incoming new work, for the first time since July 2016.
The disappointment in the services PMI comes after both the manufacturing and construction indices for the month slid by more than anticipated, also weighed on by Brexit uncertainty. With the service sector accounting for around 80% of the UK economy, a nearly flat activity, combined with no concrete plans by UK officials on how to move forward in order to secure a Brexit deal, may have added to investors’ fears that a disorderly withdrawal from the EU would hurt the UK economy badly.
Technical selling in Cable for a break below the psychological zone of 1.3000 may have exacerbated the slide, but as we noted just after last week’s voting in the UK Parliament, we see the case for the pound to continue trading south. The rejection of an amendment including a nine-month extension to the Brexit process and the adamant stance of the EU to not renegotiate increase the likelihood of a no-deal Brexit and thereby, the selling activity in GBP.
With regards to the broader market sentiment, although not so clear by the performance in the FX sphere, risk appetite continued to be supported. Indeed, major EU and US indices were a sea of green yesterday, with the positive mood rolling into the Asian trading Wednesday. Although Chinese markets are closed for the whole week in celebration of the Lunar New Year, Japan’s Nikkei closed its session 0.2% up. As we noted yesterday, the driver behind the risk-on trading may have been optimism over a final trade accord between China and the US, and with little market-driving remarks in President Trump’s annual State of the Union address overnight, markets continued to trade in the same manner. Just for the record, the US President insisted in building a wall across the Mexican border, called for unity in order to avoid another government shutdown and noted that a trade deal was possible if China agrees to “real structural change”.
The British pound was one of those currencies that got hit yesterday as well, especially against the dollar, with Cable breaking its psychological 1.3000 hurdle. The pair found support at 1.2925, from which it corrected slightly back up. In our view, given that the pair is forming lower lows below the prior upside support line drawn from the low of January 2nd, there is a chance of seeing another leg of selling, especially if the rate breaks below yesterday’s low, at 1.2925.
As mentioned before, in order to continue aiming lower, we would like to see a rate-drop below the 1.2925 hurdle, as this would also place the pair below the 200 EMA on the 4-hour chart. This could open the door towards lower areas like the 1.2845 obstacle, marked by the low of January 21st. We may see a small rebound from that obstacle, but if the bear-pressure remains strong, the rate could easily travel further down, break the above-mentioned 1.2845 hurdle and move to the 1.2805 level, marked by the intraday swing low of January 15th.
On the other hand, if GBP/USD gets a boost from the bulls again and rises above the 1.3000 barrier, this could quickly invite more buyers into the game and lead the rate a bit higher. Certainly, this could increase the pair’s chances of moving further in the upwards direction, but the upside might get limited due to the downside resistance line drawn from the high of January 25th. However, if GBP/USD manages to overcome that line, then this is when we may shift our outlook towards the positive side. A push above the 1.3100 obstacle, might clear the path towards the next potential resistance area at 1.3160, marked by the high of January 31st. If that area is not able to withstand the buying activity, this could open the door to the 1.3220 hurdle, which is the highest point of January.
Today, we will get US data releases that were delayed due to the government shutdown. The 1st estimate of Q4 GDP is expected to have slowed to +2.6% qoq SAAR from +3.4% in Q3, something supported by the Atlanta Fed GDPNow and the New York Nowcast models. Durable goods orders and retail sales, both for December, are also due to be released. With regards to durable goods, expectations are for headline orders to have risen 0.8% mom, the same pace as in November, while core orders are anticipated to have rebounded 0.2% mom after sliding 0.3%. Headline retail sales are anticipated to have ticked down to +0.1% mom from +0.2%, while the core rate is expected to drop to 0.0% from +0.2%.
In Canada, the Ivey PMI for January is coming out and the forecast suggests that the index rose to 60.2 from 59.7.
With regards to the energy market, the EIA (Energy Information Administration) weekly report on crude oil inventories is coming out and expectations are for a 2.18mn barrels increase after a nearly 0.92mn inventory build the week before. The API report revealed a 2.5mn barrels build, and thus we see the case for the EIA to come in near its forecast.
As for tonight, during the early Asian morning Thursday, we have New Zealand’s employment data for Q4. Expectations are for the unemployment rate to have rebounded to 4.1% from 3.9%, which was lowest since Q2 2008, while the employment change is anticipated to have slowed to +0.3% qoq from +1.1%. Although the somewhat better than expected inflation data for Q4 may have encouraged some participants to reduce their bets with regards to a rate cut by the RBNZ, the slowdown in Q3 GDP and a potential rebound in the unemployment rate may allow Governor Orr to keep that option well on the table.
We also have two speakers on the agenda: During the Asian session tonight, Fed Chair Jerome Powell and Fed Governor Randal Quarles will speak.
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