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by Charalambos Pissouros

German Government Agrees on Migration; Aussie Unfazed Once Again After RBA

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EUR Recovers as German Government Agrees on Migration

The euro traded mixed against the other G10 currencies on Monday. It gained against NZD, AUD and GBP in that order, while it underperformed against SEK, NOK, USD and JPY. It traded virtually unchanged against CAD and CHF.

EUR perf 030718

The common currency opened lower on Monday against most of its counterparts and continued drifting south during most of the day following weekend developments in the German political scene. Horst Seehofer, the interior minister and leader of the CSU party, one of Merkel’s coalition partners, rejected the migration deal Merkel brought back from last week’s EU summit and threatened to resign.

However, after five hours of talks between Merkel’s CDU and Seehofer’s CSU, the two parties managed to find common ground with Seehofer withdrawing his resignation threat. The euro rebounded on the news to recover some of the previously lost ground, as concerns over a government collapse in Eurozone’s largest economy have eased for the time being.

That said, we will continue closely monitoring developments in the nation’s political landscape as any fresh clashes between Merkel and her partners could revive fears over a coalition break up and thereby bring the euro under renewed selling interest. For now, barring any new conflicts within the German government, we believe that the euro could continue to perform well for a while, at least against the riskier currencies, like the AUD and NZD, which have been under pressure due to the developments surrounding the global trade front, and especially the US-China dispute.

EUR/NZD – Technical Outlook

EUR/NZD is still traveling higher, supported by a steep upwards moving trendline drawn from the low of the 16th of June. The pair continues to look quite strong, but we should not exclude the possibility for a correction to the downside, before EUR/NZD decides to make another run to the upside. Overall, we are still bullish on the pair in the short term.

For now, EUR/NZD found its resistance at around the 1.7380 zone. Further advance above that zone could send the pair to test the 1.7480 level, marked by the peak of December 2017. That said, a correction to the downside could be a reality and the pair could drop towards the 1.7295 level, a break of which, could the door to the downside for a possible test of the 1.7180 area or even the aforementioned upwards moving trendline, from where the bulls could take the reins again.

Alternatively, if the break of that trendline happens, then this could lead to a change in the short-term trend, which may lead EUR/NZD to test the 1.7115 level initially, the break of which could set the stage for the 1.6965 zone, marked by low of the 28th of June.

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Aussie Unfazed After Another Non-event RBA Meeting

Overnight, during the Asian morning Tuesday, another RBA meeting entered the basket of non-events and hence, the Aussie barely moved at the time of the release. The Bank decided to keep interest rates unchanged at +1.50%, and once again it made very little changes to the accompanying statement.

Policymakers remained optimistic with regards to the domestic economy, noting that the recent data continue to be consistent with the Bank’s central forecast for GDP growth to average a bit above 3% in 2018 and 2019. They remained upbeat on the labor-market outlook, but they reiterated that wage growth remains low and this is likely to continue for a while yet, although the rate of wage growth appears to have troughed. They continued saying that inflation is low and that is likely to remain for some time, while they kept concerns over household consumption as well as over the direction of international trade policy in the US.

Once again, the key take-away from the meeting is that RBA officials are unlikely to turn their eyes to the hiking button in the foreseeable future. According to the Bank’s latest quarterly Statement on Monetary policy, the cash rate is expected to increase around the middle of next year.

As for the Aussie, we believe that its outlook remains negative. AUD/USD is likely to continue drifting lower. On the one hand, the RBA is anticipated to remain on hold for the months to come, while on the other hand, the Fed signaled that it could hike two more times this year and three in 2019. What’s more, as we already noted, global trade tensions are likely to keep extra pressure on the Australian currency due to Australia’s export-oriented economy. In case of further escalation in trade tensions, one of our favorite proxies for playing Aussie’s weakness is AUD/JPY, given that the safe-haven yen tends to attract flows during times of uncertainty and turbulence.

AUD/JPY – Technical Outlook

AUD/JPY continues to move higher slowly, within a short-term rising channel, but on a bigger picture, this move could be seen as a correction before the pair decides to drop lower again. Certainly, in the short-run, we could see AUD/JPY bouncing around within the channel boundaries, but overall, the near-term outlook remains negative in our view.

For now, we will keep monitoring AUD/JPY’s trading within the aforementioned channel. If AUD/JPY hits the 81.77 area and then reverses straight away down, this could be the sign of weakness that we were expecting, and the pair could make its way towards the lower bound of the rising channel for a quick test. If it breaks that bound and closes a 4-hour candle below it, then we will start examining lower levels like the 80.63, which was the low of the 19th of June. Further declines could lead to the 80.05 zone for a quick test.

On the other hand, a push higher above the 81.77 mark could lead the pair towards the 82.11 level, marked by yesterday’s high. Slightly above that we have the upper bound of the channel, which could turn the rate down, acting as a strong resistance.

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As for the Rest of Today’s Events

During the European morning we have another central bank deciding on interest rates, the Riksbank. At its latest meeting, the world’s oldest central bank kept its repo rate unchanged at -0.50% and pushed back the timing of when it expects the rate to start rising. Since the last meeting, data showed that both the CPI and CPIF rates rose to +1.9% yoy and +2.1% yoy in May from 1.7% and 1.9% respectively, while the excluding energy CPIF rate ticked up to +1.5% yoy from +1.4%. All rates are near the same levels they were back in March, the data set Riksbank officials had in hand at the April meeting. So, bearing that in mind, we still expect them to reiterate the view that interest rates will begin to be raised towards the end of the year.

As for the economic indicators, Eurozone’s retail sales for May are anticipated to have risen at the same pace as in April (+0.1% mom). However, this will drag the yoy rate down to +1.4% from +1.7% previously. The bloc’s PPIs are also due to be released.

In the UK, we have the construction PMI for June, which is expected to have ticked down to 52.4 from 52.5. That said, investors are likely to pay more attention to the services index, due out on Wednesday, as the service sector accounts for around 80% of the UK GDP.

From the US, we get factory orders for May, which are expected to have risen 0.1% mom after sliding 0.8% in April. What’s more, it is the day before the fourth of July holiday (Independence Day) and thus, US markets will close early.

Tonight, during the Asian morning Wednesday, we get Australia’s trade balance and retail sales data, both for May. Expectations are for the nation’s trade surplus to have increased somewhat, but retail sales are anticipated to have slowed to +0.3% mom from +0.4% in April. China’s Caixin Services PMI for June is also coming out.

As for the speakers, we have one on the agenda: ECB Chief Economist Peter Praet.

 

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