Overnight, the RBNZ kept its policy unchanged, as was widely anticipated. In a surprising twist, at least for us, the final sentences of the meeting statement retained an easing bias despite the latest improvement in economic data. The RBNZ echoed its previous policy statement and indicated that numerous uncertainties persist, particularly in the international outlook, and policy may need to adjust accordingly. In addition, the Bank reiterated that NZD remains higher than desired, and that a decline in the exchange rate is needed. On the bright side, the officials acknowledged the improvement in the domestic economy, though these upbeat points were not enough to offset their pessimistic view on the global outlook and the strength of the Kiwi. Therefore, NZD/USD slid on the decision, and continued even lower during Governor Wheeler’s press conference. An interesting point that Governor Wheeler made, was that the biggest risk he sees is US President Trump’s potential protectionist trade policies, something that could spark retaliation from other countries, and that may cause the Fed to tighten even faster as prices in the US rise rapidly.
NZD/USD tumbled following the decision, falling below the upside support line taken from the low of the 3rd of January and finding support slightly above the 0.7180 (S1) barrier. This shifts the short-term outlook to negative in our view and as such, if the bears manage to overcome the 0.7180 (S1) hurdle, they may target the 0.7130 (S2) support next.
Despite these dovish signals from the officials, we do not expect them to actually cut rates again in the foreseeable future absent a major shock, such as heightened global protectionism as Governor Wheeler indicated. We think that this dovish forward guidance may be an implicit way to halt any further gains in NZD, at least temporarily. As such, we believe that although the latest pullback in NZD/USD may continue in coming days, the pair’s broader outlook remains cautiously positive. New Zealand’s economic data are still strong, and as long as the aforementioned shocks do not materialize, we could see the pair turn up again in the foreseeable future. On the daily chart, NZD/USD is back below the downside resistance line drawn from the peak of the 7th of September. However, there is still a strong possibility for a higher low and as such, we would treat the short-term reversal as a corrective move, at least for now.
EUR/USD heads higher, but political risks persist
The US dollar slid yesterday, pushed down by a decline in the yield of US treasuries. This caused EUR/USD to rebound from the diagonal support line drawn from the low of the 16th of January. Nevertheless, given that the financial world has started paying some attention to the upcoming European elections and the political risks they pose to the bloc, we believe that this rebound is likely to remain limited. We expect the pair to come under renewed selling interest soon, and if sellers manage to drive the battle below the aforementioned support line and the 1.0630 (S1) level, we would expect them to initially pave the way for our next support of 1.0590 (S2). With regards to the broader trend, the fact that the recovery which started on the 3rd of January remained limited near the key obstacle of 1.0800 (R3) enhances our view that this was just a corrective move and that the medium-term downtrend remains intact.
Today’s highlights:
During the European day, the most noteworthy economic indicator we get is Norway’s GDP growth for Q4. The forecast is for growth to have rebounded notably after a decline in Q3, which is likely to be pleasant news for the Norges Bank. Something like that could diminish even further the likelihood for any further easing by the Bank in the foreseeable future and thereby, bring NOK under renewed buying interest.
In Germany, the trade balance for December is due out, though this is usually not a major market mover for the common currency.
From the US, we get initial jobless claims for the week ended on February 3rd and expectations are for an increase in the figure, something that would bring the 4-week moving average down slightly.
We have four speakers scheduled for today: BoE Governor Mark Carney, RBA Governor Philip Lowe, Chicago Fed President Charles Evans and St. Louis Fed President James Bullard.
