Late during the US session today, market participants are likely to turn their attention to the RBNZ rate decision. Expectations are for no change in policy. At its latest gathering, the Bank retained its easing bias despite improving domestic economic data. Policymakers indicated that numerous uncertainties persist, particularly in the global outlook, and that policy may need to adjust accordingly. As was later explained by Governor Wheeler, this was a reference to the risks surrounding exports and the prospect of increased global protectionism. These concerns may have been amplified further last week given that the G20 finance leaders dropped their commitment to resist trade protectionism. Importantly, the RBNZ also reiterated that a decline in the Kiwi’s exchange rate is needed, something that became reality following the Bank’s cautious signals. Since that gathering, economic data have been lackluster. Although the nation’s terms of trade improved in Q4, GDP growth slowed notably in the quarter, much more than the RBNZ’s own forecasts. To make matters worse, economic growth for Q3 was revised lower. Bearing also in mind that the aforementioned protectionism risks remain elevated, we see the case for the RBNZ to retain its cautious stance and leave the door open for further easing. Something like that could bring the Kiwi under renewed selling interest.
NZD/USD traded lower yesterday after it hit the downtrend line taken from the peak of the 7th of February. However, the slide was stopped by the 0.7015 (S1) barrier. Bearing in mind that the pair is trading below the aforementioned downtrend line, we would consider the short-term outlook to be negative. A more-cautious-than-previously RBNZ tonight could encourage the bears to push the rate below the 0.7015 (S1) level and perhaps set the stage for our next support of 0.6970 (S2). Such a break would also signal that the recovery started on the 14th of March was just a corrective phase.
UK inflation accelerates, but will the BoE scale back stimulus?
Yesterday, UK inflation data showed that consumer prices continue to accelerate at a rapid pace, with both the headline and the core CPI rates for February rising by much more than anticipated. Specifically, the headline rate overshot the BoE’s 2% inflation target, while the core rate came in at exactly 2%. At the latest BoE gathering, some members noted that they would consider reducing stimulus should there be any further upside news on the prospects for growth or inflation, while Kristyn Forbes actually voted for an immediate hike. GBP/USD surged at the release, possibly as market participants brought forward their expectations with regards to a potential reduction in stimulus by the BoE. The surge brought the pair above the downside resistance line drawn from the high of the 2nd of February, which makes us confident that the recovery from near the key territory of 1.2100 may continue for a few more days. Now the rate is testing the 1.2500 (R1) level, but we prefer to wait for a break above 1.2525 (R2) before we assume the extension of yesterday’s rally. A move above 1.2525 (R2) could open the way for the 1.2580 (R3) hurdle. As for the broader picture, although we expect some more upside in the near term, as long as the rate stays within the sideways range between 1.2100 and 1.2850, we consider the medium-term outlook to be neutral.
As for the Bank, although market expectations with regards to a hike may have come forth, we are not convinced that such an action will occur in coming months. We believe that accelerating inflation is indeed likely to lead to more hawkish BoE dissents, but we don’t expect a consensus for a hike mainly because we consider it unlikely that the Bank will rush into any policy move before the Brexit negotiating landscape becomes clearer. This view is amplified by Governor Carney, who indicated yesterday that the BoE should not overreact to a single data point, referring to the CPIs. Having said all these though, we think that the decision of whether to reduce BoE stimulus will ultimately depend on how fast UK inflation will accelerate in coming months. A rapidly rising inflation rate is likely to overshadow political considerations we believe.
Safe havens rally as risk aversion prevails
Risk aversion was evident across financial markets yesterday, with safe haven assets rallying, while riskier assets, such as equities, tumbled. Even though the fundamental catalyst behind the move is not clear, a possible reason may be speculation that US President Trump’s much-awaited tax reform could be delayed even further. Specifically, a few weeks ago Trump pledged to deliver a comprehensive tax plan, but only after he repealed and replaced the Affordable Care Act (Obamacare). However, the latest signals from Congress suggest that there is widespread opposition to the proposed replacement of Obamacare among both Democrats and Republicans. The vote for Trump’s replacement plan is due to take place on Thursday. If Trump loses the vote tomorrow, we expect to see similar market reactions as uncertainty around US fiscal policy heightens. Namely, we expect further pullback in equities as well as increased flows into safe haven assets.
As for the rest of today’s highlights: During the European day, the economic calendar is relatively light, with only second-tier indicators on the agenda. We get Norway’s AKU unemployment rate and Eurozone’s current account balance, both for January, though neither of these is usually a major market mover.
From the US we get existing home sales for February and expectations are for the figure to have ticked down from the previous month.
We have one speakers on the schedule: ECB Executive Board member Sabine Lautenschlager.
NZD/USD
Support: 0.7015 (S1), 0.6970 (S2), 0.6945 (S3)
Resistance: 0.7075 (R1), 0.7110 (R2), 0.7170 (R3)
GBP/USD
Support: 1.2435 (S1), 1.2340 (S2), 1.2300 (S3)
Resistance: 1.2500 (R1), 1.2525 (R2), 1.2580 (R3)
