Dollar Broadly Softer on Tax Plan Worries, Markets Stuck in Consolidation Mode

Dollar continues to trade generally weak today on worries of a delay in implementing corporate tax cut. EUR/USD edged lower to 1.1553 earlier this week but is now back above 1.16 as the greenback pared gains. Both USD/CHF and USD/JPY are stuck in tight range below recent high at 1.0037 and 114.73 respectively. Yen tried to stage a breakout yesterday but there was no follow through buying. Meanwhile, AUD/USD is also holding on to 0.7624 support as sideway trading continues. New Zealand Dollar trades slightly firmer after a more hawkish than expected RBNZ statement. But recent price actions in Kiwi remains corrective in nature.

Powell’s confirmation hearing scheduled on November 28

US Senate Banking Committee schedules a confirmation hearing for Jerome Powell as Fed Chair on November 28. Fed Governor has already got quick endorsement from Republicans after Trump’s nomination. Senate Majority Leader Mitch McConnell met with Powell on Tuesday and said he looked forward to "supporting his nomination". Meanwhile chair of the Banking Committee, Republican Senator Mike Crapo, also hailed that Powell was "well-equipped to lead our economy and the country in a positive direction." Powell is generally seen as a safe choice by the markets and would likely continue with the policy path laid by Janet Yellen. That is, Fed will continue with rate hikes, likely three, next year, as well as the plan to shrink the USD 4.5T balance sheet.

BoJ opinions show debate on extreme steps

In the summary of opinions in the October BoJ meeting, there were debates on the call from new comer Goushi Kataoka to increase stimulus. Kataoka proposed to target 15 year bond yields to below 0.2% through the bond purchases. That is, he either wanted to expand the targeting from 10 year yields to include 15 year yields. Or, he wanted to switch to target 15 year yield. But the proposal met with oppositions as one board member described by one member as "extreme steps" that could destabilize financial markets. The member added that "the current policy is the most appropriate one to lay the grounds for companies to boost productivity, with the smallest degree of uncertainty over its effect on the economy." Nonetheless, it’s consensus that there were concerns over inflation outlook and another member noted "it may take some time before inflation reaches 2 percent."

At this point, there is no confirmation on whether BoJ Governor Haruhiko Kuroda would be renewed for another term next year. The outspoken economic advisor to Prime Minister Shinzo Abe reiterated his call for changes in BoJ. Etsuro Honda said that "The leaders of the central bank must conduct a comprehensive review and then take responsibility." And, "it’s impossible to end deflation without bringing in a new regime." Meanwhile, Honda also warned that BoJ has to meet the 2% inflation target before sales tax hike in 2019. Otherwise, "Japan’s economy will be in critical danger."

RBNZ turned slightly more hawkish

While keeping the OCR unchanged at 1.75%, the tone of November RBNZ statement has turned slightly more hawkish than previous ones. The central bank upgraded inflation forecasts, while describing core inflation as ‘subdued’ and reiterating ‘uncertainties’ in the new government’s policies. The growth outlook remained largely unchanged from August’s, as weaker growth in the housing and construction sector would be offset by greater fiscal spending promised by the new government and higher terms of trade, thanks to NZD depreciation and the rise in oil prices. RBNZ slightly pushed ahead the rate hike schedule. However, given the minimal change, we believe this is rather a symbolic move. The central bank expects more material interest rate movements by 2020. We believe the monetary policy would stay unchanged for the rest of 2018. More in RBNZ Upgraded Inflation Forecasts, Ambivalent About New Government Policies

On the data front

Japan machine orders dropped -8.1% mom in September, current account surplus narrowed to JPY 1.84T. Australia home loans dropped -2.3% mom in September. China CPI accelerated to 1.9% yoy in October, PPI was unchanged at 6.9% yoy. UK RICS house price balance rose 1.0% in October. Swiss unemployment rate was unchanged at 3.1% in October. German trade surplus was largely unchanged at EUR 21.8b in September. ECB will release monthly bulletin in European session. Later in the day, Canada will release new housing price index while US will release jobless claims.

AUD/USD Daily Outlook

Daily Pivots: (S1) 0.7644; (P) 0.7664; (R1) 0.7697; More…

Outlook in AUD/USD remains unchanged as consolidation pattern from 0.7624 is extending. Intraday bias remains neutral for the moment. Near term outlook stays bearish with 0.7896 resistance intact and deeper fall is expected. Decisive break of 0.7624 will resume whole decline from 0.8124. And, AUD/USD should target next key cluster level at 0.7322/8 next.

In the bigger picture, corrective rise from 0.6826 medium term bottom is likely completed at 0.8124, after hitting 55 month EMA (now at 0.8067). Decisive break of 0.7328 key cluster support (61.8% retracement 0.6826 to 0.8124 at 0.7322) will confirm. And in that case, long term down trend from 1.1079 (2011 high) will likely be resuming. Break of 0.6826 will target 61.8% projection of 1.1079 to 0.6826 from 0.8124 at 0.5496. This will now be the favored case as long as 0.7896 near term resistance holds.

Economic Indicators Update