Reserve Bank Of Australia On Hold, USD Gains As Market Switch In Risk-Off Mode

News and Events:

USD extends gain versus G10, JPY resists

After a quiet start into the week, the USD was back in full force on Tuesday as it extended gains against most of its pairs. The Japanese Yen was the only G10 currency able to offer resistance as it rose 0.36% with USD/JPY sliding to 110.40. The market is currently switching slowly into risk-averse mode, with the Yen and Gold seeing good inflow, amid rising global uncertainty.

Investors will soon however ever get some fresh data to get their teeth into. In the US, February factory orders (+1% m/m exp.,1.2% prev.) and durable goods orders (first est. 1.7% m/m) are due this afternoon.

Tomorrow, the publication of the FOMC will get special attention from investors who will try to read between the lines, looking for hidden hints about the pace of the rate normalisation process.

Finally, March’s job report will be Friday’s major event. The US economy is expected to have created 175k private jobs last month, compared to 235k in February. As explained a month ago, we believe that the market is less and less focused on job gains but instead monitoring wage development closely. Looking at the headline figures, the momentum seems solid as average hourly earnings were up 2.8% y/y. Nevertheless, the sustained rise in consumer prices, which has been mostly driven by rising commodity prices, has eroded the purchasing power of the average American as real average weekly earnings dipped in negative territory during the first two months of the year.

Emerging market and commodity currencies took the bigger hit this morning as market participants shied away from risky positions. We do not think this is the time for further Dollar debasement as the global uncertainty favours long USD position, especially ahead of the French and German election. Similarly, the setback of commodity currencies will also prove temporary in our opinion as high returns are still a rare breed.

French Elections: Candidates return to debate

Today 11 candidates will debate for the French Presidency. At the last debate, contrary to what is said now about him being a frontrunner, Emmanuel Macron had not been successful. So this debate may see a turnaround in this presidential election, as Francois Fillon has improved lately in the polls despite the accusations that engulfed him.

Tonight’s debate will mostly be on jobs, security, and the candidates’ vision for the future of France. It is clear that the European Union will be at the centre of the debate and we should see “small” candidates trying to make a difference with their views on this.

It is expected that François Asselineau, the Frexit candidate, will largely attack Macron and Fillon on this specific topic, as will Marine Le Pen. But a possible referendum if she gets elected remains somewhat unclear.

For now, markets are still not pricing a Le Pen victory. In terms of currency, the Euro is consolidating against the USD between 1.06 and 1.07 and we believe that there is more room for further downside in the short-term.

Bullish on AUD after RBA kept rates unchanged

As expected the RBA held its cash rate at 1.50%. Despite this, the AUDUSD quickly fell to 0.7557 on market disappointment that rate expectation should be paired back and also due to lower risk appetite and lower iron ore prices.

The accompanying statement was marginally more optimistic regarding the domestic and global economic outlook. They mentioned the improvement in trade and higher commodity prices (on-going large trade surplus) would support domestic conditions. The RBA indicated that “on-going moderate growth” will support forward indicators and backstop softening labor markets.

The RBA also highlighted risks in the housing market. They took particular care in discussing retail credit growth and risk of rising mortgage rates on outstanding loans, adding that lenders must watch serviceability analytics. Additionally, the RBA introduced a new paragraph on macro-prudent measures stating “a reduced reliance on interest-only housing loans in the Australian market would also be a positive development”.

On inflation the statement was unchanged with headline CPI expected to break 2% in 2017, with a limited upside as wage growth is subdued.

All in, it is unlikely the RBA will rise rates unless the housing market continues to accelerate and even then it is likely to use micro-adjustment tools prior to monetary policy hikes. However, we can expect the RBA to shift from dovish to neutral as growth gradually breaches the bank’s forecasted range.

Given the positive global conditions of risk taking (despite the current bout of uncertainty) we are constructive on AUDUSD, as 0.7563 should provide support for a recovery rally to 0.7633 resistance.

Today’s Key Issues (time in GMT):

• Mar Unemployment MoM Net (‘000s), exp -40,9, last -9,4 EUR / 07:00
• 4Q Deficit to GDP YTD, last 2,30%, rev 2,50% EUR / 08:00
• Mar FIPE CPI – Monthly, exp 0,12%, last -0,08% BRL / 08:00
• Mar Markit/CIPS UK Construction PMI, exp 52,5, last 52,5 GBP / 08:30
• Feb Retail Sales MoM, exp 0,50%, last -0,10%, rev 0,10% EUR / 09:00
• Feb Retail Sales YoY, exp 1,00%, last 1,20%, rev 1,50% EUR / 09:00
• Lowe Gives Remarks at RBA Board Dinner, Melbourne AUD / 09:15
• Mar Effective Exchange Rate, last 88,83 TRY / 11:30
• Feb Industrial Production MoM, exp 0,70%, last -0,10% BRL / 12:00
• Feb Industrial Production YoY, exp 0,30%, last 1,40% BRL / 12:00
• Feb Trade Balance, exp -$44.6b, last -$48.5b USD / 12:30
• Feb Int’l Merchandise Trade, exp 0.60b, last 0.81b CAD / 12:30
• ECB President Draghi speaks in Frankfurt EUR / 13:30
• Mar Foreign Reserves, exp 470,8, last 466,6 DKK / 14:00
• Mar Change in Currency Reserves, last 8.8b DKK / 14:00
• Feb Factory Orders, exp 1,00%, last 1,20% USD / 14:00
• Feb Factory Orders Ex Trans, last 0,30% USD / 14:00
• Feb F Durable Goods Orders, exp 1,70%, last 1,70% USD / 14:00
• Feb F Durables Ex Transportation, last 0,40% USD / 14:00
• Feb F Cap Goods Orders Nondef Ex Air, last -0,10% USD / 14:00
• Feb F Cap Goods Ship Nondef Ex Air, last 1,00% USD / 14:00
• Mar QV House Prices YoY, last 13,50% NZD / 17:00
• Fed’s Tarullo speaks at Princeton University USD / 20:30
• Mar Foreign Reserves, last $373.91b KRW / 21:00

The Risk Today:

EUR/USD is getting lower despite ongoing consolidation. The pair is heading lower since the pair failed to hold above former resistance given at 1.0874 (08/12/2017 high). Hourly support can be found at 1.0643 (03/04/2017 low). Stronger support can be found at 1.0493 (22/02/2017 low). The short-term technical structure indicates further weakness.. In the longer term, the death cross late October indicated a further bearish bias. The pair has broken key support given at 1.0458 (16/03/2015 low). Key resistance holds at 1.1714 (24/08/2015 high). Expected to head towards parity.

GBP/USD‘s bullish pressures have faded abruptly. Hourly resistance is located at 1.2615 (27/03/2017 high) while hourly support can be found at 1.2324 (03/17/2017 low). Expected to show continued strengthening towards resistance at 1.2775 (06/12/2016 high) if support area around 1.24 stands. The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.

USD/JPY‘s bearish pressures are fading. Hourly resistance is given at 112.20 (31/03/2017 high). Stronger resistance can be located at 113.57 (16/03/2017 high) while support is given at 110.11 (27/03/2017 low). We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).

USD/CHF is strengthening. Hourly support is given at 0.9814 (27/03/2017 low). Key resistance can be found at a distance at 1.0344 (15/12/2016 high). Expected to show further consolidating. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.