The week starts with higher USD across the board. The PBoC’s rate cut is now expected to be followed by similar RBA action at tomorrow’s policy meeting. AUD-complex trades sluggish at week open. In the UK, talks on approaching general elections should deviate the attention from Wednesday’s BoE gathering.
PBoC cuts rates, RBA on the wire
The PBoC lowered the 1-year deposit and lending rates by 25 basis points to 2.50% and 5.35% respectively; the deposit rate ceiling has been stretched from 1.2 to 1.3 times, perceived as PBOC’s motivation toward a more market-oriented approach. The economic slowdown combined to deflationary pressures both on consumer and producer prices remain the biggest concern of Chinese policy makers. Yet the monetary policy measures alone are clearly not enough per se to inject a big scale, two-digit economic growth. Significantly more market-oriented measures are necessary to push the domestic and international business to levels that would cope with meaningful recovery. Good news is that the appetite is definitely there, which means that the economy has full potential to fuel expansion. However we believe that the monetary measures is not fully effective given the macro-restrictions, clearly more difficult to change. This is why, the PBoC will likely find the need for more policy actions, on rates and/or other available tools. The first quarter GDP growth is now expected to ease to 7% according to State Information Center. This is quite alarming not only for the Chinese markets but equally for China’s biggest trade partner, Australia.
The RBA gives policy verdict tomorrow and is expected to lower its cash rate target by 25 basis points, from 3.25% to 3.00%. The accompanying statement should remain comfortably dovish, leaving the door open for more action if needed over the months ahead given the favorable inflation dynamics, slowdown in China leading to determinedly sliding commodity prices, the over-valued AUD (as insists the RBA) and persistently falling oil prices. The iron ore delivered to Qingdoa, China trades at record lows (62.50$ at the time of writing), while the overall commodity prices slid 20.6% lower on year to February. The AUD/USD is back below its 21-dma (0.7794) and the upside attempts should remain limited pre-RBA decision. Potential short squeeze post-RBA should reverse the short-term momentum to bearish in AUD/USD and lead to a re-test of February down picks at 0.7626/44. It is just a matter of time before the AUD meets the 75 cents target verse USD.
BoE to maintain status quo on Wednesday
Bank of England meets on March 5th and is expected to keep the bank rate unchanged at the historical low of 0.50% and its asset purchases target stable at GBP 375 billion. While the policy decision will likely be a non-event, talks on approaching UK elections (May 7th) become increasingly influent in GBP-trader’s sentiment. Latest survey by Political Studies Association revealed 32.6% chances for PM Cameron’s Conservatives to win the general elections verse 32.3% supporting the Labour Party, while the opposition would secure most seats (282 vs 278).
The Cable remains offered at 1.5500/54 (optionality / 100-dma) with lower-than-expected net consumer credit (0.8bn vs. 0.9bn exp. & 0.6bn last) and tighter-than-anticipated mortgage approvals (60.8K vs. 61.K exp. & 60.3K last) in January. PM Cameron vowed to double the number of houses built for first-time buyers to remedy to UK’s housing shortage. Good news for BoE’s Carney fighting to cool-off price pressures in the housing market as shortage combined to record low rates push the house prices 10% higher at annual pace and interferes with BoE’s low rate policy! GBP/USD holds ground at downtrend channel base building since Feb 4th (1.5385). A break below should signal a short-term reversal mostly due to broad USD-positive pressures pre-US NFPs.
AUD/USD under pressure pre-RBA
| Today's Key Issues | Country / GMT |
|---|---|
| 4Q Current Account Balance, exp -$12.5B, last -$8.4B | CAD / 13:30 |
| Jan Personal Income, exp 0.40%, last 0.30% | USD / 13:30 |
| Jan Personal Spending, exp -0.10%, last -0.30% | USD / 13:30 |
| Jan PCE Deflator MoM, exp -0.50%, last -0.20% | USD / 13:30 |
| Jan PCE Deflator YoY, exp 0.20%, last 0.70% | USD / 13:30 |
| Jan PCE Core MoM, exp 0.10%, last 0.00% | USD / 13:30 |
| Jan PCE Core YoY, exp 1.30%, last 1.30% | USD / 13:30 |
| Feb RBC Canadian Manufacturing PMI, last 51 | CAD / 14:30 |
| Feb F Markit US Manufacturing PMI, exp 54.3, last 54.3 | USD / 14:45 |
| Jan Construction Spending MoM, exp 0.30%, last 0.40% | USD / 15:00 |
| Feb ISM Manufacturing, exp 53, last 53.5 | USD / 15:00 |
| Feb ISM Prices Paid, exp 37, last 35 | USD / 15:00 |
| IT Feb New Car Registrations YoY, last 10.90%, rev 10.91% | EUR / 17:00 |
| IT Feb Budget Balance, last 3.4B | EUR / 17:00 |
The Risk Today
EUR/USD has broken to the downside out of the range defined by the support at 1.1262 and the resistance at 1.1450. Further weakness towards the support at 1.1098 is favoured. Hourly resistances can now be found at 1.1245 (27/02/2015 high) and 1.1279 (20/02/2015 low). In the longer term, the symmetrical triangle favours further weakness towards parity. As a result, any strength is likely to be temporary in nature. Key resistances stand at 1.1679 (21/01/2015 high) and 1.1871 (12/01/2015 high). Key supports can be found at 1.1000 (psychological support) and 1.0765 (03/09/2003 low).
GBP/USD is showing signs of weakness near the key resistance at 1.5620 as can be seen by the breach of the short-term rising trendline. Hourly supports stand at 1.5384 (27/02/2015 low) and 1.5317. An hourly resistance now lies at 1.5459 (27/02/2015 high). In the longer term, the recent rise is seen as an oversold rebound. Upside potentials are likely given by the resistances at 1.5620 (31/12/2014 high) and 1.5826 (27/11/2014 high). A strong support stands at 1.4814.
USD/JPY remains strong as can be seen by the breach of the hourly resistance at 119.84. Resistances stand at 120.48 (11/02/2015 high) and 120.83. Hourly supports can be found at 119.12 and 118.63 (25/02/2015 low). A long-term bullish bias is favoured as long as the key support 110.09 (01/10/2014 high) holds. Even if a medium-term consolidation is likely underway, there is no sign to suggest the end of the long-term bullish trend yet. A gradual rise towards the major resistance at 124.14 (22/06/2007 high) is favoured. A key support can be found at 115.57 (16/12/2014 low).
USD/CHF continues to grind higher and is now challenging the resistance at 0.9554. An hourly support lies at 0.9450 (26/02/2015 low, see also the rising trendline). Another support stands at 0.9374 (20/02/2015 low). Following the removal of the EUR/CHF floor, a major top has been formed at 1.0240. The break of the resistance implied by the 61.8% retracement of the sell-off suggests a strong buying interest. Other key resistances stand at 0.9554 (16/12/2014 low) and 0.9831 (25/12/2014 low). A key support can be found at 0.9170 (30/01/2015 low).
