Stay cautious but Fed will remain dovish (by Peter Rosenstreich)
Despite the general expectation that nothing meaningfully will occur at tonight’s FOMC meeting, there are actually plenty of chips on the table. The market is currently over positioned for a dovish monetary policy decision and statement. Fed Funds are pricing in a soft 20% probability for a June rate hike. The USD oversold position has unwound marginally but IMM indicates that speculative USD long remains historically low, while the US yields curve front-end has steepened, rates remains pointedly low. A less dovish Fed will have a rapid market impact. March’s Fed meeting suggested two hikes and it’s unlikely that the Fed “dots” have shifted downwards amid improvements in global conditions, specifically stability in China data, which could put some members in a mildly more optimistic mood. The issue is that should the forecast for two interest rate hikes prove accurate the Fed will need to signal tonight that a June hike is possible.
It’s unlikely that the Fed will fire off multiple rate hikes in subsequent meetings as comments indicate a patient, 'gradual' path to tightening. This implies a hike-then-pause will be the strategy of choice. So to safely push the Fed Fund target rate to 1.0% in 2016, the June meeting must be live. The July and September meetings are less ideal options for volatility inducing policy action. The July 26-27th FOMC meeting is stuck between the Republic and Democratic National Convention plus a week before the critical British referendum on EU membership. The September 20-21st meeting is close to the US Presidential Elections where any adjustment could have significant political consequences and therefore deemed political. Unless we see inflation accelerating, potentially triggered by higher oil prices, or evidence that the US housing market has become unstable, we will see a single 25bp hike at the December 13-14th or potentially November 1-2nd meeting. Given the uncertainly in US data we don’t see the Fed risking their credibility to get ahead of the market. We remain bearish on USD and view pullbacks as an opportunity to reload on EM and commodity linked currencies. Tellingly, FX implied volatilities have been declining in recent days. Should our view prove correct, then we still have a solid 4-months to run the carry fuel trade.
RBNZ to surprise markets by cutting rates (by Yann Quelenn)
Many central bank decisions are awaited this week. Amongst these, the Reserve Bank of New Zealand will announce its Official Cash Rate decision tonight. Currently, the country’s rates are the highest amongst the G10.
Last month, the central bank took markets by surprise, which was something unusual, by cutting rates to 2.25% (record low). Inflation is far from reaching the target band of 1% to 3% over the medium term and is currently running at 0.4%. Furthermore, we believe that inflation will not be reached within the next year despite the recent rebound in commodity prices, which has been insufficient in providing significant upside pressure on inflation. Rates are likely to decrease again before the end of the year.
Therefore, we believe that the RBNZ will be forced against their will to feed the housing bubble, which is particularly significant in Auckland. If not, New Zealand will face deflation and slowed growth. The latest 2015 Q4 GDP printed at a decent 0.9% q/q but it still remains fragile due to the world economic slowdown (weaker demand). A global currency war on competitive devaluation continues to rage (the dovish stance is the new normal) and New Zealand is unfortunately obliged to participate. Weakening the kiwi is necessary and the RBNZ still has room to do so without affecting the credibility of the institution. We target the pair USD/NZD to reach 1.5000 over the medium term.
EUR/CHF - Monitoring Strong Resistance Area. 
The Risk Today
Yann Quelenn
EUR/USD is moving sideways within downtrend channel. The pair still seems far from hourly support at 1.1144 (24/03/2016 low). Stronger support is located a 1.1058 (16/03/2016 low). Resistance can be found at 1.1465 (12/04/2016 high). Expected to show further bouncing back within the downtrend channel. In the longer term, the technical structure favours a bearish bias as long as resistance at 1.1746 ( holds. Key resistance is located at 1.1640 (11/11/2005 low). The current technical appreciation implies a gradual increase.
GBP/USD is heading towards 1.4668 (04/02/2016 high). The pair is gaining momentum to break this level. Hourly support is given at 1.4320 (04/04/2016 high). Expected to show further consolidation below resistance at 1.4668 (04/02/2016 high). The long-term technical pattern is negative and favours a further decline towards key support at 1.3503 (23/01/2009 low), as long as prices remain below the resistance at 1.5340/64 (04/11/2015 low see also the 200 day moving average). However, the general oversold conditions and the recent pick-up in buying interest pave the way for a rebound.
USD/JPY is consolidating around 111. The pair still lies within the uptrend channel. Hourly resistance can be found at 111.91 (25/04/2015 high) while hourly support can be found at 107.68 (07/04/2016 low). Short-term momentum is clearly bullish. Expected to show further increase. We favour a long-term bearish bias. Support at 105.23 (15/10/2014 low) is on target. A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems now less likely. Another key support can be found at 105.23 (15/10/2014 low).
USD/CHF is lying within a short-term uptrend channel but the pair fails to hold above former resistance at 0.9788 (25/03/2016 high). Hourly support can be found at 0.9499 (12/04/2016 low). Expected to show further increase. In the long-term, the pair is setting highs since mid-2015. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours a long term bullish bias.
