USD rally to continue as FOMC minutes show Committee split on June rate hike The minutes of the recent FOMC meeting were considered modestly hawkish. The headline that grabbed everyone’s attention was that “several” FOMC participants thought it would be appropriate to start raising rates in June, but investors later reasoned that the “several” were probably the usual hawkish regional Presidents who have been pushing for some time for the Fed to start tightening as soon as possible. These people do not necessarily represent a consensus on the Committee. For example, Richmond Fed President Lacker, St. Louis Fed President Bullard and Cleveland Fed President Mester all said recently that they favour a June rate hike, but they have been at one extreme of the Committee’s thinking for some time and certainly are now when compared to what Chair Yellen said two weeks ago and FOMC Vice Chairman Dudley said in two appearances this week. For example, Gov. Powell said yesterday that the risk of hiking too early was greater than the risk of waiting too long and that while he expects a first rate increase later this year, the rise in rates thereafter can be “gradual,” something that Yellen and Dudley have emphasized as well.
The two views are not necessarily contradictory The Fed could raise rates in June, but then hold steady for some time before hiking again, rather than raising rates by 25 bps at each meeting. That would satisfy both camps. I expect though that we would have to see a substantial upward revision to the March nonfarm payrolls and continued strong growth in jobs in order to see a June rate hike. September seems more likely to me.
The minutes also showed that more than half the members of the Committee have lowered their estimate for how low unemployment can fall before it causes wage inflation, meaning that their estimate of where the Fed’s mandate for “maximum employment” is has shifted down. That has important consequences for the pace of tightening. As a result, the Fed funds rate expectations rose only a modest 1 bps. Still, it was enough to support the dollar and the US currency gained against most of its G10 counterparts. I expect USD to gain further as monetary policy divergence continues to be a major theme in the FX market. EM was more resilient however and almost all of the EM currencies that we track firmed as market participants now expect the shock to EM countries from higher US rates may be less than they had anticipated.
AUD, NZD and GBP rose vs USD. GBP has been boosted by Shell (LONDON:RDSa)’s planned purchase of BG Group (LONDON:BG). The market may be getting used to the political story; a YouGov poll showing Labour ahead by 1 bp with 35% and Conservatives at 34% with other parties with smaller shares had no impact. Still, I expect the uncertainty around the elections to exert continuing downward pressure on the pound as the May 7th election draws nearer.
Oil collapses after US inventories rise more than expected On Monday, the story was that inventories at Cushing, Oklahoma may have fallen in the latest week. On Tuesday, after the API data, it appears that they rose. On Wednesday, the official US Energy Information Agency data was released, showing an enormous 10.9mn barrel increase in inventories, the biggest increase since 2001. Inventories at Cushing rose only 1.2mn barrels, well below the 2.1mn barrel weekly average so far this year, but so what? They’re still on their way to filling up the town’s total storage by the middle of the year. That is likely to weigh on the commodity currencies, particularly CAD, today.
Greek T-bill auction has odd results Greece managed to sell all the T-bills on offer yesterday. The results were quite strange when compared with other countries’ bond auctions; the bid-to-cover ratio, at 1.3, was exactly the same as in the previous auction, which implies that investors bid for exactly as many bonds this time as last time. A coincidence? Also the bills came at 2.97%, which compares with the existing 6-Month bill rate of 3.81%. Who would buy new T-bills at almost 100 bps through existing bills? Is there such a shortage of investment opportunities in Greece? Apparently the government refuses to accept bids above 3.0%, and I can only deduce that there is a feeling of “mutual assured destruction” that encourages the buy-side to ensure that the auction is fully underwritten, lest the market panic and prices of their other holdings collapse. Meanwhile, Greek PM Tsipras’ visit to Moscow resulted in the promise of closer ties between the two countries, but no money. The countdown to default continues.
Today’s highlights: German industrial production rose more than expected on a mom basis while the current account balance was a bit lower than expected in February. Nonetheless exports rose more than expected, in contrast to yesterday’s disappointing figures on factory orders. The data suggest that the German economy is still gaining strength. In the UK, the Bank of England meets to decide on its policy rate. There’s little chance of a change, hence the impact on the market should be minimal, as usual. The minutes of the meeting however should make interesting reading when they are released on 22nd of April. The country’s trade balance is also coming out. Recently, the Bank of England warned that the current account deficit could cause financial markets to turn against the UK economy in times of stress. Since the trade deficit is a large part of the current account deficit, its widening could heighten those concerns and GBP could weaken somewhat.
From the US, initial jobless claims for the week ended April 4 and wholesale inventories for February are due to be released.
The Market
EUR/USD below 1.0800
EUR/USD bounce a bit on Wednesday after finding support near the 1.0800 level and the black uptrend line taken from the lows of 13th of March. Afterwards, the pair found resistance at the 50-period moving average, and declined following the release of Fed March meeting minutes. Even though the minutes revealed a divergence in views concerning the first rate hike, the fact that several members kept alive the scenario for a rate hike as early as June strengthened USD a bit. EUR/USD fell to trade few pips below the 1.0800 line but I would need a clear break below the support level of 1.0710 (S1) to trust further declines. In the bigger picture, the overall trend is still to the downside. EUR/USD is printing lower highs and lower lows below both the 50- and the 200-day moving averages.
• Support: 1.0710 (S1), 1.0650 (S2), 1.0600 (S3).
• Resistance: 1.0950 (R1), 1.1045 (R2), 1.1165 (R3) .
GBP/USD just below 1.4890
GBP/USD moved up ahead of the FOMC March minutes release breaking above our 1.4890 (R1) resistance line, but in the event it fell back to trade below that hurdle again. Today, the Bank of England meets to decide on its policy rate. Even though the market reaction should be minimal as usual and no change in policy is expected, it could be enough to push the rate for a test of the 1.4800 (S1). Nevertheless, I repeat that GBP/USD has been oscillating between the 1.5000 (R3) resistance and 1.4740 (S2) support lines since the 19th of March, therefore any move limited within those levels is likely keep the near-term bias neutral, in my view. A break in either direction is needed to determine the near-term bias as it will print a higher high or lower low on the daily chart.
• Support: 1.4800 (S1), 1.4740 (S2), 1.4680 (S3).
• Resistance: 1.4890 (R1), 1.4950 (R2), 1.5000 (R3).
USD/JPY testing the 120.40 resistance
USD/JPY advanced following the slightly hawkish tone from Fed March minutes. During the early European morning it’s testing the 120.40 (R1) resistance hurdle. A break above that level is needed to extend the advance, perhaps for a test of our next resistance line of 120.70 (R2). Our short-term momentum indicators support the notion for further advances. The RSI found support at its 50 line and moved higher, while the MACD, already in positive territory, crossed above its trigger line. On the daily chart the pair is trading above the 50- and 200-day moving averages, keeping the overall uptrend intact.
• Support: 119.60 (S1), 119.10 (S2), 118.80 (S3).
• Resistance: 120.40 (R1), 120.70 (R2), 121.20 (R3).
Gold breaks below 1200
Gold fell below 1200 on Wednesday but the move was halted near the black uptrend line taken from the lows of 17th of March and the 200-period moving average. A break below the 1196.45 (S1) support line and the black line is likely to trigger further bearish extensions perhaps towards our next support level of 1190 (S2). Our short-term momentum signs support further declines. The RSI broke below the 50 line and is pointing down, while the MACD, already below its trigger line, dipped its toe below the zero. On the daily chart however, the rebound at 1180 (S3), which stands near the 50% retracement level of the 17th – 26th of March up leg, printed a higher low, and the possibility for another higher low still exists, so I would be careful about a possible rebound if the bulls take the reins again.
• Support: 1196.45 (S1), 1190 (S2), 1180 (S3).
• Resistance: 1210 (R1), 1220 (R2), 1235 (R3).
WTI just above 50
WTI fell below our support-turned-into-resistance level of 52.20 (R1). The move was halted at the 50-period moving average and few cents above our support of 49.85 (S1). I still believe that the next move is likely to be to the upside but I would wait for a break of the well-tested 54.20 (R2) resistance area to trust further bullish extensions. In such event, we could see a confirmation of the inverted head and shoulders formation and WTI could rise near 60 again. On the daily chart, WTI is above its 50-day moving average, which also keeps the near-term bias slightly to positive. Nevertheless, the break of 54.20 (R2) is needed to support further advances, in my view.
• Support: 49.85 (S1), 48.60 (S2), 47.00 (S3).
• Resistance: 52.20 (R1), 54.20 (R2), 55.00 (R3) .
BENCHMARK CURRENCY RATES - DAILY GAINERS AND LOSERS
MARKETS SUMMARY
