RBA releases minutes from August meeting
The minutes from the August RBA meeting were roughly in line with market expectations. Even though the minutes didn’t indicate clearly any policy bias, we think the overall tone was less dovish than expected as the Reserve Bank seems pretty comfortable with the current monetary policy settings. On the domestic economic conditions, RBA members highlighted “that labour market conditions had been a little bit better than expected”, contrasting with previous expectations of a unemployment rate drifting higher. Still on the bright side, RBA’s officials stated that “Domestically, economic activity had generally been more positive over recent months” as both consumption and net exports are taking advantage of a weaker Australian dollar. We therefore think that the RBA will maintain the status quo for now as the AUD/USD is trading at low level, thanks to a US dollar strengthen by lift-off expectations.
The minutes also indicates that the central bank was quite confident that the downside risk to the outlook for Chinese growth had abated somewhat. However, at that time, the PBoC had not yet devaluated its currency and according to the latest developments, China’s outlook may not be as bright as expected. Australian exports will likely feel the consequences of a weaker yuan and will therefore undermine growth outlook in Australia.
U.S.: Housing Starts and Building Permits
“On today’s calendar are housing starts and building permits. Economists forecast an increase of 0.5% of new constructions, however, much less than the June data that printed at 9.8%m/m. Building permits are also expected to decrease -8.2%m/m. It is important to notice that current housing starts number is well below the building permits data reflecting the continuing weakness of the U.S. economy. Good data will help supporting the acceleration of the U.S. economy and allow the dollar to strengthen further. We also know that the Fed decision concerning a September rate hike is very dependent of supporting data.
We consider that the yuan devaluation is likely to postpone the timing of a U.S. rate hike. Despite China’s officials stated they are not entering into a currency war, a strong dollar could move away the first rate hike since 2006. And it is not the only aspect, indeed commodity prices are also very low and keep on declining. In addition, Janet Yellen did not provide huge hints for a September move. The reality is that the Fed is keeping the December alternative.
On the contrary, traders have mostly priced in a September rate hike and we think that a change in the U.S. monetary policy timing will have a negative effect on the US dollar. On the medium term, Gold and Swiss franc are likely to benefit of the Fed’s inability to increase rates.”
TRY suffers from political uncertainty
The TRY continues to come under selling pressure as political uncertainty intensifies and broad-based sell-off in EM currencies as US rate hike materializes. USD/TRY rallied to 2.8774 ahead of today’s Turkish central bank’s monetary policy decision. A vast majority of analysts expect the central banks will maintain the one-week repo rate at 7.50%. Yet, given the rapid depreciation of the lira and inflation pressures growing, a rate hike is clearly warranted. There is a chance that the MPC will remove overnight deposit rate which will be viewed as stealth tightening and provide short term support for the lira. In our view, with the Turkish government signifying they would like a weaker lira suggests the MPC is unlikely rates move higher. Traders will be watching for comments on any new monetary framework and acceptable levels of FX depreciation. Potentially, the MPC will opt for a subtler approach in FX management such as removal of the lower end of the interest rate corridor (unused tool for controlling lira appreciation). Moving forward we remain bearish on the Turkish lira as government intervention will constrain correct functioning of central bank strategy and political worries will escalate.
AUD/USD - Selling Pressures Increase
The Risk Today
EUR/USD is still trading around 1.1100. Over the last month, the pair is setting higher highs. There is a short-term upside momentum. Hourly resistance lies at 1.1278 (29/06/2015 high). Stronger resistance lies at 1.1436 (18/06/2015 high). Support can be found at 1.0660 (21/04/2015 low). In the longer term, the symmetrical triangle from 2010-2014 favors further weakness towards parity. As a result, we view the recent sideways moves as a pause in an underlying declining trend. Key supports can be found at 1.0504 (21/03/2003 low) and 1.0000 (psychological support). Break to the upside would suggest a test of resistance at 1.1534 (03/02/2015 reaction high).
GBP/USD has shifted into a consolidation pattern after slight bullish recovery. However, drift lower indicates persistent selling pressure. Stronger support is given at the 38.2% Fibonacci retracement at 1.5409. Hourly resistance is given at 1.5733 (01/07/2015 high). Nonetheless, we remain bearish on the pair. In the longer term, the technical structure looks like a recovery bottom whose maximum upside potential is given by the strong resistance at 1.6189 (Fibo 61% entrancement).
USD/JPY continues to recover after its recent sell-off. The pair is oriented upward. In addition, the road is still wide open towards the stronger resistance at 125.86 (05/06/2015 high). Hourly support is given by the 38.2% Fibonacci retracement at 122.04. We remain bullish as long as the pair trades in the channel. A long-term bullish bias is favored as long as the strong support at 115.57 (16/12/2014 low) holds. A gradual rise towards the major resistance at 135.15 (01/02/2002 high) is favored. A key support can be found at 118.18 (16/02/2015 low).
USD/CHF is holding below 0.9800, suggesting persistent selling pressures. Nonetheless, the pair remains in a short-term upside momentum. We are bullish on the pair. Hourly support can be found at 38.2% Fibonacci retracement at 0.9586. In the long-term, the pair has broken resistance at 0.9448 suggesting the end of the downtrend. This reinstates the bullish trend. Key support can be found 0.8986 (30/01/2015 low).
