Forex News and Events
Currency war is far from being over as central banks around the world are easing further their monetary policy. This morning, the Reserve Bank of Australia (RBA) cut its cash rate by 25bps to a record low of 2.00%, in an attempt to devaluate further the Aussie. Governor Stevens expressed dissatisfaction with the current level of the Aussie “against a basket of currency”, adding that “The Australian dollar has declined noticeably against a rising US dollar over the past year”.
The Aussie depreciation was judged necessary, especially given the sharp drop in commodity prices. Interestingly, iron ore price for immediate delivery to the port of Qingdao reached almost $60 a ton, up 27% from April 28th low of $47.08. The statement was less dovish than expected as the RBA noticed stronger growth in employment and improving household demand. This last rate cut will not help to take the steam out of the Australian housing market, especially in Sydney and Melbourne were house price are rising steadily while the numbers are more mixed in other cities across the country. But the RBA declared “working with other regulators to assess and contain risks that may arise from the housing market”. In the accompanying statement, the RBA added “the Board judged that the inflation outlook provided the opportunity for monetary policy to be eased further, so as to reinforce recent encouraging trends in household demand”.
It is therefore the last rate cut for a while, unless the RBA’s outlook deteriorate significantly, justifying further easing. We expect the AUD to remain strong and even to appreciate further as the rate cut was already priced in. Moreover we expect commodity prices to pick up this year, helping the Australian economy to grow at a faster pace.
Chinese equity markets
Chinese equities have skyrocketed since mid-2014 with the Shanghai Composite up more than 110% from 2,010.53 in June 2014 to 4,298.70 this morning. This honourable performance comes despite further signs that the economy is losing steam. Chinese GDP expanded only 7%y/y in the first quarter, down from 7.3% in Q4 2014. Moreover, the April HSBC Manufacturing PMI came in below expectation at 48.9 while analysts were looking for 49.4. The PBoC and the government are aware that recent equity gains are backed by no fundamental, except the perspective of a more accommodative monetary policy stance from the PoBC. Therefore, the government tries to control the equity rally by tightening rules on margin lending as the bubble is fuelled by thousands of Chinese investors who open an account every day.
On the other hand, policy makers are aiming to soften the impacts of a contained economic expansion on the job market and overall financial stability by easing monetary policy further. The People’s Bank of China lowered the 1-year lending rate by 25bps to 5.35% on February 28th and decreased the requirement ratio (RRR) by 100bps to 18.50% on April 19th. We expect that the PBoC continue to work together with regulators to control the effects of a more accommodative monetary policy on the stock market. Additional measures in the form of 50bp cut in the bench market rate and further use of liquidity facilities will help corporates yet spillover into the broader economy is less assured.
That said, we anticipate, growth to return and CNY to remain stable. On the equity side, the Shanghai Composite was down more than 4% during the last session; the index retreated for the fifth day in a row, down 274pts from its peak from April 28th. We think it is a temporary correction and equity prices start to surge again as we expect the Chinese economy will start picking by Q3.
The Risk Today
Peter Rosenstreich
EUR/USD has declined sharply after reaching highs at 1.1224. Break of support at 1.1114 calls for a test of key support at 1.1043 (18/03/2015). A key resistance stands at 1.1150 (intraday high). In the longer term, the symmetrical triangle from 2010-2014 favours 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).
{{2|GBP/USD}} has successfully tested the resistance zone around 1.5552 (21/10/2014 high) and has broken the support at 1.5166. A decline towards the key support at 1.5028 (24/04/2015 low) is likely. Hourly resistances can be found at 1.5149 (intraday high) and 1.5179 (04/04/2015 bearish pause top). In the longer-term, the break of the strong support at 1.4814 opens the way for further medium-term weakness towards the strong support at 1.4231 (20/05/2010 low). Key resistance stands at 1.5552 (26/02/2015 high).
USD/JPY is bouncing. However, the resistance implied by the top of the declining channel (around 120.10/20 remains intact). A clean break of the resistance at 120.12 (14/04/2015 high, see also the declining trendline) is needed to suggest exhaustion in the selling pressures. An hourly support stands at 118.53. Another resistance can be found at 120.84 (13/04/2015 high). 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 124.14 (22/06/2007 high) is favored. A key support can be found at 118.18 (16/02/2015 low), whereas a key resistance stands at 121.85 (see also the long-term declining channel).
USD/CHF has broken the key support area defined by 0.9491 (24/03/2015 low) confirming an underlying downtrend. Current bounce is thus far unimpressive,as prices remain near their recent lows. An initial key support lies at 0.9241 (50% fibo level) and 0.9170 (05/02/2015). Hourly resistances can be found at 0.9413 (30/04/2015 high) and 0.9493 (27/04/2015 low). In the longer-term, the bullish momentum in USD/CHF has resumed after the decline linked to the removal of the EUR/CHF floor. A test of the strong resistance at 1.0240 is likely. As a result, the current weakness is seen as a counter-trend move. Key support can be found 0.9170 (30/01/2015 low).
