Equity markets continued to trade north on Monday, perhaps driven by reduced bets that the Fed could start scaling back its asset purchases as early as this month. Following the cautious Jackson Hole remarks by Fed Chair Powell, Friday’s disappointing NFPs came to reduce those bets even more. Today, during the Asian session, the RBA proceeded with the planned tapering but pushed back the date of its next policy review from November 2021 to February 2022.
Risk Sentiment Stays Supported Due To A Slowdown In NFPs
The US dollar traded mixed against the other major currencies on Monday and during the Asian session Tuesday. It gained versus NZD, AUD, and GBP, while it slightly underperformed against CAD, CHF, and EUR. The greenback was found virtually unchanged against JPY.
The performance in the FX world paints a blurry picture with regards to the broader market sentiment and thus, in order to clear things up, we prefer to turn our gaze to the equity world. There, major European stock indices traded in the green, with the positive morale rolling into the Asian session today. The only exception was South Korea’s KOSPI, which slid 0.50%. Wall Street stayed closed yesterday in celebration of the Labor Day.
The driver behind the robust performance of the equity market lately may have been reduced expectations that the Fed could start its QE tapering process as early as this month. Remember that, in his Jackson Hole speech, Fed Chair Powell maintained a cautious stance, refraining from providing clear signals with regards to when they may begin tapering, and added that he wants to avoid chasing “transitory” inflation and potentially discouraging jobs growth in the process. Then, on Friday, the US employment report came to add some credence to that view, with the NFPs slowing to 235k from an upwardly revised 1053k.
We believe that announcing and beginning the tapering process in September may now be off the table, but we still see chances for an official announcement in November and a formal start in December. In other words, we still see the case for tapering to begin before the end of the year as many policymakers suggested. Nonetheless, this will most likely depend on upcoming inflation and employment data. The next employment report is scheduled for Oct. 8 and may prove determinant as to when and how the Fed will execute its policy plans. For now, we do expect risk sentiment to stay supported and equities to drift higher, as a delayed tapering could mean delayed rate hikes, and thereby lower borrowing costs for companies for longer. At the same time, the US dollar could stay under selling interest.
DAX Technical Outlook
The German DAX cash index traded sharply higher yesterday, after it hit support at 15720, the lower end of the sideways range that’s been containing most of the price action since Aug. 5. However, the advance was stopped at the upper bound of the range, at 15960, and then, the index pulled back. As long as DAX is trading within those two boundaries, we will hold a flat stance.
In order to start examining the continuation of the prevailing broader uptrend, identified on the daily and weekly charts, we would like to see a break above the upper end of the range, at 15960. Initially, we could see another test at the record peak of 16032, the break of which will take the index into uncharted territory and perhaps aim for the 16100 zone. Another break, above 16100, could pave the way towards the 16200 territory.
Now, in case we do see the index exiting its recent range through its lower bound, at 15720, we will consider the short-term outlook to have turned negative. The bears may, at first, target the low of Aug. 19, at 15620, the break of which could carry larger bearish implications, perhaps setting the stage for the 15435 zone, near the lows of July 27 and 30.
RBA Tapers, But Delays The Date For A New Policy Review
Today, during the Asian session, we had an RBA monetary policy decision. The Bank indeed proceeded with the planned tapering from AUD 5bn to AUD 4bn per week, but it delayed the date for a new review from November 2021 to February 2022, due to a delay in the economic recovery and increased uncertainty associated with the outbreak of the Delta coronavirus variant. As for interest rates, officials stuck to their guns that they are likely to keep them at present levels at least until 2024.
Remember that this was the scenario we saw as most likely, as we thought the Bank will refrain from appearing indecisive with regards to its past guidance. The Aussie spiked higher initially, perhaps as some participants were anticipating officials to discard their tapering plans today. However, proceeding with what was announced back in July and delaying the review is far from a hawkish outcome. It suggests that the RBA plans to stay accommodative for longer. Maybe that’s how participants interpreted the decision soon thereafter, as the local currency gave back all the initial gains and traded even lower against most of its major peers.
Although due to a potentially improved market sentiment, it is hard to predict how the Aussie will perform against every other major currency, we believe that it could resume its downtrend against the Kiwi soon. Both are risk-linked currencies and any forces from changes in the broader market sentiment are offset in the AUD/NZD pair. Therefore, monetary policy divergence may play a bigger role. Remember that while the RBA is expected to hold rates untouched until 2024, the RBNZ is expected to hit the hike button as early as at its upcoming gathering.
AUD/NZD Technical Outlook
AUD/NZD spiked up after the RBA decision, but hit resistance slightly above the key barrier of 1.0445, and then it retreated again. Overall, the broader path appears to be a downtrend and thus, we would treat the latest recovery, started on Aug. 31, as a corrective phase. We will consider the path of least resistance to still be to the downside.
Even if the pair trades a bit higher, the bears could take charge again from near the 1.0445 zone and push the action back below the 1.0400 zone. This could pave the way towards the low of September 1st, at around 1.0370, or the low of the day before, at 1.0347. Another break, below 1.0347, would confirm a forthcoming lower low on the daily chart and could see scope for extensions towards the 1.0285 territory, defined as a support by the low of April 8, 2020.
On the upside, a break above 1.0470 could encourage more bulls to enter the action, and thereby result in gains towards the 1.0537 zone, which provided resistance on Aug.17, 18, and 19. If buyers are not willing to stop there, then we could see the recovery extending towards the 1.0565 level, marked by the highs of Aug. 2 and 3, or even the peak of July 28, at 1.0607.
As For The Rest Of Today's Events
During the European session, we get the German ZEW survey for September. The current conditions index is forecast to have risen to 33.0 from 29.3, but the economic sentiment one is anticipated to have fallen to 30.0 from 40.4. Eurozone’s second estimates of the employment change and the GDP for Q2 are also coming out, but they are expected to confirm their preliminary estimates.
Tonight, during the Asian session Wednesday, we have Japan’s GDP for Q2. However, this will also be the second estimate and expectations are just for a small upside revision to +0.4% qoq from +0.3%.