Forex News and Events
RBNZ to lower the OCR by 25bps to 2.75%
The Reserve Bank of New Zealand is expected to ease monetary policy for the third time this year. The RBNZ will likely cut its official cash rate by another 25bps to 2.75% and it will unlikely be the last rate cut in 2015, as the economy is feeling the pinch of a slowdown in global demand and more specifically in China. In addition, headline inflation is still far from the 2% target, as the depreciation of the New Zealand dollar has been offset by the collapse of commodity prices. We believe the RBNZ will bring the OCR even lower than 2.75% in an attempt to weaken the kiwi further, especially since the effect of such rate cuts on the housing market will be mitigated by modifications in the Loan to Value Ratio restriction rule (LVRs) and in the minimum deposit threshold for investors in Auckland.
We believe the recent rebound in NZD/USD will be short-lived and that the kiwi will continue to move lower against the greenback once traders will start to price in the upcoming rate cuts.
Shinzo Abe commits to cut corporate tax
In an event that was held yesterday in Tokyo, Japan’s Prime Minister Shinzo Abe declared that the effective corporate tax rate of about 35% will be cut by next year by at least 3.3%. Abe stated that he is willing “to go beyond that if possible.” Indeed, the “Abenomics” are not giving, for the time being, the expected results. Consumer spending are very low and the country is struggling for exiting a period of 20 years of deflation. We think that Abe is only trying to find other ways to stimulate the Japanese economy as the “Abenomics” are failing to provide sufficient results. On Tuesday, the final read of the second quarter GDP came in at -0.3% quarter-on-quarter, improving by 0.1% from the first print. Furthermore, the annualized GDP deflator diminished at 1.5% from the first read at 1.6%. Prices are still increasing but it seems at a slower pace.
We consider that the Japan’s economic strength is a serious concern. Despite all measures provided by the “Abenomics” - in particular the money waterfall -, there is no current pickup in inflation. The Bank of Japan’s inflation target of 2% is still quite distant. BoJ’s Governor Kuroda remains confident and Central Bank officials maintained their view that the pace of asset purchases will not be increased. We remain bullish on the USD/JPY. Over the past few weeks, the yen has strengthened on markets pricing in a later rate hike. Nonetheless, Shinzo Abe has not many arrows left. There is no clear path of recovery. 122 seems a decent target.
China Headwind
Bad news continues to weigh on China. China’s August trade report showed further deceleration as exports and imports contracted. This comes on the heels of weak PMI reads. With downward pressures from oversupply in the housing market, high debt burdens and weak domestic consumer demand near term growth looks weak. Anticipation for structural changes to help rebalance the Chinese economy, such as allowing reducing market access for foreign and private companies, are misplaced. Right now China needs a strong central government, not more market determination. We anticipate another 25bp cut in the benchmark and 100bp to be cut from RRR alongside reforms.
EUR/CHF - Highest Level Since January 15
The Risk Today
EUR/USD EUR/USD is consolidating. Hourly resistance is given at 1.1332 (01/09/2015 high) and stronger resistance lies at 1.1714 (24/08/2015 high). Support can be found at 1.1017 (18/08/2015 low). In the longer term, the symmetrical triangle from 2010-2014 favored 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). We have broken the resistance at 1.1534 (03/02/2015 reaction high). We are entering an upside momentum.
GBP/USD GBP/USD has bounced back at the 38.2% Fibonacci retracement support at 1.5409. Hourly resistance is given at 1.5443 (28/08/2015 high). However, we think that the 61.8% Fibonacci retracement at 1.5087 is on target. 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 USD/JPY is pushing higher. Hourly support is given at 118.61 (04/09/2015 low). Stronger support can be found at 116.18 (24/08/2015 low). Hourly resistance can be found at 120.40 (28/08/2015 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 135.15 (01/02/2002 high) is favored. A key support can be found at 118.18 (16/02/2015 low).
USD/CHF USD/CHF is pushing higher. Hourly resistance at 0.9799 (17/08/2015 high) has been broken. Hourly support is given at 0.9259 (24/08/2015 low). On the very short-term term, the pair is setting higher highs. Therefore we remain bullish on the pair. 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).
