Market Brief
The Australian dollar jumped sharply in Sydney as it got a fresh boost from better-than-expected 4Q GDP release. The Australian economy grew 3.0%y/y in the fourth quarter of 2015, beating market expectations of 2.5% and an upwardly revised figure of 2.7% in the previous quarter. As a result, it allowed AUD/USD to test the 0.7250 resistance for the third time over the past week and a half.
However, we still believe that risk remains on the downside. From a fundamental standpoint, this good GDP reading didn’t change the big picture as the low inflation environment and weak growth outlook continue to provide scope for further easing from the Reserve Bank of Australia. In addition, the recent improvement in risk sentiment - commodity and equity recovery - and the better run of US data - yesterday ISM manufacturing printed at 49.5 vs. 48.5 expected and 48.2 in Jan., Markit manufacturing came in at 51.3 vs. 51.2 consensus and 51 first estimate - has allowed the rate hike story to come back into play.
Amid the release of the encouraging manufacturing data, US front-end rates surged sharply yesterday as traders started to adjust their expectations for a Fed rate hike. For now, the market is pricing no rate hike in 2016, but this could change relatively quickly if the US economy keeps sending positive signals over the next few months. The monetary policy sensitive 2-year treasury rate jumped more than 7bps to 0.8410%, while the 5-year rate surged 12bps to 1.3275%.
Overall, the US dollar continued to gain ground against most G10 currencies. After falling 4.50% since mid-February, EUR/USD was treading water at around 1.0875. In our opinion, the dollar bull run is coming to an end as traders adjust their positions to the more stable environment. On the downside, the 1.0711 level will act as a strong support, while on the upside the closest resistance can be found at 1.0965 (previous highs and Fibonacci 61.8% on Jan.-Feb. rally).
In Asia, GBP/USD continued to push higher as Brexit eased. The pair is still trading within its short-term rising channel and is currently testing the $1.40 resistance level. We believe that the pound sterling sell-off was overdone, and we expect the pound to move back above the 1.41 level against the US dollar. However in the medium-term, the Brexit story will prevent the pair to move above the 1.45-1.46 level.
On the equity market, Moody’s decision to lower China's credit rating outlook from stable to negative didn’t prevent investors to buy happily equities across Asia. The Shanghai Composite was up 4.26%, while in the Shenzhen Composite equities rose 4.70%. Hong Kong’s Hang Seng was up 3.06%. In Japan, the Nikkei climbed 4.11%. In Europe, futures are pointing to a higher open as optimism spreads. After Tuesday’s sharp rally, US futures are mixed.
Today traders will be watching unemployment rate for Spain; Markit/CIPS construction PMI from the UK; MBA mortgage application, ADP employment change from the US; inflation report from Russia; interest rate decision and commodity price index from Brazil.
Currency Technical Outlook
EUR/USD:
R 2: 1.1068
R 1: 1.0963
CURRENT: 1.0870
S 1: 1.0810
S 2: 1.0711
GBP/USD:
R 2: 1.4409
R 1: 1.4168
CURRENT: 1.3957
S 1: 1.3836
S 2: 1.3657
R 2: 117.53
R 1: 114.91
CURRENT: 114.27
S 1: 110.99
S 2: 105.23
R 2: 1.0257
R 1: 1.0074
CURRENT: 0.9981
S 1: 0.9847
S 2: 0.9660