During the late US trading session today, the RBNZ will announce its rate decision and the forecast is for the Bank to take no action. In the statement accompanying the latest decision, the most noteworthy point related to the Kiwi. Policymakers softened their tone on the currency, noting that a lower NZD would “help” the economy, as opposed to a lower NZD is “needed” in the previous meeting. Since then, the currency fell notably, mainly due to developments on the nation’s political front. Among other pledges, the new Labour government announced it is seeking to reform the RBNZ Act. If enacted, these reforms will expand the central bank’s mandate to include full employment as well, in addition to price stability.
In terms of economic data, there has been steady progress, with the labor market tightening even further and inflation accelerating somewhat in Q3. Also, even though the RBNZ’s 2-year inflation expectations rate declined slightly, it still remains marginally above the 2% target, signaling that expectations remain well anchored. Having all these in mind, we believe that the Bank will likely soften even further its tone on the Kiwi given its recent tumble, and may appear slightly more optimistic on the economy. Combined, these could help NZD recover some of its recent losses. The risk to this view would be any signals that rates could remain low for longer in case the Bank’s mandate is expanded to include employment too.
NZD/USD has been trading in a sideways mode since the 31st of October, between 0.6880 (S1) and 0.6955 (R1). Having said that, the rate remains within the downside channel that has been containing the price action since the 20th of September, but in the last days of October, the pair rebounded from near the crossroads of the channel’s lower bound and the lower end of the longer-term wide sideways range between 0.6830 (S2) and 0.7400. If the RBNZ appears optimistic tonight, the rate could trade higher and perhaps challenge once again the 0.6955 (R1) resistance or the upper bound of the aforementioned channel. We would like to see a clear close above that bound though before we evaluate the case for NZD/USD to trade higher within the larger sideways range.
Key ECB members challenge forward guidance
According to a media report yesterday, three of the ECB’s most influential policymakers pushed last month to alter a commitment in the Bank’s forward guidance to continue QE purchases until inflation picks up. Specifically, Bundesbank President Jens Weidman, Bank of France Governor Villeroy de Galhau and ECB Board member Benoit Coeure, all recommended to link the overall level of stimulus - not just asset purchases - to the outlook for inflation. Even though the QE pledge was maintained in the end, this division within the Governing Council could be a signal that the Bank may alter this part of its guidance in the foreseeable future, we think, especially so because the bigger economies appear to be pushing for it. The euro’s reaction to this story was positive, but only modest. The currency had been on the decline for the entire day, and this may have helped it to limit its losses.
EUR/USD traded lower yesterday but hit support at 1.1555 (S1) and then it rebounded somewhat. The rate remains below the key resistance territory of 1.1660 (R2) and thus, we will treat yesterday’s recovery, or any extensions of it that stay limited below 1.1660 (R2), as a corrective rebound. We still see a negative short-term picture and we expect the bears to take charge again soon, perhaps aiming for another test near 1.1555 (S1). A break below that hurdle may pave the way for our next support of 1.1490 (S2).
Switching to the daily chart, we see that the dip below 1.1660 (R2) on the 26th of October may have signaled the completion of a head and shoulders formation, something that enhances further our view that the pair may turn back down soon.
As for the rest of today’s highlights:
The only noteworthy indicators we get are Canada’s housing starts for October and building permits for September.
We have only one speaker on the agenda: BoE Governor Mark Carney.
Support: 0.6880 (S1), 0.6830 (S2), 0.6755 (S3)
Resistance: 0.6955 (R1), 0.7000 (R2), 0.7050 (R3)
Support: 1.1555 (S1), 1.1490 (S2), 1.1380 (S3)
Resistance: 1.1615 (R1), 1.1660 (R2), 1.1730 (R3)