Weekly Review and Outlook
Three Central Bank Meetings Done, Four to Come This Week
While ECB meeting triggered much volatility in the financial markets, the underlying momentum in return of risk appetite continued. DJIA closed near to the weekly high at 17213.31, up the week by 206.54 pts. S&P 500 closed also near to the weekly high at 2022.19, up the week by 22.2 pts. German DAX dived to as low as 9498.15 after ECB, but managed to rebound to close the week at 9831.12, up the week slightly by 7 pts. Japanese Nikkei was just slightly down by -75.3 pts to close at 16938.87. WTI crude oil extended recent rebound and closed at 38.49, up from prior week's 36.33. Meanwhile, gold lost momentum and closed the week down -34.8 pts at 1251.1. US 10 year yield also jumped to close at 1.977 comparing to prior week's 1.883.
Hence, the overall theme in the financial markets were still a return into risk assets. And thus, in the currency markets, Australian dollar ended as the strongest major currency, as lifted additionally by the record rally in iron ore. Euro was the second strongest after ECB president Mario Draghi's jawboning. Meanwhile, yen was the second weakest as market sought risks. New Zealand dollar was the weakest one, an exception, as RBNZ surprised the markets by cutting interest rate.
There were three central bank meetings last week and two of them provided some surprises. ECB was the most volatility triggering one as broader than expected stimulus measures were announced. That initially sent Euro sharply lower. But then, president Draghi signaled at the press conference the ECB might not ease further. And, Euro rebounded strongly since then. More in Aggressive ECB Moves Failed to Sustain Risk Appetite, Market Underwhelmed by Draghi's Comments.
To the surprise of the market, RBNZ cut the OCR by -25 bps to 2.25%. Despite improvement in domestic economic developments, policymakers were concerned about the increasing downside risks to the global growth outlook. They were also weary over the persistently low inflation and the stubborn strength in New Zealand dollar. The RBNZ also signaled further easing in coming months with the central bank projections indicating another -25 bps reduction later this year. More in RBNZ Trimmed OCR By -25 Bps, Further Easing To Follow.
BoC left its overnight rate unchanged at 0.5% in March. While this had been widely anticipated, the upbeat tone sent from the central bank lifted Canadian dollar mildly. BoC noted that it would assess the impacts of the federal budget due March 22 before adjusting its growth and inflation outlook. We expect to stay on hold for the rest of the year. More in BoC Left Rates Unchanged, Upbeat Statement Sent CAD Higher
Four central banks will meet this week. Main focus in the FOMC meeting on Wednesday. Fed is widely expected to keep interest rate at 0.50%. Fed might sound a bit less cautious on economic outlook due to stabilization in the financial markets. Futures markets are pricing in 43% chance of a hike in June, up from around 33% in the previous week. The new economic projections as well as Fed chair Janet Yellen's press conference could trigger some adjustments in the pricing.
Where there were some speculations on BoJ easing, governor Haruhiko Kuroda has repeatedly indicated that the central bank is done on easing for now. Hence, we'll expect BoJ to keep policies unchanged on Tuesday. BoE will also keep policies unchanged. SNB could be a wild card on Thursday. However, as EUR/CHF stayed pretty well in range after ECB's announcements, SNB would more likely stand pat this time.
On the technical side, the rise in DJIA continued as expected. As noted before, price action from 18351.36 are merely a sideway consolidation pattern. It could be finished with three waves down at 15450.56. Or it could develop into a triangle pattern with one more falling leg. In either case, further rise is in favor in near term to trend line resistance at around 17700. We'll start to be cautious on topping around there.
Outlook in the dollar index is also unchanged too. The choppy decline from 100.51 is still in progress. Break off 55 weeks EMA (now at 95.78) could accelerate on the downside. But still, price actions fro 100.39 are viewed as a sideway consolidation pattern. Thus, strong support is expected above 38.2% retracement of 78.90 to 100.39 at 92.18 to contain downside and bring rebound. Larger up trend is expected to resume later in the year.
Regarding trading strategy, the anticipated dip in commodity currencies was much shallower than expected. Hence, our strategies of buy AUD/USD on dip to 0.73 and sell USD/CAD on recovery to 1.36 were both not filled. While stocks rallies are expected to continue and dollar is expected to stay pressured, the moves look quite stretched already. Also, Fed's meeting and press conference this week is an uncertainty for all markets. Thus, we'll keep our hands off trading for this week first.
AUD/USD Weekly Outlook
AUD/USD's rise from 0.6826 continued last week and reached as high as 0.7582 so far. Initial bias is on the upside this week. Such rise should target medium term fibonacci level at 0.7849. On the downside, below 0.7426 support will indicate short term topping and bring consolidations first.
In the bigger picture, a medium term bottom was formed at 0.6826, on bullish convergence condition in weekly MACD. At this point, AUD/USD is still held well inside long term falling channel. Thus, there is not enough evidence for trend reversal yet. We'll treat price actions from 0.6826 as a medium term corrective rise first. Strong resistance could be seen at 38.2% retracement of 0.9504 to 0.6826 at 0.7849 to limit upside.
In the longer term picture, at this point, we're not anticipating a break of 0.6008, 2008 low. AUD/USD is oversold in monthly chart and a medium term rebound is due. Strong support is expected above 0.6008 to bring medium term bottoming.
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