During the early Asian session Thursday, the RBNZ will announce its rate decision. The forecast is for the officials to take no action again. The Bank kept the door for further easing open when it last met, mainly due to global uncertainties. As for inflation, the RBNZ noted that it expects it to reach the midpoint of its target range over the ‘medium-term’. Nevertheless, inflation data for Q1 released shortly after that meeting showed that CPI inflation rose faster than the Bank anticipated, and now lies slightly above the target-range midpoint. Meanwhile, 2-year inflation expectations rose further, and the labor market continued to tighten in Q1.
Even though all of these encouraging domestic developments should normally see the RBNZ shifting to a somewhat more upbeat tune, we think that any optimistic message will be moderate. Concerns over global trade remain elevated, as we were reminded of recently by the US imposing tariffs on Canada. In addition, we doubt the Bank will risk a speculative surge in NZD by appearing too optimistic, as that could offset some of the economic progress achieved so far.
NZD/USD traded somewhat higher yesterday after it hit support near the 0.6880 (S1) key hurdle. In our view, the rate is likely to oscillate around current levels waiting for the RBNZ decision tonight. If indeed the Bank adopts a slightly more optimistic tone than previously, the rate may trade higher and challenge the 0.6940 (R1) resistance. A decisive break above that level could carry more upside extensions, perhaps towards our next obstacle of 0.6980 (R2). On the other hand, a message more dovish than what the market anticipates may be a reason for a decisive dip below 0.6880 (S1).
USD/JPY pares earlier gains after North Korea comments
The dollar gained notably against its major counterparts yesterday, especially against the yen. The surge in USD/JPY may have been fueled, at least partly, by the heightened expectations regarding a Fed rate hike in June. The other major catalyst behind the move may have been the increasing risk appetite of investors following the French election. This market euphoria is also evident by the fact that US stock indices continue to break record highs, as well as the recent sell-off in other safe haven assets such as gold. However, USD/JPY pared some of its earlier gains during the Asian morning Wednesday, after comments from North Korea that it will proceed with its nuclear tests.
USD/JPY surged yesterday, breaking above the resistance (now turned into support) barrier of 113.50 (S1) to stop near 114.35 (R1). Then, the rate pulled back. Despite the correction lower, we think that the path of least resistance for the pair is still to the upside, amid a general risk-on market environment.
Indeed, the price structure on the 4-hour chart suggests a short-term uptrend above a trend line drawn from the low of the 21st of April. Therefore, we expect the bulls to take charge again soon and aim for another test near the 114.35 (R1) area. A clear move above that level is possible to pave the way for the next resistance of 114.90 (R2). The case for another leg up is also supported by the fact that there are no real risk events on the economic calendar over the next few weeks.
As for the rest of today’s highlights:
During the European day, the only economic indicator we get is Norway’s CPI for April. The forecast is for both the headline and core rates to have risen somewhat. These are likely to be pleasant news for the Norges Bank, which at its latest two policy meetings appeared concerned with regards to inflation. As such, these data could diminish somewhat the likelihood for any further easing and thereby, reverse some of NOK’s latest losses.
We have one speaker on the agenda: ECB President Mario Draghi will speak about the impact of ECB monetary policy before the Dutch Parliament. Following comments from the German Finance Minister yesterday that normalization of ECB policy will begin shortly, investors may once again look for clues as to whether the Bank is set to shift to a slightly more hawkish tone at its upcoming meeting in June.
NZD/USD
Support: 0.6880 (S1), 0.6840 (S2), 0.6780 (S3)
Resistance: 0.6940 (R1), 0.6980 (R2), 0.7020 (R3)
USD/JPY
Support: 113.50 (S1), 112.90 (S2), 112.35 (S3)
Resistance: 114.35 (R1), 114.90 (R2), 115.50 (R3)
