Thu, Dec 03, 2020 @ 13:43 GMT
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RBA Minutes Reflect the Statement

Overnight, the RBA released the minutes from its February policy meeting. The tone of these minutes was little changed from the statement accompanying the decision, as it echoed similar upbeat comments with regards to the domestic economy. The Bank judged that the negative GDP growth print in Q3 was only temporary, and that despite the downtick in the underlying CPI rate for Q4, the actual figure was more or less in line with the RBA’s own forecasts. As for the AUD, the officials did not appear particularly worried with regards to its recent appreciation. The only new comment on the Aussie was that it has strengthened over the past two months, but that was mainly due to rising commodity prices. Given that these minutes simply confirmed much of what we already learned from the statement, the reaction in the Aussie was limited at the release. AUD/USD traded somewhat lower after it hit resistance near the 0.7690 (R1) level. Nevertheless, the rate is still trading above the uptrend line taken from the low of the 13th of January, which keeps the short-term outlook positive. A break above 0.7690 (R1) is possible to open the way for another test near the 0.7730 (R2) barrier, marked by the peak of the 16th of February. For now though, given the negative divergence between our short-term oscillators and the price action, we remain skeptical that further correction could be looming. If the bears manage to push the rate below 0.7650 (S1), then we may experience extensions towards the key support of 0.7600 (S2).

Looking ahead with regards to the Aussie, we see the case for the currency to remain somewhat supported in the foreseeable future. The RBA has shown little appetite for further easing lately, and has shifted to a neutral stance. At the same time, iron ore prices have surged in the past months, something likely to continue to support Australia’s commodity-oriented economy. What’s more, the fact that Australia’s yields are still among the most competitive within the G10, could be another factor that drives flows into AUD. However, we prefer to avoid the USD as a counterpart. Instead, EUR appears a much better play considering that Eurozone’s political uncertainties have started to escalate (see below).

French election poll shows Le Pen gaining ground

A new poll on the French presidential election showed a narrowing gap between the two main candidates, Emmanuel Macron and Marine Le Pen. The new poll confirmed that Le Pen is likely to crush her main rivals in the first round of the election, and while she is still expected to lose the second round, the gap between her and Macron is shrinking. Even though the reaction in the euro was not major at the release of this poll, the fact that media headlines have begun to focus increasingly more on this election is important, in our view. We think that incoming polls showing Le Pen gaining even more ground against her main rivals are likely to weigh on the common currency, as investors price in higher risk of European disintegration. EUR/USD edged south and fell below the support (now turned into resistance) barrier of 1.0600 (R1). Given that the pair has resumed its downfall after testing as a resistance the prior upside support line taken from the low of the 16th of January, we believe that the near-term bias remains negative. A clear dip below 1.0560 (S1) is possible to open the way for another test near the 1.0500 (S2) support area.

Any negative reaction in EUR though could be more clearly visible against safe haven currencies, such as JPY and CHF, which may attract safe-haven flows as political uncertainty mounts. That said, we prefer EUR/JPY over EUR/CHF as a proxy for further euro weakness, considering that the SNB remains active in the FX market in order prevent the franc from appreciating materially.

Today is a PMI day

During the European day, we get the preliminary manufacturing and services PMIs for February from several European nations and the Eurozone as a whole. Expectations are for most indices to have declined, albeit marginally. In January, the bloc’s composite PMI survey was very optimistic on all economic fronts, indicating strong employment growth, intensifying inflationary pressures, and a relatively robust pace of economic growth. Even though a tick down in February’s index may hurt the euro somewhat, as long as it remains at elevated levels, we do not expect such a decline to be a reason for the ECB to consider further easing.

From the US, we get the preliminary Markit manufacturing and services PMIs for February. Both indices are forecast to have ticked up. Even though investors usually pay more attention to the ISM indices, considering that there are no other US data releases throughout the day, and that both figures are expected to rise, we may see a positive reaction in USD on the news.

We have three speakers scheduled for today: BoE Governor Mark Carney, Minneapolis Fed President Neel Kashkari and San Francisco Fed President John Williams.

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