Gold Spikes As Equities Tumble, RBNZ Meeting In Focus

News and Events:

NZD consolidates ahead of RBNZ meeting

The New Zealand dollar, like most commodity currencies, has performed relatively poorly over the last few days as it failed to attract investors’ attention in spite of the broad based USD sell-off. The last RBNZ meeting drenched investors like a cold shower as Graeme Wheeler baffled investors with his surprisingly changed dovish tone on forward guidance. We can see how the RBNZ’s decision could be viewed as confusing, especially against the backdrop of the improving inflationary outlook. However, we think that the central bank is betting on the Fed having to hike rates to control rising inflation pressures caused by the’Trumponomics’ effect.

Unfortunately for the RBNZ, investors are currently unwinding the so-called reflation trade. In short, equities and the USD fell off a cliff yesterday and the trend is set to continue today. Against this backdrop, we would not be surprised if the Fed slows the pace of tightening and waits to see the actual effects of Trump’s upcoming policy changes.

The RBNZ is holding its March meeting this evening and we do not expect Governor Wheeler to change his stance, neither to lift the OCR. The institution will however have to justify its dovish stance especially against the backdrop of mounting inflationary pressure. We favour long NZD positions, especially against the Australian dollar. NZD/USD has room for appreciation, even though the risk-off sentiment will limit risk appetite.

Trump Presidency to face serious litmus test

Is there really any language sweeter in an analyst’s world than ‘we told you so’?

The central theme expressed in our 2017 Market Outlook was that US President Trump would underperform expectations, unable to deliver the pro-growth, market driving policies he so fervently promised on the campaign trail. Yet, markets were too swept up in the hype of fiscal spending and tax reform to really examine the probability of success. Tomorrow’s vote on the Obamacare repeal bill should be viewed as a defining moment for the inexperienced Trump presidency. With Republicans currently holding 237 to 193 majority in the House and 52 to 48 majority in the Senate, the inability to pass his hallmark legislation will be a massive political blow (especially following the debacle of his executive order travel ban). Polling indicates a tight vote, forcing Trump himself to make the round to drum up support for the bill. Trump has stated healthcare as a first priority followed by his proposed tax reform, so a defeat will only push strong pro-growth policy further from the market’s reach. US cyclical and financial stocks have already come under significant pressure as optimism evaporates, pushing the global equity market broadly lower. Commodities (metals and energy) with the exception of precision metals are falling as the pace of US economic acceleration is being brought into question. A rejected bill will further zap risk-taking sentiment from investors, sending US yields and stocks lower. However, we doubt the current pullback will spiral into a full-blown correction. First, US economic data remains healthy, led by consumer and business optimism (however not accelerating to the point where the Fed needs to slam on the brakes). Second, should faith in Trump’s ability to swiftly move forward on tax reform and other pro-growth policy, expectations for Fed hikes will reduce, likely triggering a resumption of risk-taking behavior. Interestingly, the market’s reaction to hawkish comments by George and Mester was to largely ignore. In the current environment with rising global demand, accommodating monetary policy and low volatility we continue to advocate selling USD and rotating in higher yielding EM currencies. In the US, existing homes sales will provide a clear area where US optimism is translating into hard data (followed by Friday’s durable goods orders).

Gold spikes one week after Fed rate hike

Curiously, gold is surging a week following the Fed’s rate hike, flying in the face of the conventional way of thinking that the commodity should normally take a hit on the back of increased rates. Last week, the metal was struggling and took a hit but this week, it is largely recovering. Why?

It is clear to us that markets were overly optimistic about Trump’s election and almost naive concerning the promised massive fiscal and spending plan. Now markets fears have come flooding back with no one really knowing what the outcome of Trump’s presidency will truly be. The stock market has even begun to correct with the S&P losing almost 30 points, dropping to 2344 yesterday as the Trump administration desperately scrambles to pull together a plan to deliver its program.

Interestingly, though interest rates remain very low in the US, this is a trend we are seeing the world over. This is likely because markets are holding out for more insight on Trump’s next moves before selling back their gold. If this is the case, then gold’s rise is far from over.

Today’s Key Issues (time in GMT):

• Jan Leading Indicator, last 96,3, rev 96,2 ZAR / 07:00
• Jan Unemployment Rate AKU, exp 4,50%, last 4,40% NOK / 07:00
• Feb Retail Sales MoM, last 0,20% DKK / 08:00
• Feb Retail Sales YoY, last -1,30% DKK / 08:00
• Feb CPI YoY, exp 6,30%, last 6,60% ZAR / 08:00
• Feb CPI Core MoM, exp 1,20%, last 0,30% ZAR / 08:00
• Feb CPI Core YoY, exp 5,40%, last 5,50% ZAR / 08:00
• Feb CPI MoM, exp 1,20%, last 0,60% ZAR / 08:00
• 4Q Current Account as a % GDP, exp -3,20%, last -4,10%, rev -3,80% ZAR / 08:00
• 4Q Current Account Balance, exp -147b, last -176b, rev -166b ZAR / 08:00
• ECB’s Villeroy Speaks in Frankfurt EUR / 08:30
• Jan Current Account NSA, last 47.0b, rev 46.9b EUR / 09:00
• Jan ECB Current Account SA, last 31.0b, rev 30.8b EUR / 09:00
• Jan Current Account Balance, last 5535m EUR / 09:30
• mars.17 MBA Mortgage Applications, last 3,10% USD / 11:00
• ECB’s Lautenschlaeger speaks in Frankfurt EUR / 11:30
• Mar IBGE Inflation IPCA-15 MoM, exp 0,14%, last 0,54% BRL / 12:00
• Mar IBGE Inflation IPCA-15 YoY, exp 4,73%, last 5,02% BRL / 12:00
• mars.20 CPI WoW, last 0,10% RUB / 13:00
• mars.20 CPI Weekly YTD, last 0,90% RUB / 13:00
• Jan FHFA House Price Index MoM, exp 0,40%, last 0,40% USD / 13:00
• Feb Existing Home Sales, exp 5.55m, last 5.69m USD / 14:00
• Feb Existing Home Sales MoM, exp -2,50%, last 3,30% USD / 14:00
• mars.17 DOE U.S. Crude Oil Inventories, exp 3000k, last -237k USD / 14:30
• mars.17 DOE Cushing OK Crude Inventory, exp 1100k, last 2130k USD / 14:30
• Currency Flows Weekly BRL / 15:30
• mars.23 RBNZ Official Cash Rate, exp 1,75%, last 1,75% NZD / 20:00
• 4Q BoP Current Account Balance, exp -$12.00b, last -$3.40b INR / 22:00
• Feb Tax Collections, exp 93000m, last 137392m BRL / 23:00

The Risk Today:

EUR/USD keeps on pushing higher, even though the pair is now pausing around 1.0800. A break of the upside channel would signal persistent buying pressures. Key resistance is given at a distance 1.0874 (08/12/2017 high). Strong support can be found at 1.0493 (22/02/2017 low). The technical structure suggests deeper increase towards resistance at 1.0874. In the longer term, the death cross late October indicated a further bearish bias. The pair has broken key support given at 1.0458 (16/03/2015 low). Key resistance holds at 1.1714 (24/08/2015 high). Expected to head towards parity.

GBP/USD has broken bearish downtrend channel. The pair has broken resistance at 1.2429 and there are rooms for further strength. Key resistance can be located at 1.2570 (24/02/2017 high). Hourly support is given at 1.2324 (03/17/2017 low). The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.

USD/JPY has failed to break key resistance given at 115.62 (19/01/2016 high) confirming persistent selling pressure. The pair has broken strong support at 111.36 (28/11/2016 low). Hourly resistance can be located at 113.57 (16/03/2017 high). We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).

USD/CHF is declining. Hourly support is given at 0.9862 (31/01/2017 low). Key resistance can be found at a distance at 1.0344 (15/12/2016 high). Expected to show continued weakness. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.