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Reserve Bank of Australia (RBA) to Remain on Hold and Maintain a Neutral Tone

During the Asian morning Tuesday, the Reserve Bank of Australia will announce its rate decision. The forecast is for the RBA to remain on hold once again, a view that we share given that the Bank’s latest communications suggested that officials are keen to hold rates unchanged for some time. Even though we got some dovish signals from the latest meeting statement and minutes, those were balanced out by a repetition that high housing prices continue to pose risks to financial stability and that any more rate cuts could amplify such risks further.

Since that gathering, data showed that the unemployment rate rose in February, while retail sales for the same month unexpectedly fell. As such, although we do not expect these data to alter the Bank’s overall bias, they tilt the risks towards a somewhat dovish narrative from policymakers. In such a case, we could see the Aussie coming under renewed selling interest.

AUD/USD tumbled during the Asian morning Monday after retail sales for February disappointed. The pair dipped below the 0.7625 (R1) barrier and during the early European morning, it looks to be headed towards the key support zone of 0.7600 (S1). Even though the pair trades within a downward sloping channel since the 17th of March, a clear break below 0.7600 (S1) is needed to confirm a forthcoming lower low on the 4-hour chart and make us more confident on more downside extensions. For now, we expect the rate to settle around that obstacle and wait for the RBA meeting tonight. A dovish tilt by the Bank could prove the trigger for such a dip.

Japan’s Tankan survey signals improved business sentiment

The sentiment of Japanese firms improved further in Q1 according to the BoJ’s quarterly Tankan business survey. The index measuring the sentiment of large manufacturers rose for a second consecutive quarter, though it missed its forecast, while the large non-manufacturers’ figure rose in line with expectations. In our view, these prints are consistent with the BoJ keeping its current policy framework unchanged for the foreseeable future. The gradual improvement in business conditions diminishes the likelihood for any further easing, but the survey was not strong enough to fuel expectations for an eventual end to BoJ stimulus.

With regards to the yen, the currency has strengthened notably in the past weeks, perhaps due to fiscal-year-end demand by Japanese firms trying to repatriate funds. Considering that the fiscal year is officially over, it would be interesting to see whether this move is reversed in the coming weeks.

Another driver of JPY over the coming weeks may be incoming polls with regards to the French election, which have lately shown Le Pen losing ground versus her main rivals. If this continues, we would expect EUR/JPY to recover some of its recent losses, as European political risk diminishes and investors turn away from safe havens.

EUR/JPY traded lower on Friday, falling below the support (now turned into resistance) barrier of 119.10 (R1). The slide was stopped slightly above the key support obstacle of 118.50 (S1). Although the price structure on the 4-hour chart still suggests a short-term downtrend, given our proximity to that key hurdle, we prefer to stand pat for now. The fact that the rate rebounded several times in the past from that zone combined with the aforementioned fundamentals, make us cautious that another recovery may be on the cards. We prefer to wait for a clear close below 118.50 (S1) before we turn our eyes to the downside again.

Today’s highlights:

From the UK, we get the manufacturing PMI for March. The forecast is for the index to have remained unchanged, in which case the reaction in GBP could be limited.

In the US, the ISM manufacturing PMI for March is due out. The figure is forecast to decline somewhat, but to still remain well above the 50 barrier that separates expansion from contraction. Although the reaction in USD may be negative, given that the index is expected to remain at a healthy level, we don’t expect such a reaction to be major.

As for the rest of the week:

On Tuesday, during the Asian session, the RBA rate decision will be in focus, as we outlined above. On Wednesday, we get the US ADP employment report for March and later during the day, the Fed will release the minutes of the March FOMC meeting. On Thursday, we have a relatively light day, while on Friday, the US employment report for March will take center stage. We also get employment data for March from Canada.


Support: 0.7600 (S1), 0.7580 (S2), 0.7550 (S3)

Resistance: 0.7625 (R1), 0.7650 (R2), 0.7680 (R3)


Support: 118.50 (S1), 117.70 (S2), 116.50 (S3)

Resistance: 119.10 (R1), 119.80 (R2), 120.35 (R3)

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