Overnight, the RBA kept its policy stance unchanged, as was widely expected. Overall, the officials maintained an optimistic tone, which was a surprise for us, as they disregarded the latest mixed data out of Australia. They indicated that although GDP growth was negative in Q3, this was due to temporary factors, and a return to reasonable growth is expected in Q4. With regards to the slip in the underlying inflation rate in Q4, the RBA simply indicated that the CPIs were more or less in line with their forecasts, and that even though inflation remains low, it is expected to return to target over time. On the negative side, they reiterated that a rising AUD could complicate economic transitions in the economy and that medium-term risks in the Chinese economy persist, but these comments were not enough to offset their confident view on the domestic economy.
AUD/USD traded higher on the decision after it hit support near 0.7640. Given that the Bank is likely to remain on hold in coming months, we expect the Australian currency to remain supported. The short-term trend is already positive and as such, we would expect a clear break above the 0.7700 territory to open the way for our next resistance of 0.7740. As for the longer-term outlook though, we would like to see a decisive close above 0.7800 before we get confident on larger bullish extensions.
Overnight: New Zealand’s 2-year inflation expectations surge
New Zealand’s 2-year inflation expectations for Q1 rose to 1.92% from 1.68% previously, data showed overnight. Expectations are now almost at the mid-point of the RBNZ’s 1% – 3% target, which in our view greatly diminishes the likelihood for any further action by the Bank in the foreseeable future. Let’s not forget how much attention the Bank pays to this indicator. When the figure unexpectedly slipped in Q1 2016, it triggered a surprise rate cut, mainly to ensure that expectations do not become de-anchored from the target.
NZD/USD surged overnight after the 2-year inflation expectations came out and emerged above the resistance (now turned into support) zone of 0.7230 (S1). Now, the pair looks to be headed towards the next obstacle area of 0.7400 (R1). The price structure on the 4-hour chart suggests a short-term uptrend, while the pair is now trading above the prior downside resistance line taken from back at the peak of the 7th of September. As a result, we would expect the bulls to remain in the driver’s seat and if they prove strong enough to overcome the 0.7400 (R1) territory, we would expect them to target the next resistance of 0.7440 (R2).
Attention now turns to the RBNZ meeting tomorrow. We expect the Bank to be quite pleased with the progress towards its mandate, as both the Q4 CPI rate and 2-year inflation expectations rose notably, something that could lead to a rather optimistic statement.
Euro takes a hit as political risks loom
The common currency took a hit yesterday while safe havens rallied, as Eurozone’s political risks came into the market’s focus. In France, the center-right presidential candidate Francois Fillon apologized over payments his family members received for parliamentary work. In our view, this diminishes his chances to win and in turn, increases the probability that the far-right candidate Marine Le Pen is victorious. Le Pen is an outspoken Eurosceptic, who wants to hold a "Frexit" referendum. As such, the possibility of her election represents an existential threat for the European Union, one much greater than Brexit we think, considering that France was among the founding members of the EU and is also a member of the Eurozone.
EUR/JPY tumbled yesterday breaking three support (now turned into resistance) barriers in a row. Now the rate is trading below the psychological figure of 120.00 (R1) and looks to be headed towards the 119.50 (S1) barrier. Given that the pair is trading within a downside channel since the 27th of January, we would consider the short-term trend to be negative. A clear dip below 119.50 (S1) is possible to open the way for the next support territory of 118.70 (S2).
Without trying to predict how French citizens will finally vote, we expect the period ahead of the actual election in April to be marked by heightened uncertainty, and we believe that investors are likely to concentrate more on incoming polls in coming weeks. If Le Pen is seen as increasingly more likely to win as we approach the election, we could see investors pricing in greater risk of European disintegration, something that may weigh further on the euro and may support safe haven assets.
During the European day, we get a lot of second tier indicators. In Germany, industrial production data for December is coming out, while from the UK, we get the Halifax house price index for January.
In the US, the trade balance for December is expected to show that the nation’s trade deficit narrowed, albeit slightly. The JOLTS survey for the same month is due out as well, and expectations are for an increase in the number of job openings.
From Canada, we get the Ivey PMI for January, though no forecast is currently available. Our own view is that the Ivey index is likely to have risen, something supported by the nation’s Markit manufacturing PMI for the month, which showed the fastest growth in the sector since late 2014. Something like that could bring the Loonie under renewed buying interest. We also get the trade balance for December.
We have only one speaker on today’s schedule: ECB Governing Council member Jens Weidman.