BCB Cuts Rates, Trump's Speech Triggers USD Sell-Off

Forex News and Events

Carry traders back in business as fears ease

As expected, the Brazilian central bank eased its monetary policy yesterday as it cut the Selic rate. However, the BCB surprised market participants by lowering its benchmark interest rate by 75 basis points, while the market was expecting a cut of 50bps, which brought the Selic down to 13%. The market did not have the opportunity to react to this decision as it occurred after the market had closed. Yesterday's session was therefore more about digesting Donald Trump’s statements at his first press conference as President-elect.

The real appreciated sharply against the dollar as The Donald took the stage to outline his presidential programme. USD/BRL slid 1.40%, down to 3.1796, its lowest level since early November last year. Given the fact that the dollar is suffering a heavy sell-off today, the real should also benefit from this broad-based move. In addition, we believe that the rate will actually be welcomed by investors as it gives a much-needed breath of fresh air to the economy, which is facing one of its worst recessions. Against the backdrop of low volatility and easing fears regarding the negative impact on EM of a Trump presidency, it should create a positive environment for carry trades as investor risk tolerance should improve. USD/BRL should continue heading toward the 3.10 threshold that was reached last October.

Europe quietly moves forward

Political fireworks in the US have captured the market's full attention. Away from the current misdirection in the background are real economic developments. Developments, which in our view will have a large and real impact on asset prices than the political showmanship on display in the US. As discussed in our Outlook 2017, the hype machine will distort markets and drive volatility but sustainable trends will be based on traditional fundamentals.

In Europe, we should see steady economic improvement and a slow shift by the ECB towards nominalization. Headline Euro area industrial production is expected to come in at 1.6% y/y from 0.6% y/y prior read, confirming the strong performance seen in the summer. The three-month moving average suggests a reversal of the downward trend. This data read provides further evidence of a steady economic improvement. Also, the ECB will release monetary policy minutes from the December meeting, which should provide insight on the rationale to extend asset purchases, yet reduce the monthly purchases to €60bn. Markets are expecting a lively debate between peripheral countries wanting additional three-month extensions and Germany wanting further tightening. Finally, we will watch for any discussion on potential adjustments to the parameters of the program as we do not anticipate a linear QE program decommission. Given the historically overextended USD positioning, we expect further improvement in EURUSD. Break of 1.0640/45 indicates a bullish extension to 1.0800 resistance.

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Gold enjoys the end of the Trump honeymoon

Gold had a great year in 2016, that is, until Trump's election, when, through a series of declarations about fiscal stimulus the President-elect pushed the dollar and the stock market to new highs.

Now that uncertainty has come roaring back, gold is trading at its highest level since mid-November - around $1200 an ounce. Indeed, the Fed's path normalisation no longer seems so straightforward. In December, financial markets were betting on four or five rate hikes, now even two or three look uncertain. Logically, if anticipation for rates lowers, then gold appreciates. Further concerns on the future of Brexit may be favourable for the yellow metal. Also, in France, for now, there is no clear leading candidate in the election.

Technically, the precious metal has broken the 50-day moving average and we believe that there is some further upside room.

The Risk Today

EUR/USD has finally broken resistance at 1.0653 (30/12/2016 reaction high). Hourly support lies at 1.0341 (03/01/2017 low). Expected to see continued increase. 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 bounced back after breaking hourly support at 1.2083 (25/10/2016 low). Hourly resistance at 1.2268 (11/01/2016 reaction high) has been broken. However, the technical structure still looks bearish. 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 sharply declined over the last few days. after bouncing between 116.12 and 118.66 for two months. Hourly support at 114.74 (12/12/2016 low) has been broken. Expected to see further downside moves.. 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 continues to weaken. Yet, the pair is still moving between hourly resistance given at 1.0344 (15/12/2016 high) and support at 1.0021 (08/12/2016 low). Key support is given at the parity. Expected to decline towards 1.0021. 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.