BOE In Focus
Swissquote Bank Ltd | Aug 04, 2016 06:49AM ET
Forex News and Events
BoE to surprise markets
Three weeks ago we predicted that the probability of a cut was unlikely, while markets had already priced it in. This time around, while there is a widespread consensus that the rate will be cut, our desk is now split on whether the central bank will continue to hold fire or push ahead.
Indeed, the BoE may be reluctant to use its remaining ammo as the remaining room before negative interest rate territory will narrow. Data gathered since the last meeting has been encouraging. Aside from the current uncertainty, the shock of the post-Brexit period has worn off somewhat. The pound has lost 12% since pre-referendum levels but we can already see this easing. GDP data released later last week has for example beaten estimates at 2.2% y/y vs 2.1% y/y. Of course, the recent PMI and consumer confidence prints were on the soft side but in our view, this is clearly not sufficient for the time being to trigger a rate cut. As a result, the pound should remain below 1.3500 for some time.
RBNZ’s cut to weigh on the Kiwi
In spite of the absence of economic data from New Zealand, the Kiwi strengthen substantially against the US dollar last week. However, the gains have been mostly made on the back of a global sell-off in the greenback rather than renewed interest for the New Zealand dollar. The chase for higher yields coupled with fading expectations for a Fed rate hike this year also helped the Kiwi to outperform its peers. However, this Kiwi recovery would likely be short lived as the RBNZ is expected to cut the official cash rate by 25bps to 2% at its next meeting on August 10th.
Indeed the central bank may be poised to cut rate on the heel of a disappointing second quarter inflation report. Headline CPI dropped unexpectedly in the second quarter, sliding to 0.4% on both a quarterly and yearly basis, missing projections for both the market and the RBNZ. The market was expecting a read of 0.5%y/y, while the central bank forecasted CPI to rise 0.6%y/y during the June quarter. Tradable inflation (i.e. domestic inflation) fell 1.5%y/y, reflecting the unexpected rise of the Kiwi over the last few months, while non-tradable inflation increased 1.8%y/y as housing market prices continued to gain momentum.
In addition, a couple of weeks ago the Reserve Bank of New Zealand released an economic update. The statement was very dovish and clearly set the stage for a rate cut in August. The RBNZ highlighted the diminished prospect for growth in spite of a very stimulatory monetary policy, the “fragility of global financial markets” and persistent uncertainties about the outlook. Most importantly, the central bank appeared to be quite unhappy with regards to the strength of the Kiwi as the trade-weighted exchange rate was 6% higher than assumed in the June statement.
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As a consequence, we expect the RBNZ to cut the official cash rate by another 25bps at its August meeting, which would bring the OCR down to 2%, in spite of the negative effects it would have on the housing market. Indeed housing prices have been fuelled by the low price environment and another rate cut would definitely increase the upside pressure on these prices. However, the Reserve Bank had clearly indicated its intention to take separate measures to stem the housing bubble by using lending restrictions and tightening the LVR.
On the technical side, the NZD/USD tested the 0.7182 resistance implied by the 61.8% Fibonacci line (on July’s debasement) and is now heading toward the 50% line at 0.7139. Given the strong likelihood of a rate cut, the pair will most likely return quickly towards 0.6950, especially if the RBNZ release a dovish statement to emphasize the central bank’s easing bias.
Silver - Ready To Bounce Back.
The Risk Today
EUR/USD has failed to hold above 1.1200 suggesting that selling pressures are still on.. Hourly support can be located at 1.1128 (intraday high). Another hourly support lies at 1.1056 (27/07/2016 base), while a key support stands at 1.0965. The road is wide-open for further decline. In the longer term, the technical structure favours a very long-term bearish bias as resistance at 1.1714 (24/08/2015 high) holds. The pair is trading in range since the start of 2015. Strong support is given at 1.0458 (16/03/2015 low). However, the current technical structure since last December implies a gradual increase.
GBP/USD continues to push slightly higher. Hourly resistance is located at 1.3372 (03/08/2016 high) has been broken. Stronger resistance can be found at 1.3534 (29/06/2016 high). Support located at 1.3058 (26/07/2016 low). The long-term technical pattern is negative and favours a further decline as long as prices remain below the resistance at 1.5340/64 (04/11/2015 low see also the 200-day moving average). Key support at 1.3503 (23/01/2009 low) has been broken and the road is wide open for further decline.
USD/JPY is consolidating in its way towards psychological support at 100. The short-term technical structure is clearly negative as long as prices remain below the hourly resistance at 103.91 (13/07/2016 low). Expected to further weaken. We favour 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 has bounced sharply. Over the medium-term the pair is setting higher lows. Hourly support can be found at 0.9634 (02/08/2016 low). 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 a long term bullish bias since last December.
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