Fed Rate Hike Back On The Table
Swissquote Bank Ltd | Aug 17, 2016 07:09AM ET
Is it time for the Aussie to weaken? (by Arnaud Masset)
It has been a complicated year so far for the Reserve Bank of Australia. The central bank has had to deal with weak inflationary pressure, an economy that is at the mercy of slowing demand from China and a strong currency, which has been bolstered by investors desperately chasing higher yields against the backdrop of constant monetary easing from major central banks.
In spite of two interest rate cuts in less than four months (May and August), the Australian dollar remains under heavy buying pressure as monetary easing becomes the new normal among central banks. Back in May, the first rate cut had the expected effect as investors closed their long Aussie positions. At that point the market was still fearing the central bank, ready to play its game by staying away from the AUD. However, at the time of the second rate cut in August, the market already had plenty of time to question the central banks’ ability to actually drive their respective currency. The failure of the BoJ to effectively weaken the yen has opened the door for a broader questioning of ultra-accommodative monetary policies. Therefore, the effect of the August rate cut was short lived as AUD/USD climbed back to its initial level in less than a week.
It is becoming increasingly evident that central banks are losing their grip on FX when they want to weaken their respective currencies. However, mounting rate hike expectations still have the same effect, especially when the central bank has inflation expectations under control. Therefore, we would not be surprised to see the Aussie weaken in the next few weeks -- especially against the greenback -- as the market (again) anticipates the Fed to increase borrowing costs .
Russian economic data on the rise (by Yann Quelenn)
The ruble continues to appreciate and is now at a one-month high against the dollar. Of course there is room for further upside due to the ongoing Russian economic recovery. 62 rubles for one dollar represents a decent target in the short-term. This current strengthening is due to the fact that investors are looking for yields and while many western rates are negative or close to negative, the ruble is definitely a very good opportunity and looks still undervalued.
Secondly, the current rebound in oil prices is driving investors towards Russia as its economy relies significantly on the black commodity. Today, July retail sales will also be released and markets estimate a sharp increase with a 2.9% m/m push. On an annualized basis retail sales growth should remain deeply negative below -5% y/y because of last year’s strong downturn and the collapse of oil. Unemployment data is also expected today and should nonetheless remain below 5.4%.
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As a result, it seems that the Russian economy is recovering well. The Central Bank of Russia should now attempt to limit upside pressures on its currency. We expect a cut of the key rate toward 10% at the September 16 meeting. A deeper rate cut may also be anticipated.
Sleeping through FOMC minutes (by Peter Rosenstreich)
Yesterday, Atlanta Fed president Lockhart and New York Fed President Dudley’s comments were mildly hawkish, keeping the door open for a rate hike in September or December. Fed’s Dudley sounded generally positive on the US growth outlook, commenting that a tightening of monetary policy was "possible". The comments supported short-end rates and USD. For the July 27 FOMC minutes, incoming US economic data has the Fed cautiously optimistic on the state of labor markets and external conditions, yet given the aggressive search for yields, repricing of higher rates will result in unwanted USD strength. Default tightening of financial conditions is a result that the Fed will likely want to avoid. However, given the low expectations for September we expect that the minutes will sound hawkish giving USD further bullish momentum in the short term. We view these bounces as an opportunity to reload on USD shorts and don’t expect an interest rate increase in September.
USD/CAD - Selling Pressures Are Important.
Yann Quelenn
EUR/USD continues to increase after breaking hourly resistance at 1.1234 (02/08/2016 low). Buying pressures are important. Strong resistance is given at 1.1428 (23/06/2016 high). Hourly support can be found at 1.1046 (05/08/2016 low). Expected to further increase. In the longer term, the technical structure favours a very long-term bearish bias as long 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 has failed to exit downtrend channel. The pair is back above 1.3000 despite the bearish momentum is lively. Hourly resistance can be located at 1.3097 (08/08/2016 high). Expected to head towards support given at 1.2798 (06/07/2016 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 broken 100.00 beofre bouncing back. Hourly support given at 99.02 (24/06/2016 low). Hourly resistance is given at 102.83 (02/08/2016 high). Expected to go further lower. 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 is trading lower. The pair has broken hourly support at 0.9634 (02/08/2016 low) and is now consolidating. Hourly resistance can be found at 0.9844 (09/08/2016 high). Expected to further weaken. 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.
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