Market News & Analysis
RBNZ hear the coo of the doves?
Tony Sycamore February 12, 2019 2:29 PM
U.S. equity markets traded largely in a holding pattern overnight as equity traders contemplate the prospect of another government shutdown on Friday of this week. Additionally, reports last week that refuted the idea that President Donald Trump and Chinese President Xi would meet in Vietnam in late February, have cast a shadow over the positive light that enveloped equity markets for the first five weeks of 2019.
With United States Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin in Beijing this week for another round of talks, the waiting game for markets continues. Despite the conflicting headlines which are part and parcel of this game of global one upmanship, equity markets have held onto a large percentage of their 2019 gains. Mostly based on a belief that the self interest of both countries will ensure that negotiators reach an agreement that avoids a rise in in tariffs on March 1.
Taking a more optimistic view of matters were FX traders who chased the U.S dollar higher for an 8th session in a row to enjoy its longest winning streak since January 2016. The U.S dollar index, the DXY is now just 0.65% away from its 97.71 high of 2018, a performance more impressive given the current rally commenced the very day that Federal Reserve Chairman, Jerome Powell halted the Feds interest rate tightening cycle to complete its dovish U-turn.
Of course, approximately 85% of Forex trades involve the U.S. dollar and this statistic makes it imperative to keep tabs on the prospects and economic wellbeing of the U.S. economy. However, the U.S. is only one side of the current story as events elsewhere have conspired to make the Federal Reserve and the outlook for the U.S. economy much less dovish than elsewhere.
Take for example the EURUSD which has a 57% weighting in the DXY. Growth in the Eurozone continues to languish and last week the European Commission downgraded its growth forecast from 1.9% to 1.3% for 2019. Further highlighted by the woes of the new problem child of the Eurozone, as data confirmed Italy officially slipped into recession at the end of last year. Little wonder the EURUSD is now exploring the bottom quartile of its 1.1550/1.1250 range.
Also joining the dovish choir of Central Banks last week was the Bank of England who lowered its 2019 growth outlook by 0.5% to 1.2% as well as the Reserve Bank of Australia who downgraded previously overly optimistic inflation and growth forecasts. Attention now turns to the RBNZ MPS tomorrow and whether the RBNZ will hear the coo of the doves.
The RBNZ have had in the past held a reputation for either not caring or not really knowing how to deliver the message the markets expected to hear. To make matters worse the RBNZ interest rate announcement was always delivered right on the changeover between the New York and the Sydney day session when liquidity was patchy leaving many a trader choking on their breakfast immediately after an extraordinary move in the NZD.
More recently, under the stewardship of Governor Adrian Orr who was appointed in March 2018, the RBNZ have been able to consistently deliver the message they intended to deliver. In 2019 the timing of RBNZ interest rate announcements has been shifted from early doors on a Thursday morning when liquidity was poor to Wednesday at midday AEDT.
For tomorrow the RBNZ is expected to leave the OCR at 1.75%. The statement is likely to be dovish, based on emerging downside risks to growth and inflation and this is consistent with the current market pricing of a rate cut in NZ by year end.
As always there is a danger of a “buy the rumour sell the fact” type reaction. For that reason, I’ll be watching the NZDXXX charts to confirm that the RBNZ has met and exceeded dovish expectations including AUDNZD. As mentioned in recent articles I believe the flash crash low in AUDUSD and AUDXXX should mostly be ignored, given so little volume went through at an illiquid time of the year/day.
Therefore, I think it’s very possible that AUDNZD completed a Wave V at last weeks 1.0400 low after trading below the Wave III low at 1.0435. I am also mindful that AUDNZD is approaching levels that the cross has traditionally bounced sharply from. Hence should post the RBNZ tomorrow, AUDNZD break and close above downtrend resistance at 1.0600 it would signal a medium-term low is in place in the cross and an opportunity to consider a long AUDNZD trade.
Source Tradingview. The figures stated are as of the 12th of February 2019. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation
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