The New Zealand dollar has managed to pause in the wake of the recent Reserve Bank of New Zealand interest rate statement, as the RBNZ has held interest rates flat at 2.00%. This was for the most part expected in the long run as the current economic data had been relatively positive, and we had recently seen a boost in commodity prices which would carry over into the domestic economy. It's however hard to justify further rate cutting in the near future, if we do see further rises in the economic data and pressure on inflation it could be a case of the RBNZ reversing their tune very rapidly, and I would anticipate with the lift in commodity prices could add this pressure that has been missing. The final move from the RBNZ during the meeting was to try and jawbone the currency, but the market was in no mood as it has heard it time and time again when it comes to central bank policy.
The NZDUSD has so far paused and provided little in the way of movement in the wake of the RBNZ announcement. Resistance levels at 0.7375 have so far held back any higher highs, but the reality is that we could see further pressure for the currency to lift higher than it currently is, as jawboning has failed miserably from the RBNZ and I feel that the outlook is still quite positive for the NZ economy. The next level of resistance is at 0.7401 and is likely to be a tipping point before the major level at 0.7475 which I would be surprised to see the NZDUSD move beyond.
US markets are still struggling to understand the motives of the Federal Reserve after the recent speech from Yellen was very hawkish but failed to offer any real hints as to what the future might hold. This seems like further rhetoric from the FED in the face of mixed economic data, but some key elements were gleamed from the ensuing press conference where she outlined that the FED did not have to worry too much about inflation at this stage. Yellen went on further to add "if we continue on the course for jobs without and shocks, I expect a hike this year" - this was the most hawkish statement and holds the course for an expected rate rise in the near future, but the market is still cautious about the reality of this given the dovish nature of the FED in previous years.
The market was quick to react when it takes a dovish feel of things and the S&P is no stranger to the volatility of the FED in recent teams as the bulls leapt on the chance to grab some ground after a month of volatility. Resistance is likely to be found at 2164 at this stage, and it will be interesting to see if further momentum can be found in the market at present, or if the market will indeed accept a hawkish fate and look to slip lower in the long run.
GBPUSD recovery pauses after Boris Johnson headlines
After recovering ground following a return to levels not seen in over a month below 1.29, the bounce in the GBPUSD appears to have lost momentum at the conclusion of the week following headlines being made by UK Foreign Secretary Boris Johnson that the process of leaving the European Union does not need to take two years once Article 50 is invoked. The Foreign Secretary also made comments that Article 50 will be invoked early next year and while this has been widely reported elsewhere, the explicit comments have likely made investors reconsider options on the British Pound.
The present expectations are for the British Pound to be maintained at what are historically depressed levels for a prolonged period. Although economic data from the United Kingdom might not hit the extent of an immediate downturn that was feared, there is still an anxious road ahead once the UK Government actually make the turn towards beginning to exit the European Union.
Let’s put it this way. The outcome of the EU referendum could be compared to a sentence being declared, but the UK still has to begin the process of leaving the European Union and the possible ramifications that this could have on investor sentiment. Right now all that has been priced into the Pound is the EU referendum outcome, the unknown of what will really happen with the EU exit is still ahead and does present risks for investors that they will need to take into account.
Overall, Dollar weakness is still seen as the major catalyst and motivator behind recovery rallies in the British Pound. I still maintain my own view that the GBPUSD can still realistically conclude the year between the 1.20 – 1.25 levels if the expectations to invoke Article 50 early next year are realised. At best, the GBPUSD can head back towards the 1.34 zone if you are looking at the technical possibilities but we have seen time and time again throughout 2016 that the investor strategy towards the currency is to sell rallies rather than buy low.
Traders once again reject the BoJ
While the Federal Reserve interest rate decision is attracting the most headline attention, the major market action this week has been in the Japanese Yen where traders have once again rejected the efforts by the Bank of Japan (BoJ) to resume weakness in the Japanese Yen. Despite the BoJ making a significant change to its policy framework that some are seeing as a different direction of monetary easing from a central bank, investors rejected the efforts in spectacular fashion with this leading to the USDJPY returning to the major psychological level around 100.
The Yen has weakened since then with the USDJPY returning just above 101.230 in the early hours of trading on Friday, but the reason for this could be that the BoJ intervened in the markets following the USDJPY meeting a major support level. I also maintain the view that there is very little to BoJ can do to encourage a return to Yen weakness with this being in spite of any detrimental impacts that the fascinating Yen correction has had on an already-struggling Japanese economy.
What to look out for today
The spotlight is going to remain firmly on the US Federal Reserve with three officials from the central bank scheduled for speeches later today. Perhaps the markets will be monitoring to see if any of the expected speeches indicate any further divide of opinions on US interest rate policy within the Federal Reserve after three out of 10 voting members voted for a US interest rate rise this month.
By Hussein Sayed, Chief Market Strategist (Gulf & MENA)
The week ahead: Focus shifts from central banks to politics
Oil prices on both sides of the Atlantic have plunged by 4% on Friday due to the skepticism that the world’s largest oil producers can reach a deal – when they meet on Wednesday – to end the supply glut that dragged prices by more than 60% since mid-2014.
Earlier on Friday oil was trading in positive territory based on reports that Saudi Arabia has offered to cut production if Iran agrees to freeze output at current levels. However, the rally turned into a freefall after another report indicated that Riyadh does not expect any deal to be struck.
Traders are getting seriously frustrated and mislead from comments here and there, which explains the huge volatility seen in oil prices most recently.
Deal or no deal?
Recent action in terms of price shows that investors are expecting very little from the OPEC/non-OPEC informal meeting next week in Algeria on the sidelines of the International Energy Forum.
As always we argue that a deal could be reached if the Saudi’s and Iranian’s decide to put their political conflicts on the side and cooperate towards ending the supply glut.
Iran has repeatedly indicated its plan to boosting output to pre-sanction levels after the U.S. lifted it in the wake of the key nuclear accord. Now with output of 3.6 million barrel per day, they’re still 400,000 thousand short of the targeted figure. Though if the Saudi’s are seriously considering a cut instead of a freeze, then it would be a fair deal for Iranian’s to freeze at current levels.
Considering there is lot of pessimism over reaching a deal, I believe the magnitude for prices moving higher is far larger than moving lower. The bad news is already priced in, which will limit the downside, but if a surprise deal comes out, get ready for a strong rally.
Round one: Clinton vs Trump
Monday’s US presidential debate will probably break a new record, not in the S&P 500, but the number of viewers which according to media analyst could reach over 100 million Americans, surpassing Carter-Reagan debate in 1980 which attracted 80.6 million viewers.
With Donald Trump closing the gap with Hillary Clinton in latest polls, the debate is becoming more interesting than any other TV show.
America's direction, achieving prosperity and securing America are the three major topics at the first presidential debate.
Investors are becoming increasingly concerned on how to tweak their portfolios before Nov 8. Nasaq’s Biotech index plunged 4.5% in two days (24-25 Aug) on one tweet from Hillary Clinton criticizing the recent price hikes on EpiPens, which suggest that investors and portfolio managers are seriously considering having different asset allocation strategies on the outcome of the election. However, I still believe that a Trump win will be perceived as a negative factor to the overall market.
By Hussein Sayed, Chief Market Strategist (Gulf & MENA)
It's been an interesting start to the week as politics is looking likely to take centre stage amongst a market which is becoming increasingly worried over the result of the US presidential election. Obviously this has a flow on effect for the USD, and many pundits are starting to worry that a swing in the polls for Trump could cause a sell-off in the USD, as investors look for safe havens around worries that we could see negative economic policy for the US. The politics at hand certainly have had a big impact on the USD and have so far dragged attention away from the FED and it's hawkish talk that it has put on to bolster the USD.
Regardless of the FED movements and politics, early in the week the focus switched to the NZD as it looked to be a case of bad news for the New Zealand economy as exports shrank to 3.39B (3.58B exp) and the New Zealand trade balance slipped to -1265M (-751M exp). This will put pressure on the Reserve Bank of New Zealand as it's a keen watcher and commentator of the balance of payments for New Zealand. However, at the same time the recent economic news has been relatively upbeat and an interest rate cut may not be the answer in the short term to help the economy. At present the strong NZD is what is hurting exports and preventing a stronger recovery, so it could end up being a case of the NZD looking to be jawboned by the RBNZ if they have their way.
On the charts the NZDUSD has so far managed to climb back up after some sharp selling at the end of last week. The recent push through the 50 day moving average was a strong bearish signal but the recovery today comes on the back of a weaker USD and in reality little has changed for the NZD on the whole. The push higher though was hit with some serious resistance at 0.7287 and it's likely this level will look to hold out against the bulls in the short term at the very least, unless of course we see further selling of the USD in the wake of recent political events. If the bears do take hold then I would expect support to be pushed on and the next levels down can be found at 0.7221 and 0.7180, which are likely to be the main targets.
Lastly, the pound continues to struggle to find any sort of real momentum in the current market climate, and I would expect this to continue as it looks to find a way to push through strong support at 1.2939. Traders have been very apprehensive to have any sort of bullish run, and a push lower looks more on the cards, but it's a case of the market holding back until it gain a clearer picture of the upcoming presidential elections and how polls are moving.
Round one of the U.S. presidential debate is over and as expected big punches were exchanged from both sides, but clearly no knockout blows were landed.
Although polls were showing different outcomes of who won the debate, financial markets obviously declared Clinton as the winner.
Asian shares recovered some of yesterday’s losses and European stocks opened higher, meanwhile U.S. futures are also indicating a positive open. However, the best financial asset proxy to the U.S. presidential race is the Mexican Peso which rose by more than 1.5% against the U.S. dollar after declining to a new record low yesterday. The higher the Mexican currency goes suggests higher probability for Clinton reaching the White House as Trump repeatedly raged against globalisation and free trade agreements.
The Aussie, Kiwi and Yen also supported the opinion that Hillary Clinton won the first presidential debate. The high yielding commodity currencies are favored when appetite to risk is high due to carry trade opportunities, while the Yen gets sold out when signs of risk aversion fades. However, I believe there is more volatility to come with 41 days left to the presidential election day.
Oil prices saw some profit taking after trading sharply higher Monday with nervous investors awaiting the outcome of OPEC’s unofficial meeting. Markets are still unconvinced that an agreement will be reached with Iran downplaying yesterday the chances of OPEC and non-OPEC producers sealing a deal to curb output.
Considering there is lot of pessimism over reaching a deal, I believe the magnitude for prices moving higher is far larger than moving lower. The bad news is already priced in, which will limit the downside, but if a surprise deal comes out, get ready for a strong rally.
By Hussein Sayed, Chief Market Strategist (Gulf & MENA)
The Canadian economy got a welcome boost today as trade balance data was more positive than economists expected, coming in at -1.9b (-2.5b exp). This was greeted positively in the Canadian economy which has so far been struggling under the weak commodity prices and especially around oil prices in particular. However, oil has been on the rebound as of late and this has been seen in the short term to offer some reprieve for the Canadian economy, which is still pushing on with its own commodity focused programs to boost the economy. The reality of the recent jump in oil prices is if it can actually be sustained, many are wondering if we had bottomed out and we may even see further upside potential after the recent crude oil inventory in the US showed a drawdown of -2.98M barrels. I would expect a slow recovery in oil and anything above the $50 dollar a barrel mark is likely to struggled unless OPEC actually puts in production cuts.
For the USDCAD it has been a mixed bag as many had expected that the USDCAD would fall as the Canadian economy improves and as oil continues to push upwards. However the US dollar has found some strength as people find themselves being bullish for the most part and economic data today out of the US painted a rather positive picture. The USDCAD lacked enough momentum to hit resistance at 1.3275 and this has set up a decent head and shoulders pattern on the charts. It looks likely we could see some further falls lower to support around 1.3149 and 1.3000 which is acting as the psychological level in the market. The 50 day moving average could also move upwards and it will be interesting to see if it can hold back any further bearish movement in the long run.
The Australian dollar also was relatively upbeat today as retail sales m/m came in at 0.4% (0.2% exp) beating the previous months flat reading of 0.0%. The Australian dollar has for the most part found itself under a fair amount of pressure in recent days after the cash rate was held at 1.50%, but the Reserve Bank of Australia warned of difficult market conditions on the horizon and that Australia may be further impacted. I've spoken previously about how the Australian economy is struggling, but for the AUD it still finds itself to be a popular currency for its interest yield; hence the appreciation in the currency at the end of the day.
AUDUSD technically speaking has struggled to find momentum today after some large swings. Dynamic support was formed around the 20 day moving average and it has so far been held up at the 23.6 fib ratio. Below these levels support is likely to be found at 0.7582, with the next major level at 0.7467. I would expect that if the USD remains strong we may see further losses for the AUDUSD when it comes to bearish movement.
Asian equities received a boost Thursday morning as oil traded near highest levels in 4-months and the Yen fell for 7 consecutive days.
European stocks also indicated a positive open after slipping back yesterday on reports that the ECB will consider tapering its bonds purchase program by early 2017. Although markets don’t seem really buying the news it still managed to move some asset classes especially gold which dropped by more than $50 an ounce since Tuesday.
Is the yellow metal’s rally over?
Gold has had a great performance so far in 2016, and although prices dropped by 4% since Oct-3 it’s still one of the best performing asset classes with 19.2% gains year-to-date. Of course speculations over a Fed rate hike and other central banks normalizing monetary policy are not good news for the yellow metal which benefited from a world of negative interest rates.
The recent selloff in gold was over exaggerated due to speculative positioning and breaking key technical support levels which triggered stop losses in derivatives markets. If U.S. non-farm payrolls report on Friday surprised to the upside we might see additional pressure on gold. However, I still see couple of factors likely to support prices on the short to medium term.
- Long term investors and physical consumers have been on standby for some time, and probably this dip will provide a good opportunity to jump in.
- China, the largest gold consumer is on a long Golden Week holiday, and we’re likely to see some interest when markets open on Monday.
- Demand in India picks up during the festival and wedding season that runs from October to December.
- According to World Gold Council a recent survey showed 90% of 19 central bank reserve managers planning to increase or maintain their gold reserve levels.
Although I’m not a big fan of non-yielding assets, I still believe that gold has an important role in portfolios. There’s lot of uncertainties going into 2017, with market’s valuations overstretched, looming banking problems in the EU, Brexit’s aftermath, China’s growing mountain of debt, and the list goes on. That’s why I still believe gold is an essential asset to hedge against all those risks.
By Hussein Sayed, Chief Market Strategist (Gulf & MENA)
