The day of central banks

Five of the G10 central banks meet in 24 hours! The spotlight today is on the Federal Open Market Committee (FOMC) meeting. I discussed that in detail yesterday and so will not bore you with it again, except to remind you that a) the main question will be whether they think the current stream of sluggish data is simply a temporary “soft patch,” like in early 2014, or whether they think the US economy is undergoing a more significant downturn, and b) whether they think the labor market is still improving and inflation still headed towards 2%.

What I expect: I think the Committee will have to acknowledge the softer data recently, but that they will once again attribute it to transitory factors and repeat their previous comments about how they expect to meet their goals of maximum employment and 2% inflation in the foreseeable future. I expect that they will want to leave themselves the option of raising rates in June even if that does not currently seem to be the most likely scenario. (The market consensus is currently that the first rate hike occurs in October, if we assume that the first rate hike puts the Fed funds rate at 0.25%.) At the end though they are likely to say that it all depends on the data – which is no different than what they’ve been saying recently anyway. I expect that this view will be seen as more hawkish than anticipated and that the dollar will firm up as a result.

Riksbank meeting Before the FOMC meeting, Sweden’s central bank holds it monetary policy meeting. At their last meeting, Riksbank decided to make monetary policy even more expansionary by cutting the interest rate by 15bps to -0.25%. It also said it would buy SEK 30bn in government bonds in a “mini-QE.” Even though the bank argued that inflation has bottomed out and is beginning to rise, the additional measures aimed to support the upturn in inflation and weaken the krona a bit. Given that Riksbank has said it is ready to take further expansionary measures if needed to ensure that inflation rises towards the target, I believe they could cut further at today’s meeting. There is an unusual dispersion in the market predictions, in part because no one knows any more how much they would cut now that rates are negative. Six out of 20 analysts see the rate remaining at -0.25%, while 14 expect a cut: five expect 10 bps (-0.35%), four expect 15 bps (-0.40%), and five expect 25 bps (-0.50%). The average and median are therefore around -0.35%. In any event, I expect further loosening and remain bearish on SEK.

ECB meeting on Greece The ECB holds its regular weekly meeting today. (I’m counting that as a central bank meeting too, although it is not a “monetary policy meeting.”) The main topic of discussion is likely to be the haircuts that it charges on Greek bank Emergency Liquidity Assistance (ELA) collateral. An increase in the haircut could be a significant tightening of conditions for the banks and a sign of increasing impatience on the part of the ECB. Enough of a change could effectively cap the amount of ELA funds, as it could exhaust the banks’ collateral. That could force Athens to move faster to avoid catastrophe. The banks’ liquidity position continues to be very strained even under current conditions. I expect no change after Athens recently shuffled its negotiating team to be friendlier to the EU.

Tsipras hints at a referendum Meanwhile, Greek PM Tsipras Tuesday hinted that he might call a referendum if an agreement with creditors falls outside his anti-austerity mandate. “If the solution offered goes beyond our mandate, it will have to be endorsed by the people,” he said in an interview on TV. He ruled out snap elections, however, saying there was no need for them. Eurogroup President Jeroen Dijsselbloem disapproved; he said a referendum would “create great political uncertainty” and that there wasn’t time for it. I see a referendum as the only way for Tsipras to gain the popular approval necessary to change his party’s position on agreeing with the creditors. Otherwise, the more left-wing members of SYRIZA might just support breaking off negotiations and defaulting. I therefore see this as EUR-positive.

Today’s highlights: As for the indicators, German CPI for March is coming out after several regional states release their data in the course of the morning. As usual, we will look at the larger regions for a guidance on where the headline figure may come in, as an indication for the near-term direction of EUR. That said, with the ECB on QE autopilot, neither the German CPI nor the Eurozone’s CPI to be released on Thursday are as market-affecting as before. Eurozone money supply for March and EU consumer confidence are also coming out.

The main indicator today is the first estimate of US Q1 GDP. The market consensus is +1.0% qoq SAAR, a slower pace than 2.2% qoq in Q4 2014. However, the consensus is based largely on forecasts made before Friday’s disappointing durable goods figure, which caused some firms to revise down their estimates. The Atlanta Fed’s GDP model for example is estimating an even lower 0.1% pace. The possibility of a disappointment seems high. The question is whether the market will assume this is like last year, when growth was weak in Q1 (-2.1%) but rebounded in Q2 (+4.6%), or whether they will think it’s a sign of some more fundamental problems with the economy. The first estimate of the core personal consumption index, the Fed’s favorite inflation measure is also coming out. A weak reading could prove USD-negative.

BoJ and RBNZ Then overnight we have two more central bank meetings: Bank of Japan (BoJ) and Reserve Bank of New Zealand (RBNZ).

The Bank of Japan has already admitted that the country will probably fall back into deflation later this year after the rise in the consumption tax falls out of the calculation. On top of that, Governor Haruhiko Kuroda last Thursday said in the Diet that achieving the 2% inflation target might take longer than expected, into the fiscal year that starts in April 2016. Further details and new long-term projections for growth and inflation are expected in the semi-annual Outlook for Economic Activity and Prices report, which will be released after the meeting. The previous (end-October) full report predicted that inflation will “reach around 2 percent around the middle of the projection period; that is, in or around fiscal 2015,” but the Board lowered that forecast to 1.0% in its interim assessment in January. The Nikkei has reported that the report may lower the forecast further to 0.5%-1%. It was such a change in the inflation forecast that triggered the surprise easing on 31 Oct last year. However, it’s probably the medium-term forecast that matters more. They are still forecasting inflation back at 2.2% in FY2016, showing that they expect to achieve their 2% goal. The key question is whether the bank will adjust its claim in the October report that the CPI is likely to “reach around 2 percent around the middle of the projection period; that is, in or around fiscal 2015.” Nonetheless, no action is likely at this meeting and hence the market reaction is likely to be limited. I would expect them to wait at least until July, when the results of this year’s wage negotiation should be known and the MPC members update their forecasts again. October is the favored month for the market.

As for the Reserve Bank of New Zealand, market expectations are for no change in rates at this meeting. Last time, they kept interest rates unchanged and signaled an extended period of steady interest rates. However, recent comments by RBNZ Assistant Governor John McDermott that weakening demand and domestic inflationary pressures would prompt the Bank to consider lowering interest rates signal a moderate shift towards an easing bias, in my view. The fall of inflation rate below the lower boundary of the range target amplifies the case for no rate increases this year. The March statement ended by saying “Our central projection is consistent with a period of stability in the OCR. However, future interest rate adjustments, either up or down, will depend on the emerging flow of economic data.” The focus tomorrow will be on whether they still see a period of stability and whether the risk of an up or down move is still evenly balanced. A formal shift to an easing bias, as seems likely to me, would probably weaken NZD, whereas maintaining the current neutral bias might cause it to strengthen.

The Market

EUR/USD finds resistance a few pips below 1.1000

EUR/USD continued to climb higher on Tuesday. It broke above the resistance (now turned into support) of 1.0910 (S1) and hit resistance at 1.0990 (R1). The near-term bias stays positive, in my view. I believe that a move above 1.0990 (R1) is likely to open the way for another test at the critical resistance line of 1.1045 (R2). Nevertheless, our short-term oscillators still give evidence that a minor pullback could be in the works before the bulls take another shot. The RSI hit resistance near its 70 line and turned down, while the MACD shows signs of topping and that it could fall below its trigger soon. In the bigger picture, EUR/USD is still trading below both the 50- and the 200-day moving averages. However, a clear close below 1.0460 is needed to confirm a forthcoming lower low and trigger the resumption of the larger downtrend. On the other hand, a close above 1.1045 (R2) could signal the completion of a double bottom and perhaps set the stage for larger bullish extensions.

Support: 1.0910 (S1), 1.0830 (S2), 1.0785 (S3).
Resistance: 1.0990 (R1), 1.1045 (R2), 1.1115 (R3).

GBP/JPY continues its near-term uptrend

GBP/JPY continued to trade higher to breach the resistance (now turned into support) line of 181.75 (S1) and to trade near the 182.30 (R1) barrier. The pair is still trading within a short-term upside channel and this keeps the short-term picture positive in my view. A move above 182.30 (R1) is likely to set the stage for a test at 183.00 (R2). Nevertheless, looking at our oscillators, I would stay cautious that a pullback could be looming before buyers try again. Both the RSI and the MACD show signs that they could start topping. On the daily chart, the rate is trading above both the 50-and the 200-day moving averages and this supports the continuation of the short-term uptrend. Our daily oscillators corroborate that view as well. The RSI continued higher after crossing its 50 line, while the MACD, already above its trigger line, just poked its nose above its zero line.

Support: 181.75 (S1), 181.00 (S2), 180.00 (S3).
Resistance: 182.30 (R1), 183.00 (R2), 183.80 (R3).

AUD/USD breaks escapes from a 3-month sideways range

AUD/USD flew yesterday, crushing the key resistance (now turned into support) line of 0.7900 (S2), which is the upper bound of the sideways range the pair had been trading since the 29th of January. This confirmed my view that following the completion of the double bottom, the short-term bias of this pair is to the upside. However, the advance was halted by our resistance line of 0.8025 (R1), marked by the peak of the 28th of January. A break above that obstacle is likely to target initially the next resistance at 0.8065 (R2). Looking at our oscillators though, I would be mindful that a possible corrective move could be on the cards. The RSI has topped and looks ready to exit its overbought zone soon. The MACD shows signs of topping as well. On the daily chart, the upside escape from the 3-month trading range between 0.7550 and 0.7900 (S2) confirmed the positive divergence between the daily oscillators and the price action and turned the medium-term bias to the upside, in my view.

Support: 0.7940 (S1), 0.7900 (S2), 0.7840 (S3).
Resistance: 0.8025 (R1), 0.8065 (R2), 0.8135 (R3).

Gold shoots up once again

Gold continued its surge yesterday, breaking above 1205 (S1) and hitting 1215 (R1). As long as the metal is trading above the upper bound of the near-term downside channel, the short-term picture remains positive. A clear break above 1215 (R1) could probably set the stage for extensions towards the next resistance at 1224 (R2), defined by the peak of the 6th of April. However, given that the RSI found resistance at 70 and retreated, I would be careful that a pullback could be looming before the next positive leg. A pullback could perhaps test the 1205 (S1) line as a support this time. As for the bigger picture, this week’s rally brings into question my view that we could see the metal trading lower in the not-too-distant future. As a result, I would take to the sidelines as far as the overall picture is concerned. A clear close above 1224 (R2) could signal the completion of an inverted head and shoulders formation and perhaps carry larger bullish implications.

Support: 1205 (S1), 1197 (S2), 1186 (S3).
Resistance: 1215 (R1), 1224 (R2), 1235 (R3).

WTI rebounds from 56.10

WTI rebounded from 56.10 (S2) on Tuesday, but hit resistance near 57.85 (R2) and retreated to sit around 56.75 (S1). With no clear trending structure on the 1-hour chart, I would switch my stance to neutral for now as far as the near term is concerned. The trendless short-term picture is also confirmed by our hourly oscillators. Both the 14-hour RSI and the hourly MACD stand near their equilibrium lines pointing sideways. However, on the daily chart, I still see a positive medium term outlook. The break above 55.00 on the 14th of April signalled the completion of a double bottom formation, something that could carry larger bullish implications in the not-too-distant future. Therefore, I would treat any possible further downside extensions as a corrective phase.

Support: 56.75 (S1), 56.10 (S2), 55.70 (S3).
Resistance: 57.35 (R1) 57.85 (R2), 58.40 (R3).