Fading iron ore rally to increase pressure on BRL

Forex News and Events

Brazilian real to come under renewed pressure (by Arnaud Masset)

In Brazil, inflation is expected to have risen 10.44%y/y in February, slightly less than January 10.71% increase. It seems that inflation expectations have been successfully re-anchored for a few months now. Nevertheless, it is still above the Central Bank’s target range of 2.5% to 6.5% (the target range will be cut to 3% to 6% starting in 2017) and the BCB’s economic surveys showed no sign of substantial improvement lately. In fact, over the last few months, the market has already stopped paying too much attention to economic indicators from Brazil as the political chaos has lifted uncertainty to record levels.

Over the past week, the Brazilian real got a boost from the commodity rally and fading risk-off sentiment, which help it to reach levels last seen in September last year. Iron ore active contract benchmark has been rising 30% since the beginning of 2016 as traders speculated about a pick-up in Chinese demand. However, given China’s slowing economy and the current demand-supply imbalances, we anticipate this rally to be short-lived. As a result, we expect the Brazilian to come under renewed downside pressure on the short to medium-term as the iron ore bubble bursts. In addition, the escalating political crisis is also building the case for a weaker real. We anticipate USD/BRL to return shortly at around the 4.00 mark.

Draghi to toe the line with financial markets (by Yann Quelenn)

Consensus is resoundingly clear. The ECB will loosen monetary policy at tomorrow’s meeting. The deposit rate should decline to -0.4% from -0.3% and there is a decent likelihood that the refinancing rate, currently stalling at 0.05%, will go into negative territory. Expectations for this meeting are very high. Of course there is still an element of fear that Mario Draghi will under deliver tomorrow like he did at the December meeting when the pace of QE was not increased above €60 billion-a-month.

It is important to remember that downside pressure on the EURUSD is fading as markets start to question the true nature of the monetary policy divergence. The Fed is definitely struggling to hike rates and for the first time negative interest rate have been discussed. However, as we know this is not an option as Euro competitiveness would take the biggest hit in the event that markets further price in no rate hike this year.

At tomorrow’s meeting we will be closely analysing any announcement concerning inflation. We believe that it is likely that inflation forecasts will be lowered below 1% for 2016, which is far from the ECB inflation target of 2%, while growth projection should also face a cut to 1.5% on continued global uncertainties and weaker global demand. We firmly believe that Draghi will deliver exactly what the market expects with some fine tuning in terms of the bonds the European institution is going to buy. However, there will be no major shocks for fear of adding further turmoil to the overall situation.

Crude Oil - Recovery Continues

The Risk Today

Yann Quelenn

EURUSD is bouncing back. Yet, the short-term technical structure still suggests a further bearish move. Hourly resistance lies at 1.1068 (26/02/2016 high). Hourly support can be located a 1.0940 (07/03/2016 low) then 1.0810 (29/01/2016 low). Expected to show continued weakness. In the longer term, the technical structure favours a bearish bias as long as resistance holds. Key resistance is located region at 1.1453 (range high) and 1.1640 (11/11/2005 low) is likely to cap any price appreciation. The current technical deteriorations favours a gradual decline towards the support at 1.0504 (21/03/2003 low).

GBPUSD's short-term bullish momentum continues. Major resistance is given at 1.4409 (19/02/2016 high). Hourly resistance lies at 1.4284 (07/03/2016 high) while hourly support can be found at 1.4108 (04/03/2016 low). The technical structure suggests further increase as buying pressures are still on. The long-term technical pattern is negative and favours a further decline towards key support at 1.3503 (23/01/2009 low), as long as prices remain below the resistance at 1.5340/64 (04/11/2015 low see also the 200 day moving average). However, the general oversold conditions and the recent pick-up in buying interest pave the way for a rebound.

USDJPY is declining but remains above 112.00. Strong resistance is given at 114.91 (16/02/2016 high). Hourly support lies at 112.41 (intraday low). Next support lies at 110.99 (11/02/2016 low). Expected to show continued weakness. We favour a long-term bearish bias. Support at 105.23 (15/10/2014 low) is on target. A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems now less likely. Another key support can be found at 105.23 (15/10/2014 low).

USDCHF is definitely trading mixed. An hourly support lies at 0.9879 (04/03/2016 low), while a key support stands at 0.9847 (16/02/2016 low). Hourly resistance is located at 1.0012 (07/03/2016 high). Expected to remain in range around psychological level at 1.0000. In the long-term, the pair is setting highs since mid-2015. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours a long term bullish bias.

Resistance and Support: