BRL to lose ground as commodity rally fades, Norges Bank cut rates

Forex News and Events

Brazilian assets on rollercoaster ride (by Arnaud Masset)

Over the past two weeks the Brazilian real has been caught in crossfire between mounting political instability and a rally in commodity prices. As if volatility wasn’t high enough, last Wednesday the Federal Open Market Committee surprised the market, which was pricing in a more hawkish signal and lowered its projections for 2017 for the federal funds rate to 0.875%, compared to 1.375% at its December meeting, on concerns of worsening global slowdown and high volatile financial markets. In other words, the Fed now anticipates to hike rate twice in 2016 compared to four initially.

Last Wednesday, the political crisis climbed another notch in Brazil after President Dilma Rousseff named Luiz Inacio Lula da Silva her chief of staff and a federal judge released a taped conversation suggesting that President Rousseff offered the position to protect Lula against ongoing prosecutions - the cabinet position provides immunity from the current charges of money laundering and making false declaration but not from the Brazilian Supreme Court. As a result, millions of Brazilians took the streets to call for President Rousseff to resign. One would think that the mounting political mess would weigh heavily on Brazilian assets but this is the opposite that is happening as investors see it more as a positive development that would help to remove the reform gridlock and put the country back on the growth path. In the latest twist, a judge blocked the appointment of Lula as chief of staff, arguing it could derail the ongoing investigation.

Separately, the fading risk-off sentiment and hopes for stronger Chinese demand supported iron ore prices, one of Brazil's key export sectors, and pushed prices by roughly 50% since mid-January. Similarly, most commodities rallied heavily lately with the West Texas Intermediate testing the $40 level for the first time since mid-December and gold rising 17% since the beginning of the year. The Brazilian real rose sharply on Thursday as protesters took the streets. However, we expect USD/BRL to come under renewed upward pressure on Friday as the commodity rally runs out of steam.

Norway between inflation and competitiveness (by Yann Quelenn)

Yesterday, Norges Bank lowered its deposit rates to an historic low of 0.50% from 0.75%. The Norwegian central bank is trying to foster growth in a country where a quarter of its economy depends on the oil industry. In 2015, the GDP printed at 1% y/y, down from 2.3% the previous year, mostly due to the decrease in investments. However, consumer spending and exports improved last year, both increasing 2% and 2.6% respectively. Unemployment is on the rise and even though it remains relatively low, it has jumped from 3.5% in 2014 to 4.4% in 2016. Wage growth is expected to suffer. Declining economic conditions have been sufficient to convince Norges Bank to cut rates in order to import inflation and becomes more competitive.

The main issue in this competitive devaluation is that the ECB and Sweden are following the same monetary policy. The ECB is clearly trying to further devalue the single currency and Sweden has already adopted negative rates. Competitive devaluation is pushing Norges bank to maintain the stance of its monetary policy accommodative. In addition, the end of low oil prices would have the adverse effect to strengthening the Norwegian currency. We consider that this strategy of entering into competitive devaluation is not without risk as it could damage price stability. Indeed inflation is far from being weak - 2015 CPI printed at 3.1% y/y. Hence, Norges Bank is willing to increase upside inflation risks which would remove the increased competitiveness earned from a lower Krone. Last but not least, low rates could underpin a real estate bubble.

The Norwegian economy’s outlook is clearly uncertain. There is the need to increase competitiveness by devaluing the currency to increase growth and revenues as Europe and Sweden’s monetary policy in particular are so aggressive as negative rates are still in place. In other words, Norway is currently taking a bet of sacrificing price stability for the sake of competitiveness.

Silver - Bullish Breakout !!

The Risk Today

Yann Quelenn

EUR/USD's short-term bullish momentum is increasing. Hourly resistance lies at 1.1376 (11/02/2016 high) has been broken. Hourly support can be located a 1.1058 (16/03/2016 low). Expected to show further strengthening. In the longer term, the technical structure favours a bearish bias as long as resistance at 1.1746 ( 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).

GBP/USD is pushing strongly higher. Yet, the technical structure is still showing a medium-term bearish trend-line. Hourly resistance at 1.4437 (11/03/2016 high) has been broken while hourly support can be found at 1.4033 (03/03/2016 low). A break of strong resistance at 1.4668 (04/02/2016) is needed to show a reverse in the short-term momentum. 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.

USD/JPY has exited its range by breaking hourly support at 110.99 (11/02/2016 low). Hourly resistance is given at 112.96 (17/03/2016 high). Stronger resistance is given at 114.91 (16/02/2016 high) . Expected to see further consolidation. 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).

USD/CHF is now consolidating after it lost two figures over the last two days. The short-term momentum is clearly bearish. Hourly support at 0.9661 (11/02/2016 low) has been broken. Hourly resistance is located at 0.9914 (16/03/2016 high). Expected to show further consolidation 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: