Would the RBNZ cut the policy rate further?

KBC Market Research Desk KBC Bank

Markets

The US announcing a pause Johnson & Johnson vaccinations was quickly set aside. Instead, attention soon shifted to stronger-than-expected March CPI. Bond yields somewhat surprisingly quickly erased their kneejerk move higher. Strong demand for the US 30 year auction despite the recent yield pause dragged rates even further lower. The US curve bull flattened, the belly (-4.5 to -5 bps) outperforming the wings (-3.5 to -4 bps). A (bond) bullish double top formation is developing in long tenors from 10y over 20y to 30y with neckline support situated near 1.6%, 2.2% and 2.3% respectively. German bonds finished a choppy session virtually unchanged. EMU stocks struggled to find direction. Wall Street closed with new record highs for the S&P500 (+0.33%) and Nasdaq (+1.05%). The US dollar swapped initial strengthening for weakening in the wake of stronger (!) CPI data, losing vs. all G10 peers. EUR/USD rose from below 1.19 to 1.1948 after testing intermediate resistance near 1.195. USD/JPY neared the 109 barriers. DXY (trade-weighted dollar) ditched support at 92 to close around 91.85. EUR/GBP continued to arm-wrestle with 0.87. It ventured briefly north in sympathy with EUR/USD but closed just below this tough resistance. Crypto’s fared well too. The IPO of a large cryptocurrency exchange has relaunched their popularity.

Overnight news flow is very thin. Asian-Pacific stock market sentiment is generally constructive this morning, following the US performance yesterday. China and India outperform. The central bank of New Zealand chose for a status quo (see below). The kiwi dollar is leading the G10 scoreboard though that’s mainly the result of a US dollar on soft footing. EUR/USD ekes out gains towards 1.1962. DXY drifts further south. Core bonds trade with a minor downward bias.

Today’s economic calendar isn’t very spectacular, leaving the opportunity of current market trends to continue. That means an ongoing dollar correction, perhaps accompanied (or even driven) by a further decline in US yields.In EUR/USD we’re looking at important resistance near 1.199 (March 2021 correction high) after taking out 1.195 this morning (2021 38.2% retracement). A break north turns the technical picture neutral. The parallel support zone for the DXY lies at 91.32. As for US yields, we’re monitoring the 10y in particular. Both the 20y and 30y already fell below the upward sloping 2021 trend channel end of March. The 10y yield did so yesterday. This morning’s comeback is unconvincing. A slew of (soft?) Fed speeches by ‘the big three’ Powell, Clarida and Williams might trigger a test of neckline support near the 1.6%. Trading in EUR/GBP likely remains a EUR/USD derivative. Resistance in EUR/USD at 1.199 compares with 0.87 in EUR/GBP.

News Headlines

The Reserve Bank of New Zealand kept its policy rate (0.25%), the Large Scale Asset Purchase programme (LSAP) and the funding for lending programme unchanged this morning. The central bank holds on to its framework of least regrets until it has confidence in sustainably achieving employment and inflation targets. If necessary, the RBNZ will cut the policy rate further. LSAP purchases could slow because of reduced government bond issuance. Economic activity recently slackened with the outlook uncertain. Downside risks obviously stem from Covid-developments while the planned trans-Tasman travel bubble with Australia should support income and employment in the tourism sector. Headline inflation will exceed the 2% target for a period, but the central bank considers the impact from supply chain disruptions and oil price increases to be temporary. The kiwi dollar barely blinked after the policy statement. Instead, a weaker dollar is pushing NZD/USD up towards 0.71 for the first time since March 23.

US President Biden proposed a summit with Russian President Putin on neutral territory in coming month according to the transcript of a call between both presidents yesterday. Relations between the two soured in recent weeks with the US threatening sanctions following a build-up of Russian military in Crimea and on Ukraine’s borders. The Russian rouble enjoyed a relief rally with USD/RUB declining from 77.5 to 76.

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KBC Market Research Desk

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