During the month of December, G-7 equity markets fell an average of 15% on fears that trade disputes combined with the tightening of financial conditions could trigger a global de-leveraging of share prices.
In response, the Peoples Bank of China (PBoC) freed up close to $100 billion by lowering bank reserve requirements for the fifth time in 12 months, the ECB outlined plans to re-open long-term targeted refinance operations (TLTROs) and the US Federal Reserve toned down its trajectory of rate normalisation as well as its balance sheet contraction.
Tomorrow the Reserve Bank of Australia (RBA) will meet for the first time since early December and release its updated policy statement. And while the odds of a change to the benchmark rate of 1.5% are very slim, Forex traders will be watching closely for any changes in the central bank’s guidance.
For some perspective, the RBA benchmark rate has been at the historically low level of 1.5% since August of 2016. In fact, since Stuart Lowe took over from Glenn Stevens as the RBA chief in September of 2016, the benchmark rate has not budged.
That’s not to say that the RBA has not been actively projecting its directional policy bias. In July of last year, just as the ASX 200 was trading at a 10-year high of 6300, the RBA released their board meeting minutes with the phrase ” the next move in cash rates will more likely be an increase.”
And even though Australian households are saturated with debt, domestic wage growth continues to stagnate and the national inflation rate is well below the RBA’s target of 2.0%, the central bank’s tightening bias still dominates interest rate discussions.
However, over the last several months, the yield on the Aussie 5-yr bond has dropped over 58 basis points from 2.43% to 1.85% (23%). In a similar move, the yield on the 2-yr bond has slipped 28 basis points from 2.10% to 1.82% (14%).
As a result, the Aussie yield curve is inverted out to 5 years. This curve structure tells us that the market is starting to price in the possibility of a rate cut in the second half of the year and that the RBA’s tightening rhetoric is beginning to ring hollow for investors.
As such, we consider any move in the AUD/USD into the .7300 range to be the sell zone. We are currently short from .7175. We suggest looking to add to short positions at .7310 with an initial target of .6960 and a .7375 stop.
The data schedule in the Euro zone is fairly light except for the ECB Economic bulletin due out on Thursday. These updated forecasts don’t usually move the market. However, considering that both Italy and Spain are on the edge of recession, these numbers may have a greater impact this week.
We are currently short from 1.1475. We suggest adding to short positions at 1.1485 with an initial target of 1.1180 and a 1.1575 stop.
The Bank of England is meeting on Thursday and will announce their inflation estimates along with their economic policy summary. We don’t expect any material policy changes but comments about the impact of a hard Brexit may add to the Sterling’s weakening technical outlook.
We are still short the GBP/USD from 1.3155. We suggest holding short with an initial target of 1.2860 and a break-even stop at 1.3155.
It seems that our technical signals for the USD/JPY have been wrong-footed recently. Since early December, our three trade suggestions have resulted in two break-evens and a 50 point loss.
Our break-even stop at 109.50 was hit on Friday, which leaves us flat. We suggest that short-term traders can look to sell USD/JPY at 110.40 with an initial target of 108.20 and a 111.35 stop.
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