Forex News and Events
RBNZ on hold, rate cut in the pipeline
On Thursday, the Reserve Bank of New Zealand left unchanged its official cash rate at record low 2% but extended a severe warning stating that “further policy easing will be required to ensure that future inflation settles near the middle of the target range”. Unfortunately for Governor Wheeler, its statement was completely overshadowed by the FOMC meeting as the market was too busy analysing the Fed’s statement and understanding Janet Yellen’s press conference in order to guess the timing of the next rate hike in the US.
The New Zealand dollar was therefore little changed after the release. However, the Kiwi muted reaction was also due to the solid profit announcement made by Fonterra. The Kiwi multinational dairy co-operative announced an annual profit of $834 million, up 65% from last year, and said it would pay out $3.90/kg milk solid for the 2016 season and 40 cents a share in dividends. It also raised its forecast of farmgate milk price to $5.25/kg milk solid for the next season.
On a broader front, the Kiwi economy has done relatively well over the second quarter, even though GDP growth over that period came in well below consensus, printing at 0.9%q/q versus 1.1% median forecast. On the inflation front, headline CPI has been far below the target band of 2%+/-1%; in the housing market, prices remains under upside pressures as immigration and domestic growth remain solid. The RBNZ has therefore only one issue: inflation, more specifically tradable inflation. We therefore expect Graeme Wheeler will cut the OCR down to 1.75% as the November in an attempt to devaluate the Kiwi.
Indeed, on a trade weighted basis the New Zealand dollar rose more 2% since the August meeting, well above forecast. Unfortunately for the RBNZ the weak global conditions and low interest rates relative to New Zealand have attracted investors across the globe, which increased the demand for the Kiwi. We do not expect the dynamic to change anytime soon as most central banks will maintain a strong dovish bias.
Fed maintains its hawkish stance
As we expected, the Fed has maintained its rate unchanged at 0.25% to 0.50%. The US central bank is awaiting further evidence that it can reach its objective. The Fed has also mentioned that a strong signal is very likely for a rate hike before year-end.
We maintain our view that a hike before year-end without sustainable inflation is not a likely scenario for the Fed, which is dragging out promises of a further rate hike to maintain credibility and in turn to avoid a dollar sell-off. It has now been more than a year that the Fed hints at a rate increase without actually taking action.
Fed Chair Yellen appears satisfied with the current state of the US economy. Yes, this satisfaction does not seem strong enough to tighten monetary policy, as officials await a pick-up in the labour market. Low unemployment rates are simply not synonymous with zero wage growth and signals a red herring. We believe that the current jobless rate is in fact underestimated and this is why the Fed is waiting for some improvement.
In the financial markets, the EUR/USD has picked up and equity markets have been improved by this latest Fed decision. The likelihood of a December rate hike is now priced at 61%. There is a strong sense of déjà vu as we face a long wait for the Fed to move to save face, which is sure to have consequences for the central bank - most likely a deeper equity market correction.
USD/JPY - Selling Pressures Surged. 
The Risk Today
EUR/USD is weakening towards hourly support given at 1.1123 (31/08/2016 low). Key resistance is given at 1.1352 (23/08/2016 high) then 1.1428 (23/06/2016 high). Strong support can be found at 1.1046 (05/08/2016 low). Expected to decline towards 1.1100. In the longer term, the technical structure favours a very long-term bearish bias as long as resistance at 1.1714 (24/08/2015 high) holds. The pair is trading in range since the start of 2015. Strong support is given at 1.0458 (16/03/2015 low). However, the current technical structure since last December implies a gradual increase.
GBP/USD has surged and is back above 1.3000. Hourly resistance is given at 1.3091 (19/09/2016 high). Key resistance is given at 1.3445 (06/09/2016 high). Hourly support can be found at 1.2947. Expected to show renewed downside pressures. The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.
USD/JPY's volatility has increased. The pair is now trading lower. Strong resistance can be found at 104.32 (02/09/2016 high). Psychological support at 100 is not far away. A key support lies at 99.02 (24/06/2016 low). Expected to further weaken. We favour a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).
USD/CHF is moving up and down. There are periods of strong and low volatility and the pair seems without direction. Hourly support is given at 0.9632 (26/08/2016 low) while hourly resistance can be found at 0.9885 (01/09/2016 high). Next resistance lies at 0.9956 (30/05/2016 high). Expected to show continued increase. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.
