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Aussie Central Bank cut rate by 1.75% on May 3rd. AUD expected to gradually fall over the year.  Key support AUD\USD 0.74 (already broken) EUR\AUD 1.54


"Despite the rate cut we maintain our view that the Australian dollar should be well supported on dips towards US75¢," they said. 

"With iron ore holding [for now] above $US60 per tonne, premium coking coal closer to $US100 per tonne, export volumes rising plus reduced concerns about China and improved global risk sentiment, it's hard to see the Australian dollar much below that level near term, though Friday's Reserve Bank Statement of Monetary Policy will be closely watched for forecast changes."

Some forecasters, however, were more bearish on the Aussie – at least for the short-term.

"The prospect of the Reserve Bank easing again and the US Federal Reserve hiking sooner than expected...could potentially push the Australian dollar lower to US72¢-US73¢," said easyMarkets senior dealer Andreas Tjahja.

That ​was also the view of IG market analyst Angus Nicholson.

"The combination of the Reserve Bank rate cut, bounce in the US dollar, and wilting commodity prices is setting the Aussie dollar up for a fairly sustained drop," he said.

"The Aussie dollar lost 2.3 per cent overnight [Tuesday] and crucially broke through its key support level at US75¢.

"If we do start to see consistent momentum behind this sell-off, a move down to US72¢-US73¢ could happen within a week."


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The kiwi fell to 68.54 US cents, dragged lower by a drop in the Aussie dollar, from 69.02 cents yesterday.


the kiwi has now risen to levels against the Aussie "where it looks very elevated to me" give there is growing market expectation that the Reserve Bank of New Zealand will cut the official cash rate to a record low 2 percent in June.

"The market is moving closer to pricing in more rate cuts from the RBNZ," he said.

The overnight swaps market was indicating a 66 percent chance of a cut in June, with the odds rising to 96 percent by the August monetary policy statement, he said.



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the market does not expect UK Bank Rate to start rising until mid-2020 and even then only very gradually.

The decline in the value of the British pound reflects this move in expectations; only when the market starts pricing in a rise coming sooner will the currency likely gain traction.

TD Securities: A 2016 Rate Hike Possible

James Rossiter, Senior Global Strategist at TD Securities, believes that if the UK votes to remain in the EU in the upcoming referendum, the Bank of England will be in a position to hike Bank Rate in November.

What is clear is that cost pressures continue to be the highest priority to the MPC’s framework.

Wages are one of the biggest costs that firms face, and we’ve seen sustained increases in private sector regular pay growth in the past four months to 2.4% y/y.



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One side-effect of the EU referendum is that traders are now treating the UK currency as ‘risky asset’ - i.e one that is to be bought when times are good and sold when sentiment sours.

What we are witnessing this April is a decent rally in stock markets, a move that has coincided with a stronger GBP/EUR.

Of note is that there is a decent correlation with the German DAX in particular:






Now this is by no means a perfect correlation, but it does indicate the two are trending together, with both drawing on the ‘same kind’ of risk.

(i.e A FTSE rally is a little different to a DAX rally owing to the index’s strong weighting towards the resource sector).



Therefore we will continue to watch the general sentiment of markets, and particularly German markets, until such a time as this relationship breaks down.

The move above 1.26 in the GBP/EUR comes as European equities climbed to a three-month high on Tuesday thanks to encouraging updates from companies such as French cosmetics firm L'Oreal and advertising group Publicis.

On the macro front German business confidence data beat expectations by coming in better-than-expected.

Germany’s ZEW index of investor optimism brightened for a second straight month, rising to a four-month high of 11.2 in April.

Typically we would have expected the pound to fall against the euro on such an event as the euro would traditionally be the inheritor of strength from Eurozone economic data.

But in today’s environment where positivity aids the pound sterling more, the euro has lost out.




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Why then has the USD’s ability to weaken declined? There are three reasons:

First, CFTC data indicate that speculative USD long positions have been pared back significantly from around 25% of open interests in November to about 3.2% currently, although if we exclude the JPY, the drop is comparatively less.

“Given relatively positive labor market fundamentals in the US economy, we doubt that USD positioning will turn to net short in the near-term,” say Barclays. This should derive dollar bears of the required momentum to extend the decline.

Second, Barclays’ research suggests the US dollar is likely very close to a bottom, if history is any guide. The trade-weighted dollar has already fallen more than 7% . versus the majors since the January peak, compared to the largest peak-to-trough drawdown in a USD uptrend of 9.5% .


Finally, the prospects of an interest rate rise at the Federal Reserve - the lifeblood of dollar strength - are already really quite low, and chances are growing that they start to rise.


A rise in expectations will naturally see the dollar catch a bid.


Then there is the status quo in global stock markets; the recent rally in stocks has not been helpful to the USD which typically catches a bid when markets are nervous.


“Although we expect benign market conditions and a range-bound USD in the near term, there are risks on the horizon that could potentially interrupt the risk recovery. In particular, financial risks in China appear to be rising,” say Barclays.


Chinese SOE defaults in the onshore bond market have driven credit spreads wider, in turn leading to renewed pressure on the stock market.


“Consequently, roughly RMB60bn of onshore bond issuance was cancelled or postponed, while reported defaults in the shadow banking sector have increased,” say Barclays, “if the contagion effect widens beyond China’s shores, safe haven demand for the USD could return.”



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Based on CME Group 30-Day Fed Fund futures prices, which have long been used to express the market’s views on the likelihood of changes in U.S. monetary policy, the CME Group FedWatch tool allows market participants to view the probability of an upcoming Fed Rate hike.




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Hitting a Limit

The move higher in sterling has certainly lost some steam. The GBP/EUR exchange rate is looking particularly vulnerable to stalling, as we note here, having risen into the brick wall that is the 100 day moving average.

The technicalities of the market appear to be marrying with fundamentals as the odds for a Remain vote appear to have risen to their limit.

It is almost certain that they will retreat in the run-up to the referendum.

"While those within the financial markets may continue to focus upon the economic merits of membership, for many voters, particularly those outside of the London bubble, the decision remains far more ‘emotional.’  Hence while the remain campaign may have had a strong start the race is by no means over, despite the interjection of Obama into the debate," says Jeremy Stretch, FX analyst with CIBC in London.

Analyst James Rossiter at TD Securities is in agreement and sees the pound to dollar exchange rate retreating all the way to 1.35:

"Despite the rise in odds, we emphasise that we remain cautious going forward—there are still nearly two full months between now and the referendum. As our recent analysis has shown, while a Remain win is favoured by both polls and betting markets, micro-analysis of polling data suggests that turn-out will be key, and a low–to-average turnout will favour a Leave win."

TD Securities have taken profit on our Dec16/Dec17 short sterling steepener trade, while on the FX side they maintain their view that GBPUSD will continue to depreciate into the vote date, with a target of 1.35.

Where Next for Sterling v Dollar?

TD Securities have laid out their stall, but this is by no means the only opinion going.

Looking at the key exchange rates we note that the pound to dollar exchange rate is now at 1.46, around about the January highs.

Two things could now happen - the pound turns lower in a move that confirms this as the upper limit of a range that it will trade ahead of the June referendum.

Or, a break above the highs will confirm a medium-term change in trend which will see the pound head back towards 1.50, a target that we set earlier this month when noting the increase in buying interest in the GBP.

“Medium term, we expect the market to continue to trade a range between 1.3850-1.35 support and 1.45-1.48 resistance. Through 1.35 there is little support till the 1.28 region. A move up through 1.48 and 1.50 would suggest the 30-year support region has again held for a gradual long-term move back towards 1.60,” says Robin Wilkins at Lloyds Bank.




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Where Next for Sterling v Euro?

The pound continues to push its advance against the euro too with the euro to pound sterling exchange rate (EUR/GBP) falling to 0.7736.

Turning the equation around this translates to 1.2924 - very near to some of the targets that we have been mentioning in the forecasts we have reported of late.

Again, what we are seeing here is the potential change in trend on the pair, good news for those who are using sterling to buy euros but a ‘better act quick’ message to those using euros to buy sterling!

“Medium term, the trend from the 0.6935 lows set in July 2015 is starting to show signs of reversal. We are clearly through key daily trend supports, but we haven’t broken any major lows yet. A close through 0.7660 would be the first of these to watch for,” says Wilkins.

Then our focus will be on weekly trend support at 0.7590.

Wilkins reckons a direct rally back through 0.7950/0.80 would re-open the recent highs, while a move through 0.82 is needed to negate our underlying view for a move back towards 0.74

CIBC's Stretch believes the relief rally in GBP also has to be kept in some degree of context owing to the real possibility that the tone on the EU referendum could shift quite suddenlt.

"However, in the near term we would be wary of EUR GBP continuing to head back towards 0.7690/95, ahead of what is likely to be a disappointing UK Q1 GDP data on Thursday," says Stretch.

As alluded to, mid-week brings with it the US Federal Reserve meeting and UK GDP numbers - both of which could shift sentiment and put sterling on the back-foot again.




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Pound Sterling



We would instead expect a depreciation in Sterling of roughly 10% against the US Dollar and 5% against the Euro in the immediate aftermath of a Brexit vote.

Conversely, and given the odds being priced in, an ‘in’ vote and the resulting clearing of uncertainty would bring about a Sterling rally of roughly half that amount, 5% against the US Dollar and 2.5% against the Euro.

It could be very interesting to see how the Bank of England would react in the event of a Brexit. We would expect the monetary policy committee to issue an emergency interest rate cut and flood the markets with liquidity in order to maintain monetary stability.

By contrast, an ‘in’ vote would lead markets to quickly remove expectations for a rate cut and start pricing in the chance of a hike at some point in the following twelve months.

We therefore still forecast the Bank of England to hike rates in the final quarter of 2016, provided the UK remains a member of the European Union following this summer’s referendum.




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New Zealand Dollar



The New Zealand dollar was the third-worst performing currency in the G10 forex space in the first week of May and the second week of May is likely to result in further declines.

A good deal of the NZD’s weakness can be blamed on its trans-Tasman cousin, the Australian dollar.

The Aussie fell sharply as the Reserve Bank of Australia (RBA) surprised first with a rate cut and then with a downbeat monetary statement in which inflation expectations for 2016 were slashed.

A sharp fall in iron ore prices only served to add to dour sentient.

Analysts are in agreement - the RBA is likely to cut interest rates again as it tends to follow the ‘cockroach principle’ on delivering policy changes.

With the prospect of Australian interest rates at 1.5% this year, the Reserve Bank of New Zealand will become incredibly nervous at being left stranded with a 2% base interest rate.

Australia and New Zealand have long attracted foreign currency inflows as investors seek to earn yield on higher interest rates which are underpinned by the high base interest rates set at the respective central bank.

A 2% yield at the RBNZ confirms New Zealand’s attraction in this regard will only rocket, putting upward pressure on the NZD, something the RBNZ is desperate to avoid as the expensive kiwi has the effect of stifling export demand and deterring tourism.


Markets are betting that the RBNZ will have to chase the RBA and cut interest rates again, thereby undermining the attraction of the New Zealand dollar.


Such bets are justified as low inflation and an under-pressure dairy sector are also proving problematic for New Zealand and lower interest rates will certainly provide a boost.

The move lower in the NZ dollar is based on the premise that the RBNZ will cut interest rates over coming months. But…

There is One BIG Problem

The RBNZ would certainly have already cut interest rates further than it has were it not for the persistent headache that is the property market.

The property market remains red-hot and presents the RBNZ with a conundrum:

It needs to keep rates low to stimulate inflation back up to the target range of 1 to 3 per cent while being wary of the impact low interest rates are having on the heated housing market.

Typically you deal with a hot housing market by raising interest rates which in turn subdues demand for mortgages. But this would knock the economy into recession, so other measures have been sought in order to deal with the housing market.

The New Zealand government introduced a capital gains tax on investment properties bought and sold within two years while the RBNZ introducing a 30% loan-to-value restriction on borrowing.



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Aussie Dollar



The weakness in AUD comes almost exclusively from the Reserve Bank of Australia where a surprise interest rate cut at the start of the week was reinforced by a downgrade to inflation expectations at the end of the week.

Australia’s currency has long found support from foreign inflows of capital as investors seek out the country’s superior interest rate yield, courtesy of the central bank’s high base interest rate.

The cut to 1.75% in the base interest rate this week dramatically diminishes that advantage and prospective currency inflows.

And, the rate could be slashed further researchers tell us.

“It is hard to imagine that a single RBA rate cut this year will suffice to address the unexpected step lower in Australian inflation. This is in line with the familiar “cockroach principle” of interest rate changes: there’s never just one,” says Sean Callow at Westpac Global Markets in Sydney.


Westpac believe Governor Stevens will leave his successor Phil Lowe in Sep with a 1.5% cash rate, lowering the profile for AUD/USD in coming months. "Such a prospect is currently priced about a 50% chance. This poses risks to AUD on a range of cross rates, if markets start to move towards our view in the weeks ahead," says Callow.


Westpac reckon the impact of the RBA’s rate cut is likely to be long-lasting, including largely removing the prospect of AUD/USD making a push towards 0.80, even with the US dollar’s outlook being lukewarm.



"This is unlikely to be a 'one and done' cut. The RBA nearly always follows up with another cut. And we expect this time to be no different," says Felicity Emmett at ANZ Research.

Emmett believes the RBA’s decision to cut rates will keep a lid on further appreciation in the AUD, and increases the likelihood that we have seen a peak for the AUD.



Forecasting More Declines Against Pound Sterling

With the AUD under so much pressure the underlying structure of the markets it trades in has shifted.

We have witnessed a notable technical event occurring against pound sterling in the first week of May that has us confident that the GBP to AUD will advance further against the Australian dollar.

The GBP/AUD managed to crack through the 100 day moving average - an area that had been proving a barrier to advances - which opens the door to a test of 2.0 once more.

2.0 in GBP/AUD appears to be a decent target from which those with an interest in buying Aussie dollars can place buy orders with their brokers.





The Australian dollar is now left particularly exposed to an US dollar which is looking increasingly intent on recovering the ground it has lost in 2016.

Indeed, the dollar was the best performing currency in the G10 space over the course of the first month of May.

This advance comes despite a notable miss on the much-anticipated release of employment data on Friday the 6th.

While the prospect of a June interest rate rise at the US Federal Reserve has been put to bed by the employment data, the dollar could well advance over coming days.

“Can the dollar still rise in the coming week?  Yes because the steady 0.3% increase in earnings and the uptick in year over year wage growth provides hope that retail sales, which fell sharply in March will rebound strongly in April,” says Kathy Lien at BK Asset Management.


The Australian dollar was hit hard after the Reserve Bank cut its inflation forecast by a whole percentage point and downgraded its assessment of the economy.

As we have noted already, this move not only explains the central bank's decision to cut interest rates in May but also fuelled speculation of more easing.

Citigroup's economiic researchers now estimate it may take up to 3 quarters before Australian inflation is back within the RBA’s 2-3% tolerance band, which potentially guarantees that further rate cut from the RBA.

“AUD is therefore seen to be more vulnerable to a turn in USD sentiment – which also makes it vulnerable on crosses such as sterling and euro which have recently found more resilience,” say Citi in a foreign exchange brief to clients.

However, there are likely to be limits to the currency’s weakness.

Westpac’s Sean Callow reckons that because the most recent set of US employment data came in below expectation the immediate threat of a notably higher US dollar has eased, limiting the downside for the Aussie.

“So another rate cut is likely to be driven mostly by further evidence of slowing inflation, with growth holding up OK. Near term, this should help AUD/USD stabilise ahead of 0.74. The US dollar looks soft enough near term to reinforce demand for AUD/USD on dips,” says Callow.

Those with Australian dollar purchase decisions should therefore be positioned for further AUD declines but be realistic as to just how far they will extend.




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There is good reason for the euro to be in demand on a fundamental basis.

Euro area flash Q1 16 GDP growth surprised to the upside printing above consensus forecasts at 0.6% q/q (0.55% at two decimal places).

This almost doubles its growth rate from Q4 15 and pencils in a new record high since the historical peak in Q1 08.

However, analyst at Olga Tschekassin at Barclays in London is a little sceptical about the latest data release:

“With no details released by Eurostat, very few national statistical offices having released their own GDP data, and only France to release a full expenditure GDP breakdown, there is an unusually low amount of information (mainly due to the fact that Eurostat decided to move its flash GDP release publication to 30 days after quarter end, from 45 days previously).”

Tschekassin notes that business and consumer surveys have moved sideways in the last few months, and she thus believe that Q1 GDP growth might constitute a one-off acceleration and the pace of growth is unlikely to be sustained throughout this year.


The euro is headed towards the top of its recent ranges against the US dollar defined by 1.12 towards the bottom and 1.1450 towards the top.

We would imagine that repeated failures to break above 1.1450 will have convinced markets to layer significant amounts of sell orders at 1.1450-1.15 and just above.




So expect a strong supply of euros to be made available as we toy with these levels.

However, if the bulls are determined enough and able to clear out the sell orders then we could well see a strong pop towards August 2015 highs at 1.17.

There remains reasons to be sceptical on the euro’s ability to really push higher beyond these levels.

Most notably is that expectations with regards to the amount of US Federal Reserve rate hikes that will fall in 2016 are really quite low.

Markets are pricing in one rate rise at most, seemingly ignoring rising inflationary pressures and an unrelentless supply of positive job data.




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When reducing interest rates to historically low levels did not stimulate growth and inflation, the ECB embarked on a massive programme of purchasing eurozone sovereign debt. But the sellers did not spend or invest the proceeds. Instead, they placed the money on deposit.



So the ECB went to the logical extreme: it imposed negative interest rates. Currently almost half of eurozone sovereign debt is trading with a negative yield. If this fails to stimulate growth and inflation, “helicopter money” will be next on the agenda. Future students of monetary policy will shake their heads in disbelief.



What is more, as purchaser-of-last-resort of sovereign debt, the ECB is underwriting the solvency of its over-indebted members. Countries no longer fear that failure to reform their economies or reduce debt will raise the cost of borrowing. Six years after the onset of the European debt crisis, total indebtedness in the eurozone keeps on rising. Badly needed reforms have been abandoned.



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Negative rates signal to the average consumer or small or medium-sized company that things are dire. Such uncertainty means people save more and capital expenditure remains stagnant. Capital supports businesses that would not be viable under normal conditions. Households without financial assets are hardest hit, while those owing equity-portfolios or property benefit from increasing asset prices.



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Canadian Dollar



A look at the charts confirm the Canadian dollar’s advance is by no means over yet.

The US to Canadian dollar exchange rate (USD/CAD) has fallen from 1.4690 reached in January to current levels around 1.2725 as the CAD embarked on a period of appreciation alongside rising oil prices.

In trying to anticipate future CAD moves we note that there is yet to be a discernible base formation, the first requirement ahead of any recovery in the pair.

Indeed, USD/CAD is trading below its key moving averages, and until we see a break above the 20 day moving average we will continue to anticipate further declines.

Note too that momentum is deep in the red (lower pane):




Against the pound sterling, the CAD could be running out of strength as there is in fact a tentative attempt at forming a base. The pound has been a strong performer over the past two weeks with signs that the markets have had their fill of EU referendum selling for now.

The currency pair is finding a good amount of demand at 1.8080 it would seem, this has allowed the formation of a ‘double bottom’ (looks like a W) which technical traders often use as the basis to buy as it suggests a floor has been found.




That said, the pair continues to trade below its moving averages while momentum here is also negative.

The Canadian dollar remains in command, we believe, and this will continue to press against the Canadian export sector which would like to see a weaker currency in order to stimulate international demand for Canadian produce.

Will the Bank of Canada Block Further Strength?

At its April meeting, the Bank of Canada nudged against recent Canadian Dollar strength, noting in the statement the profile of non-energy exports was weaker than projected, in part driven by the higher C$.

Governor Poloz’s attempt at capping CAD strength was by no means aggressive, nevertheless the comments do suggest there is a concern.

We would imagine that as the currency grows in strength so too will the BoC’s displeasure, and therefore so do the dangers that the BoC could act and weaken the currency.

Poloz and Senior Deputy Governor Wilkins then appeared in Parliament last week to discuss the outlook for the Canadian economy.

Poloz noted that the recent outperformance seen in the Canadian economy is not forecast to persist as the positive boost provided by a weaker CAD heading into 2016 is diminished.

They stated that the strengthening Canadian dollar was clouding the outlook for the economy:



"The Canadian dollar has also increased from its lows. Our assumption in our current projection is 76 cents US, four cents higher than in January. While there are many factors at play, including oil prices, most of the increase appears to be due to shifts in expectations about monetary policy in both the United States and Canada. The higher assumed level of the dollar in our projection contributes to a lower profile for non-resource exports, as does lower demand from the United States and elsewhere."

The rising CAD, and other developments, would have meant a lower projected growth profile for the Canadian economy than the BoC had in January.

The question now becomes, how far will the CAD fall in light of a central bank that clearly does not like what it is seeing?

“Importantly, the comments limit USD/CAD downside, in our view, as any further C$ gains will reinforce an already cautious BoC tone,” says Ian Gordon, analyst with Bank of America Merrill Lynch.

Canadian Dollar Overvalued

By mid-April the Canadian dollar had earned the accolade as the 3rd best performing currency this year, behind JPY and NOK, having appreciated a sharp 5% since end-Feb as oil rallied.

The Federal Reserve Bank’s dovish tone and comfort at “being behind the curve presents headwinds for the U.S. dollar broadly with higher breakevens supporting higher-beta currencies, like CAD, as US real yields move lower,” notes Bank of America’s Gordon.

However, the supportive factors for the Canadian dollar have also grown, the policy signal is muted as the BoC prepares to raise its growth forecasts on the back of the recently announced Federal spending plans.



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Longterm oil production costs in Canada are over 40 dollars a barrel.


Canada reported earlier this week that the country experienced its worst trade deficit ever as exports hit the lowest level in more the 2 years.

Deterioration in the March 2016 trade deficit resulted from exports dropping by $2.1 billion (4.8%) tempered by imports declining by $1.1 billion (2.4%).

While some commentators have suggested the trade data is an open invitation to an interest rate cut at the Bank of Canada it is worth noting that the Bank’s most recent forecast assumed even greater slowing in growth in the current quarter to 1%.

As such, "we expect the central bank to hold policy unchanged in the near term while awaiting confirmation of this outlook," says Paul Ferley, Assistant Chief Economist at RBC Economics.

So while there is no immediate BoC-inspired threat to CAD, there is evidence that economic numbers may be headed in the wrong direction.




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Japanese Yen



The Bank of Japan has surprised investors by deciding against any fresh market stimulus despite shocking data that underlined the huge problems facing the country’s economy.


Although it kept its negative interest rate policy in place and voted to continue with its massive asset purchase scheme, the bank’s policymakers refrained from any extra measures to kickstart the stagnating economy.


The dollar plunged 2.35% against the yen following the news as investors clawed back trades based on the expectation of more easing that would have weakened the Japanese currency.


On the share market, the Nikkei fell sharply in reaction to the news and was down more than 3.5% at 7am GMT.



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