AUD/NZD tumbles on bad AUD data.
Sentiment undecided as pair trades flat.

AUD/NZD went flat through New York, currently trading around 1.0935 with little volume.

The Aussie fell against the Kiwi yesterday on weaker-than-expected CPI data, and hasn’t been able to regain the lost ground, sinking from a high of 1.1039 to trade staunchly within the 1.0947-1.0919 range. Little economic data is expected for either currency for the rest of the week, outside of some low-impact building permit numbers for Australia at 00:30 GMT and New Zealand at 21:45.

AUD/NZD has drifted lower for three consecutive months as the Aussie pares back in light of weaker-than-expected growth in key economic metrics as the Kiwi continues to garner support with increases in job ads and higher expectations of wage growth.

AUD/NZD Technical Levels

The pair is currently caught in a volatility trap, with intraday support priced at yesterday’s low of 1.0920 and a resistance zone between  1.0958 and 1.0945.

Today’s pivot points:
R2: 1.1084
R1: 1.1010
PP: 1.0965
S1: 1.0890
S2: 1.0845

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Analysts at Westpac explained that at its January 2018 meeting (Chair Yellen’s last), the FOMC left the stance of policy unchanged as expected. 

Key Quotes:

“Alterations to the decision statement versus December were subtle, but together pointed to greater confidence in the Committee’s ability to meet its objectives via “further gradual” interest rate increases. “Gains in employment, household spending, and business fixed investment have been solid” and that “Inflation on a 12 month basis” is now expected to “move up this year” rather than “remain somewhat below 2 percent in the near term” signal the Committee’s belief in the sustainability of late-2017’s broad-based momentum and its likely result, steady progress towards the FOMC’s medium-term objective. 

Additional evidence of this progress towards the 2.0%yr target was found in the discussion of market inflation expectations. Previously characterised as simply having “remain[ed] low”, in the January statement there was an upgrade to “measures of inflation compensation have increased in recent months but remain low”. With the market increasingly on the look-out for a stronger inflation pulse, the next test for firming inflation expectations will be the household sector. 

As yet, “survey-based measures of longer-term inflation expectations are little changed”. Wages growth arguably remains the greatest impediment to household inflation expectations as well as consumer spending. Simply, despite an unemployment rate below its full-employment level and ongoing job creation well in excess of population and labour force growth, wages are yet to meaningfully accelerate. That said, the December quarter may be the first step in this process. Also released overnight, the Employment Cost Index reported that annual wage growth in the private sector accelerated to 2.8%yr at December; that compares to 2.4%yr at June and 2.6%yr in September. Importantly, growth in benefit compensation was less of a drag on total pay for the sector, annual growth having risen from 1.8%yr a year ago to 2.4%yr. These are not strong outcomes by any means, but are a clear acceleration from the abnormally low pace of gain post GFC. 

For the Committee, they will be evidence that wages are responding to reduced labour market slack and that, with the economy at full employment and above-trend growth continuing, a “sustained return to 2 percent inflation” should be anticipated. It is worth noting that many firms have responded to President Trump’s tax plan with one-off and recurring increases in compensation. Hence this uptrend should persist through 2018. A crucial point not discussed in the statement is financial conditions. Coming into 2018, the US economy has received a material boost on this front, with the US dollar having fallen to three-year lows and term interest rates remaining around the level seen in December 2016 – despite four rate hikes since, and three more being priced in. Further, the equity market has seen strong gains, and national house price growth has continued at a multiple of income growth, substantially increasing household wealth. All of these factors should provide significant support to the US economy in 2018 – arguably considerably more than President Trump’s tax reform. 

The January meeting and recent US data have given us greater confidence in our view that the FOMC will raise the fed funds rate at each of the March; June and September meetings. What occurs past that point will depend critically on the effect of the FOMC’s concurrent balance sheet reduction – at maximum effect from late-2018. This historic shift in the stance of policy, along with the three rate hikes by September, should see financial conditions tighten materially, holding inflation near the FOMC’s target and allowing the rate hike cycle to enter an indefinite hiatus.”

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AUD/JPY declines through New York, rebounds from 87.80.
Aussie struggles to make headway against strengthening Yen.

AUD/JPY has found its footing in the overnight session, trading around 0.7365 after declining through New York. The Aussie lost ground to the Yen in New York, declining from yesterday’s high of 0.7420 after gaining through Asia and London yesterday, with the Yen continuing to strengthen despite dovish commentary from officials at the Bank of Japan.

BoJ Governor Kuroda, and Deputy Governor Iwata have had a tough time convincing markets that tightening of their easy monetary policy is unlikely anytime soon, with currency markets piling into a strengthening Yen on anticipation of the BoJ beginning to wrap up their QQE program within the next year. While Japan has had positive economic data recently, growth is still well below the central bank’s targets, and challenges to future growth are still present, such as the slowdown expected by policy makers for the first half of 2018. 

The Aussie continues to wither in intraday trading following a miss for inflation data this week with CPI coming in at 1.9%, under the expected 2.0%, and while the island continent is experiencing growth, the numbers continue to consistently disappoint market forecasts, applying downward pressure to the Aussie.

Economic reports for the rest of the week are slim for both the Aussie and the Yen, with Japanese Foreign Investment at 23:50 GMT, and trade price indexes with building permits for Australia at 00:30. 

AUD/JPY Technical Levels

Intraday swing support/resistance at 87.80 and 88.11, respectively, with the previous day’s high at 88.49 and the low at 87.63.

Today’s Pivot Points:
R2: 88.87
R1: 88.40
PP: 88.02
S1: 87.55
S2: 87.16

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Analysts at ANZ noted that the January ADP report was stronger than expected, at 235k, implying robust private sector jobs growth.

Key Quotes:

“It may lead to upward tweaks to expectations for the upcoming non-farm payrolls report (currently 180k).  Additionally, the Q4 Employment Cost Index was in line with expectations, rising 0.6% q/q vs 0.7% q/q in Q3. However, total compensation including wages and benefits rose 2.6% y/y vs 2.2% y/y 12 months ago.

That is the highest annual growth since Q1 2015. Finally, the Chicago PMI dipped in January (65.7 vs 67.8 in December), but was still better than expected. The dip echoes the drop in other regional activity readings for January and may well have been influenced by inclement weather conditions.”

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Forex today was all about the FOMC that came on the hawkish side with the Fed upgrading its language on growth and inflation. 

Pre-FOMC, US 10yr treasury yields rose from 2.70% to 2.75% as a result while 2yr yields rose from 2.10% to 2.16%. The Fed fund futures increased the chance of another rate hike in March from 76% to 83%. As a result, the dollar was in demand but it remains at YTD lows while the market’s views on Fed Funds are capped at 2.5% still with three hikes projected for the year.

On the statement, analysts at Westpac offered a summary and review:

“The FOMC statement had a modestly hawkish tilt to it, suggesting increased confidence in growth and inflation through the year. Overall activity is still described as “solid” and the outlook is one of “moderate” growth, and further gradual hikes – no changes there. However, there are several notably more positive tweaks: they have been observing “job gains have been solid” but more broadly they now note that “employment, household spending and business fixed investment have been solid”. Commentary on inflation expectations is upgraded as well, to “have increased in recent months” (although this upgrade was widely anticipated). The Fed also upgraded confidence on its inflation outlook this year to “Inflation on a 12-month basis is expected to move up this year”, changed from “Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term”. More adventurous commentators thought the Fed might adjust their “roughly balanced” near-term risk assessment, but it was left unchanged.”

Elsewhere, the US Jan ADP National Employment arrived at 234k, vs185k Reuters forecast of and vs the 250k previous, (242k revised). US Jan Chicago PMI came in at 65.7 vs the 64.1 expected and 67.6 previous, (67.8 revised). US Dec Pending Homes Index followed in at 110.1 vs 109.5 previous, (109.6 revised).

On politics, the UK government will now hand over Brexit analysis after damaging leak.  The FBI was reported having ‘grave concerns’ over Republican memo’s accuracy and a Reuters source said Mueller will interview the former spokesman of Trump’s legal team.

In terms of other currencies, the euro was better-bid on the sessions on distinctly diverging rate paths with a steepening of the Euribor curve, 2yr/2yr contrasting with the US counterpart. EUR/USD made a roundtrip on the FOMC from 1.2419 to 1.2387 post FOMC low (on Fed’s ‘roughly balanced’ repeated language) and 1.2438 post FOMC high before moving sideways again along the 100 -hr SMA at 1.2412 into the close.

GBP/USD was bid again with month-end flows into and after the London fix rising to 1.4224 and extending to 1.4233 before falling to 1.4175 in NY ahead of the FOMC. GBP/USD closed at 1.4192 with demand driven from yesterday’s hawkish comments from Carney.

EUR/GBP reversed strength in early US trade and 0.8752 was scored with offers coming in at 0.8800, closing at 0.8743 in a bearish drift as euro strengthed faded on the handover to early Asia. EUR/GBP has otherwise been supported by the EZ data in core inflation rising to 1.2% y/y from 1.1% vs a forecast of 1.0% while the German jobless rate fell to a new record low at 5.5%.

After being in a range of 108.60-109.09 in the previous session, USD/JPY extended from 108.60 to 109.40 in NY while the JPY was underperforming with the US benchmarks once again booking solid monthly gains and also on the back of the  BoJ comments in Asia on Tuesday where the Central Bank said it had increased its short maturity bond purchases. 

As for the commodity sector, the market is confident of a lower dollar and volatility was lower on the sessions, supporting the higher betas. AUD/USD initially recouped pips from its CPI data disappointment losses and was bid up from 0.8047 to 0.8117, capped at 0.8035 in NY o the back of UST yields and the USD sinking post FOMC ahead of Aussie December building approvals and China’s January Caixin Mfg PMI final. The Bird outperformed rising from 0.7340 to 0.7420 o the back of AUD/NZD selling, before falling to 0.7346 post-FOMC. 

Asia – Economic Data (GMT) ahead:

31 Jan 22:30 AU Jan AIG Manufacturing Index, 56.20 previous.
31 Jan 23:50 JP w/e Foreign Bond Investment, 411.1B previous.
31 Jan 23:50 JP w/e Foreign Invest JP Stock, -148.2B previous.
1 Feb 00:30 AU Dec Building Approvals, -8.0% Rtrs f’cast , 11.7% previous.
1 Feb 00:30 AU Dec Private House Approvals, -2.0% previous.
1 Feb 00:30 AU Q4 Export Prices, -3.0% previous.
1 Feb 00:30 AU Q4 Import Prices, -1.6% previous.
1 Feb 01:45 CN Jan Caixin Mfg PMI Final, 51.3 Rtrs f’cast , 51.5 previous.
1 Feb 00:30 JP Jan Nikkei Mfg PMI, 54.4 previous.

Key events in US session:

Wall Street retreats, but once again books solid monthly gains
Gold makes a U-turn after hitting weekly lows
US Dollar Index unchanged after FOMC statement
FOMC hints at more rate hikes – NBF

 

 

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Dow ends month comfortable above 26,000 up around 1,700 points.
Rate hikes on the horizon made bulls hesitate, but not ready to quit.

Following a volatile session, US major indexes closed in the green, although off their daily highs after the Fed hinted more rate hikes in the horizon. A strong start to the day lost momentum ahead of the Fed’s announcement, which resulted in the Nasdaq and the S&P briefly entering negative territory. The Dow Jones Industrial Average added 73 points, to close at 26.150.63. The Nasdaq Composite finished at 7,411.48, up 9 points, while the S&P added 0.5% or 1 point, ending the day at 2,823.81. All of them booked strong monthly gains. Within the Dow, Boeing was the best performer by adding 5.04%, followed by Microsoft that gained 2.45%. Johnson & Johnson led decliners by losing 2.44%.

Technical view

The daily chart shows that the index bounced from a bullish 20 DMA, while technical indicators have pared their declines right above their mid-lines, indicating that bulls are trying to fight back. Shorter term, and according to the 4 hours chart, the risk of additional declines is not over yet, as the index was unable to regain ground above a bearish 20 SMA, currently at 26,343, while technical indicators bounced from oversold territory, but remain well below their mid-lines. 

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Analysts at Nomura offered their expectations for nonfarm payrolls.

Key Quotes:

“We expect the BLS to report a 205k increase in nonfarm payroll employment for January, with 200k from private employers and a 5k contribution from the government.”

“We forecast a steady, 0.2% m-o-m increase in average hourly earnings (2.6% y-o-y) with a higher-than-usual amount of uncertainty due to tax bill-related pay increases and changes to various states’ minimum wage laws. The momentum in the labor market, with consistent employment growth above that needed to absorb new labor market entrants, will likely bring the unemployment rate down 0.1pp to 4.0%.” 

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