• NZD/USD stays firmer around 42-month high flashed recently.
  • RBNZ’s Orr raised bars for policy tightening, NZ FinMin requires RBNZ to focus on housing, government financial policy.
  • Fed policymakers’ comments, broad US dollar weakness also back the bulls.
  • ANZ Business Confidence and Activity Outlook for New Zealand can offer immediate direction but risk catalysts remain as the key.

NZD/USD bulls dominate near the highest in 3.5 years, currently around 0.7445, during the initial Asian session on Thursday. The kiwi pair’s latest jump could be attributed to the upbeat comments from RBNZ Governor Adrian Orr and the central bank’s acceptance of the New Zealand Finance Minister’s push for a change in policy guidelines. Also favoring the buyers could be the Fed policymakers’ firm rejection of reflation fears.

Not only turning down the odds of monetary policy tightening, by looking for sustained inflation at mid-point, but the readiness to further easing by RBNZ’s Orr also marked a stark rejection of fears that the New Zealand (NZ) central bank (RBNZ) is up for easing.

However, comments from New Zealand’s Finance Minister Grant Robertson, suggesting that the RBNZ needs to consider the housing market and government policies for decision-making, signals a shift into the central bank’s policy guidelines towards the bulls. In doing so, the NZ government requires the RBNZ to consider the impact on housing when making monetary and financial policy decisions.

Read: RBNZ’s Orr: Prepared to provide additional stimulus if necessary

Also on the positive side could be a firm rejection of chatters concerning the monetary policy tightening and reflation fears by the Federal Reserve officials off-late. Be it Fed Chairman Jerome Powell or Vice Chair Richard Clarida, not to forget Federal Reserve Governor Lael Brainard, all of them reiterated strong support for the Fed’s easy money policy.

With the receding fears of reflation, the reduction in the US dollar’s safe-haven demand becomes imminent, which in turn helps equities and bonds in the latest market moves. The same helps commodities and Antipodeans to remain bullish and refresh multi-month high.

It’s worth mentioning that the RBNZ managed to propel the Kiwi pair the previous day despite no major changes to its monetary policy and immediate guidance.

It should, however, be noted that a lack of major data/events during Asia, except for second-tier numbers from the Australia and New Zealand Banking Group (ANZ) can restrict the NZD/USD moves. As a result, the bulls need to look for more risk catalysts for fresh impulse.

Technical analysis

Having successfully crossed 2018 top, NZD/USD bulls eye 2016 peak of 0.7485 ahead of targeting the 0.7500 threshold and 2017 high of 0.7560.

 

  • Having found support above 1.4100, GBP/USD has moved back into the mid-1.4100s.
  • Though having now been overtaken by AUD, NZD and NOK, GBP is still a strong performer this week.

As Wednesday FX trade draws to a close and volumes this ahead of the start Thursday’s Asia Pacific session, GBP/USD look set to close with modest 0.2% or just under 30 pip gains. Despite a lack of any fundamental catalysts and amid thin volumes, the pair rocketed from the 1.4100s to as high as 1.4240 during Wednesday’s Asia Pacific session but spent most of the rest of the day gradually pulling back towards the 1.4100 handle. Over the first half of the US trading session, the pair found support at this key level and in the last few hours has started to rise again. Currently, GBP/USD trades around the 1.3940 mark and the sterling bulls will be targeting a gradual grind back to the multi-year highs set earlier during Wednesday’s session.

Driving the day

Bank of England members spoke before the UK Parliament Treasury Select Committee on Wednesday and nothing new was mentioned about the bank’s monetary policy plans going forward. On the economy, the bank noted the various downside risks faced by the economy, such as concerning Covid-19 variants, rising unemployment if the government pulls the plug on furlough and EU/UK trade disruptions, but also noted upside risks such as if the vaccine rollout goes faster than planned. Given the lack of direct policy implications, GBP was not particularly interested in the event and thus spent the majority of Wednesday’s session trading as a function of US dollar flows.

This time on Tuesday, GBP was the best performing currency in the G10 on the week. Since then, it has been overtaken by NZD (boosted by a less dovish RBNZ), AUD and NOK (both boosted in line with buoyant commodity prices and recovering stocks market sentiment). Still, the currency holds onto gains on the week versus the US dollar of nearly 1.0%. That compares to the euro, which is just 0.4% higher and the yen, which is down 0.3% on the week versus USD. It seems as though the vaccine/reopen trade is still very much alive and the main thing that might higher GBP gains going forward could be either a combination of profit-taking or fears of over-valuation.

 

Despite “very near-term” downside risks to the US economy from the spread of COVID-19 and emergence of new variants, effective vaccines and fiscal relief passed late last year have set the table for stronger growth, Federal Reserve Vice Chair Richard Clarida said on Wednesday.

“Prospects for the economy in 2021 and beyond have brightened and the downside risk to the outlook has diminished,” Clarida said in remarks prepared for delivery to the US Chamber of Commerce, as reported by Reuters earlier.

Federal Reserve’s Clarida says he is bullish on the US recovery.

Key comments

Says economy has good momentum, vaccine welcome news, and there is a lot of fiscal, monpol support.
Says there is a lot of pent up labor supply in US.
Says not concerned will see an inflation response this year inconsistent with goals.
Says we will not be lifting off on rates until we actually get to 2% inflation, and max employment.
Says later this year inflation will most likely be above 2%, because of base effects.
Says most of that rise will be transitory; expect inflation to be around 2% by end of year.
Says there’s a lot of slack in economy that can meet extra demand from fiscal, monpol support.

Says talk about tapering is premature. 

Says monetary policy accommodation is appropriate for the rest of the year. 

The biggest risk to the economic outlook is the virus. 

Market implications

He is not saying anything here that the Fed’s chair has not already said earlier this week for which had helped US stocks to climb to new record highs on Wednesday. 

 

  • AUD/USD rises to fresh high since February 2018, up for sixth day.
  • Market sentiment buoyed as Fed policymakers reject reflation fears by closing doors to abrupt policy change.
  • Wall Street cheers easy money, US dollar drops.
  • Australia’s Q4 Private Capital Expenditure decorates calendar, risk signals are the key.

AUD/USD marks another push to grab the 0.8000 threshold by rising to the fresh highs in 36 months, currently around 0.7970, during the initial Asian session on Thursday. The aussie pair followed upbeat sentiment while cheering the central bankers’ firm support to the easy money policy and rejecting the reflation fears.

Fed turns down fears of policy tightening…

By firmly supporting the current monetary policy, also turning down abrupt moves without enough prior notice and confirmation from data, Fed policymakers managed to renew market optimism. Not only Federal Reserve Chairman Jerome Powell reiterated his bearish bias but Vice Chair Richard Clarida and Fed Governor Lael Brainard also backed the move that pushed back chatters over monetary policy tightening.

This helped equities and bond yields to rally while the US dollar index (DXY) snapped Tuesday’s corrective pullback by the end of Wednesday’s North American trading. Also portraying the risk-on mood could be the rally in commodities.

Furthermore, news that Pfizer-BioNTech vaccines have 92% effectiveness after two doses, per Reuters, adds to the market optimism.

Looking forward, AUD/USD traders will have to take clues from the risk catalysts as scheduled economic data needs to be extremely different, due to its second-tier character, to wobble the pair.

Technical analysis

Unless breaking below the highs marked during October 2017 and March 2018, around 0.7900, AUD/USD is less likely to probe the rally towards the 0.8000 psychological magnet.

 

  • It was a solid day on Wall Street, with all major indices gaining and the Dow hitting 32K for the first time.
  • The macro backdrop remains positive, amid pandemic, fiscal stimulus and dovish central bank optimism.
  • Rotation from growth, momentum and high P/E ratio stocks into value names continued on Wednesday and GME shares also surged.

It was a solid day for US equity markets, with all three major indices gaining throughout US trading hours. The S&P 500 finished the day with gains of 1.18% and reclaimed the 3900 mark to close in the 3920s, only about 0.6% away from last week’s intra-day all-time highs. The Dow closed 1.39% higher, having broken a key barrier of resistance at 31,650 to advance to fresh intra-day all-time highs around 32,000. The Nasdaq 100 0.81% higher. That means the three major indices have recovered 3.2%, 2.6% and 4.3% from the lows hit at the start of Tuesday’s session. Talk about buy the dip!

Macro backdrop remains positive

Wednesday’s gains were not really surprising given that the macro backdrop remains overwhelmingly positive for US equity markets.

1) Pandemic news is good – The FDA looks set to give Johnson & Johnson EUA, and the White House is primed and ready to start distributing the vaccine, which the Biden administration is confident will further accelerate the US’ already robust vaccine rollout.

2) Central bank news is good – A second day packed full of Fed speak, this time not just from Fed Chair Jerome Powell, but also Vice Chair Richard Clarida and influential permanent voting FOMC member Lael Brainard, all three of whom stuck to the bank’s dovish script; though none have expressed concerns about the recent rise in US borrowing costs, all have been keen to emphasise that the US remains a long way from the bank’s dual mandate goals and both Powell and Clarida sounded dovish on inflation, pushing back on concerns about overheating.

3) Fiscal stimulus news is good – Not much by way of new updates on stimulus on Wednesday, but the US House is expected to vote in favour of US President Joe Biden’s $1.9T “rescue” package at the end of the week. Moreover, there is already a lot of chatter regarding the follow up infrastructure-focused “recovery” package, which could be up to $3T in size and is said to command pretty decent bipartisan support, given that taking US infrastructure to the next level is seen by many on both sides of the political aisle as crucial if the US is to outcompete China in the 21st Century (which is a key national security goal of both the Republicans and Democrats). 

Rotation

Rotation out of growth, momentum and high price to earnings ratio stocks into value names continued on Wednesday; the S&P 500 value index finished the session 1.47% higher versus more modest 0.83% gains for the S&P 500 growth index. Smaller cap stocks performed better than large-cap stocks, with the Russell 2000 index finishing the session 2.38% higher and the equal-weighted S&P 500 outperforming the S&P 500 to finish the session 1.54% higher.

Stock market rotations continue to tell two stories; 1) investors betting on those stocks that have the most to gain from the end of lockdowns and from more US government fiscal stimulus at the expense of those “stay-at-home” stocks that benefitted initially from the lockdown and 2) the impact of rising long-term interest rates; according to finance theory (and clearly this is the case in real life as well) higher price to earnings ratio stocks are more exposed to increases in long-term interest rates than low.

GameStop short-squeeze 2.0?

GameStop shares rose more than 100% on Wednesday, with the vast majority of the gains coming in the final hour and a half of trade. News that the company’s CFO seems to have reignited some interest in the stock on Reddit boards. It will be a tough task to trigger another short-squeeze, however, with short interest in GME shares as a percentage of the stocks overall flout now under 40%, versus this time last month, when it was over 140%. Still, that might not stop the Reddit army from trying again and the stock is up a further approximately 80% in after-market trade.

The Reserve Bank of New Zealand’s governor, Adrian Orr comments are crossing the wires following yesterday’s interest rate decision as he speaks to a parliamentary committee:

Key comments

Uncertainty will constrain investment.

Prepared to provide additional stimulus if necessary.

The outlook remains uncertain.

Uncertainty will constrain investment.

Prepared to provide additional stimulus if needed.

Need to make sure inflation is sustainable the mind point before moving to tighten conditions. 

Need to be patient to get inflation at 2% before considering tightening conditions. 

Market reaction

Meanwhile, NZD/USD has printed a higher high on Wednesday in the New York session, breaking 0.7400 to 0.7410, but is steady on the comments, so far. 

OPEC+ oil producers will discuss a 500,000 barrels per day (bpd) increase in the oil output from April, Reuters reported on Wednesday, citing OPEC+ sources familiar with the matter.

Sources further noted that they expect Saudi Arabia to end the voluntary cut of 1 million bpd from April. “Some in OPEC+ urge group to hold output steady if the entire Saudi cut is returned to market from April,” they added.

Market reaction

Crude oil prices showed no immediate reaction to this headline. As of writing, the barrel of West Texas Intermediate (WTI) was up 3.2% on the day at $63.15.

  • EUR/JPY bulls rally to projected highs and forms a daily bearish W-formation. 
  • The price has since moved back to test a 38.2% Fibonacci retracement at prior resistance.

EUR/JPY was one of the watchlists picks for the week in a technical analysis and price projection illustrated in the following article:

The Watch List: Gold, USD/JPY, AUD/USD, EUR crosses and many more

Subsequent to the original analysis, the test of the 128 figure and projected price action to the target was documented as follows:

EUR/JPY Price Analysis: Bulls step-up to the plate, breaking the 128 hurdle

Prior analysis

4-hour chart

The above chart illustrates attempt 1 (1R loss) and attempts 2, which has now moved above the prior closing highs for a breakeven worst-case scenario by moving the stop loss to the entry point.

At this juncture, the upside is limited to the target and the downside is limited to 1R loss on a compounded position.  

One would caution about moving the stop loss any higher considering that the W-formation is a bearish chart pattern and a correction to at least the neckline to test old resistance would now be expected. 

Live market, 4-hour chart

As seen, the price extended to the target and now consolidates.

However, it has since moved back to test a 38.2% Fibonacci retracement at prior resistance and remains in a bullish environment which gives rise to the prospects of an upside continuation:

However, the daily chart’s bearish M-formation is problematic and hamstrings the prospects of an immediate continuation. 

Daily W-formation

While a continuation is without a doubt possible, a downside correction from a daily perspective is more convincing at this juncture in order to fully test the daily resistance between a 50% mean reversion and the 38.2% Fibo.

  • NZD/USD is posting impressive gains on Wednesday, trades above 0.7400.
  • NZD capitalizes on risk flows and RBNZ’s upbeat outlook.
  • US Dollar Index looks to close the day little changed.

The NZD/USD pair started the day on a firm footing and posted strong gains during the Asian trading hours. After going into a consolidation phase during the European session, the pair regained its traction and touched its highest level in three years at 0.7411. As of writing, the pair was up 0.9% at 0.7405.

Following its February policy meeting, the Reserve Bank of New Zealand (RBNZ) left its policy rate unchanged at 0.25% as expected and kept large scale asset purchases steady at NZD100 billion. Although the bank reaffirmed its commitment to take policy action if needed, it revised the GDP growth forecast for 20212 to 4% from 3.6%.

The RBNZ’s upbeat outlook provided a boost to the kiwi but the renewed USD strength in the second half of the day limited NZD/USD’s upside. 

DXY remains on track to close flat

Supported by a sharp upsurge witnessed in the US Treasury bond yields, the US Dollar Index climbed to a daily high of 90.43.

However, the positive shift in market sentiment, as reflected by a decisive rebound in Wall Street’s main indexes, made it difficult for the USD to preserve its strength and allowed risk-sensitive NZD to extend its rally. At the moment, the DXY is virtually unchanged on the day at 90.20 and the S&P 500 Index is up 1.15%.

On Thursday, the ANZ Business Confidence and Activity Outlook data from New Zealand will be watched closely by market participants.

Technical levels to watch for

 

  • Gold is ripening for a sort side trade setup given the recent price action. 
  • Bears can target a measured target of $1,745.80 once 4-hour conditions confirm the bearish bias. 

Further to the prior analysis, Gold Price Analysis: Bears engaging below firm resistance, targetting $1,750, gold has indeed broken below 1800 and reached the $1,790 target, in fact printing a low beyond there at $1,782.50.

Prior analysis, daily chart

The market at this juncture would now be expected to move deeper into test $1,790. 

In doing so, the focus will be on a downside extension towards $1,750 in a continuation of the daily downtrend and bearish late summer 2020 cycle:

Live market

The daily chart shows that the price has started to carve out the road to the downside.

At this juncture, bears can start to monitor for bearish structure from the 4-hour chart and engage at an optimal entry point once higher probability conditions have been met:

4-hour price action 

The price structure is still too neutral until the resistance at the bullish M-formation’s neckline proves resilient because. On the next test, the price can easily move higher. 

However, on repeated failures at the resistance, MACD will turn negative confirming the bullish bias and technical environment.

Bears will then have the additional conviction needed to engage with the downtrend and target a measured -272% Fibonacci retracement of te daily correction and target of $1,745.80.