•  Fails to capitalize on early up-move led by a modest USD weakness.
   •  Investors seemed reluctant to place aggressive bets ahead of Chinese PMI.
   •  Next week’s RBA/important macro releases might provide fresh impetus.

The AUD/USD pair struggled to build on early up-move and has now retreated over 15-pips from session tops.

The US Dollar held on to its mildly weaker tone but holiday-thinned liquidity conditions failed to assist the pair to extend its gain further beyond the 0.7700 handle. 

Moreover, traders now seemed reluctant to place any aggressive bets ahead of the official Chinese PMI figures (manufacturing & non-manufacturing, due for release on Sunday and which has the potential to influence demand for the China-proxy Australian Dollar.

Ahead of next week’s scheduled release of important macro releases at the start of a new month, including the keenly watched NFP and the latest RBA monetary policy update, also held investors from initiating any fresh positions and eventually led to a subdued rangebound price action on the last trading day of the week. 

Technical levels to watch

Any subsequent retracement is likely to find support near the 0.7675 level, below which the pair seems to head back towards retesting 0.7650-40 intermediate zone before eventually dropping to the 0.7600 handle. 

On the upside, a sustained move above the 0.7700 handle has the potential to continue lifting the pair further towards the 0.7745-50 supply zone, which if cleared should assist the pair to aim towards reclaiming the 0.7800 handle.

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Next week will see the release of the US Non-Farm Payroll on Friday.

The NZD/USD is still supported at 0.72 multi-month support.  

The NZD/USD is trading at around 0.7237 virtually unchanged on Good Friday so far as most major currencies are trading quietly while markets are closed in the US, Europe, Australia and New-Zealand for the long Easter holiday weekend. While the US and Canadian markets will reopen on Monday, Europe, Australia and New Zealand markets will only re-open next Tuesday. 

Next week will see the US Non-Farm Payroll (NFP) which is considered one of the most important macroeconomic data piece, especially for the US Dollar.

The Dollar Index (DXY), this week rebounded from the $89 handle to meet resistance at the $90 mark. Analysts attribute the DXY rally to the dissipating concerns over the trade war between the US and China and the progress on the North Korea’s nuclear program. 
“A key part of the dollar’s recent gains were quarter-end flows, with many investors seen to have closed out short positions on the currency to lift the dollar. It remains to be seen if the dollar can retain its gains next week when the new quarter begins, as it will no longer have support from such flows. Much of the challenging themes will remain the same in the next quarter, such as the health of the U.S. economy and trade issues.” according to Shin Kadota, senior strategist at Barclays, Tokyo.

NZD/USD daily chart

The NZD/USD rebounded yesterday at the 200-period simple moving average close to the 0.72 handle multi-month support. Resistance is seen at 0.7250 and 0.73 level high of the week. On the flip side, support is seen at the 0.72 level mentioned above and at the 0.7150 swing low.  

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   •  A modest USD weakness helps regain traction and bounce off weekly lows.
   •  Remains on track to post weekly losses, but end with gains for the month.
   •  Investors now look forward to next week’s important releases for fresh impetus.

The EUR/USD pair held on to its recovery gains and now seems to have entered a bullish consolidation phase near the 1.2325-30 region. 

The pair stalled this week’s retracement slide from near 6-week tops and found some support near the 1.2285-80 region, snapping three consecutive sessions of losing streak. 

A subdued US Dollar price action, amid lack of any fresh fundamental drivers and holiday-thinned trading conditions, helped the pair to gain some positive traction and move back closer to yesterday’s swing high. 

Despite the up-move, the pair seems all set to end the week with some losses, third in the previous four but remains on track to post the third month of gains in the previous four. 

Meanwhile, looking at the broader picture, the pair remains confined within a broader trading range and now look forward to next week’s important macro releases, including the keenly watched NFP, for some fresh directional impetus.

Technical levels to watch

Immediate resistance is pegged near the 1.2335-40 area, above which a bout of short-covering could assist the pair to head back towards reclaiming the 1.2400 handle. On the flip side, weakness back below the 1.2300 handle, leading to a subsequent break below the 1.2285-80 support, might now turn the pair vulnerable to extend its downfall towards 1.2240 intermediate support en-route the 1.2200 handle.

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Marc Chandler, Global Head of Currency Strategy at BBH, suggests that it is going to be the start of the next phase in Italian politics, which since the election in early March has not been much of a market factor.

Key Quotes

“Indeed, the Italian equity market is the best performing within the G7 this month, losing a little less than 1%.   Italian bank shares have declined by 3.9% this month.  They fell by nearly 1.6% in February.  However, it seems to be simply paring the out-sized 13.3% rise in January.”

“In the middle of next week, Italy’s President Mattarella will begin consulting with party leaders to see if a majority government can be formed. There are four key players here.  The center-left PD, who’s leader, Renzi, insisted that it goes into opposition have a horrific showing in the polls before resigning.  The center-right accounts for two of the players Berlusconi’s Forza Italia and the Northern League (Salvini).  The Northern League edged out Forza Italia by four percentage points and so its ostensibly the senior party in the coalition.  The Five Star Movement (M5S) won a plurality of votes, but not a majority.”

“There are a few more wrinkles in the plot.  First, due to a tax fraud conviction, Berlusconi cannot serve hold office until 2019.  Second, Berlusconi had campaigned only force that could stop the populist M5S.  This further strains ties between the two camps.  Third, Salvini of the Northern League has stuck with Berlusconi and is resisting M5S from pulling them apart.  Fourth, Berlusconi and Salvini are opposed to the head of the M5S, Di Maio, from becoming the next premier, which he seems to believe he is entitled to as the head of the party with the most votes.”

“Next week will be a month since the Italian election.  While the situation seems fluid and it may be premature to reach any strong conclusions, the outlook is not particularly encouraging.”

“The election was held under new rules that had ostensibly been designed to facilitate more sturdy governments.  If Mattarella finds that after several weeks, a stable coalition remains elusive, a technocrat government could be put into place that would seek to modify the election rules again and go back to the polls.  This might ultimately be in the PD and Berlusconi’s interest.  It might allow the PD to regroup and maybe even recover the left flank that split from it last year.  If the next election is deferred sufficiently, Berlusconi’s ambition can be exercised again.  The M5S thinks that it has the momentum.  Northern League’s Salvini was quoted in the press as saying it there was a 50/50 chance of a new election.” 

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   •  A modest USD weakness helps gain some positive traction.
   •  The up-move lacked strong conviction amid a subdued trading action.
   •  Investors look forward to next week’s macro releases for fresh impetus.

The GBP/USD pair extended its steady climb on Friday and is currently placed at the top end of its daily trading range, around mid-1.4000s.

The pair snapped three consecutive days of losing streak and gained some positive traction from closer to the key 1.40 psychological mark. A modest US Dollar weakness, amid a subdued/range-bound trading session, was seen as one of the key factors driving the pair higher. 

Apart from a weaker tone surrounding the greenback, the up-move lacked any obvious fundamental trigger and thus, seemed struggling to gain any follow-through traction.

Investors now look forward to next week’s important macro releases, scheduled at the start of a new month and which would help determine the pair’s next leg of directional move. 

Technical levels to watch

Immediate resistance is pegged near 1.4075 level, above which the pair is likely to aim towards surpassing the 1.4100 handle and head towards testing the 1.4135-40 supply zone. On the flip side, the 1.4020 area now seems to protect the immediate downside, which if broken might prompt some fresh selling and continue dragging the pair towards 1.3965-60 horizontal support.

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Analysts at Rabobank suggest that nearly two years after political events paved the way for a rational, consistent economic policy as the Brazilian economy and assets have been largely favoured.

Key Quotes

“With a little additional help from one-off events and a supportive global backdrop, the sound policymaking fostered improvement in broad financial conditions and real activity momentum. Past the worst recession in decades, the (gradual) recovery is consolidating and spreading across the sectors. Inflation and interest rates have fallen to historical lows. Balance of payments remains solid (yet with some cyclical help).”

“Fiscal policy continues to be the Achilles heels of the Brazilian economy. Despite a cyclical improvement in the budget performance (as faster activity gears up tax collection and discretionary spending remains under lid), the “time bomb” of mandatory expenses has not been dismantled. Quite the opposite, as the pension reform was pushed back to (at least) after the election. Without a comprehensive overhauling of constitutional spending rules – especially via deep changes in Brazil’s overly generous social security system – government debt will not stabilize (even in the long run) and the economy will be (at some point) dragged back into recession, with inflation, interest rate and FX expected to jump through the roof in time.”

“The urgent necessity to finish off the set of budgetary reforms started in the current administration (even better if those are complemented with other macro and micro adjustments) make this year’s general election a critical one for the Brazilian economy. While financial market seems comfortably sedated by constructive (probability-adjusted) expectations about the outcomes ahead, the fact is that the election outlook still looks very uncertain, and the execution of key reforms is far from a done deal for any electoral scenario. The results will (definitely) matter.”

“For now, we assume positive developments ahead, with the next government keeping (and delivering on) the commitment to pass reforms and keep a sound economic policy. Taking this key element for granted (at least for now), we see inflation and rates taking longer than expected to normalize to a new, lower equilibrium (given the huge economic slacks), a cyclical GDP acceleration taking a bit longer than expected to materialize (as uncertainties fade), as well as a long, painful but well succeeded fiscal consolidation process. With no domestic stress expected, we look for a BRL repricing ahead, but only reflecting the less fancy global liquidity conditions.”

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Analysts at Standard Chartered note that the CBE cut its policy rate, the overnight deposit rate, by 100bps to 16.75% on 29 March.

Key Quotes

“The move was in line with our (and consensus) expectations. This is the CBE’s second cut since the start of the easing cycle initiated in February. Headline inflation has continued to decline rapidly, and we expect it to fall further. Nevertheless, we think room for the CBE to cut much more is limited by a combination of domestic and global factors.”

“First, although inflation has declined (in part due to base effects), further subsidy cuts are likely in the budget for FY19 (year beginning July 2018). This should put upward pressure on m/m inflation, even as the favourable base effect fades in Q4-2018.”

“Second, Egypt stands alone in the MENAP region in diverging from Federal Reserve policy. Although Egypt is cutting from a significantly higher level, policy makers will likely wait to assess any impact on over USD 20bn of foreign portfolio investment in the country’s local currency (LCY) government debt market.”

“We think the statement supports our cautious view on further easing. Although we expect only a further 100bps cut before the end of FY18 (there are two meetings before then: 17 May and 28 June), on balance, we think risks are skewed towards the CBE adopting caution over further cuts. It may well choose to remain on hold going into FY19 to see the actual impact of subsidy cuts on consumer prices.”


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The rise in USD FRA/OIS spreads has not been replicated to any significant extent in most other currencies, although an exception is for the AUD, points out Greg Gibbs, Analyst at Amplifying Global FX Capital.

Key Quotes

AUD interbank funding costs have increased significantly, in line with USD funding costs. On the one hand, this might support the AUD, raising the carry return” from the AUD investment.”

“On the other, it might weaken the AUD, representing a higher funding cost for Australian banks, reducing their net interest margins.  At some point it might lead Australian banks to raise mortgage rates, more broadly tightening credit conditions in Australia.”

“It is hard to see a clear link from rising USD and AUD interbank borrowing costs to either the USD or AUD exchange rate.  However, it is interesting to note that Australian banks are one of the few foreign banking sectors to see a fallout from higher US bank borrowing costs.”

“This suggests that Australian banks are more reliant on foreign sources of capital as a marginal source of balance sheet funding than other countries’ banks.  This is despite a significant reduction in Australian banks’ use of short-term money markets since the 2008 Global Financial Crisis (down from around 35% to 20% of bank funding).”

“If we are searching for reasons why the AUD is weaker, it may be that the market is showing concern over the rise in Australian bank funding costs, whereas other currencies, (including the NZD) have not.  However, again, we are not reading too much into this development at this stage.”

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Greg Gibbs, Analyst at Amplifying Global FX Capital, suggests that the rise in US LIBOR over US cash rate expectations (LIBOR/OIS spreads, and FRA/OIS spreads) is a factor behind the rebound in USD in recent days. 

Key Quotes

“A variety of analysts suggest that it may be related to the US tax reform; including incentives for companies to reduce their cash hoards (short-term USD paper) held in offshore markets.   And an increased supply of US Treasury bills, raising the competing yields in US commercial paper markets.  Such factors may suggest that there is a structural shift up in the LIBOR/OIS spread that while adding to corporate and bank funding costs modestly, is unlikely to blowout to severe proportions and trigger broader asset market correction.”

“In past times, a rise in USD term funding costs might represent some stress in credit markets and lead to a squeeze higher in USD exchange rates.  However, it seems unlikely that there would be generalized credit stress at this time of a relatively upbeat global economy, ongoing QE policies in Japan and Europe, and excess liquidity in the US banking system.”

“The recent volatility in equity markets and wider credit spreads might be feeding back into higher funding costs, and vice-versa. However, in recent sessions, as equities have fallen and credit spreads have widened, FRA/OIS spreads have narrowed from recent highs.  As such, there appears to be a limited connection between the two.”

“Analysts have also noted that if there were a genuine squeeze on dollar funding, it would tend to widen cross-currency basis swaps.  In fact, these have narrowed suggesting that there has been little evidence of a scramble for USD funding from most other major countries.”

“There has been no apparent correlation between the USD exchange rate and FRA/OIS spread widening.  It is possible that the spread widening helped stabilize the USD In recent months, but the evidence is far from convincing.”

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   •  Investors looked past yesterday’s disappointing Canadian macro releases.
   •  Renewed USD weakness prompts some fresh selling over the past hour. 

The USD/CAD pair broke down of its Asian session consolidation phase and dropped back to the three-day-old trading range support near the 1.2865-60 region.

The pair sudden fall of around 30-pips over the past hour or so lacked any fundamental trigger and could be attributed to a modest US Dollar weakness. With investors looking past Thursday weaker Canadian macro releases, the USD price dynamics has been an exclusive driver of the pair’s bearish momentum over the past 24-hours.

Meanwhile, possibilities of some short-term trading stops being triggered, on a break below the Asian session trading range support near the 1.2885, coupled with holiday-thinned liquidity conditions might have further collaborated towards aggravating the downfall.

The selling pressure, however, abated near the 1.2860 level, with traders refraining from placing aggressive bets during the Easter long weekend and ahead of next week’s important macro releases, including the keenly watched NFP.

Technical levels to watch

Weakness below the 1.2860 level might now turn the pair vulnerable to head back towards retesting the 1.2800 support area before eventually dropping to test important moving averages confluence support near the 1.2700 handle.

On the upside, the 1.2885 level, followed by the 1.2900 handle might now act as immediate resistance levels, above which the pair could head back towards challenging the 1.2940 supply zone.

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