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.

  • The S&P 500 is grinding higher and now back above the 3900 mark.
  • Positive vaccine news and dovish Fed speak is supporting equity markets.
  • Value continues to outperform growth amid ongoing concern about rising long-term bond yields.

US equity markets have picked up where they left off in the second half of Tuesday’s session and continue to grind higher, with the S&P 500 up about 0.8% on the day and has now reclaimed the 3900 level, marking a now more than 100-point turnaround from Tuesday’s low. Having recovered more than 3% from Tuesday’s lows, a further 0.8% rally required to get back to all-time highs at 3950 does not seem too far-fetched a goal for the end of the week. The Dow is seeing an even stronger performance, up 1.0%, while big tech continues to struggle amid rising yields, meaning the Nasdaq 100 is up just 0.15%.  

Positives news helps power recovery back to all-time high levels

Positives news on vaccines, falling Covid-19 infection rates, strong housing data and more dovish Fed speak are giving equity market investors plenty of reasons to buy on Wednesday. Starting with positive vaccine news; the FDA published a positive document on the Johnson & Johnson vaccine, teeing it up for EUA. The White House says it is ready to rollout the vaccine immediately once FDA approval has been granted. This comes on the back of news that the White House had managed to secure 100s of millions of additional vaccine doses for delivery in the coming weeks from AstraZeneca and Pfizer/BioNTech. Subsequently, the White House Covid-19 vaccine coordinator said that the vaccination rate is likely to accelerate markedly in the coming weeks.

Turning to falling infection rates; the US Centre for Disease Control said that the average daily death toll due to Covid-19 had declined 35% WoW, while cases had dropped around 5% WoW to around 64K per day in its latest update on the state of the outbreak. An accelerating vaccination drive combined with falling infection rates continues to be a bullish combination for stock markets.

Meanwhile, Fed Chair Jerome Powell has finished the second and final day of his semi-annual testimony before Congress. As expected, his message on Wednesday was much the same as that on Tuesday and was resolutely dovish; though the outlook for the US economy might have improved markedly in recent weeks, the Fed is still a long way from its goals, Powell was eager to impress. Seemingly keen to hammer home the message that the Fed will be on hold for a very long time, Powell dovishly noted that it may take more than three years to attain its inflation goal. Meanwhile, he reiterated that bond-buying will continue at the current pace until actual data shows that the economy is moving closer to the Fed dual inflation/employment mandate goals.

Fed Vice Chair Richard Clarida, also speaking on Wednesday, delivered a very similar message and, following in Powell’s footsteps on Tuesday, implied that he is not worried about the recent rise in US borrowing costs; he said he sees asset market pricing as consistent with expectations for robust growth. Elsewhere, another influential FOMC member Lael Brainard was on the wires; she was also dovish, saying that monetary policy will continue to provide support by keeping borrowing costs low.

Looking ahead, stock markets look set to remain underpinned by positive vaccine news and assurances of continued central bank support. Focus is likely to turn back towards the theme of US fiscal stimulus in the coming days/weeks, with the House set to vote in favour of US President Joe Biden’s $1.9T fiscal stimulus package and chatter already starting regarding Biden’s follow up “recovery” package, which could potentially invest up to $3T in US infrastructure. This is likely to be an equity market positive.

Value continues to outperform growth

The “post-Covid-19 reopening” trade remains evident in US equity markets, as the S&P 500 value index (up more than 1.5%) outperforms the S&P 500 growth index (up around 0.5%). The growth to value ratio, which peaked at 2.172 in September 2020, has now slipped back to 1.928 and has taken a beating in recent weeks; over the same period of time, the yield on the US 10-year bond has risen from about 0.7% to near 1.4% and the yield on the 30-year bond has rallied from around 1.4% to close above 2.2%. High price to earnings (P/E) ratio stocks have suffered from a disproportionately larger multiple contraction amid rising long-term interest rates compared to low (P/E) ratio stocks. Since September, the S&P 500 tech index (which disproportionately contains stocks with high P/E ratios) is up just 5%, versus the S&P 500 energy and financials indices (both containing predominantly low P/E ratio stocks), which are up 33% and 42% respectively.

Whilst rising rates is one factor, stock market investors are also anticipating a shift in consumer spending patterns towards socialising and out-of-home experiences (which is set to benefit tourism, hospitality and leisure sector company earnings), as they spend less time at home once the pandemic subsides (hurting stay-at-home stocks such as Big Tech and home-delivery stocks). This is another headwind for S&P 500 growth stocks, which primarily fall into the latter category.

Federal Reserve’s Vice Chairman Richard Clarida said on Wednesday that he sees the asset market pricing as consistent with expectations for robust economic growth, as reported by Reuters.

Additional takeaways

“Not expecting sustained upward inflation pressures.”

“The Fed has tools to achieve, keep inflation consistent with the price stability mandate.”

“Inflation, employment are well below the Fed’s goals.”

“Monetary policy can’t eliminate variation in inflation but can keep expectations anchored.”

“Support from fiscal policy should accelerate the pace of progress toward the Fed’s goals.”

Market reaction

The market mood remains upbeat following these remarks and the S&P 500 Index was last seen gaining 0.91% on a daily basis at 3,916.

  • Cable has rallied over 4% in 2020 due to a combination of USD weakness, BoE dialling back on rates and the vaccine roll-out. 
  • GBP/USD bears target the 50% mean reversion mark at 1.4036 ahead of the 1.3980s.

As per the prior analysis, GBP/USD Price Analysis: Bulls coming up for their last breath?, cable rallied in a fresh daily impulse from the support structure.

However, the price extended in five consecutive days of higher highs and lows, coming within touching distance of 1.43 today and sailed through anticipated resistance in the psychological 1.40/41 areas. 

The pound has been the best-performing G10 currency this year. Cable was up some 4% for the year so far while the pound was 3.2% higher vs the euro.

A combination of the Bank of England pushing back on the need for negative rates, USD weakness and a faster and more effective COVID-19 vaccine rollout has spurred on investment back into sterling.  

Equally, the relief of avoiding a no-deal Brexit and fewer immediate complications at the start of the year pertaining to the new regulations has been positive for the British currency. 

”There is speculation in the market that some of the interest in the pound this year has been drawn from pent-up demand,” analysts at Rabobank explained. 

”There is evidence that investment levels in the UK were lower than they would have been otherwise in recent years due to political uncertainty related to Brexit.”

Moreover, the analysts remind that ”any relief on the Brexit trade agreement announcement should be tempered by the fact that the deal agreed was not comprehensive or an improvement on market expectations.”

Overall, the analysts forewarn that there could still be stumbling blocks on the road ahead related to Uk politics and Brexit, concerning, In particular, the Northern Ireland issue as well as the Scottish elections in May.

Additionally, considering the PM’s Boris Johnson’s cautious relaxation of the lockdown, some restrictions may remain in place into the summer months and given how fluid the crisis is, covid could still give the UK bulls the run-around.

All things weighed, the UK economy was one of the worst affected by the virus, and while that leaves plenty of room for an economic bounce back, under the bonnet of any economic growth is a very damaged engine. 

Therefore, in the absence of any new economic data that would prove otherwise, following such longevity in the recent rally, the focus, if only technically, should be on the downside. 

GBP/USD technical analysis

The path of least resistance, having cleared whatever liquidity had accumulated around the 1.40/41 area, opens the way to a 61.1% Fibonacci retracement, 1.3987, of the length of the latest daily bullish impulse. 

Daily chart

The first hurdle, however, is the 50% mean reversion mark at 1.4036, which has a confluence with the 19th Feb highs.

“Prospects for the economy in 2021 and beyond have brightened and the downside risk to the outlook has diminished,” Federal Reserve’s Vice Chairman Richard Clarida said in remarks prepared for delivery to the US Chamber of Commerce on Wednesday.

Key takeaways as summarized by Reuters

“COVID-19 infections in the United States, the spread of the coronavirus variants pose a downside risk to the very near-term outlook.”

“It will take some time for the US economic activity, employment to return to pre-pandemic peaks.”

“The Fed is committed to using full range of tools to support economy, make recovery robust and rapid.”

Market reaction

The US Dollar Index showed no immediate reaction to these comments and was last seen posting small daily gains at 90.21.