Risk Sentiment Stays Supported, RBNZ Less Dovish than Expected

JFD Brokers
10 min readFeb 13, 2019


Risk assets continued to gain, and safe-havens stayed on the back foot yesterday, marking another day of risk-on trading, with the main driver being once again optimism surrounding the US-China trade negotiations. The Kiwi was the big winner among the G10 currencies, surging after the RBNZ kept interest rates on hold, but appeared less dovish than many may have expected. As for today, the central bank torch will be passed to the Riksbank. UK and US inflation data are also due to be released.

Equities Continue to Rise on US-China Optimism

The dollar pulled back yesterday, underperforming against all but two of the other G10 currencies. The main winner was NZD, gaining after the RBNZ decision (see below), with NOK and AUD taking the second and third place respectively. The currencies which failed to capitalize against the greenback were the safe-havens JPY and CHF, with USD/JPY and USD/CHF trading virtually unchanged.

The pattern suggests another day of risk-on trading, with the dollar pulling back after eight straight days of gains. Indeed, major EU and US equity indices were a sea of green yesterday, with the upbeat investor morale rolling into the Asian trading Wednesday. Japan’s Nikkei 225 and China’s Shanghai Composite ended their trading 1.35% and 1.84% up respectively.

Optimism surrounding the US-China trade negotiations may once again be the main driver, with US President Trump noting yesterday that he could allow the deadline for sealing a deal “slide a little while”. However, he said that he would prefer not to delay the deadline and that he expects to meet with China’s Xi Jinping to finalize the deal. Following his own comments last week that such a meeting is unlikely to happen before that deadline, which is on March 1st, we see the delay as a one-way path if Trump actually wants to secure a deal.

Market participants are likely to keep their gaze locked on the US-China trade sequel, with top-level negotiations scheduled for Thursday and Friday. According to overnight headlines, President Xi will also meet the US negotiators on Friday, which adds to signs that the two nations are willing to work things out. In our view, further positive remarks are likely to keep market sentiment supported, but for a sustained recovery in risk assets, like equities, we would like to see signatures. We would also like to see a permanent solution with regards to the US spending bill. Yes, on Monday US lawmakers agreed on a tentative deal in order to avert another government shutdown at the end of this week, but yesterday, President Trump said he is not happy with the deal and that he has not decided yet whether he will support it.

Nasdaq 100 — Technical Outlook

Looking at the 4-hour chart of Nasdaq 100 cash index, we can see that it continues to climb higher, breaking now above its key resistance zone at 7030. For now, it seems that the bulls could continue dictating the rules and the price may push further to the upside. We will remain positive, at least for the short run.

Because the index managed to clear the 7030 barrier, it has opened the way for itself towards slightly higher resistance areas, the first strong one being the 7134 obstacle, marked by the high of December 3rd. But this is where we may see Nasdaq 100 getting held for a bit, or even retracing slightly back down. But if this correction is short-lived, the bulls might charge again and this time, if the 7134 barrier fails to withhold them down, a break might set the stage for a test of the 7219 hurdle, which is the high of November 8th.

On the other hand, in order to shift our view more in the southern direction, we would need to see a break of the aforementioned upside support line and a drop below the 6890 hurdle, marked by the low of February 11th. After that, we may target the key support area at 6830, which is the low of February 8th. If the selling remains strong, a drop below that support area could open the door to some lower level, one of which could be the 6717 obstacle, marked by the intraday swing high of January 29th.

Kiwi Surges as RBNZ Appears Less Dovish than Expected

The Kiwi was the main winner among the G10 currencies, surging after the RBNZ announced its interest rate decision. The Bank maintained interest rates unchanged at +1.75%, while in the accompanying statement, Governor Orr reiterated that they expect rates to stay at this level through 2019 and 2020. He also brought back into the statement the part saying that the direction of the next move could be up or down.

The Governor also noted that the risk of a downturn in trading-partner growth has increased in recent months, but maintained the view that employment is near its maximum sustainable level and that low interest rates and government spending are expected to support a pick-up in GDP growth over 2019, which suggests that policymakers believe that the slowdown in Q3 economic activity may be owed to temporary factors. In the quarterly Monetary Policy Statement, officials downgraded somewhat their GDP and inflation projections, but most importantly, they pushed back the timing of when they expect interest rates to start rising, from Q3 2020 to Q1 2021. A 25bps rate increase is now seen in Q2 of 2021.

Most of this was in line with our expectations, but the Kiwi’s reaction suggests that many market participants were probably positioned for a more dovish outcome, and that’s why they may have liquidated prior short bets at the time of the announcement. Certainly, the Bank was not hawkish, but the somewhat sanguine tone on employment and future growth may have been the reasons behind the massive short covering. At the press conference, Governor Orr stuck to his guns that if growth does not pick up, a cut may be required, but he also noted that the chance of a rate cut has not increased, which may have added extra fuel to the Kiwi recovery.

GBP/NZD — Technical Outlook

During the Asian morning today, we saw increased buying activity in the New Zealand dollar, which led GBP/NZD to decline sharply, breaking through some key support areas, which now could become good resistance levels. There is a possibility to see the pair traveling a bit lower again, but before it may do that, GBP/NZD could retrace back up, in order to let other bears, who missed the initial slide, jump in and ride the pair.

The rate fell shy by a few pips from hitting the important zone at 1.8820, which acted as good support on February 1st and January 16th. At the time of the analysis, GBP/NZD is reversing back to the upside and this move could go a bit further, potentially testing the 1.8900 hurdle, or even the 1.8950 barrier, marked by the intraday swing highs of February 5th and 6th. If the pair fails to continue its path higher, this is when the bears could step in and take control of the steering wheel and drive GBP/NZD back down. This might push the rate towards the 1.8820 obstacle, a break of which could clear the way to the strong 1.8760 support zone, marked by the low of February 6th.

Alternatively, a strong push back above the 1.9015 barrier, marked by the low of February 7th and near the high of February 4th, could interest more buyers and the rate may get lifted to the next potential resistance, at 1.9070, which is yesterday’s low. A break of that resistance could allow GBP/NZD to go a bit higher and test today’s high near the 1.9155 level.

As for Today’s Events

Today, the central bank torch will be passed to the Riksbank. At its latest policy meeting, the world’s oldest central bank decided to raise rates to -0.25% from -0.50%, which is the first increase since 2011, while in the accompanying statement, officials noted that the next hike is likely to come during the second half of 2019.

Since then, inflation data showed that the headline CPI rate remained unchanged at +2.0% yoy, the CPIF rate ticked up to +2.2% yoy, while the core CPIF rate, which excludes energy, rebounded back to +1.5% yoy from 1.4%. Although the Krona strengthened when these numbers were published, it was quick to give back all the inflation-related gains, which suggests that the prints were not strong enough for investors to raise bets that Riksbank officials may to bring forth the timing of when they expect rates to rise again, something we agree with. We expect the Bank to keep policy on hold at this meeting and to maintain a more or less unchanged narrative in the accompanying statement.

As for the economic releases, during the European morning, we get the UK CPIs for January. Expectations are for the headline rate to have slid further, to +1.9% yoy from + 2.1%, while the core rate is expected to have remained unchanged at +1.9% yoy. That said, we still believe that pre-Brexit inflation numbers are unlikely to attract much attention, as everything could change after the UK departs from the EU. In case of a no-deal outcome, economic growth could get hurt, but a potential slide in the pound could lift inflation up again.

We believe that GBP traders will keep their gaze locked on the Brexit sequel, and the new debate in Parliament. Yesterday, Theresa May addressed lawmakers, but given that she has not secured any changes to her Brexit bill, there was not much to drive the markets. Tomorrow, MPs will debate on Brexit, with a chance of another round of voting on proposed amendments. With less than two months until the official divorce date, approving amendments which include extending Article 50, like the one proposed by Cooper on January 29th, could ease fears that the UK will crash out of the EU without in a chaotic manner. On the other hand, a repeat of the decisions taken on January 29th could add to no-deal Brexit fears.

We get inflation data from the US as well. Expectations are for the headline CPI rate to have declined to +1.6% yoy from +1.9%, further below the Fed’s objective of 2.0%, while the core rate is anticipated to have ticked down to 2.1% yoy from 2.2%. In our view, with the Fed signaling patience with regards to its future moves, such results are unlikely to alter much market expectations on that front. According to the Fed fund futures, market participants are almost certain that the Committee will not push the hiking button this year, while they see a 10% chance for a rate cut. Even if the headline rate falls to +1.6% yoy, we believe that for that percentage to increase notably, the core rate may need to dip below 2% as well.

As for tonight, during the Asian morning Thursday, Japan’s preliminary GDP for Q4 is coming out and the forecasts suggests that economic activity grew +0.4% qoq in the last three months of 2018 after contracting 0.6% the prior quarter. This would bring the yoy rate back to positive territory, to +1.4% from -2.5%. China’s trade balance for January is also coming out. Expectations are for the nation’s surplus to have declined to 32.00bn from 57.06bn in December, while both exports and imports are anticipated to have fallen for the second consecutive month.

With regards to the speakers, we have four on the agenda: From the Fed, we have Atlanta President Raphael Bostic, Cleveland President Loretta Mester, and Philadelphia President Patric Harker. RBNZ Governor Orr will speak again, less than 24 hours after the press conference following the Reserve Bank’s rate decision.


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