To QE or not to QE? RBA cuts their asset purchases from five to four billion AUD but extends the period resulting in no meaningful action. This could be what the other central banks will also want to do: leaving their QE programs mostly untouched while the Fed tapering is delayed. As a result, the USD rallies and commodity currencies are hit hardest. The RBA kept the rates unchanged at 0.10% as expected. The announcement created a fake rally that was quickly faded. The RBA board decided to keep the target rate 0.10% and the interest rate on exchange settlement balances at 0%. The board will keep the April 2024 Australian Government bond target rate at 0.10% and continue buying government bonds at a rate of AUD $4 billion per week until at least February 2022. By reading further you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
Currency performance. Compared to London open yesterday the weakest currencies are NZD (-0.36%) and AUD (-0.36%) after the RBA decided to keep the rates unchanged and didn’t really decrease their QE program to any meaningful extent. The strongest currency today is the CHF (0.16%) with the USD (0.07%) right behind it.
Commodity performance. When looking at the commodities performance since the beginning of Q3 it’s remarkable how correlated platinum (-6.23%), silver (-7.00%) and USOIL (-7.97%) have been. What’s common with these three commodities is their industrial use while gold (1.87%) is seen as a speculative asset or an inflation hedge. The recent trend change in oil, silver and platinum suggests that the investors are again betting for growth. Relative to these markets gold’s movements have remained fairly modest reflecting uncertainty related to the impact of possibly tightening central bank policy while the current administration in the US looks to continue pushing through colossal infrastructure and social spending.
The S&P 500 (-0.03%), the DJIA (-0.21%) and the Nasdaq (0.21%) finished the day with mixed results. All the indices traded sideways on Friday and the same can be said about the last week as a whole. We have a slight upward tendency in the major indices that have been moving steadily higher with low volatility but most sectors closed lower on Friday. Only the technology (0.40%) and the healthcare (0.11%) sectors made small gains. The utility sector (-0.83%) lost the most. Top performers on our watchlist were WPM, NVDA, LRCX, PYPL and AVGO while DD, NTES, LVS, AAL and SLB were the biggest losers.
The above chart shows the % performance of each stock. Stocks are presented here with the S&P 500 tracking ETF (SPY, red line) to illustrate the performance of each stock relative to the benchmark index. This allows our readers to see the potential for intraday trading opportunities in these stocks. Often the sudden increase in volatility continues on the second day. You should, therefore, keep monitoring these stocks to see if they will satisfy your criteria for a trade. All % performance charts in this report are courtesy of Tradingview.com.
RBA rate decision was the main risk event today and the market is still reacting to it. The other key events today are MPC member Saunder’s speech (BOE) and the ZEW Economic Sentiment release. For details on other important macroeconomic releases, see the TIOmarkets economic calendar here.
Market update: We pointed out yesterday that EURUSD has created a bearish shooting star candle and a decisive break below Friday’s low (1.1865) would confirm the indication. Yesterday’s price action was indecisive but that’s not a surprise as the day was a bank holiday in the US and Canada. Therefore nothing much has changed but now that the central banks are trying to balance between the likely future Fed policy and supporting their own economies the dollar pairs (of which the EURUSD is obviously the biggest and most important market) will be highly interesting. The key price levels and areas in EURUSD are 1.1663, 1.1804 (50-day SMA and a previous resistance level), 1.1892 – 1.1908 (38.2% retracement level and a weekly resistance level) and 1.1965 – 1.1975 (the 50% retracement level and a daily swing point).
AUDUSD has been selling off today after it reacted to the RBA decision with a fake rally. It seems that the 38.2% retracement level was too much for the bulls and now that the RBA isn’t really going to taper but cuts here and adds there (cuts AUD $1 billion per week but at the same extends the QE period by three months) traders are selling the AUD against the USD. As it seems that the AUDUSD pair cannot stay above the 0.7426 level then probabilities are that there’s going to be a counter move against the recent bull move. The next key price level zone is at 73.05 – 73.20 where we have the SMA(20 and the 23.6% retracement level. A sustained rally above 74.77 would negate these bearish indications.
NZDJPY rallied strongly but now that the pair is losing momentum near to a weekly resistance level (78.65). Stochastic Oscillator is in the overbought zone and about to give a sell signal. If this weakness continues and the pair cannot rally above Friday’s high (78.64) it’s likely that NZDJPY retraces back to a 23.6% Fibonacci level (77.68). The 76.84 – 77.09 range (SMAs and the 38.2% retracement level) is an important confluence zone.
Macro Drivers for the USD
As the most followed, invested and traded markets for risky assets are priced in the USD it is helpful to understand what macroeconomic factors impact the other side of the equation, the USD. Whether we are trading EURUSD, XAUUSD or US equity CFDs the factors impacting the dollar, the nominator in the equation, have a significant role in the formation of all medium to long-term price action. The following table summarises the most important fundamentals.
|The FED||Fed Chair Powell said on Friday (August 27th) in Jackson Hole Symposium that tapering could begin in 2021 but also voiced concerns about the spread of delta variant.|
|Stimulus||The US lawmakers have authorised approximately five trillion dollars of economic stimulus since the beginning of the pandemic. Now, US lawmakers have agreed to a $1.2 trillion infrastructure spending plan. The Fed officials consider ending the asset purchases in the middle of 2022.|
|Yields||Apart from the recent pickup (that started in August 2021), the Treasury yields have been moving lower since March 2021. All in all, the yields and interest rates are extremely low on both nominal and real basis.|
|Employment||After two highly positive employment reports (+938K and +943K) the August number (+235K) was a big disappointment but in fact at a level that used to be the norm in the years before the pandemic. This number could delay the Fed taper but isn’t likely to reverse their decision to taper.|
|Inflation||The month on month Core CPI (excluding food and energy) for July came in at 0.3% (0.4% expected) which indicated a big drop in the rate of inflation from the month before (0.9%). The Fed has earlier taken a view that inflation is transitory and will be therefore likely to fade away. Even though one data point doesn’t make a trend it seems that the Fed has been correct in their inflation projections. The lumber futures for instance are once again trading at October 2020 levels and down over 70% from their May highs.|
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Market News & Facts
- RBA kept rates at 0.10% and cut but extended QE
- Australian consumer confidence 100 (101.8 prior)
- German factory orders +3.4% (-1.0% expected)
- Saudi Arabia cuts oil prices for Asia
- New Zealand ANZ Commodity Price index -1.6% (-1.4% prior)
- Mercedes: chip shortage to stay in 2022
- China Services PMI 46.7 (52.6 expected)
- Gazprom to switch all settlements from USD to CNY
- US Factory Orders 0.4% (0.3% expected)
- WHO: Variant Mu could be resistant to coronavirus vaccines
- Australia July trade balance 12.1 bn AUD surplus (10.2bn expected)
- OPEC in agreement on increasing output gradually
- US ISM Manufacturing Index 59.9 (58.6 expected)
- USD under pressure after ADP disappointment (374K, 640K expected)
- BBC: New coronavirus variant could be more resistant to vaccines
Quick Links to Recent Analysis
The Next Main Risk Events
- GBP – MPC Member Saunder’s Speech
- EUR – ZEW Economic Sentiment
- EUR – German ZEW Economic Sentiment
For more information and details see the TIOmarkets economic calendar here.
Chief Market Analyst
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