Daily Roundup – Markets review
Fundamental analysis of currency markets really does make for slim pickings today, with the prevailing theme appearing to be one of ‘wait and see’. There’s no shortage of potentially big ticket items on the agenda, but right now it feels as if a waiting game is being played out.
One notable move has been for the Aussie dollar against the Kiwi, with a rally being staged here over the last few hours, fears of recession in Australia are fading fast. Although global trade worries may well serve to keep a lid on the potential for further upside here, the potential for rate cuts in New Zealand adds a layer of downside risk for NZD here.
Two key points to watch are the yield curve inversion on US treasuries and Brexit. The former may have been most noticeably triggered on Friday when the 10 year yield fell below the three month equivalent, but the more subtle point to watch is the two-year vs five-year split. Historically, when the inversion here exceeds 12 points, it’s a trigger for the Fed to cut rates in a bid to stave off recession. On Friday it reached nine points before retreating and the last time the Fed didn’t act promptly was in 2006, with some seeing this as having contributed to the global financial crisis. A widening of this two-year vs five-year inversion could see the greenback selling off.
Brexit drags on, with last night’s developments in London seeing cross-party politicians take control of the agenda. They want to hold a series of votes to find an alternative solution, although there’s no legally binding nature to these. On top of this, the EU has announced that it is now prepared for a no-deal Brexit and that the chances of such an outcome are becoming more likely. The market isn’t buying into this rhetoric however, although any signs of progress in either direction should result in a significant break out for Sterling.
Early tomorrow, the Reserve Bank of New Zealand will make its latest call on monetary policy. Markets have already priced in a 90% chance of a rate cut by August, so any deviation from the script here could produce fresh volatility for the kiwi Dollar, with a more dovish than expected slant having the potential to see AUD/NZD push back to last week’s highs.
EUR/USD is displaying a sell signal. The pair already bounced off the 61.8% retracement of the 2017 run higher and could now be poised to make another test of this level, around the 1.1200 mark.