This week our currency strategists focused on the Reserve Bank of New Zealand’s Monetary Policy Statement and US CPI update for potential high-end setups.
Of the eight scenario/price forecast discussions this week, It cannot be said that any of us saw the arousal of both financial and technical arguments They become potential candidates for overlay trading and risk management. But here’s a quick look at the two scenarios with the closest fundamental catalysts and see why we don’t get a technical catalyst.
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NZD/CHF 1 Hour Forex Chart by TradingView
On Monday, our strategists set their sights on the Reserve Bank of New Zealand’s monetary policy statement and its potential impact on the New Zealand dollar. Based on our event guide, expectations were for a 50 basis point rate cut to 4.75%, with markets looking for signs of future easing.
With these expectations in mind, here’s what we were thinking:
“Kiwi climbing” scenario:
If the RBNZ delivers a smaller 25 basis point cut or signals a pause in the easing cycle, we expected this could support the New Zealand dollar. We focused on the GBP/NZD pair for potential selling strategies, especially in light of the pair’s potential reversal at a key resistance area and recent dovish comments from Bank of England Governor Andrew Bailey on the likely path of interest rate cuts.
In case of a less pessimistic stance from the RBNZ combined with positive risk sentiment, we considered NZD/JPY among the potential long strategies. This scenario took into account the recent weakness of the yen and the interest rate differential that favored the New Zealand dollar over the yen.
“Kiwi Collapse” scenario:
If the Reserve Bank of New Zealand cuts interest rates by 50 basis points and signals further aggressive easing, we thought this could weigh heavily on the New Zealand dollar. We looked at potential selling strategies for NZD/CHF, given the safe-haven status of the Swiss franc and the pair’s recent downtrend.
But if we see a net risk-off environment coupled with RBNZ’s dovish actions, we may look at NZD/CAD as potential selling strategies. This has taken into account the relative strength of the Canadian dollar, supported by higher oil prices due to geopolitical drivers and a less pessimistic Bank of Canada recently.
What actually happened
The Reserve Bank of New Zealand met market expectations by cutting its policy rate by 50 basis points to 4.75% on Wednesday 9 October. The central bank cited weak economic activity, weak consumer spending, and easing employment conditions as key factors behind the decision.
Key points from the RBNZ statement:
- Annual consumer price inflation is assessed to be within the target range of 1-3% and converging at the midpoint of 2%.
- Global economic growth remains below trend, with expectations of a slowdown in the United States and China.
- The New Zealand economy is now in a position of excess capacity, which encourages price and wage adjustment in a low-inflation economy.
- The Reserve Bank of New Zealand has signaled the possibility of further easing, noting that future OCR changes will depend on its evolving assessment of the economy.
Market reaction and outcome
With expectations of further interest rate cuts in the future and an uncertain economic outlook, it was no surprise that the initial market response to the RBNZ’s decision was a sharp decline in the New Zealand dollar across the board. This essentially triggered the NZD/CHF and NZD/CAD scenarios, and with markets feeling risk averse at the time thanks to uncertainty over Chinese stimulus, NZD/CHF selling rose to the top of the list.
But in our original discussion, Our technical setup was to see if the New Zealand Dollar would bounce into potential technical resistance areas and wait for bearish reversal patterns before considering short selling. This was not the case as the market fell immediately, not giving us a full setup.
USD/CHF 1 Hour Forex Chart by TradingView
On Wednesday, our Forex strategists set their sights on the upcoming US CPI update for September 2024 and its potential impact on the US Dollar. Based on our Event Guide, expectations were for headline CPI to come in at +0.1% m/m and +2.2% y/y, with core CPI at +0.2% m/m and +3.1% y/y.
With these expectations in mind, here’s what we were thinking:
“Dollar Diving” scenario.
If the CPI comes in lower than expected, we expected that markets may take into account expectations that the Fed may lean toward cutting interest rates more aggressively in November. This could attract sellers of the underlying US dollar, and we have our eyes on EUR/USD for potential longer-term strategies, especially given its position near long-term support and the possibility that the ECB’s rate cut has been fully priced in for the month. October.
If CPI comes in below expectations and risk aversion takes over, we thought USD/JPY could provide short selling opportunities. The pair was trading just below the key psychological level of 150.00, and potential Japanese intervention was a consideration.
“Greenback Gains” Scenario
If US inflation comes in hotter than expected, we thought this could ease US recession fears and strengthen the dollar. We have been monitoring the USD/CHF pair for this scenario, as the pair is near the rising trend line and the 50% Fibonacci retracement level, which could pave the way for an upward move if technical players jump in to take control.
In case of a mixed CPI report that is neutral to higher but with improving risk sentiment, we looked at AUD/USD for potential short selling strategies. The pair has been testing an uptrend line, and if we see weaker than expected Australian economic data, it could trigger a bearish technical breakout, especially with the uncertainty over Chinese stimulus at the time.
What actually happened
Well guys, it’s Thursday, and the US CPI report decided to throw us a curve ball. The September CPI report came in slightly hotter than expected, with headline inflation rising 0.2% m/m (vs. 0.1% expected) and 2.4% y/y (vs. 2.3% expected). Core CPI also surprised higher, rising 0.3% m/m (vs. 0.2% expected) and holding steady at 3.2% y/y (vs. 3.1% expected).
Key points from the CPI report:
- Shelter costs increased 0.2% month over month, contributing significantly to the overall increase
- Food prices rose by 0.4% on a monthly basis
- The energy index fell 1.9% month-on-month, offsetting some other increases
Market reaction
The initial market response to the slightly hotter than expected CPI data was mixed, with the market pushing the US dollar up and down within the first 20 minutes of the release. This was likely due to traders also pricing in weekly initial jobless claims in the US, which came in at a much weaker than expected 258K (231K forecast, 225K previously) for the week ending October 3.
Economic activity appears to be a bigger driver than inflation conditions these days, which is likely why we see the US dollar trading as a net loser for the rest of the week as interest rate cut odds remain in favor of the 50 basis points camp.
So our fundamental arguments for buying the USD were stimulated by higher than expected CPI readings, and with the market moving towards broad risk sentiment, we thought USD/CHF made the most sense to monitor potential risk overhang and manage the trade.
The technical triggers for this pair were that if USD/CHF pulls back to a resistance-turned-support area near the uptrend line and the 50% Fibonacci level, we will wait for bullish reversal patterns before considering buying, or if the pair breaks above the swing highs. , long trading would probably make sense there.
Unfortunately for us, neither scenario materialized as volatility eased, leaving us with no potential moves this week.
In general, market volatility cannot remain high in both modes, which can happen quite often, and that’s just the way things go sometimes. The market is a living, breathing entity that does not always behave as expected.
We can’t control that. But what we can control is that we adhere to the highest levels of quality as best we can and control/minimize risk as much as possible at times when we are exposed to risk, and when the monster we call the market behaves differently than we expect.