The issue of negative central bank interest rates was a major driver of foreign exchange markets last week. Dollar ended as the strongest against a chorus of Fed officials voiced their objections. The New Zealand Dollar, on the other hand, ended up as the weakest as RBNZ clearly prepared the system for negative interest rates. BoE Governor Andrew Bailey did not have the support of colleagues like Powell. Sterling also ended up as the second weakest in speculation about negative rates.
US-China trade and political tension were another major theme along the way. Shares showed signs of bearish reversal on rising tensions. Gold and silver’s strong rally could also be at least partially attributed to risk aversion. The strength of gold could also somewhat reflect the resilience of the Dollar. As discussed below, overall, we need to know if the risk sentiments are really reversing quite soon.
Bold Powell rejected negative rates, Dollar lifted mildly
Despite persistent market speculation about negative interest rates, Fed chairman Jerome Powell was pretty clear on his objection. He reiterated last time that “the committees’ view of negative prices has really not changed. This is not something we look at. “There are fans of the policy with negative rates, he added, because now it’s not something we consider. He emphasized “we have a good toolkit and that is what we will use.” More importantly, Powell received a chorus from his colleagues who also openly dismissed the negative interest rates.
Dollar was somewhat supported by Powell’s comments last week. But no clear decisive purchase was seen. The dollar index remains bounded in the range below 100.93 resistance. General outlook remains unchanged in that the correction pattern from 102.99 can still extend with another leg down. But even in this case, we expect strong support of the 61.8% retracement from 94.65 to 102.99 at 97.83 to contain disadvantages. Meanwhile, breaches of 100.93 resistance should bring retest of 102.99 high.
NZD / USD and NZD / JPY short-term reversal as RBNZ prepares for negative exchange rates
The New Zealand Dollar ended up as the worst result when it was deeply sold after RBNZ nearly doubled its Long Term Asset Buying program to NZD 60B. More importantly, RBNZ indicated that a negative cash interest rate “will become an opportunity in the future” and that “discussions with financial institutions on preparing for a negative OCR continue.” The statement reaffirmed market expectations that RBNZ will eventually go negative. Some expected OCR to be reduced to -0.50% by November.
NZD / USD’s break of 0.5994 support suggests that the entire rebound from 0.95469 is completed at 0.6176, on bearish divergence mode in 4 hour MACD. Immediate focus will now be on 0.5910 cluster support (38.2% retracement from 0.5469 to 0.6176 at 0.5906) this week. Company shutdown to confirm this case and bring a deeper drop to the 61.8% retracement of 0.5739 and above. Nevertheless, rebounding from the current level followed by breaches of 0.6016 less resistance will revive near-term bullishness for another increase through 0.6176.
Similarly, NZD / JPY is also pushing for similar cluster support at 63.55 (38.2% retracement from 59.49 to 56.15 at 63.60). The sustained break should confirm the completion of the entire rebound from 59.49. Deeper decline should be seen at 61.8% retracement of 62.03 and below. This happens, if that happens, also an indication of risk aversion elsewhere. Meanwhile, the rebound from the current level, followed by a break of 64.59 less resistance, will revive near-term bullishness and turn the bias upside for 66.15 resistance and above.
GBP / CHF and GBP / JPY are also heading south towards negative exchange rates and Brexit
Sterling ended up as the second weakest last week, also on negative interest rate negotiations plus renewed Brexit uncertainty. BoE Governor Andrew Bailey said during the week that the negative rate was “not something we are currently planning or considering.” But he added, “It’s always wise, and especially in these circumstances, not to rule out something forever.”
BoE chief economist Andrew Haldane shared a different view. Haldane told the Telegraph that “it’s something we have to look at – look at – with some greater momentum.” Negative rates or not, BoE is looking at more easing. Haldane noted that “with QE, there’s more we can do there on the gilded side and the corporate bond side in principle.” “As we’ve found from other central banks, you could buy assets further down the risk spectrum.”
Another round of Brexit negotiations ended with complaints from both the UK and the EU. British Brexit chief Brexit negotiator David Frost said “very limited progress” was being made on the “most significant outstanding issues”. “We are in dire need of a change in the EU strategy for the next round,” Frost added. On the other hand, EU chief Brexit negotiator Michel Barnier said the third round of Brexit negotiations was “disappointing”. But he insisted, “We will not negotiate our values for the benefit of the UK economy.”
The GBP / CHF has now taken decisively 1.1869 support with last week’s decline. Corrective rebound from 1.1102 should be completed at. 1.2204. With the 38.2% retracement of 1.1102 to 1.2204 at 1.1783 also taken out, the deeper decline should be seen to the 61.8% retracement of 1.1523 and below. This remains the case as long as 1.1948 is less resistance.
After some hesitation, the GBP / JPY extended from 135.74 last week. The trend is in line with the opinion that the corrective rebound from 123.94 has already ended at 135.74. Further declines are expected, as long as 131.41 less resistance holds, to the 61.8% retracement of 123.94 to 135.74 at 128.44 and below. Both the GBP / CHF and GBP / JPY developments could also be seen as early indications of risk aversion.
DOW and S&P 500 reversal are confirmed soon
Speaking of risk aversion, both DOW and S&P 500 completed head and shoulder top patterns last week. Towards the end of the week, both indices participate in typical repayment. Ideally, we should see rejection from the neckline resistance as well as 55 hours of EMA in the early part of this week. The subsequent break of last week’s low should follow. Then, short-term reversal must be confirmed.
However, a crucial breach of resistance in the neckline will invalidate the reversal pattern. The latest rebound would then resume for another highlight. One way or another, we know the answer pretty soon.
The AUD / USD remained in the range of 0.6372 / 6569 last week and the outlook remains unchanged. The initial bias remains neutral this week first. Rebound from 0.5506 may still extend higher. But given the bearish deviation mode of the 4 hour MACD, the upside should be limited by 0.670 key resistance, at least on the first try. on the downside, a break of 0.6372 should indicate short-term confirmation and bring a deeper decline to the 38.2% retracement of 0.5506 to 0.66569 at 0.6163 first.
In the bigger picture, there is still no clear sign of trend reversal. The major downtrend from 1.1079 (2011 high) is still to be extended. 61.8% forecast from 1.1079 to 0.6826 from 0.8135 at 0.5507 is already met. Persistent break that paves the way to 0.4773 (2001 low). On the flip side, however, the persistent break of 0.6607 would indicate a medium-term decline, turning the focus to 0.7031 resistance next.
In the longer-term picture, the downturn from 1.1079 (2011) is still in progress. It is a little early to judge the depth of the downtrend. But sustained break of 61.8% projection from 1.1079 to 0.6826 from 0.8135 at 0.5507 could pave the way for 100% projection of 0.3882.