Forex Institutional Research: Credit Agricole FX Daily
Key quotes from the Credit Agricole FX report:
Stay Short AUD
In Asian hours risk sentiment was weak, with US stock futures trading lower at the time of writing. Looking ahead, risk sentiment will remain driven by Fed rate expectations and conditions in China. From that angle this week’s main focus will be on Wednesday’s release of the March FOMC meeting minutes and Caixin PMIs in China. Should stabilizing conditions in China indicate lower externally driven downside risks to the US economy, the Fed may well start to focus on more on domestic conditions when communicating its stance on monetary policy. It must be noted too that Fed’s Evans reiterated that it will be appropriate to make two more hikes this year and follow a very gradual path of rate increased thereafter. If so, current market pricing appears too pessimistic. Firm labour market conditions to the benefit of domestic demand expectations should in the end confirm that rising core prices are sustainable. As a result to the above outlined conditions we believe that the USD should still be bought on dips, for instance against commodity currencies such as the AUD and CAD.
When it comes to Australia, the main focus was on today’s RBA monetary policy announcement. In line with market expectations the central bank left monetary policy unchanged. When it comes to the currency, it was stressed that a further appreciating exchange rate could complicate the adjustment underway in the nation’s economy. This stands in contrast to previous comments, in which the central bank explained that the currency has been adjusting to the evolving economic outlook. If anything such comments may indicate that the RBA is fully aware of a stronger currency’s dampening impact on monetary conditions. Strongly capped RBA monetary policy expectations, elevated long positioning and unstable risk sentiment should keep AUD/USD a sell on rallies. We stay short the pair as a trade recommendation. This is especially true as the latest business activity data points to more lacklustre conditions.
In New Zealand, according to the NZ Institute of Economic Research, business confidence dropped to 2 (prev. 15). A weaker growth outlook should be taken as a signal of the RBNZ remaining in a position to ease monetary policy further up ahead. Weaker growth prospects to the benefit of central bank easing expectations should make the NZD more sensitive to global risk sentiment too. As such the risk should remain on the downside, just as with the AUD
Ahead today, the main focus will be on the UK and US services PMIs. Even if today’s UK data were to surprise higher, GBP upside should remain limited. In an environment of intact Brexit fears we expect actual buying interest to stay low. When it comes to the US, further expanding services sector related business activity should make a case of rising domestically driven upside risks to inflation. This in turn may ultimately support the notion that rising core prices are indeed sustainable. Hence Fed rate expectations have room to rise.
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