Wednesday, November 27, 2019

RBA officials sends slightly hawkish signals during Tuesday’s speeches; will consumer spending data in the US disappoint?

Tags
  • Dollar
  • Gold
  • Yen
  • Pound
  • Stocks

US equities gained for the third straight day on Tuesday after US President Trump made upbeat comments on the progress of the phase one US-China trade deal. Trump said that the US and China are close to an agreement on Tuesday after high level negotiators from both from both counties spoke via telephone. The DJIA gained 0.20%, the S&P500 advanced 0.22% and the Nasdaq inched 0.18% higher.

Safe haven assets closed mixed on Tuesday. The Dollar Index fell 0.07%, after consumer confidence in the US fell short of expectations (of 127.0), falling to 125.5 from a previous of 125.9. The cheaper dollar likely influenced gold prices as gold gained 0.42% to 1461.39. But the yen weakened 0.11% against the dollar, as markets remain cautious on Trump’s comments. US Treasury yields fell across the board. Two-year yields fell 3bps to 1.58% and 10-year yields fell 1bp to 1.74%.

Gains in the US stock market extended into Asia on Wednesday morning, as the Nikkei, Hang Seng Index and Straits Times Index started Wednesday’s trading session 0.34%, 0.11% and 0.17% higher respectively.

The Reserve Bank of Australia’s (RBA) Governor Philip Lowe and Deputy Governor Guy Debelle both sounded less than dovish on monetary policy in each of their speeches on Tuesday. Debelle hinted that wage growth in Australia is likely to normalize at a slower pace than before 2012. During Lowe’s speech on unconventional monetary policy, he signalled that while quantitative easing is an option, he doesn’t expect the RBA to use it in the near future. The Australian dollar gained 0.13% against the dollar as a result of the slightly hawkish comments from both key officials.

Today’s Analysis: Expect today’s US economic data to affect the greenback today

A slew of economic data from the US is due to be released later today. October's durable goods orders and Q3's GDP data (second estimate) will be released at 5.30pm (GMT +4) while the Bureau of Economics Analysis’ (BEA) Personal Consumption Expenditure (PCE) report for October is set to be released at 7pm (GMT +4).

Economists expect slower contraction in the US economy from Wednesday’s data

Time

Indicator

Consensus

Prior

9.30pm

GDP (Second Estimate for Q3)

1.9%

1.9%

9.30pm

Durable Goods Orders (Month-on-Month)

-0.9%

-1.2%

9.30pm

Initial Jobless Claims

221,000

227,000

11pm

Personal Income (Month-on-Month)

0.3%

0.3%

11pm

PCE (Month-on-Month)

0.33%

0.2%

11pm

Core PCE (Year-on-Year)

1.7%

1.7%

*Source: ADSS

The highlight of the day will likely be durable goods orders and PCE data. Recent economic data has signalled that the US economy is contracting slower than expected and that domestic consumption in the US is expected to continue to stay resilient. This is likely an effect of the three consecutive rate cuts earlier this year. But Fed Chair Jerome Powell has signalled that the central bank is likely to put monetary policy on hold in the near future and allow the earlier rate cuts to reflect in the US economy before re-evaluating monetary policy again. Fed Fund futures indicate that the next rate cut is only likely from June 2020 onwards, as probabilities of a rate cut is only above 50% for June 2020 and after.

Durable goods orders contracted 1.2% in September after the US manufacturing sector unexpectedly contracted. Economists forecast durable orders to contract slower in October at 0.9%. It is unlikely that durable goods orders data later today will largely deviate from expectations as the Institute for Supply Management's (ISM) manufacturing Purchasing Managers' Index (PMI) for rose from 47.8 in September to 48.3 in October. But ISM’s manufacturing PMI report shows that production in the manufacturing sector is contracting at a faster rate in October, while new orders contracted at a slower rate, signalling that durable goods orders (that also comprises of production or manufacturing equipment) is likely to contract at a slower speed than September.

Data that markets are likely to be focused on in the PCE report include personal income, PCE and core PCE. Economists expect core PCE (also an inflationary measure that is favoured by the Fed) to remain constant at 1.7% year-on-year for October. It is likely that Core PCE will fall within expectations, or possibly slightly improve as the earlier rate cuts this year come into effect. PCE is expected to grow faster at 0.3% from September, while personal income is forecasted to remain consistent with September’s growth of 0.3%.

It is likely today's data will be within expectations or skew positive, as the US economy continues to reflect the effect of the Fed's rate cuts this year and as the US and China continue to progress towards a partial trade deal. As a result, the dollar is likely to continue strengthening against major currencies, with the Dollar Index rising towards 98.40’s level. But the market is likely to focus on any disappointing data especially since consumer confidence in the US fell short of expectations on Tuesday. If durable goods orders fall short of economists’ forecast, then the Dollar Index may fall slightly toward 98.20. But if PCE data signals that consumer spending is worse than expected, then the Dollar Index may break the 98.20 support level.

 

Scenario

Effect on Dollar Index

1

PCE data and durable goods orders fall within expectations

Remains little changed

2

PCE data disappoints, durable goods orders fall within expectations

Falls below 98.20

3

Durable goods orders disappoint, PCE data falls within expectations

Falls toward 98.20

4

PCE data and durable goods orders beat expectations

Rises towards 98.40

*Source: ADSS

 

Technical Analysis:         

DXY

The greenback bulls continue to dominate the Dollar Index as the Fed stays upbeat on the US economy and as better-than-expected economic data from the US released over past weeks. Dollar traders are likely to look out for today’s economic data on durable goods and inflation. If inflation disappoints the markets, then expect the bears to put downward pressure on the dollar and possibly break the support level of 98.20. But if the data skews positive, then the bulls are likely to charge forward and break the 98.40 resistance level. In the medium-term, the Dollar Index looks set to continue on its uptrend as the US economy looks to be contracting slower than expected.

Support: 98.20 / 98.00 / 97.74

Resistance: 98.40 / 98.53

DXY Chart (H4)

27B

*Source: ADSS, TradingView

 

GBP/USD

Although no major UK economic figures released this week, almost all published economic data last fell short of market expectations, the pessimism on pounds may therefore continue to spread and grow throughout the week. The pound slipped 0.3% to 1.2858 level on Tuesday, suffering the greatest drop among G10 currencies.

Technically speaking, sterling has formed three tops at the 1.2970-1.3000 range, which indicated that the bullish momentum is not sufficient enough to break the current period’s resistance range. Should pounds decline to break the previous low of 1.2764, it may continue to retreat to 1.25-1.26’s level in the medium-term. RSI indicates that the pound leans closer towards bearish side of roughly 40, implying that sterling has room to fall before another retreat comes. Bulls have to protect the previous low at 1.2815 and 1.2764 so as to keep GBP/USD at its current range. Bears then need to break 1.2815’s level and continue its downtrend and create lower highs and lower lows.

Support: 1.2815 / 1.2770 / 1.2706

Resistance: 1.2894 / 1.2911

GBP/USD Chart (4H)

27A

*Source: ADSS, TradingView