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By Arnaud Masset, market analyst, Swissquote Bank

  • Commodity currencies may further recover thanks to crude rebound
  • NZD/USD broke the 0.6966 resistance having received a strong boost from the commodity rally and improving risk sentiment, however we prefer to remain cautious as the country’s economic outlook is still uncertain.
  • The Aussie should continue to ride the positive trend as commodities strengthen further; however the pair is extremely vulnerable to renewed Fed rate hike expectations and negative signals from the Chinese economy
  • Financial markets carefully scrutinize German economic indicators with the ZEW due to be released later today
  • The single currency should continue to push lower against the Swiss franc
  • We remain bullish EURUSD as the Fed’s renewed dovish stance should continue to add upside pressure

As expected, the crude oil debasement, which was triggered by the failure of the Doha meeting, proved to be short-lived. The West Texas Intermediate almost completely erased Monday’s early losses as it bounced back slightly below the $40 threshold after hitting $37.61 at the opening. Similarly, the Brent crude filled the gap and returned to around $43. Gold was also buoyed this morning as it surged 0.60%. Silver was up 2.40%, platinum rose 1.20% and palladium jumped 1%. Finally, iron ore futures on the Dalian commodity exchange were up 2.40% after gapping higher at open.

In such an environment, commodity currencies were buoyed during the Asian session with AUD, NZD, NOK and CAD recovering significantly. The NZD rose the most among the G10 currencies, rising 0.79% against the US dollar. NZD/USD broke the 0.6966 resistance (high from March 31st) and held ground above the 0.70 threshold; its highest level since mid-June 2015. The Kiwi received a strong boost from the commodity rally and the improving risk sentiment, however we prefer to remain cautious as the country’s economic outlook is still uncertain as there is no clear evidence of a solid recovery.

The Australian dollar also continued to rally in overnight trading and finally broke the $0.7720 resistance to the upside. The pair is now heading towards the next resistance at 0.7849 (high from June 18th last year), and the release of the RBA’s minutes earlier this morning did not allow any room for doubt on further Aussie strength as we found no solid evidence of an easing bias in the RBA’s minutes. The Aussie should continue to ride the positive trend as commodities strengthen further; however the pair is extremely vulnerable to renewed Fed rate hike expectations and negative signals from the Chinese economy.

On the equity market, most equity indices were trading in positive territory on improving risk sentiment. Japanese shares rose the most among the Asian markets with the Nikkei 225 and the Topix index surging 3.68% and 3.25% respectively. In mainland China, the Shanghai and Shenzhen Composite rose 0.21% and 0.28% respectively. In Australia, shares jumped 1.01%, while in New Zealand the S&ZP/NZX was up 0.32%.

Peter Rosenstreich, head of market strategy: Still eye downside in USDJPY: “In a WSJ interview BoJ Governors Kuroda stated that he sees yen appreciation as a direct threat to inflations goals. Today’s comments on FX pricing were the central bank chief’s most explicit since the JPY began strengthening. Kuroda went on to provide some generic jawboning suggesting the BoJ stood ready to act, but markets reaction was muted. In our view, for Kuroda straight talking provides some insight into the panicky feeling at the BoJ. Corporate and household confidence in Abenomics is declining, which will undermine the BoJ efforts. With growing expectations of deflation, Japan is once again falling into a deflationary trap. Negative interest rates have proved less effective than originally believed (indicated by the flaws in economic theory in predicting behavioral response). Households and corporates have become worried over the sustainability of fragile inflation, which has triggered a reduction in borrowing, which in turn has strapped banks with additional reserves (hurting banks profitability). In addition, there is increased evidence that households, which were spooked by the BoJ negative rate policy reversal, are hoarding cash to avoid negative interest rate penalties. Overall, deeper negative rates are unlikely. Direct FX intervention remains a threat (sub 105 levels). Yet the BoJ must tread lightly as unsuccessful action will only erode the BoJ credibility, which is critical in policy setting. Dovish Fed and positive risk sentiment have forced the cutting of USD long positions indicating that liquidity issues with JPY repatriation will be an issue. We remain bearish on USDJPY and target range bottom at 107.63.”—

Yann Quelenn, market analyst: “Germany suffers and accuses the ECB: Tensions are rising between Germany and the ECB over the European institution’s current monetary policy. Germany believes that QEs and low interest-rates are destroying its economy and that what may be good for most of Europe is not, in the end, good for them, as they bear the brunt of the cost.

Financial markets are closely scrutinising German economic indicators and will be paying close attention to the ZEW, due to be released later today. This will provide insightful economic sentiment for April including current situation and expectation figures. ZEW Current situation data is expected to print in line with March’s previous figure. One year ago, the indicator was above 70. Economist are growing increasingly pessimistic.

However, while the overall European situation is worsening, the ZEW expectations rebounded last month but remain, as well, in a clear negative trend. In general, sentiment remains negative and the European outlook is clearly uncertain, especially due to Brexit and Grexit.

The single currency should continue to push lower against the Swiss franc. On the other hand, we remain bullish EURUSD as the renewed dovish stance of the Fed should continue to add upside pressures on the EURUSD.” —

Today traders will be watching ECB current account from the euro zone; ZEW survey from Germany (current situation expected at 50.8 and expectations at 8.0); housing starts and building permits from the US; today RBA’s governor Stevens will speak in New York and BoE Governor Carney will speak before the UK Parliament, while BoC governor will testify before the House of Commons Committee.