Today’s Key Market Drivers: 7th February 2019

RBA Governor’s comments seals the AUD fate.

The RBA does not hold press conferences following monthly statements but the RBA Governor was invited to speak at the National Press Club in Sydney on Wednesday. Traders expected Tuesday’s official RBA statement to suggest that the long-held view the next official rate adjustment would be up would soften but the RBA gave no hint of this in the statement. Traders, therefore, ceased on the opportunity and bought the AUD higher in the hours following its release.

Fast forward 24 hours and during questions at the National Press Club yesterday the RBA Governor was asked if there was the potential for a rate cut given global growth is expected to slow. The RBA Governor said that the potential for a rate cut was now equal with the potential for a rate increase which is a direct change in the official view which previously suggested the next move would be higher.

This gave traders the ammunition needed to sell the AUD and whilst I don’t expect to see the AUD fall as sharply today, the admission from the RBA Governor that a rate cut is a possibility is just the tonic investment banks and hedge funds need to abandon the AUD in coming months. My expectation is the AUD v USD will see below 0.70c in coming weeks and its fate is now sealed thanks to the comments made by the RBA boss on Wednesday.

Kiwi Dollar falls as guilty by association.

Traders abandoned the Kiwi Dollar as it was seen as guilty by association. The RBNZ said in early 2018 that it had no intention to raise rates until 2020 but it too may now be forced into admitting that a rate cut might be the next move.

The NZD v USD slipped below a key trend line on the 4-hour chart and is now heading back towards the 200 EMA on the 4-hour chart which may offer some resistance in the short term. Just like the AUD I expect the NZD is now destined for lower levels and if your trading system provides an opportunity to short the NZD v USD then I would encourage you to carefully consider taking it. The New Zealand economy won’t be able to withstand slowing global growth and it will be expected that the RBNZ will need to admit a rate cut is now a possibility when it next issues a statement.

Euro falls after more poor economic data.

The Euro fell sharply against the greenback on Wednesday as German Factory Orders and Construction numbers failed to meet the market’s expectations. There has recently been a consistent theme of weaker than expected economic data out of Germany and the Euro Area and the ECB will be under no illusions that it cannot consider raising the official cash rate from 0% until the Euro Area improves.

The fact that the ECB still has rates at 0% 10 years on from the GFC is a major concern to me. Global growth is slowing and where are they going to go with rates if we see a recession grip Europe in coming years? They would have to fire up the printing presses again and artificially print money which would send the Euro crashing lower. The Euro Area is the largest economy in the world and if there is a region that could trigger another GFC type event it’s Europe. The Euro Area consists of 27 countries, 19 of them use the Euro and all of them are virtually bankrupt.

Bank of England could send the Pound sharply lower.

I am expecting the BOE may change its commentary with respect to future rate hikes and move to a more “wait and see” approach similar to the US Fed when it issues its February statement today. In previous statements, the BOE has said that once Brexit is sorted it would likely move to raise rates in the UK, however, all the other Central Banks are now in a holding pattern so I will be keen to see what Governor Mark Carney says today.

The UK has been performing better than many expected but with its biggest trading partner being Europe, and Europe slowing, the good times it’s been enjoying may begin to fade in future quarters. The BOE’s statement is set for release tonight at 11.00pm Sydney time. If the BOE changes its tune from hawkish to more dovish the Pound is going to be sold.

Trump’s State of the Union speech supports the US Dollar.

The US Dollar, as expected, was supported through Donald Trump’s State of the Union address with much of what he said already priced into the currency. Trump was always going to be Pro USA in his address and he really didn’t suggest or promise anything new that gave traders a reason to jump all over the US Dollar.

No question the US economy is still performing extremely well, with US company earnings holding up strongly, more job vacancies than workers to fill them and growth and inflation that suggests a recession is a long way off. I do hold the view that if the US economy continues to grow at the current pace, even slightly slower, the Fed is going to raise rates so there is a door waiting to be slammed shut for those expecting to see new highs on stock markets.

If you can’t control what you think, you can’t control what you do. AB

 

About the Author: Andrew Barnett

Andrew is a professional trader and successful investor who has a strong focus on education. He is a regular Sky News Money Channel Guest and one of Australia’s most awarded and respected financial experts and is regularly contacted by the Australian Media for the latest on what is happening with the Australian Dollar. Director at LTG GoldRock, Andrew Barnett, guides thousands of traders around the world in the live market on a daily basis, advising them on buy and sell directions, as well as trading his own personal account. Andrew, a regular keynote speaker at trading and wealth-creation events throughout the Asia Pacific region, is an authorized representative registered with the Australian Securities and Investment Commission (ASIC).

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