- Brazilian Real surged 4.35% versus the Dollar Friday, bucking a 6-day streak of losses
- Brazil’s central bank offered intervention for a fourth day after a trucker protest slowed the economy
- The protest’s added to inflation views and prompted speculation of a rate hike from the central bank
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The Brazilian Real posted a staggering rally against the Dollar Friday as a collection of factors came to buoy the currency of the largest Latin American economy. The climb was seemingly fueled by an unexpected uptick in inflation. The consumer price figure came in at an annualized rate of 2.86% in May versus an expected 2.74%. Although inflation is well below the targeted 4.5%, the increase was a surprise and some analysts believe the recent trucker strike will increase inflation again next month. Exerting similar pressure, the central bank of Brazil has engaged in intervention aimed at arresting the currency’s slide this week, increasing the sale of currency swaps hoping to cushion volatility but with little effect. Today, the Brazilian central bank conducted a fourth day of currency swap sales and the Real seemed to have found its feet.
Chart 1: USD/BRL 1 Hour, June 3-8
Despite the willingness of the central bank to intervene, the lack of response through three days of direct actions calls into question whether it was really the group’s efforts that stoked the rebound. It was no doubt a contributing factor as was the speculation that the Brazilian central bank will increase interest rates. Further uncertainty from the looming presidential election in October likely contributed to speculation. The Latin American nation has seen falling interest rates since June of 2015 when the interest rate was 14.25%. Currently, the benchmark rate is 6.50%, a record low and unchanged from the central bank meeting in May. What is remarkable about Friday’s rally is that it comes at a time when emerging markets are coming under intense pressure. The segment of economies and assets are finding themselves at risk with rising interest rates in the United States and the advance of global trade wars. The Fed will meet next week to release their interest rate decision with heavy speculation of a rate hike which will further raise costs for emerging markets with debt denominated in dollars.
The rate decision by the Fed is not the only factor affecting emerging markets as a trade war waged by the US begins to take effect. With an opportunity to appeal to the United States, members of the G-7 are voicing concern over the tariffs this weekend at a summit in Canada. Officials of other nations will be watching the summit closely for any developments in the trade war and the effect it will have on their economy. Already, emerging markets like Turkey, India, and South Africa have seen losses in their currencies versus the dollar as the fear of fallout from broken trade lines begins to take its toll for these countries’ exports and risk appetite in general.
For live coverage of the Fed’s rate decision next week, join John Kicklighter’s live webinar coverage of the event.
Chart 2: USD/TRY Daily, Year to Date
Chart 3: USD/IDR Daily, Year to Date
Chart 4: USD/ZAR Daily, Year to Date
AUD/NZD Nets Out Market Mood Swings, Focus On RBA & RBNZ Policy
AUD/NZD Talking Points:
- The Australian and New Zealand Dollars tend to closely follow global stock indexes
- AUD/NZD can thus at times net out market mood swings, acting as “risk neutral”
- This places the focus for AUD/NZD on RBA and RBNZ monetary policy expectations
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Part 1 – AUD & NZD, Sentiment-Linked Currencies
In the majors FX spectrum, two currencies often find themselves moving in tandem with global stock indexes such as the S&P 500 and Nikkei 225. These are the Australian and New Zealand Dollars. To get a rough idea of why, we have to go back to the 2008 financial crisis. Central banks in developed economies at the time cut their lending rates close to or near zero levels to help stimulate their economies as liquidity shrunk, growth slowed and inflation fell.
However, two of them did not quite cut rates as far. Those are the reserve banks of Australia and New Zealand. While the Fed’s benchmark rate hovered between a range of 0.00% – 0.25% and the Bank of England pushed theirs down to 0.50%, the RBA and RBNZ reached 3.00% and 2.50% respectively. Then, in the aftermath they eventually glided down to 1.50% and 1.75% respectively (though at times they did rise before getting to those levels).
Still, those rates were higher than what other major central banks offered. This in turn gave investors an option for higher returns in a world with depressed yields. One could borrow in a cheap/low-yielding currency and then park their capital into ones that offered a higher rate. For those seeking to capitalize on interest rate differentials, AUD and NZD were/are a prime target for carry trades.
With that in mind, during times when market mood is jubilant and traders are focused on seeking returns as stocks rally, the sentiment-linked Australian and New Zealand Dollars tend to benefit. However, this behavior can also reverse. As an example, below is a chart showing how AUD/USD performed in February 2018 when the S&P 500 and Nikkei 225 fell as much as 11% and 13% respectively.
Chart Created in TradingView
Below is the identical reaction from NZD/USD:
Chart Created in TradingView
During this period of extraordinary market volatility, AUD/USD declined as much as 4.6% while NZD/USD fell about 3.2%. Both succumbed to selling pressure as the focus for traders shifted from seeking returns to preserving capital. But what happens when you start comparing both AUD and NZD against each other during times of broad market malaise?
Part 2 – AUD/NZD, Brexit Vote Reaction
Given that these sentiment-linked currencies tend to closely follow stocks, one may hypothesize that the impact of market mood on AUD/NZD could cancel each other out. This may result in the pair being close to little changed when equities tumble. Such was the case when looking at how AUD/NZD reacted in June 2016 when the UK voted to leave the European Union.
Chart Created in TradingView
The Brexit vote carried large amounts of uncertainty for the future of the UK and EU given that no country had ever left the nation bloc before. Markets were unnerved as the S&P 500 and Nikkei 225 declined about 5% and 9% respectively in the aftermath. AUD/USD (-4%) and NZD/USD (-3.75%) also saw aggressive losses as one would expect. But, solely looking at AUD/NZD shows that it fell only about 0.65% and the pair largely remained within its trading range.
Part 3 – The Key Fundamental Catalyst for AUD/NZD
So at times, AUD/NZD can behave as a “risk neutral” pair that acts as a shock absorber to a certain extent. This allows the pair to fundamentally focus more on RBA and RBNZ monetary policy expectations. After all, the key driver for FX is the direction of where interest rates are going.
One of the ways in which we can measure which of the two is on the verge of gaining a yield advantage over the other is looking at differences in government bond yields between the two countries. Below is a chart showing AUD/NZD and its performance between the spread of two-year Australian and New Zealand bond yields from June 2016 to the beginning of August 2018.
In addition, here is the same relationship but looking at the often more liquid 10-year yield:
When the spread between Australian and New Zealand bond yields rises, it means that rates in the former are outpacing the latter. Not surprisingly, when Australian bond yields earn higher returns than in New Zealand, AUD tends to appreciate against NZD and vice versa.
Note that the 20-day rolling correlation in both cases was positive around 80 percent of the time. In addition, sometimes AUD/NZD would find itself favoring spreads between the two-year and at other times the ten-year. However, do keep in mind that this relationship is not always perfect and at times the correlation was negative.
With that in mind, those closely watching AUD/NZD should be aware of its potential as a “risk neutral” pair that can focus more on relative interest rate differentials between the RBA and RBNZ. This can also make it more reactive to local economic event risks (central banks, GDP, CPI, jobs data, etc…). This was evident when in August 2018 the Reserve Bank of New Zealand suggested that its next rate hike would be further out. As a result, AUD/NZD volatility suddenly awoke as it rallied more than 1.54% within hours of the monetary policy announcement.
Finally, keep in mind that in the future the behavior between AUD/NZD and equities could change depending on where other central banks take their interest rates. As of August 2018, the Fed boasts the highest yield in the majors FX spectrum of up to 2.00% and that seems likely to increase in the near-term. In addition, the Bank of Canada raised benchmark lending rates to 1.50% in July 2018. This tied it with the RBA. As other central banks outpace both the RBA and RBNZ, the relationship between stocks and the Australian and New Zealand Dollars could wane compared to other higher yielding currencies.
AUD/NZD Trading Resources:
— Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com
To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter
EURUSD Elliott Wave from February 2018 Concludes
EURUSD Elliott Wave at high probability the bottom is in
We began building our short EURUSD position in two separate occasions from April 10 at 1.2350 and April 26 at 1.2153 in anticipation of a developing bearish impulse wave. Though our first target of 1.1554 was hit on May 29, the bearish impulse wave appeared incomplete. As of May 29, we could count three of the five Elliott Wave impulse waves lower, which implied a fourth wave correction and fifth wave sell off still to come.
On August 6, we closed down half of the position (booking +791 pips) and tightened the stop loss on the remaining short EURUSD to 1.1750. We are now going to tighten the stop loss further as evidence is growing the bearish impulse wave from February 2018 has ended or is about to end with one more dip. Therefore, we are moving the stop loss on the remaining short EURUSD position to the August 6 low of 1.1530.
If EURUSD pops above 1.1530, then we will gladly book the remaining profits and head to the sidelines as EURUSD may be in the beginning stages of a multi-month rally that may drive to 1.17-1.22.
Elliott Wave Theory FAQ
What Elliott Wave is EURUSD in right now?
Our analysis points to a bearish impulse wave ending from February 2018 to August 15, 2018. This bearish impulse wave is likely wave 1 of a larger bearish impulse wave or wave A of a larger zigzag wave.
Our beginner and advanced Elliott Wave guides share with you typical waveforms and structure that include tips on how to trade with the waves.
Why do traders lose money?
Regardless of the style of analysis, many traders do lose money because they do not take the time to study the market and the effect of leverage. At DailyFX, we have studied millions of live trades and boiled our study down into a Traits of Successful Traders guide. You will find how leverage and human nature affects our trading so you can implement tactics like ones described in the trading idea above.
New to FX trading? We created this guide just for you.
—Written by Jeremy Wagner, CEWA-M
Jeremy Wagner is a Certified Elliott Wave Analyst with a Master’s designation. Jeremy provides Elliott Wave analysis on key markets as well as Elliott Wave educational resources. Read more of Jeremy’s Elliott Wave reports via his bio page.
Communicate with Jeremy and have your shout below by posting in the comments area. Feel free to include your Elliott Wave count as well.
Discuss this market with Jeremy in Monday’s US Opening Bell webinar.
Follow on twitter @JWagnerFXTrader .
Australian Dollar May Get Some Respite If Only For Lack Of News
Fundamental Australian Dollar Forecast: Neutral
AUD Talking Points
- The Australian Dollar remains in a pervasive downtrend against its US cousin
- Interest rate differentials and twitchy risk appetite will probably ensure it stays ther
- But this week could offer some pause
Find out what retail foreign exchange traders make of the Australian Dollar’s prospects right now, in real time, at the DailyFX Sentiment Page
The Australian Dollar faces multiple sources of downward pressure but the coming week’s light economic data schedule may offer it some probably temporary reprieve.
The widening interest rate differential in favor of the US Dollar does not appear to be going anywhere soon. Reserve Bank of Australia Governor Phillip Lowe testified before Parliament last week that, although the RBA still thinks the next move, when it comes, will be a rise, there’s no near-term case for any such move.
Indeed local futures markets do not now price in any change to the record-low, 1.50% Official Cash Rate until at least the start of 2020.
But the Aussie’s worries go a little deeper than simple rate comparisons. Risk aversion sparked first by global trade worries and then by thy collapse of the Turkish Lira has also weighed on the growth-linked currency. Morever, signs that the best of China’s growth for the year may now be behind us have also done it no favours. Official industrial production and capital investment data out of China missed forecasts significantly last week. They were also the first look at figures for July, and suggested that 2018’s second half may well be tougher than its first, with or without a trade settlement between Washington and Beijing.
So, given all of the above the Australian Dollar backdrop looks just about as gloomy as ever, especially as the markets also suspect that the RBA doesn’t mind its weakness at all given how often it talks about a weaker currency making growth and inflation goals easier to hit.
But the week doesn’t offer much in the way of Australian economic numbers. We will get the minutes of the last RBA monetary policy meeting. However, seeing as investors heard from the governor himself only a few days ago, scope for big moves on the minutes would seem very limited.
Make no mistake, the Australian Dollar is still biased lower against its US big brother, but it has been hit fairly hard in the last couple of weeks. The coming sessions could offer some breathing space and consolidation so it’s a neutral call.
Resources for Traders
Whether you’re new to trading or an old hand DailyFX has plenty of resources to help you. There’s our trading sentiment indicator which shows you live how IG clients are positioned right now. We also hold educational and analytical webinars and offer trading guides, with one specifically aimed at those new to foreign exchange markets. There’s also a Bitcoin guide. Be sure to make the most of them all. They were written by our seasoned trading experts and they’re all free.
— Written by David Cottle, DailyFX Research
Follow David on Twitter@DavidCottleFX or use the Comments section below to get in touch!
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