Forex News

Economists at Société Générale analyze Rand's outlook ahead of the South African Central Bank meeting.

Positive carry and dovish repricing of the Fed are a boon for the Rand

“We have pencilled in another 25 bps increase to 7.50% today after core inflation unexpectedly accelerated to a 5-year high of 5.2% in February.”

“Our house view is that today may not be the final hike. We have pencilled in a peak of 7.75% in 2Q.”

“The positive carry and dovish repricing of the Fed are a boon for the Rand.”

“A retracement in USD/ZAR towards 18.00 is not ruled out if the SARB comes across as hawkish.”

• USD/CAD drifts lower for the fourth straight day and is pressured by a combination of factors.
• The risk-on mood weighs on the USD and acts as a headwind amid a fresh leg up in Oil prices.
• Spot prices find some support ahead of the 100-day SMA as traders look to the US macro data.

The USD/CAD pair remains under some selling pressure for the fourth successive day on Thursday and drops to over a one-month low during the first half of the European session. The pair, however, manages to rebound a few pips in the last hour and is currently placed around mid-1.3500s, down less than 0.10% for the day.

The prevalent risk-on environment - as depicted by an extension of the recent rally in the equity markets - exerts fresh downward pressure on the safe-haven US Dollar (USD) and turns out to be a key factor acting as a headwind for the USD/CAD pair. The takeover of Silicon Valley Bank by First Citizens Bank & Trust Company helped calmed market nerves about the contagion risk. Furthermore, no further cracks have emerged in the banking sector over the past two weeks, which suggests that a full-blown banking crisis might have been averted and drives flows away from traditional safe-haven assets, including the Greenback.

Apart from a modest USD weakness, a fresh leg up in Crude Oil prices underpins the commodity-linked Loonie and contributes to the offered tone surrounding the USD/CAD pair. A surprise drop in US Crude stockpiles to a two-year low and concerns about tightening global supplies assist the black liquid to regain positive traction following the overnight pullback from over a two-week high. In fact, the Energy Information Administration reported an unexpected fall in US inventories to a two-year low
during the week of March 24. Moreover, exports from Iraq's northern region remain halted and lend support to Oil prices.

The USD/CAD pair, however, manages to find some support ahead of a technically significant 100-day Simple Moving Average (SMA) as traders keenly await the US inflation data due on Friday. The US Core PCE Price Index - the Fed's preferred inflation gauge - will play a key role in influencing market expectations about future rate hikes. This, in turn, will drive the USD demand and provide a fresh directional impetus to the major. In the meantime, traders on Thursday will take cues from Thursday's US economic docket, featuring the release of the final Q4 GDP print and the usual Weekly Initial Jobless Claims data.

Technical levels to watch

EUR/USD is expected to see an eventual break above its downtrend from May 2021 and 50% retracement at 1.0931/44, analysts at Credit Suisse report.

Break under 1.0750/14 would warn of a fall back toward 1.0590

“Whilst we see scope for further consolidation beneath key resistance from the 50% retracement of the 2021/2022 fall and downtrend from May 2021 at 1.0931/44, we continue to look for an eventual break for a retest of the 1.1035 YTD high. Whilst this should continue to be respected, we see no reason not to look for an eventual break for a test of 1.1185/1.1275 – the 61.8% retracement and March 2022 high.”

“Support at 1.0750/14 now ideally holds. A break would warn of a fall back to the uptrend from last September, currently at 1.0590.”

Gold looks set to benefit from its safe-haven appeal in more uncertain markets, according to economists at UBS.

It will take time for investor confidence to be fully restored

“Gold has already been gaining due to the recent market volatility. The spot price broke above $2,000 an ounce to hit a 12-month high. Meanwhile, Gold exchange traded funds look set to post net inflows in March for the first time in almost a year.”

“Given recent events, we think there’s a chance that Gold prices will reach our end-March 2024 target of $2,100 earlier than expected. While a repeat of the global financial crisis appears to have been averted, we think it will take time for investor confidence to be fully restored.”

• USD/JPY attracts some dip-buying on Thursday and reverses a major part of its intraday losses.
• The prevalent risk-on environment undermines the safe-haven JPY and lends support to the pair.
• A modest USD weakness is holding back bullish traders from placing fresh bets around the major.

The USD/JPY pair rebounds over 50 pips from the daily low and steadily climbs back closer to the top end of its daily trading range during the first half of the European session. The pair is currently placed around the 132.75 region, nearly unchanged for the day and just below the one-week high touched on Wednesday.

An extension of the risk-on rally across the global equity markets undermines the safe-haven Japanese Yen (JPY) and assists the USD/JPY pair to attract some dip-buying near the 132.20 area. The global risk sentiment remains well supported by receding fears of a full-blown banking crisis, especially after the takeover of Silicon Valley Bank by First Citizens Bank & Trust Company. Furthermore, no further cracks have emerged in the banking sector over the past two weeks, which boosts investors' appetite for riskier assets and continues to drive flows away from traditional safe-haven currencies, including the JPY.

The upside for the USD/JPY pair, meanwhile, remains capped amid the emergence of some selling around the US Dollar (USD). That said, easing concerns over the banking sector led to fresh speculations that the Federal Reserve (Fed) will move back to its inflation-fighting interest rate hikes. This was seen as a key factor behind the recent strong rally in the US Treasury bond yields, which is seen acting as a tailwind for the Greenback and supports prospects for a further near-term appreciating move for the major. Bulls, however, seem reluctant to place aggressive bets ahead of the crucial the US Core PCE Price Index - the Fed's preferred inflation gauge – which is due for release on Friday and will inform expectations about future rate hikes. This, in turn, will drive the USD demand and provide a fresh directional impetus to the USD/JPY pair.

USD/JPY gains may be limited in the long run, however, by an expected hawkish pivot by the BOJ if it undos years of easy money from an ultra-dovish stimulus approach to monetary policy. Many see the election of a new BOJ governor in the form of Ueda Kazuo as heralding a potential pivot in BOJ policy. If the Bank does embark on a new tightening path, the effects for the Yen may be dramatic. According to a report from Bloomberg, the Yen could rise rapidly on a backflow of $3.4 trillion of investments made by the Japanese overseas over recent decades, in a effort to eke out yield as rates at home remained perma-low.   

In the short term, however, traders will take cues from the release of the final US Q4 GDP print on Thursday and the usual Weekly Initial Jobless Claims data for some impetus later during the early North American session. Apart from this, the broader risk sentiment might produce short-term opportunities.

From a technical perspective the pair has broken above the trendline capping the move down since the March 7 highs. Wednesday witnessed a strong green breakout candle which suggests more gains could be on the horizon. The only fly in the ointment of the bullish thesis is the location of the 50-day Simple Moving Average (SMA) which sits at 132.85, capping the previous day's gains and providing a tough line of resistance to any further upside. A clear and decisive break above the 50 DMA, as well as a break above the previous higher low at 133.00, is necessary therefore, to provide a confirmation of further gains. Such a move could see USD/JPY recover to 135.00 initially. Alternatively, a break back below the 129.64 lows would reassert the bearish short term trend and see a move lower evolve. 

Technical levels to watch

GBP/USD continues to push strongly higher. Economists at Credit Suisse expect the pair to break above the 1.2447/49 December and January highs.

GBP/USD could fall back to 1.2009 on a break below 1.2190/57

“We stay bullish for a fresh look at the 1.2447/49 December and January highs. Whilst this should continue to be respected, we are biased to an eventual break of resistance next at 1.2668/1.2768 – the May 2022 high, 61.8% retracement of the 2021/2022 fall and long-term downtrend from May 2021.”

“Support at 1.2190/57 now ideally holds to keep the immediate risk higher. A break can see a fall back to 1.2009.”

Everything under control. Or not? Antje Praefcke, FX Analyst at Commerzbank, analyzes the USD outlook.

The wait continues – to the Dollar’s disadvantage

“I sometimes get a lingering suspicion that the wait for new momentum or a new (trade) idea continues and that every day that passes works to the Dollar’s disadvantage.”

“As long as the market cannot be certain that everything really ‘will be fine’ and ‘under control’ in the US it is likely to act asymmetrically and tend to position itself against the US Dollar. I can, therefore, imagine that the USD will find it difficult to gain much ground against more stable seeming currency areas such as the Eurozone.”

EUR/CZK moved below 23.60 for the first time since the sell-off in global markets two weeks ago after CNB's hawkish tone. 

Koruna welcomes hawkish Czech National Bank

“The CNB board decided to keep the key interest rate at 7.00%. The governor commented on market expectations of a peak in interest rates at current levels and a significant rate cut this year (roughly 125 bps in cuts priced in before the meeting). However, according to the governor, a rate hike cannot be ruled out and rate cut expectations are premature at this point.”

“The central bank has confirmed that it is ready to intervene if needed, but current levels are far from where the CNB was last active. On the other hand, the central bank's statement is clearly supportive for the Koruna and implies that the currency is safe in the event of a global sell-off. Moreover, with the prospect of higher rates for a longer period of time, a solid FX carry is also certain.” 

“The Koruna offers decent risk/reward and we expect it to strengthen further.”

Enrico Tanuwidjaja, Economist at UOB Group, reviews the latest Bank of Thailand (BoT) monetary policy meeting.

Key Takeaways

“Bank of Thailand (BOT) voted unanimously to raise the policy rate by 25bps from 1.50% to 1.75%, bringing its policy rate back to where it was before the pandemic. The next monetary policy board meeting is scheduled on 31 May 2023, a distant later after the scheduled FOMC meeting on 2 May 2023.”

“Confident of sustained growth momentum ahead, underpinned by broad-based tourism recovery (boon for employment and labor income), BOT forecasted the Thai economy to grow at 3.6% in 2023 and further accelerate to 3.8% in 2024.”

“We maintain our view that BOT has reached its terminal rate of 1.75% today and will keep it at the current level for the rest of this year. We pencil in a 25bps rate cut to 1.50% in the early part of next year as growth is expected to slow, along with inflation coming back steadily to BOT’s target range of 1-3%.”

• GBP/USD gains strong positive traction on Thursday and touches a fresh multi-week high.
• The risk-on mood undermines the safe-haven USD and provides a goodish lift to the pair.
• A move beyond the mid-1.2300s favours bulls amid a supportive fundamental backdrop.

The GBP/USD pair reverses an intraday dip to sub-1.2300 levels and climbs to its highest level since early February during the first half of the European session on Thursday. The pair currently trades just above the mid-1.2300s and seems poised to prolong its recent upward trajectory from the 1.1800 round-figure mark, or the YTD low touched earlier this March.

The global risk sentiment remains well supported by receding concerns over the banking sector, which is seen undermining the safe-haven US Dollar (USD) and turning out to be a key factor pushing the GBP/USD pair higher. The takeover of Silicon Valley Bank by First Citizens Bank & Trust Company calmed market nerves about the contagion risk. Moreover, the fact that no further cracks have emerged in the banking sector over the past two weeks suggests that a widespread banking crisis might have been averted. The developments continue to boost investors' confidence and drive flows away from traditional safe-haven currencies, including the Greenback.

The British Pound, on the other hand, draws additional support from a more hawkish commentary by the Bank of England (BoE) Governor Andrew Bailey, saying that interest rates may have to move higher if there were signs of persistent inflationary pressure. Furthermore, Bailey told the House of Commons Treasury Select Committee on Tuesday that the UK banking system is in a strong position and is not experiencing stress linked to the global turmoil in the banking sector. This, in turn, lifted bets for additional rate hikes by the BoE, which continues to act as a tailwind for the Sterling and remains supportive of the GBP/USD pair's strong move up.

With the latest leg up, spot prices now seem to have cleared a hurdle near the 1.2345-50 region, which favours bullish traders and supports prospects for a further near-term appreciating move. That said, the lack of strong follow-through buying warrants some caution ahead of the release of the US Core PCE Price Index - the Fed's preferred inflation gauge - on Friday. In the meantime, traders on Thursday will take cues from the US economic docket, featuring the final Q4 GDP print and the usual Weekly Initial Jobless Claims. This, along with the broader risk sentiment, might influence the USD price dynamics and provide some impetus to the GBP/USD pair.

Technical levels to watch