Daily analysis | 23 August 2017
Speaking at a rally in Arizona overnight, US President Trump said that: “if we have to close down our government, we are building that wall”. Even though this may be just rhetoric aimed at his supporters, given that building a border wall was a core theme of his campaign, his comments still suggest that the government may continue to seek funding for a wall in the upcoming budget. The deadline for Congress to reach a deal on the budget is September 30th, which is when the fiscal year ends.
This is a key issue because in case the new budget does not include funds for a wall, the President could veto it. At the same time, if it does include such funding, Congress is highly unlikely to vote for it. The Democrats have been very vocal in their opposition to such a project, and the Republicans have shown little willingness to fight for this issue. Therefore, if the President insists on keeping funds for the wall in the budget, then the prospect of a government shutdown could quickly become reality.
In our view, a potential shutdown could dampen expectations for tax reform even further. It could highlight once again the division between the White House and Congress and send the signal that if the two sides cannot agree on a budget, then a complex tax overhaul is far less likely to materialize. As such, once Jackson Hole is out of the way and investors begin to focus more on this subject, speculation for a potential shutdown could begin to weigh on the assets that rallied after the election, namely the dollar and US equities.
USD/JPY traded higher yesterday after it hit the key support barrier of 108.70 (S1) on Monday. Nevertheless, the rate found resistance at 109.75 (R1) and retreated following Trump’s comments over a government shutdown. The pair has been oscillating between 108.70 (S1) and 111.00 (R3) since the 28th of July and therefore, we consider the short-term path to be sideways for now. Having said that, given that the latest recovery started after testing the lower bound of the aforementioned range, we would expect the bulls to take advantage of the overnight Trump pullback, or any extensions of it, and perhaps drive the rate above 109.75 (R1). If they manage to do so, we believe that they may target our next resistance of 110.35 (R2).
As for the bigger picture, on the daily chart, we see that USD/JPY is trading within a broader range between 108.70 (S1) and 114.40 since mid-March. This keeps the medium-term outlook flat as well and enhances the case for a further recovery within the range. Nevertheless, if speculation over a potential government shutdown begins to heighten over the next weeks, this could bring the pair under renewed selling interest. In our view, a clear close below the key support zone of 108.70 (S1) is needed to turn the medium-term picture back negative.
Kiwi tumbles as government trims growth forecasts
NZD came under renewed selling interest overnight, after New Zealand’s government trimmed its GDP forecasts for the current year and the next. It also noted that it will not consider any tax cuts until 2020 unless economic conditions turn out better than currently expected. These reinforce our view that the outlook for NZD remains cautiously negative, amid lackluster economic data and an RBNZ worried about the high exchange rate.
NZD/USD tumbled on the news, fell below the support (now turned into resistance) of 0.7275 (R1), and now appears ready to challenge the 0.7225 (S1) barrier. Given that the rate is trading below the prior uptrend line drawn from the low of the 11th of May, and also below the short-term downtrend line taken from the peak of the 27th of July, we consider the near-term outlook to be negative. A break below 0.7225 (S1) would confirm a forthcoming lower low on the 4-hour chart and is possible to initially aim for our next support of 0.7200 (S2). Nonetheless, bearing in mind that the latest tumble appears overextended, we would stay mindful of a minor corrective rebound before the bears decide to take the reins again.
During the European morning, Eurozone’s preliminary manufacturing and services PMI for August will take center stage. The forecast is for the manufacturing index to slip somewhat, while the services print is expected to hold steady. Even though a decline in the manufacturing print could weigh on the euro somewhat, as long as these figures remain at healthy levels, we do not expect them to derail the ECB’s policy plans. We get preliminary Markit manufacturing and services PMI data for the month from the US as well.
We have two speakers on the schedule: ECB President Mario Draghi and Dallas Fed President Robert Kaplan. Considering all the recent speculation regarding some fresh policy signals on ECB policy, we expect market focus to be primarily on Draghi. Should he reiterate the risk of exchange rate overshooting, as the latest ECB minutes highlighted, then the common currency could correct lower.
- Support: 108.70 (S1), 108.00 (S2), 107.40 (S3)
- Resistance: 109.75 (R1), 110.35 (R2), 111.00 (R3)
- Support: 0.7225 (S1), 0.7200 (S2), 0.7170 (S3)
- Resistance: 0.7275 (R1), 0.7300 (R2), 0.7335 (R3)
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