Daily Analysis | 04 December 2017
During the Asian morning Tuesday, the RBA will announce its rate decision and the forecast is for the Bank to keep its benchmark interest rate unchanged. We see the case for the accompanying statement to be somewhat more optimistic than the last time, considering that economic developments since the latest meeting have been quite upbeat. The labor market tightened further in October, as the unemployment rate declined somewhat further. Meanwhile, wages in Q3 accelerated marginally, albeit below market expectations. Also, the fact that the AUD/USD has dropped marginally over the past month suggests that the Bank may be less vocal with its exchange rate concerns. Should the tone of the statement indeed be more upbeat, AUD/USD could gain on the news.
AUD/USD opened with a small negative gap this week, after hitting resistance at the 0.7635 (R1) territory on Friday. The pair continues to trade between the aforementioned resistance level and the 0.7550 (S1) support since 29th of November and as such, the short-term trend appears to be sideways. Should there be an upbeat statement by the RBA the pair could break above the 0.7635 (R1) resistance zone, and test the 0.7700 (R2) territory. For our view to turn to negative, we would require a clear break below the crossroads of the 0.7550 (S1) barrier and the longer term uptrend line beginning from the lows of the end of December 2016. Such a break could set the stage for further declines towards the 0.7500 (S2) level.
- Support: 0.7550 (S1), 0.7500 (S2), 0.7470 (S3)
- Resistance: 0.7635 (R1), 0.7700 (R2), 0.7770 (R3)
US Senate tax bill passes; Flynn pleads guilty
The Senate voted in favor of the tax bill late Friday night. Now the next step is to reconcile the differences between Senate and the House of Representatives versions of the tax bill with media reports suggesting that a deal is within grasp by Christmas. Staying on the political stage, Michael Flynn pleaded guilty to lying to the FBI about his contacts with Russian officials. However, it is still uncertain whether and how this will affect the Trump administration. As for the dollar, it collapsed on Friday after the Flynn story emerged but quickly rebounded to recover all of its losses by the European morning Monday. Moving forward, we expect choppy trading in the world’s reserve currency, with positive news from the tax front likely to limit any losses stemming from the political uncertainty. Meanwhile, the employment report this week combined with the FOMC gathering next week is likely to provide even more volatility to keep USD traders busy.
USD/JPY dropped on the Flynn news, breaking two support levels in a row, before rebounding in the following minutes. The pair opened with a large positive gap this week, recovering all of its Flynn-related losses to trade even higher. At the time of writing, the price looks to be headed for a test of the 113.10 (R1) territory, where a potential break could set the stage for advances towards the 113.80 (R2) zone. On the downside, another break back below 112.40 (S1) could aim once again for the 111.70 (S2) barrier. As for the bigger picture, zooming out to the daily chart, we see that USD/JPY has been trading in a sideways manner since January, between the resistance level of 114.30 (R3) and the support of 108.70. This keeps the broader outlook sideways, but considering that the latest slide in the pair started after we tested the upper bound of that range, this increases the chances for a test near the lower bound at some point in the foreseeable future.
- Support: 112.40 (S1), 111.70 (S2), 111.10 (S3)
- Resistance: 113.10 (R1), 113.80 (R2), 114.30 (R3)
From the UK, we get the Markit construction PMI. The index is expected to tick up from 50.8 to 51.0, which could support GBP a little, at least on the news.
As for the speakers, British Prime Minister Theresa May will meet EU Commission President Jean Claude Junker in order to discuss further details of the Brexit agreement. Following unofficial media reports that the two sides have reached an agreement on the divorce bill, an official confirmation today could extend any gains GBP posts on the construction index.
As for the rest of the week, on Tuesday, the RBA will announce its rate decision, as we have outlined above.
We also get the UK Markit Services PMI and the US ISM Non-manufacturing PMI, both for November. On Wednesday, the BoC decides on interest rates. We also get Australia’s GDP for Q3 and the US ADP Nonfarm employment report. On Thursday we have no major events on the economic calendar. On Friday, the US Employment Report for November is due out.