16-Sep-2020

1) NZD GDP: A Less Severe Economic Slump? Kiwi’s Fate Hinges On Fed, Risk Trend
2) EUR/USD: Struggles To Make It Back Above 1.1900 Mark Ahead Of FOMC
3) XAU/USD: Gold looks north but Fed’s forward guidance holds the key

1) NZD GDP: A Less Severe Economic Slump? Kiwi’s Fate Hinges On Fed, Risk Trend

New Zealand’s (NZ) solid response to contain the coronavirus pandemic is likely to translate into a less severe economic contraction than anticipated, although stricter lockdowns and borders controls imply a slower economic recovery in the long-term.

The South Pacific nation is set to witness the first recession in ten years, with the GDP likely to shrink 12.8% QoQ in the three months to June vs. -1.6% seen in the first quarter of 2020. On an annualized basis, the economy is expected to contract 13.3% in Q2 vs. -0.2% prior.

Odds of a shallower economic slump

Courtesy of the good handling of the coronavirus spread and plans of re-opening up the economy faster, the NZ Treasury Department bumped up its growth and employment forecast on Wednesday, as it published its pre-election Economic and Fiscal Update (PREFU) for this year.

According to the update, the economy likely shrank 3.1% in the year vs. the 4.6% contraction projected in the May budget. The jobless rate will rise to 7.8% by 2022, lower than the 9.8% peak seen in the previous forecast.

The latest NZ fundamentals have signaled that the economy is on a path of recovery. The country’s ANZ business confidence index improved to -26% in September vs. August’s 41.8%. Meanwhile, the fall in the manufacturing sales and wholesale volumes was not as severe as feared.

Despite the tourism being hit by the pandemic, Finance Minister Grant Robertson said most short-term indicators were less grim than predicted at the government’s annual budget in May. Although the impact of the stricter shutdowns in Auckland could probably be felt in the third quarter.

When compared to a weaker global outlook, the Pacific island nation is expected to grow by an average 4.2% across 2021 and 2022 while the economic growth in Australia the US is foreseen at 3.6% and 3.5% respectively.

Further, a faster-than-expected turnaround in the Chinese economy also boosts the case for a less severe economic downturn projected for New Zealand. China is NZ’s top trading partner and dairy is the Kiwi nation’s leading export product.

NZD/USD sits at two-week highs above 0.6700 in the lead up to the all-important US Federal Reserve (Fed) monetary policy decision following which the NZ Q2 GDP figures will be released on Wednesday at 2245GMT.

The FOMC decision will have a major impact on the market sentiment, which will likely emerge as the main driver for the FX market. Therefore, the kiwi pair will take cues from the broader risk trend, which could influence the reaction on the GDP publication.

A dovish Fed followed by a positive surprise on the NZ GDP figures could likely to bode well for NZD/USD, allowing for a rally towards 0.6800. While the Fed’s concerning tone on the US economic recovery could dampen the market mood and limit the impact of a shallower NZ recession.

2) EUR/USD: Struggles To Make It Back Above 1.1900 Mark Ahead Of FOMC

A combination of supporting factors assisted the EUR/USD pair to gain some follow-through traction through the first half of the trading action on Tuesday. The optimism over a potential vaccine for the highly contagious coronavirus disease remained supportive of the upbeat market mood. The global risk sentiment got an additional boost from stronger-than-expected Chinese macro data, which reinforced expectations for a V-shaped recovery for the world’s second-largest economy. This, in turn, weighed on the US dollar’s relative safe-haven status and assisted the pair to build on its recent bounce from the vicinity of mid-1.1700s.

The shared currency was further supported by encouraging data from the Eurozone. In fact, the German ZEW Economic Sentiment unexpectedly rose to 77.4 in September from 71.5. The data signalled that experts continue to expect a noticeable recovery for the Eurozone’s largest economy. Adding to this, the Eurozone ZEW Economic Sentiment climbed to 73.9, which pushed the pair back to the 1.1900 mark. The momentum, however, lacked any strong follow-through and quickly ran out of the steam on the back of a late USD rebound.

The greenback found some support following the release of Empire State Manufacturing Index, which jumped to 17.0 in September from 3.7 previous and easily surpassed market expectations. The reading was strong enough to offset the disappointing release of the US Industrial Production figures, which posted a modest 0.4% growth in August as compared to 3% recorded in the previous month. Apart from this, some repositioning trade ahead of the highly anticipated FOMC decision on Wednesday prompted traders to lighten their bearish USD bets.

The pair retreated around 60 pips from daily tops and finally settled near the lower end of its daily trading range, albeit lacked any strong follow-through. The pair held steady below mid-1.1800s through the Asian session on Wednesday and remains at the mercy of the USD price dynamics in the absence of any major market-moving economic releases from the Eurozone. Meanwhile, the US economic docket highlights the release of Monthly Retail Sales data for August, which will be looked upon for some meaningful trading impetus ahead of the key central bank event.

From a technical perspective, the pair’s inability to gain any meaningful traction beyond the 1.1900 mark points to a possible near-term bullish exhaustion. That said, any meaningful slide towards the 1.1800 mark might still be seen as a buying opportunity. This is followed by strong horizontal support near mid-1.1700s, which if broken will be seen as a fresh trigger for bearish traders. The pair might then accelerate the fall towards August monthly swing lows, around the 1.1700-1.1695 region, which if broken decisively will set the stage for an extension of the recent corrective slide from levels beyond the key 1.2000 psychological mark.

On the flip side, the 1.1900 mark might continue to act as immediate strong resistance and any subsequent positive move is likely to meet with some fresh supply near the 1.1935-40 region. A sustained strength beyond will negate any near-term bearish bias and assist bulls to make a fresh attempt to push the pair back above the 1.2000 mark.

3) XAU/USD: Gold looks north but Fed’s forward guidance holds the key

Gold (XAU/USD) has regained the bids above $1950 on Wednesday, having settled Tuesday a tad lower at $1954. The bright metal witnessed good two-way price swings a day before, mainly driven by the US dollar dynamics and global market sentiment, in absence of any significant US macro news. Gold rose to two-week highs of $1972 in the first half of the day, helped by notable US dollar supply. Upbeat Chinese activity numbers lifted the market mood and downed the dollar. However, in the American trading, gold tumbled over $20 as the greenback staged a comeback amid resurgent haven demand on worries over the US fiscal deadlock and a ballooning deficit. Further, the tech rally-driven gains on Wall Street indices also dampened the sentiment around gold.

In the lead up to the Federal Reserve (Fed) showdown due later on Wednesday at 1800 GMT, the dollar has given up the overnight gains amid dovish expectations. The Fed is unlikely to make any changes to its monetary policy settings but could formally announce the adoption of the average inflation targeting (AIT) framework. The key focus will be on the central bank’s long-term projections and dot plot chart which is expected to read dovish, as the economy continues to battle out the coronavirus blow. Dovish and uncertain Fed outcome could trigger a fresh sell-off in the US currency, benefitting gold.

Gold confirmed a symmetrical triangle breakout after closing Monday above the falling trendline (pattern) hurdle at $1955.18.

On Tuesday, the price closed in the red but finally found acceptance above the critical $1950 level for the second day in a row, having recaptured the 21-day Simple Moving Average (DMA), now at $1944.30.

With that, the price trades above all major DMAs alongside a bullish 14-day Relative Strength Index (RSI), currently inching slightly higher at 54.95.

Should the Fed turn out more dovish than expected, the metal has a room for a test of $2000. However, a closing above critical resistance around $1973 is needed for additional upside.

Alternatively, the price could drop back towards the upward-sloping 50-DMA at $1929, below which the September 8 low of $1906 could be put at risk. A daily closing below the latter would prompt the resumption of the corrective declines from record highs of $2075.