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NZD higher as rate cut odds fall, S&P very likely to downgrade Australia

- US, following the very weak NFPs in May, there is a strong likelihood that we’ll get an upward revision and a strong print

- With the Fed on the sidelines for an extended period of time, traders will remained focused on Brexit spillovers

- EURUSD moving sideways between 1.1030 and 1.1110 with resistance at 1.1186

- Crude oil prices may find support in the consistent declines in US inventories

- New Zealand: There is a low probability of the RBNZ cutting its official cash rate in August in order to limit the overheating housing market

- Australia: Decent probability (33%), that a downgrade will occur

- Housing debt - major cause of concern with Australian banks massively invested in a well-inflated real estate bubble

- Unemployment rate for June, which is expected to come in at 5.8%, up from 5.7%

- The continued increase of gold and silver should largely benefit the Australian economy, however precious metals aside, the declining demand for iron-ore is weighing heavily and the situation for Australia look set to become even tougher

 

The better-than-expected ADP figures released yesterday were of little use to the US dollar as investors continued to buy the Japanese yen. After a catastrophic 38k in nonfarm payrolls last month, the ADP report boosted the optimism for this afternoon's release. The report showed that US companies added 172k jobs in June (versus an expected 160k and downwardly revision of 168k). One could argue that the strong ADP print augurs well for today’s NFP, however history tells us that this has always been a very poor predictor. Nevertheless, given the dreadfully weak NFPs in May, there is a strong likelihood that we will get an upward revision and a strong print. US companies are expected to have created 180k private jobs in June.

With the Fed on the sidelines for an extended period of time, EUR/USD’s reaction was muted yesterday as traders remained focussed on Brexit spillovers. Since Wednesday, the most traded currency pair has been moving sideways between 1.1030 and 1.1110. Resistance is eyed at 1.1186 (high from July 5th). On the downside, a support stands at 1.10.

The West Texas Intermediate took a massive hit yesterday, falling as much as 7%, as data revealed that US stockpiles fell less than expected. US crude inventories contracted by 2,223k barrels last week (versus 2,500k expected & 4,053 previous contraction). However, the consistent decline in crude oil inventories, (US stockpiles contracted for a seventh straight week), could spell good news for crude oil prices. The WTI partially erased yesterday losses and rose 1.40% to $45.40, while the international gauge, the Brent crude, returned slightly below $47.

The New Zealand dollar continued to gain positive momentum after the RBNZ announced the implementation of an improved set of measures to limit the overheating housing market. There is now little chance that the central bank will cut its official cash rate in August, as it will want to avoid adding fuel to the fire. However, it does not mean that the RBNZ is done with cuts but rather that it will have to find a way to prevent further rate cuts from feeding the bubble. NZD/USD was up 0.40% during the Asian session and broke the 0.7241 resistance level (high from July 4th) and hit 0.7275. The next resistance can be found at 0.73 (psychological level and high from June 23rd).

Yann Quelenn, market analyst: S&P very likely to downgrade Australia: This week S&P decided to reduce its credit rating outlook for the Australia. The country’s coveted triple-A rating is now at stake, in fact, there is a decent probability (33%), that a downgrade will occur. The rating agency underlined housing debt as a cause of major concern and we know that Australian banks are indeed massively invested in a well-inflated real estate bubble. In fact, mortgages represent a significant percentage of the balance sheet of major Australian banks. Next week we will get the unemployment rate for June, which is expected to come in at 5.8%, up from 5.7%. Full-time employment creation is another major issue for the country. Over the last three months, most added jobs have been part-time.

Against this backdrop, the continued increase of gold and silver should largely benefit the Australian economy. China, Australia’s major trading partner is reducing its overall commodity demand from Australia. Globally, the overall decline in iron ore demand, which accounts for around a quarter of total Australian exports, is weighing heavily on the Australian economy. As a result, precious metal set aside, the situation in Australia looks tougher. We continue to be bearish on the Aussie.” ---

In the equity market, Asian regional markets failed to follow the positive lead from Wall Street. In Japan, the Nikkei slid 1.11% and the Topix fell 1.32%. In Mainland China, the CSI 300 was off 0.39%, while offshore the Hang Seng slip 0.94%. In Europe, futures are pointing towards a lower open with the Footsie down 0.30% and the DAX down 0.31%.

 

Friday, 08 Jul, 2016 / 8:15

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Source : http://swissquote-fx.com/en/research-and-analysis/

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