11-APR-2019, THURSDAY

1) AUD/USD Upside Breakout Needs Confirmation After In-Line China CPI
2) EUR/USD Extends Bullish Reversal Despite Draghi
3) Gold Prices at Key Technical Barrier
4) Crude Oil Prices Vulnerable
5) IMF Strikes Cautionary Tone in Latest Global Financial Stability Report

1) AUD/USD Upside Breakout Needs Confirmation After In-Line China CPI

The Australian Dollar remains above key resistance as it awaits a slew of potentially market-moving Chinese economic data. In the meantime, headline CPI in the world’s second-largest economy picked up to 2.3% y/y in March from 1.5% in February as expected. Meanwhile, wholesale inflation clocked in at 0.4% y/y from 0.1% prior as anticipated. The pickup in Chinese prices follows a similar uptick in manufacturing PMI data which in the same period, rose to 50.5 and indicated expansion for the first time since October. While not surpassing estimates, Chinese CPI data did not disappoint either. As of late, local economic data has been tending to outperform relative to economists’ expectations, offering a cool down in growth concerns.

If decent economic readings continue crossing the wires, AUD/USD may find support given Australia’s critical trading relationship with China. To that end, at an unspecified time these next few days, we will get Chinese new Yuan loans and trade data. Until then, the Aussie may benefit from ebbing RBA rate cut bets if they are overpriced. Keep an eye on commentary from RBA’s Deputy Governor Guy Debelle who may uphold this. On the daily chart below, the Australian Dollar has made a critical push above the US Dollar as AUD/USD cleared a descending resistance line from February. As noted in this week’s technical forecast, a breakout in the Aussie should require confirmation. For that, watch how resistance behaves between 0.7184 and 0.7207 next.

2) EUR/USD Extends Bullish Reversal Despite Draghi

The US Dollar traded narrowly lower on Wednesday despite bullish behavior on a couple of important fundamental developments. First, the Greenback rallied as ECB’s President Mario Draghi sunk EUR/USD in the aftermath of the central bank’s interest rate announcement. Mr Draghi reiterated that risks to the Euro-Area are still tilted to the downside, as anticipated. His speech largely overshadowed March’s US inflation report which was mixed. While core CPI missed expectations (2.0% y/y versus 2.1% estimated), headline CPI unexpectedly soared from 1.5% prior to 1.9%. This was the most aggressive positive change since the end of 2016. In the aftermath of the inflation data and Mario Draghi, USD declined into the FOMC meeting minutes.

The statement noted that Fed officials generally saw that a patient approach was appropriate. That may have disappointed some doves with Fed funds futures pricing in a greater than 50% chance of a cut by year-end. DXY rose on the release on the chart below. Despite its decline on Draghi’s speech, EUR/USD extended its climb by the end of the day as it is now on its best winning streak since the middle of March. This followed the emergence of a Morning Star candlestick pattern and positive RSI divergence, both typically bullish price signals. As such, we may see a test of resistance next around 1.13022, guided by a rising support line from the bottom in early April.

3) Gold Prices at Key Technical Barrier

Gold prices rose after a grim ECB monetary policy announcement spooked markets and drove yields downward, boosting the appeal of non-interest-bearing assets. The US Dollar initially popped higher as downbeat comments from President Mario Draghi crossed the wires – anchoring the yellow metal but a swift subsequent reversal removed this hurdle. US CPI data showing core inflation unexpectedly fell in March coupled with early reports of a draft deal to delay Brexit at an emergency EU leaders’ summit may have set the stage for the Greenback’s reversal. Data reinforcing a dovish stance from the US central bank coupled with avoiding a disorderly EU/UK divorce at least for now sent the bellwether S&P 500 upward, punishing the anti-risk currency. Gold prices are testing resistance in the 1303.70-09.12 area, a barrier marked by a chart inflection area and a falling trend line capping gains since late February. A daily close above sees the next upside barrier at 1326.30. More broadly, such move would hint at the completion of a bullish Triangle continuation pattern, setting the stage for longer-term recovery. Alternatively, a turn lower from here that leads to a break of neckline support at 1283.53 would point to the completion of a Head and Shoulders (H&S) top. That would set the stage for a test of rising trend support established from August 2018 lows, now 1258.34. The H&S formation would imply a larger selloff to probe near the $1200/oz figure.

4) Crude Oil Prices Vulnerable

Crude Oil prices mostly reflected sentiment trends, rising alongside shares in the latter half of the day. EIA inventory flow data revealing a larger-than-expected 7.03-million-barrel rise in crude stockpiles last week was mostly overlooked. Later in the day, minutes from the March FOMC meeting seemingly registered less dovish than markets accounted for, setting a session low for USD and high for commodities. From here, a lull in top-tier event risk might make for a period of consolidation. Alternatively, the absence of immediate distractions at least of the scheduled variety may allow investors to refocus on the increasingly worrying macro backdrop. Crude oil prices may fall if this pushes sentiment into risk-off territory. A monthly IEA oil market report may flag ebbing demand and swelling supply, compounding pressure. Crude Oil prices continue to test support-turned-resistance in the 63.59-64.88 area. A daily close above it would bring the 66.09-67.03infection zone immediately into focus, with a subsequent breach of that opening the door for a move to challenge the $70/bbl figure. A break below rising trend support set from late December now at 60.39 is needed to neutralize immediate upward pressure, exposing the 57.24-88 region next.

5) IMF Strikes Cautionary Tone in Latest Global Financial Stability Report

The International Monetary Fund has released its April 2019 Global Financial Stability Report (GFSR) which timidly assessed major threats currently faced by the global financial system. According to the latest GFSR, financial conditions generally remain accommodative across developed and developing nations but have tightened noticeably since October 2018 when the prior GFSR was published. Due to persistent accommodative financial conditions, systemic weakness has grown more pronounced. As such, the GFSR warns about elevated risks over the medium-term posed by record-high levels of corporate debt, Eurozone woes, volatile portfolio flows, and lofty real estate prices.

It is evident that financial conditions have become increasingly tighter since late-2017 despite easing somewhat last quarter subsequent to the sharp contraction experienced at the end of 2018. According to the GFSR, a backdrop of rising downside risks could cause financial conditions to contract sharply and abruptly. Highlighted as potential triggers included violent repricing of risks, escalation of trade tensions, further deterioration of global growth as well as possible political shocks. Considering the acute rebound in risk assets after the widespread selloff that plagued markets over the fourth quarter last year, the IMF cautioned against the risk of recent positive investor sentiment suddenly deteriorating which would likely lead to financial conditions tightening precipitously.

The GFSR listed an unexpected shift towards less-dovish monetary policy, worsening economic growth and political risks as prospective causes for the next downturn in sentiment and financial conditions. If any of these potential catalysts materialize and consequently spark a tightening of financial conditions, a significant downturn could ensue and snowball into a much larger issue. Complacency appears to have cultivated now considering that risk assets like stocks are within a couple of percentage points of their all-time highs despite growing signs of a deteriorating fundamental picture. Instead of pricing in these prevalent downside risks, equity markets look to have blindly rallied on the dovish shift by central bankers towards more accommodative monetary policy.

On a brighter note, however, the GFSR noted that if recent tariff hikes are scaled back and trade tensions deescalate, business confidence could rebound and lift economic growth. Moreover, prudent fiscal policy, proper regulation and defusing political pressures were also listed as possible solutions to reduce the aforementioned risks to financial stability.