KEY TAKEAWAYS

•            Central Banks had a very busy week.

•            Central Bank Digital Currencies (CBDC) are being more broadly spoken of with risks.

•            The RBNZ makes some changes to policy

•            Consumer sentiment in the US is showing inflation fear.

•            Speculation is increasing on whether Australia will join NZ and Canada on tapering.

•            Friday is Non-Farm Payroll (NFP).

THE TRADING WEEK AHEAD – 31 MAY 2021

The chart below shows the key data points and their respective impact on price during the last week.

KEY DATA

Figure 1: Significant Scheduled News Events corresponding to an hourly Aussie Dollar (AUDUSD) Chart between May 24th- May 28, 2021.

The image shows the impacts of news events on price during the course of last week for the AUDUSD on an hourly chart.  United States news dominated the week with numerous releases relating to economic data, monetary policy and Central Bank Digital Currencies (CBDC).  Interestingly, after the prior week’s cryptocurrency meltdowns, thanks to China’s restrictions and Elon Musk, central banks from numerous countries have begun discussing central bank operated cryptocurrencies often using the moniker CBDC or Central Bank Digital Currency.

Deputy Governor Thomas Lane from the Bank of Canada noted that while he didn’t see the need for an immediate CBDC, he could see that the world was moving fast.  Truth be told we are almost already there, the covid saga has seen less dependency on traditional fiat money in our wallets and more emphasis and use of buy now pay later (BNPL) services, near-field connection (NFC) payment apps, and  debit & credit cards.  The next leap to CBDC for most consumers is closer to being a single step or perhaps a single download.

Central Bank News

Aside from the large number of US related events, central banks globally provided active commentary.  The American Federal Reserve, the Bank of Canada, the Swiss National Bank, the Bank of England, the Bank of Japan, the Reserve Bank of Australia and the Reserve Bank of New Zealand all had something to say throughout the week.

The Swiss National Bank

To start the week off, the Swiss National Banks Chairman, Thomas Jordan, spoke about monetary policy outlook for Switzerland. Jordan was interviewed by the Swiss Daily, where the conversation steered towards inflation and the tightening of monetary policy conditions.  Jordan noted that it would be inappropriate and premature for the central bank to begin tightening policy, particularly in the face of a highly valued Swiss Franc and weak inflation.  He also spoke on the central bank’s balance sheet noting that the SNB could still expand the balance sheet if it was necessary.

The Federal Open Market Committee and the Federal Reserve

FOMC Members Brainard, Bostic, Barkin, Quarles and even ex-chairman acting Treasury Secretary, Janet Yellen, all spoke throughout the week.  All speeches related to the ongoing economic recovery from COVID-19 and the impacts of demand pressures bottlenecking the recovery process.

Lael Brainard discussed the risks involved in private digital money, also known as cryptocurrencies, and how preserving monetary policy transmission would be paramount in the future. In essence Brainard’s speech highlighted the common concern of currency control in a world full of cryptocurrencies, with the actions taken by Chinese officials recently, the western world is likely to follow.

The remaining FOMC speeches from the week offered little other than repeat information with phrasing we have all heard before on the FEDs current stance towards rates and inflation.

The Bank of Canada

Taking a different path to some of the other Central Banks, the Bank of Canada seems to be looking to pull back on some of the stimulus extended to support the economy. Governor Tiff Macklem noted that the domestic economy had been remarkably resilient, and that tapering monetary policy was the right way forward for Canada.

Last month the central bank slowed down on the support mechanisms reducing its monthly bond purchases by $1 billion Canadian dollars from $4 billion and making the Bank of Canada the first of the G7 banks to begin tapering monetary policy.

The European Central Bank.

ECB member François Villeroy spoke on inflation in the euro area.  He said there was no risk of a lasting return and that the central bank may shift towards more flexible monetary policy. He also spoke about the prospects of tapering bond purchases noting that the idea of reductions in 2021 was unlikely and speculative.

The Reserve Bank of New Zealand.

Of the central banking news last week, the RBNZ monetary policy report was higher up the list of importance compared to some of the other repetitive speeches.  This was demonstrated in price reaction where there was a rapid push higher on the NZDUSD and the AUDUSD. While no major policy changes occurred the key notes from the monetary policy report indicated that the central bank is expecting inflation to rise enough to warrant increases of the overnight cash rate in the second quarter of 2022. The change in language being used by the RBNZ suggests they are optimistic about the domestic economy while acknowledging some risks, particularly with issues related to the tourism sector and housing markets where new policies will take time to be observed.

The sheer number of central banking updates has kept investors busy, and the list above is not complete. The other mentions include the Bank of England’s Vlieghe who speculated on rate rises, and the Bank of Japan’s Kuroda who spoke on stimulus through exchange traded funds.

We also saw several consumer sentiment reports which mostly indicated that consumers are feeling optimistic about the long term but pessimistic about the near to medium terms. The University of Michigan’s (UoM) sentiment index sore a slide with consumers expecting and fearing increases in prices, for more on the UoM Sentiment report click here.

Additionally, updates on US Unemployment claims, and the rumored corporate tax changes by Joe Biden were speculated on. For more on the US employment situation leading into a Non-Farm Payroll week click here.

KEY TECHNICALS

In this section we will explore some of the key support, resistance and patterns from the last week.

Monthly (AUDUSD)

Figure 2: Monthly AUDUSD chart with significant points of support and resistance.

The monthly AUDUSD chart highlights some of the possible longer-term support and resistance zones. Price has been in an uptrend for the past 12-months as a result of sustained weakness in the US dollar for most of the last year.

The teal coloured trendlines show a zone that can be potentially used while thinking about the Aussie Dollar. Of these trend lines, the upper teal-coloured resistance line is the most significant, with a number of tests in the last few months. This line is sitting at approximately 0.80000 suggesting an ongoing defense point for the Reserve Bank of Australia. While no monetary policy change has occurred, when price extends near the 80 the RBA usually has something to say.

The white trendline is the current active support level for the currency pair and price has been contained in this zone for nearly 6 months, representing a possible area of consolidation.

Daily (AUDUSD)

Figure 3: Daily Aussie Dollar chart showing an upgoing trend and a suspected pattern in development.

As we move to the daily chart notice that the long-term uptrend originates from April 2020. Also observe that the white monthly trendline currently offers an area of support to consider before placing positions.

The current area of interest shows the beginnings of a pattern than may develop into a head and shoulders pattern.  Its placement near support lower is not ideal although it was worth watching and for viewing potential trade opportunities in coming days and weeks.

Four Hour (AUDUSD)

Figure 4: Four hourly AUDUSD chart with technical pattern and switch of support to resistance.

The 4-hour chart ‘zooms-in’ on the possible area of interest from the daily, which shows a double top pattern earlier on, and at least two tests of the 2020 uptrend before a failure and a minor retest at support.

WATCH LIST FOR THE COMING WEEK

For the remainder of this week there are several scheduled data releases which could present with logical trading opportunities.

All times are in Australian Eastern Standard Time.

Monday, 31 May 2021

Expect to see less volume in tonight’s trading session, bank holidays in the US and the UK will affect market conditions. Regardless a few European and Asian indexes will be releasing data updates so have a look at the economic calendar to familiarize yourself here.

Tuesday, 1 June 2021

Has several scheduled data releases for the Australian and European Markets, with an RBA Rate statement and a few Indexes being released.

2:30pm AUD RBA Rate Statement

The Australian economy is fast approaching a decision to modify monetary policy joining the ranks of New Zealand and Canada who have recently moved into a tapering phase. Due to the economic similarities between the nations, it is likely that the Reserve Bank of Australia is not far from a decision.

Tentative OIL OPEC meetings

All day Tuesday meetings of The Organization of the Petroleum Exporting Countries (OPEC) will be in discussions on oil supply and what their next moves will be so expect some price volatility in oil markets.

Wednesday, 2June 2021

12:00am USD ISM Manufacturing Purchasing Managers Index

At midnight the ISM Manufacturing PMI will be getting an update on manufacturing in the United States. Forecasts are suggesting an expansion to 61.2.

01:00am GBP BOE Gov Bailey

The Bank of England’s Governor will be speaking at an event hosted by Reuters and allows audience questions. He may receive an unexpected question and go off script, which can offer valuable opportunities.

11:30am AUD GDP

Australia’s Gross Domestic Product figures are to be announced on Wednesday, providing a much-needed update on the current situation, though the RBA Rate Statement may provide early indicators into this report.

07:00pm AUD RBA Guy Debelle

The Deputy Governor will likely reference Australia’s GDP, growth and this week’s rate statement, considering the out of market hours discussion, he may have something important to say.

Tentative NZD GDT Price Index

The Global Diary Trade Price Index is a significant number to follow for the New Zealand economy as a large portion of New Zealand GDP is derived from dairy products.

Thursday, 3 June 2021

A quieter day leading into the Non-Farm Payroll results with a number of low impact scheduled releases. The key data to watch comes from Australian Retail figures at 11:30am and from the US ADP NFP estimates. Additionally, the final unemployment claims result ahead of the Non-Farm Payroll results on Friday.

Friday, 4 June 2021

12:00am USD ISM Services PMI

With the inflationary focus, investors will be paying attention to the ISM Services PMI to see if it is beginning to affect other areas of the US economy.

09:00pm USD Fed Chair Powell

Right before the NFP data release, Federal Reserve Chairman Jerome Powell will be speaking in a banking and climate change conference. Expectations for him to reference the NFP event are low, however, as the Chairman of the FED he does have the capacity to comment on broad issues and it may provide a trading opportunity.

10:30pm USD Non-Farm Payroll

The first Friday of the month always has a Non-Farm Payroll event which often can provide increased volatility before and after the event. Expect little action leading onto NFP post the pricing in of ADP estimates on Thursday, and then watch it liven up from an hour before the main event.

Keep an eye out for an upcoming article on the Non-Farm Payroll event this week.

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