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Today's volatility may sharply rise during the expected joint speech of the Fed Chairman Powell and Treasury Secretary Yellen in the US Congress. First of all, investors will be interested in the forecast for inflation, as well as Yellen's opinion on the plan of the Biden administration to invest an additional $ 3 trillion in the economy, primarily to support infrastructure and develop the workforce. In case that the bill is successfully passed, this will mean an influx of new money into the consumer market and an increase in inflation expectations.
And although it is not yet clear where the Democrats intend to take additional funds, the bill will still involve an increase in taxes.
The US dollar continues to lead the market and remains a clear favorite. After the temporary consolidation, we expect it to continue its growth.
NZD/USD
It was previously assumed that there is a high probability of a bearish reversal. The NZD started the new week with a decline due to the negative GDP report for the 4th quarter. In particular, New Zealand's GDP was reported at 1%, against forecasted growth of 0.5%. ANZ Bank compares the dynamics of GDP with a hypothetical scenario in which there was no coronavirus. According to its calculations, the economy is now 5% lower than it could be.
The situation is complicated by the fact that New Zealand, along with Australia, is located in the southern hemisphere unlike most developed economies of the world. This means that the natural factor that contributed to the reduction in the coronavirus incidence, is almost worned out. Thus, with the onset of autumn, the probability of another wave of the disease increases.
Last month's yield spread was in favor of the New Zealand dollar, but there has been a narrowing spread recently. On Friday and Monday, US Treasures is already in the lead, that is, investors assume that the yield of US securities against similar New Zealand bonds is becoming higher. This is a key factor in changing investor sentiment, which was confirmed by the CFTC report. According to it, New Zealand's long position was completely liquidated in just a week.
As a result, the estimated price sharply declined, which indicates the fundamental reasons for the reversal. Looking at the chart, the first signs of such a reversal appeared in January.
The nearest target is the support of 0.6970/90. But judging by how actively investors are getting rid of long positions, stabilization is unlikely at this level. The next target is set at 0.6750/90, after which the outlook for the New Zealand dollar will be reassessed.
AUD/USD
The Australian labor market is showing a rapid improvement, with the unemployment rate declining from 6.3% to 5.8% in February, which is already below the forecasted 7.1% for the Q2. At the same time, budget revenues are $ 6.1 billion ahead of forecasts since this year began, and expenditures are $ 9.8 billion lower, which adds up to $ 14.5 billion to the balance sheet. Also, if we add to this growth in iron ore prices to $ 160 per ton, the budget outlook begins to look even more positive.
Unlike the NZD, the Australian dollar still retains an accumulated long position. According to the CFTC report, this has declined by just 33 million (to 590 million), which should look like a bullish factor. However, the target price declined, albeit positivity. The reason lies on the strong drop in profitability during the past two weeks, while the US Treasury yield is growing, even despite the abolition of capital allowances for American banks.
It appears that the Australian dollar is somewhat more confident than the New Zealand one. We will consider any decline as a correction as long as it remains around the zone of 0.7640/50. At the same time, there are high chances of a consistent decline of this support, as well as the two subsequent ones formed by the local lows of 0.7625 and 0.7552. From the point of view of technical analysis, a clear reversal is not yet observed. What's obvious is that investors are turning away from risky assets and the demand for the US Treasury is rising. It can be assumed that the Australian dollar will test the support level of 0.7562 by the end of the week. If this level is broken, the path will open towards the next target of 0.7418.
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