NZD USD Forecast for the Week 28th November, 2016

[xtreamforex]

The Reserve Bank of Australia are expected to hike their overnight cash rate by 25bp, which would see the OCR at a 10-year high of 3.6%. We noted in their February meeting that the statement has a hawkish tone, and that the wording suggested at least two more hikes are in the pipeline.

Any adjustments to the wording of this sentence could be the difference between one or two more hikes from here – because a further increase over the months ahead would suggests one more hike is to follow, with a terminal rate at 3.85%.

With the likelihood that inflation has peaked, unemployment will slowly rise and growth will continue to soften, the case for the RBA to pause is certainly building. But the fly in the ointment is inflation above 7%, which means we’re likely to see at least two more hikes. But we can at least say with confidence that the RBA are much closer to the end of their tightening cycle, than the middle or the start.

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[xtreamforex]

AUD/USD trades in a narrow range after struggling to push back above the 200-Day SMA, and the Reserve Bank of Australia rate decision may keep the exchange rate afloat as the central bank is expected to implement higher interest rates.

AUD/USD appears to be defending the January low as it holds within last week’s range, and the exchange rate may stage further attempts to trade back above the long-term moving average as the RBA continues to carry out its hiking-cycle.

The RBA is anticipated to raise the official cash rate by another 25bp in March as the central bank insists that further increases in interest rates are likely to be needed over the months ahead, and the central bank may pursue a more restrictive policy as the recent inflation data had suggested more breadth and persistence in inflation than had been expected.

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[xtreamforex]

Fed Chair Jerome Powell acknowledged that the pace of quarter-point interest-rate increases is not set in stone, and a faster tightening of rates may be warranted if economic data indicates it is necessary.

Powell’s follow-up testimony tomorrow will be his last scheduled public remarks on interest-rate policy before the Fed’s next meeting, March 21-22.

Strong economic data have shifted investors rate expectations, with the rate now expected to rise to around 5.5% by midyear and remain there through the end of 2023.

Federal Reserve Chair Jerome Powell acknowledged during his Capitol Hill hearings that the recent 25bps pace of interest rate increases is not set in stone. Powell expressed his belief that strong and sustained economic activity this year could prompt the central bank officials to accelerate interest rate increases. He further stated that this could lead to more rate increases than initially expected to combat high inflation.

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[xtreamforex]

EUR/USD takes out the February low following the failed attempts to trade back above the 50-day SMA, and developments coming out of the US may keep the exchange rate under pressure as the NFP report is anticipated to show another rise in employment.

EUR/USD fails to defend the opening range for March as Federal Reserve Chairman Jerome Powell warns of a higher trajectory for US interest rates, and the exchange rate may struggle to hold above the January low amid growing speculation for a 50bp Fed rate hike.

According to the CME Fed Watch Tool, market participants are pricing a greater than 70% probability for the Fed funds rate to increase to a fresh threshold of 5.00% to 5.25% on March 22, and it remains to be seen if Chairman Powell and Co. will project a steeper path for US interest rates as the central bank is scheduled to update the Summary of Economic Projections.

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[xtreamforex]

USD/JPY appears to be reversing ahead of the December 2022 high 138.18 as it fails to hold above 200-day SMA, but the Bank Of Japan interest rate decision may curb the recent decline in the exchange rate as the central bank is expected to retain its easing cycle.

USD/JPY snaps the series of higher highs and lows from earlier this week to keep the Relative Strength Index below overbought territory, and the exchange rate may continue to give back the advance from earlier this month as the oscillator shows the bullish momentum abating.

However, the BOJ is expected to retain the Quantitative and Qualitative Easing program with Yield-Curve Control at Governor Haruhiko Kurdo’s last meeting, and more of the same from the central bank may produce headwinds for the Japanese Yen as the board retains a dovish forward guidance for monetary policy.

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[xtreamforex]

The expectation is 0.2% fall in GDP for the December Quarter, following two quarters of extremely strong growth.

This does not necessarily mark the start of a recession. GDP data has been choppy since Covid, and the details don’t tell a consistent story about whether monetary policy is biting.

Nevertheless, it does show that the economy is coming from a less overheated starting point than the Reserve Bank thought.

We think that will nudge them towards a smaller 25 basis point hike at the April OCR review.

The New Zealand economy went on a tear through the middle part of last year, as the return of overseas tourists lifted GDP by almost 4% over the June and September quarters. Coming off the back of that, we were already bracing for much more subdued growth in December quarter. But the final batch of indicators released last week actually suggest a slight contraction. We now estimate that GDP fell by 0.2% in the December quarter.

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[xtreamforex]

The price of gold carves a series of higher highs and lows following the failed attempt to test the February low of $1805, and the failure of Silicon Valley Bank (SVB) may continue to heighten the appeal of bullion as market participants scale back bets for higher US interest rates.

The price of gold trades back above the 50-day SMA as it rallies to a fresh monthly high, and the precious metal may once again track the positive slope in the moving average as fears surrounding the US banking sector drags on the risk-taking behavior.

As a result, the threat of contagion may lead to a flight to safety even as the Federal Reserve announces that it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors, and it remains to be seen if the Federal Open Market Committee will adjust the forward guidance for monetary policy as central bank is slated to release the updated Summary of Economic Projections on March 22.

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[xtreamforex]

China’s banks lent a record 4.9 trillion yen in January as the economy reopened from lockdowns. And there was some anticipation to see whether the new loans were making their way through the economy to aid the governments GDP target of around 5% this year. Early data suggests they are:

Retail rose to 3.5% as expected, up from -1.8% previously.

Fixed asset investment rose 5.5%, above 4.4% expected and 5.1% prior.

Industrial output rose 2.4% y/y. This was below estimates of 2.6% y/y, is a big improvement from 1.4% in January.

During the accompanying press conference, the National Bureau of Statistics (NBS) cited seasonality for the slight rise in the unemployment rate to 5.5%, but more importantly, China’s growth target of around 5% is in line with economic data although the economy does face many challenges.

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[xtreamforex]

AUD/USD appears to be reversing course ahead of the 200-Day SMA as it fails to clear the week high, but data prints coming out of Australia may prop up the exchange rate as job growth is expected to rebound in February.

AUD/USD largely mirrors the weakness across the commodity bloc currencies as it gives back the advance from the monthly low 0.6565, and the exchange rate may track the negative slope in the long-term moving average as the Reserve Bank of Australia seems to be nearing the end of its hiking-cycle.

The update to Australia’s Employment report may generate a bullish reaction in AUD/USD as the economy is anticipated to add 48.5k jobs in February, and a positive development may push the RBA to pursue a more restrictive policy as the Board expects that further tightening of monetary policy will be needed to ensure that inflation returns to target.

In turn, AUD/USD may face headwinds ahead of the next RBA rate decision as Governor Lowe and Co. prepare Australian households and businesses for a wait-and-see approach, and the exchange rate may struggle to retain the advance from the monthly low 0.6565 amid the failed attempt to clear the week high 0.6717.


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[xtreamforex]

Dovish rate hike by ECB
EUR falls across the board
Attention turns to Lagarde at ECB presser

The ECB had set itself up to disappoint some market participants after talking up 50 basis points. As it turned out, and despite all the troubles in the banking sector, it stuck to script and delivered that 50-bps hike. Initially, the euro rose a tiny bit, but then it slumped. The DAX hit a new weekly and multi-month low, before bouncing back a little off its worst levels. Keep an eye on the EUR/JPY, which could drop to a new low for the year in light of the risk off sentiment.

Traders realized that this was the best ECB could have done in these circumstances. By not hiking and going back on their words, this would have seen the ECB lose some credibility. It had to hike. But here is the clever bit: the ECB also didn’t want to disappoint those who were calling for a smaller or no rate hike at all. So, it provided no forward guidance or commitment to future hikes. It said that “the elevated level of uncertainty reinforces the importance of a data-dependent approach to the Governing Council’s policy rate decision”. In other words, this was as dovish a rate hike as you would have seen in these circumstances.
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[xtreamforex]

Cautious Trade to start the week, EUR/AUD Focused

Australia’s ASX 200 index fell by -96.3 points and currently trades at 6,898.50.
Japan’s Nikkei 225 index has fallen by -360.97 points and currently trades at 26,972.82.
Hong Kong’s Hang Seng index has fallen by -534.15 points and currently trades at 18,984.44
China’s A50 index has fallen by -28.90 points and currently trades at 12,866.03

UK and Europe:

UK’s FTSE 100 futures are currently down -16.5 points, the cash market is currently estimated to open at 7,318.90
Euro STOXX 50 futures are currently down -35 points, the cash market is currently estimated to open at 14,733.20

US Futures:

DJI futures are currently down -30 points
S&P 500 futures are currently up 2.25 points
Nasdaq 100 futures are currently up 16 points

It has been a quiet session overnight, as traders wait to see how Europe reacts to the weekend’s headlines.
The Fed, ECB, BOJ, SNB, BOE and BOC have coordinated action to boost liquidity via their standing swap arrangements to support financial stability.

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[xtreamforex]

The Minutes emphasize a high degree of uncertainty; do not take into account the global banking disruptions; and point to a pause in April.

The Minutes of the Reserve Bank Board meeting on March 7 highlight that unlike recent meetings when several policy options were considered the March meeting only considered the case for 25 basis point increase – the resulting decision.

However the Minutes note that “Members agreed to reconsider the case for a pause at the following meeting, recognizing that pausing would allow additional time to reassess the outlook for economy.”

There is considerable discussion of market pricing in the Minutes. “ Market pricing implied a 25 basis point increase in the cash rate at the March meeting and suggested that the cash rate would peak at around 4.25% in the second half of 2023,” – with the market response to the global disruptions to the financial sector this pricing has fallen to below 3.6%; that is no further rate hikes with the possibility of rate cuts.

Similarly on international markets the Minutes refer to, “Market participants’ expectations of the path policy rate in advanced economies had shifted up since the previous meeting.” Now, market pricing for the FOMC is predicting a series of rate cuts over the course of 2023.

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[xtreamforex]

The steep decline in strength costs over the previous few months prompted March headline inflation in Europe to decline considerably year-over-year (from 8.5% to 6.9%). Rising core inflation and excessive m/m readings on the other hand confirmed that this is solely the effortless phase in the lengthy experience again in the direction of the 2% target. But with US (core) PCE inflation for February later on Friday additionally cooling barely greater than expected, the market center of attention lied elsewhere. The downleg in core bond yields accelerated, main to losses in the US between 8.1 and 11.4 bps throughout the curve. German yields slid 6.6 to 9.6 bps.

Equities ended the quarter on a fine note. The Euro Stoxx 50 rallied 0.69%. It even set a new YtD excessive intraday at 4325. US bourses rose between 1.26% (DJI) and 1.74% (Nasdaq). The euro on forex markets hit the March excessive at 1.0926 earlier than technical resistance (and possibly some euro fatigue) kicked in. EUR/USD sooner or later completed at 1.0839, down from 1.0905 at the open. The US greenback in well-known traded strong, gaining in opposition to most peers.

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[xtreamforex]

The Australian Dollar slipped slightly in the aftermath of the RBA standing still on rates for the first time since May 2022.

The RBA maintained some flexibility and didn’t rule out future hikes. In the accompanying statement on monetary policy, they said, “The Board expects that some further tightening of monetary policy may well be needed to ensure that inflation returns to target.”

Interest rate markets are currently pricing no more hikes and a better-than-even chance of a 25 basis point cut by the end of the year.

Today’s price action comes after a massive rally for the Aussie yesterday. Markets were rattled by the huge surge in crude oil prices after OPEC+ cut its crude oil production target by 1.1 million barrels per day. The move compounded existing tightening supply issues.

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[xtreamforex]

The RBNZ raised the policy rate by an unexpectedly large 50 basis points, and another 25 basis point hike appears to be scheduled for the May Monetary Policy Statement.

RBNZ Monetary Policy Report, April 2023

The Reserve Bank surprisingly raised the OCR by 50 basis points to 5.25% at today’s review, rather than 25 basis points as most expected.

Overall, the RBNZ sees the overall profile for inflation pressures as relatively unchanged since February, when its projections showed that the OCR should rise to 5.5% in the first half of 2023.

The RBNZ acknowledged the weaker starting point for GDP. However, the downward impact on its projections was offset by upward shocks to prices from the recent floods and Cyclone Gabrielle. The RBNZ remains concerned about the potential for inflation expectations to be unanchored by the current high levels of core and headline inflation.

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[xtreamforex]

In Australia, the RBA was the focus of market participants’ attention. Outside the country, the RBNZ reaffirmed its hawkish resolve, while U.S. data weakened noticeably.

The RBA decided to leave the key interest rate unchanged at 3.60% in April, a decision that was in line with Westpac’s forecast. In line with the decision, the Governor’s statement included a subtle change to the guidance, indicating that further tightening “may be required” in March, rather than “will be required.” While this certainly still qualifies as a tightening bias, after 350 rate hikes in the past decade, the central bank board is increasingly concerned about the need to assess the full spectrum of risk.

In our view, the evolution of underlying inflationary pressures is critical to the near-term stance of monetary policy. Westpac projects that inflation will average 6.6% for the year in the first quarter, an outcome that the RBA is likely to find uncomfortably high against the backdrop of a historically tight labour market, thus warranting a policy response. As a result, we continue to expect a final 25 basis point rate hike in May, taking the policy rate to a peak of 3.85%, where we believe it will remain until the end of 2023. If economic momentum continues to slow and inflation risks subside, a series of rate cuts may be implemented in 2024 and 2025 to bring policy back toward neutrality and facilitate a recovery in economic growth.

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[xtreamforex]

EUR/USD is struggling to test the yearly high (1.1033) as it fails to continue the series of higher highs and lows from the beginning of the week, and the U.S. labour market data (NFP) report may weigh on the exchange rate as employment is expected to rise further.

The short-term recovery of EUR/USD seems to have stalled as it consolidates below the weekly high (1.0973), and developments in the US could affect the exchange rate as the Federal Reserve officials continue to take a restrictive stance.

In a speech at New York University, Cleveland Fed President Loretta Mester acknowledged that ‘wages are still growing at an annual rate of about 4-1/2 to 5 percent,’ and the official went on to say that ‘inflation remains too high and too persistent,’ as price growth remains well above the central bank’s 2 percent target.

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[xtreamforex]

Bank of Canada (BoC) is widely anticipated to maintain its pause this week, leaving interest rates unchanged at a 15-year high of 4.50%. Governor Macklem has emphasized that there’s no need for additional rate hikes if the economy unfolds according to central bank’s projections, which forecast stalling growth for the rest of the year, subsequently cooling inflation. Macklem also stated that an “accumulation of evidence” would be required before considering resuming tightening.

Consequently, it’s unlikely that BoC’s announcement on Wednesday or Macklem’s speech on Thursday will trigger significant volatility in Canadian Dollar. Instead, Loonie is expected to be more reactive to developments in oil prices, as WTI crude remains stuck around 80 mark. Additionally, the currency could be influenced by US CPI data and the release of FOMC minutes when paired against the greenback.

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[xtreamforex]

The minutes of the March 21-22, 2023, Federal Open Market Committee (FOMC) meeting reaffirmed that price and financial stability are of paramount importance to the Fed.

Regarding the economy, Committee members noted that “recent indicators point to modest growth in spending and output. At the same time, however, participants noted that employment growth has picked up in recent months and is proceeding at a robust pace; the unemployment rate has remained low. Inflation remained elevated.”

Committee members noted that despite a sound and resilient banking system, “recent developments in the banking sector are likely to tighten credit conditions for households and businesses and weigh on economic activity, hiring, and inflation. “Participants noted, however, that the overall effect on economic activity is uncertain at this time.

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[xtreamforex]

Developments in Australia and the US this week were supportive of our views for the RBA and the FOMC.

The Westpac- MI Consumer Confidence Survey provided a positive update on confidence. The RBA’s decision to leave the policy rate unchanged in April proved to be an important support, with the overall index rising 9.4% this month from 78.5 to 85.8. This is underscored not only by the upswing in the housing subindexes of the survey-mortgage borrower confidence rose 12.2%, the index for the timing of home purchases rose 8.2%, and house price expectations rose 16.7%-but also by the general recovery in households’ expectations for the near-term economic outlook and family finances. While these developments represent a marked improvement over the very pessimistic readings of February and March-a situation comparable only to the major economic dislocations of the 1980s and 1990s-the overall index, at 85.8, must still be considered weak.

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[xtreamforex]

Despite the softer-than-expected inflation data released earlier last week, US inflation expectations shocked investors at last Friday’s release; the 1-year expectation jumped from 3.6% to 4.6% due to the surprise surge in energy prices. The expectation was a further easing to 3.5%.

And energy bulls remain in charge of the market, as besides the tighter OPEC supply, the US Energy Secretary Jenifer Granholm said that the US could begin buying oil to refill the strategic reserves and the EIA warned that the global oil demand will rise by 2mbpd to almost 102mbpd. Both helped keeping the price of American crude at around its 200-DMA, a touch below the $83pb level.

Therefore, despite the easing inflation pressures on the CPI figures, the positive pressure building on energy prices and the surging inflation expectations boost the Federal Reserve (Fed) hawks. Combined to waning bank stress, the US 2-year yield – which is a good proxy of what investors think the Fed will do – rose last week, although we are still far below the 5% level before the Silicon Valley Bank (SVB) collapsed. The expectation of a 25bp hike at the next FOMC meeting is given a good 83.5% chance.

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[xtreamforex]

EUR/USD cleared the February high (1.1033) last week to register a fresh yearly high (1.1076), but lack of momentum to breach the April 2022 high (1.1076) may lead to a near-term pullback in the exchange rate as it snaps the recent series of higher highs and lows.

EUR/USD forecast: April 2022 high offers resistance

EUR/USD is under pressure on the back of US Dollar strength, and it seems as though the Federal Reserve will continue to combat inflation as Governor Christopher Waller insists that ‘monetary policy needs to be tightened further.’

At the same time, Fed Governor Waller warns that ‘monetary policy will need to remain tight for a substantial period of time, and longer than markets anticipate,’ and the comments suggest the Federal Open Market Committee (FOMC) is in no rush to switch gears as inflation remains well above the central bank’s 2% target.

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[xtreamforex]

Both the EUR/USD and GBP/USD pair are holding near key points of resistance with inflation data set to be released from each economy tomorrow morning.

While European inflation has fallen as the ECB has lifted rates with tomorrow expected to show at 6.9% for headline CPI, UK CPI remains stubbornly elevated after last month’s 10.4% print, leading to an expectation for a 9.8% read in tomorrow’s release.

Both the Euro and British Pound remain very near recent highs ahead of tomorrow’s CPI data. Going first is the UK with data to be released at 2:00 AM ET. The expectation is for core inflation to come in at 6.0% and headline inflation to print at a whopping 9.8%. This would still be lower than last month’s 10.4% print but, well beyond where the Bank of England would like it.

In Europe, there’s a bit of hope for even more softening after the preliminary print earlier in the month came in at 6.9% which sets the expectation for the same at tomorrow’s release, scheduled for 5:00 AM ET.

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[xtreamforex]

Consumer prices rose 1.2% in the March quarter and are up 6.7% over the past year. The March result was below our forecast, and much lower than the RBNZ’s expectation.

New Zealand consumer prices rose 1.2% in the March quarter, with prices up 6.7% over the past 12 months.

Today’s result was lower than forex market expectations, and well below the RBNZ’s forecast for a 1.8% rise.

Annual inflation remains painfully high. However, inflation looks like it has now peaked.

Core inflation, while still high, is not pushing higher.

Today’s result supports our forecast for just one more OCR hike from the RBNZ in May.

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[xtreamforex]

EUR/USD:

EUR/USD continues to struggle with resistance around the 1.1000 level, despite aggressive comments from ECB, which were reiterated in the release of the meeting minutes of the Bank’s latest rate hike.

Headline inflation CPI has continued to fall in both the U.S. and Europe, and this week eurozone inflation CPI fell to 6.9% from last week’s report US CPI of headline inflation of 5.0%. The bigger issue at the moment is core inflation, which has continued to rise in Europe, while it has softened somewhat in the U.S. recently.

The world’s most popular currency pair continues to hold near an important resistance zone with longer-term importance.

I had highlighted this resistance last month when it was about to come back into focus. Within a range of about 100 pips in the EUR/USD pair, extending from about 1.0930 to 1.1033, there are several forms of resistance that form an area of confluence. Three weeks later, this zone has bent but not yet broken through sustainably, and prices are still hovering near the bottom of this zone as of writing.

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[xtreamforex]

Gold is struggling to capitalise on Friday’s modest rise from the $1.970 region and is coming under selling pressure on the first day of the new week. The XAU/USD pair is trading around the $1.977 level during the Asian session, remaining within striking distance of a two-week low reached last Wednesday.

The prospect of further monetary tightening by the U.S. Federal Reserve (Fed) is helping the U.S. dollar to see some buying on Monday, which in turn is seen as the main factor pulling gold prices lower for the second day in a row. Markets now seem convinced that the Fed will continue to raise interest rates to curb high inflation in the U.S. and have fully priced in a 25 basis point hike at the next Federal Open Market Committee (FOMC) meeting in May. Moreover, Fed funds futures suggest a low probability of another rate hike in June.

False expectations from the Federal Reserve are supporting the USD

Bets were boosted by recent hawkish remarks from several Fed officials and incoming positive U.S. macro data, which suggested that the world’s largest economy remains resilient. The flash version of S&P Global’s PMI survey showed Friday that overall U.S. private sector activity expanded at a faster pace in April. Service sector activity grew for the third straight month and at the fastest pace in a year, while the U.S. manufacturing indicator moved into expansion territory for the first time since October 2022.

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[xtreamforex]

Most Asian equities flashed red on Tuesday, pressured by losses in Chinese shares as investors evaluated China’s re-opening story in the face of negative economic and geopolitical forces. European futures are pointing to a mixed open with market players guarded ahead of another event-heavy week for financial markets. Some of the largest companies in the world including the four Big Tech titans (Microsoft, Alphabet, Meta and Amazon) will be reporting their results this week. If the corporate earnings paint an overall encouraging picture, this could boost risk sentiment and support equity bulls. However, a set of disappointing results is likely to enforce renewed pressure on stock markets with the S&P500 and Nasdaq feeling the brunt.

In the currency space, the dollar attempted to stabilize during early trade after slipping in the previous session as more signs of slowing US economic growth cooled Fed hike bets. With markets now pricing in the peak for US interest rates in June, dollar bulls could be running on fumes. Gold drew strength from falling Treasury yields while oil prices steadied after two days of gains.

Dollar bears to hijack the scene?

Repeated signs of cooling price pressures and disappointing US economic data could add more fuel to expectations around the Fed pausing rate hikes and eventually cutting down the road. On Monday, softer US manufacturing data strengthened the argument for the Fed to pause. There are more major releases from the US economy this week including April consumer confidence data, Q1 GDP figures, and most importantly the Fed’s preferred inflation gauge, the Core Personal Consumption Expenditure.

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[xtreamforex]

The year-to-date performance of the S&P 500 has been heavily skewed by the top 8 market cap stocks (FAANG + MNT).

US regional bank fear persists despite the takeover of First Republic Bank by JPMorgan Chase.

Markets are looking out for clues on the timing of the first Fed rate cut in today’s post-FOMC.

The combined top 8 US stocks (in terms of market capitalization) in the S&P 500 under the FAANG + MNT group; (Meta/Facebook, Apple, Amazon, Netflix, Alphabet/Google, Microsoft, NVIDIA, Tesla) that contributed close to 102% of the 2023 year-to-date return of the S&P 500 as of 28 April.

These observations suggest the average return of the remaining 492 stocks in the S&P 500 is negative which indicates a weak market breadth condition.

The lopsided return from FAANG + MNT became more pronounced after the onset of the US mini-banking crisis in mid-March.

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[xtreamforex]

The Federal Reserve delivered its tenth consecutive rate hike on Wednesday, as expected, but reset its guidance to indicate increased emphasis on incoming data. Hence, Friday’s nonfarm payrolls will be the next test for the US dollar at 12:30 GMT, with forecasts pointing to a discouraging outcome.

The Federal Open Market Committee (FOMC) decided to increase its funds rate by a quarter percentage point to the highest range in sixteen years of 5.0-5.25% for the sake of fighting inflation, despite three private banks collapsing recently. Although Powell reiterated that the banking system remains sound and resilient, he acknowledged that downside risks in the sector have grown, and a more cautious approach might be needed.

Unlike the ECB, the Fed is now more confident that a pause in monetary tightening could be around the corner but with inflation standing at 5.0% y/y – more than twice its symmetrical 2.0% target – it could not make any promises. Alternatively, it chose a safer path, adopting a less hawkish guidance to state that additional tightening could still be possible if there are signs of stronger-than-expected growth, inflation, and hiring. Previously, policymakers were focused on signs of slowing inflation to ease the pace of tightening.

Nonfarm payrolls might be the next challenge for markets

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[xtreamforex]

Better than expected US non-farm payrolls for April have failed to ignite US dollar bulls.

Two outliers; the safe haven currencies, CHF and JPY underperformed against the US dollar due to the resurgence of risk-on behavior in the US stock market.

JPY future’s bearish positioning has highlighted a risk of a short-term revival of JPY’s strength.

Last Friday, the better-than-expected US official non-farm payrolls data (labour market) for April failed to trigger a meaningful rally in the US dollar in general where the US Dollar Index ended the 5 May US session with a loss of -0.16% to close at 101.28, a whisker away from its 100.95 key medium-term support that has been tested twice so far in past four weeks.

Even the recovery in the 2-year US Treasury yield which added 12 basis points to close at 3.92% last Friday reinforced by the rosy US payrolls data that put a halt to the prior three sessions of daily losses has failed to ignite the bulls in the US dollar.

Interestingly, the major currencies that underperformed against the US dollar last Friday were the safe haven pair duo; CHF (-0.5%) and JPY (-0.4%), and the primary driver was the risk-on behaviour seen in the US stock market.

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[xtreamforex]

AUD/USD ends 6-day rally

Australian retail sales decline
Fed warns that banks are tightening credit

The Australian dollar is in negative territory, ending a rally of close to 200 points. In the European session, AUD/USD is trading at 0.6760, down 0.29% on the day.

Australian retail sales decline

Australian retail sales posted a decline of 0.6% in the first quarter, following a downwardly revised reading of -0.3% in Q4 2022. The reading matched the consensus, but investors were not pleased with a second straight decline and the Aussie has lost ground today. The National Australia Bank responded to the release by warning that a “consumer recession” had arrived.

Australians are holding tight onto their wallets due to the uncertainty in economic conditions. The cost-of-living crisis, driven by high inflation and rising interest rates, has driven down household spending. The new budget may help matters a little, but inflation will have to continue moving lower before consumers increase spending.

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[xtreamforex]

The University of Michigan consumer confidence for the month of May unexpectedly set the tone for last week’s trading session WS. The overall indicator fell more than expected, from 63.5 to 57.7, the lowest level since last July. However, markets focused on the prospective inflation expectations component of the report. 1-year inflation expectations fell less than hoped from 4.6% to 4.5%, while long-term (5-10 year) expectations rose from 3% to 3.2% (versus 2.9% consensus), the highest level since March 2011! Similar signs were provided by the NY Fed’s latest survey of consumer expectations (inflation expectations for 3 and 5 years rose by 0.1 percentage points) and in Europe by the ECB survey of consumer expectations.

Median expectations for 1-year and 3-year inflation EMU rose from 4.6% to 5% and from 2.4% to 2.9%, respectively. U.S. Treasuries slipped after the Michigan survey and underperformed German bunds. U.S. yields rose more than 9 basis points in the 2- to 7-year range of the curve, while longer maturities gained 5 to 8 basis points. The 2-year US yield closed just below the psychological 4% mark.

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U.S. stocks started the week on a slightly positive note after weak economic data fueled expectations of a pause by the Federal Reserve (Fed), hopes of a resolution in the debt ceiling talks between Joe Biden and Kevin McCarthy, and Microsoft received EU approval to buy Activision.

However, the latter are all weak reasons to jump on an upward trend, because,

1. New York’s Empire State manufacturing index fell to -31.80 in May, while analysts had expected a drop to around -3.70. Minneapolis Fed head Kashkari, however, warned investors that the Fed will continue to raise interest rates. Bostic of the Atlanta Fed said the Fed should hold rates this year but definitely not cut them, while Goolsbee of the Chicago Fed wouldn’t promise a rate pause in June. He said he’s watching the data and remains ‘particularly vigilant about the impact of rate hikes on credit conditions.”

While a Fed rate hike in June is still off the table, activity in fed funds futures suggests investors see higher odds of a rate hike next month. The probability of a 25 basis point rate hike is now at 19%. But of course, the data and the progress of the debt ceiling talks will be key to what the Fed could and would do.

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Risk sentiment remains poor as the US couldn’t reached an agreement on its debt ceiling.

But House Speaker McCarthy hinted that an agreement is possible within days. Despite both sides being far apart, everyone knows the catastrophic consequences of an eventual US default, and no one is ready to push the US into that black hole.

Yesterday, both equities and bonds were sold off on US debt ceiling impasse, while the US dollar index remained capped at two-week highs.

On the data front, U.S. retail sales released yesterday were weaker than expected. Although the monthly numbers showed a rebound after two months of negative results, it was less than expected, and the annual numbers showed that sales growth unexpectedly slowed, falling to a disappointing 1.6% from 2.4% the previous month and well below the 4.20% forecast by analysts. Core retail sales excluding gas and autos rose more than expected, while industrial production posted a larger increase in April. However, the latest data is unlikely to persuade Fed officials to change their view that the Fed’s next move should be a pause in tightening rather than another hike.

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Gold price is replicating the moves seen in Wednesday’s Asian trading, making headways for a minor recovery toward $2,000 early Thursday. The retreat in the United States Dollar (USD) and the US Treasury bond yields supports Gold price.

US Dollar steadies as US debt ceiling optimism wanes, Gold price bounces

The US Dollar is preserving a part of the previous day’s gains, although on the defensive so far this Thursday. The pullback in the US Treasury yields across the curve is capping the US Dollar upside, which is somewhat helping Gold price stay afloat. Despite the gains in the Asian indices, investors remain cautious, reflective of a minor drop in the US S&P 500 futures. Markets continue to weigh the prospects of a United States default even though the recent progress on the US debt ceiling talks

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U.S. Treasuries and German bunds parted ways Friday after a combined 10 basis point rise the day before. U.S. yields still rose between 1.3and 4.8 basis points, with the belly underperforming. They easily overcame a setback in the early hours of U.S. trading when Fed Chairman Powell said credit stress could limit the need for new rate hikes. That threw a spotlight on a growing split in the FOMC. Several other Fed governors last week were far less convinced by the idea of such a pause. This also contrasts with the ECB chairman, who on Sunday called for more rate hikes: “We are not done, we are not taking a pause, based on the information I have today.” German interest rates entered the weekend down 0.5to 2.9 basis points. The chart data presented too much of a challenge for the 10-year bond (resistance 2.5%). This was also true for equities.

The S&P500 tested the February high – before the SVB collapse – but could not overcome it. European stocks closed in the green nonetheless, with the EuroStoxx50 making an attempt to reach the important resistance at 4415. This is the post-pandemic recovery and multi-year high from November 2021. The dollar took a breather after its earlier rise. EUR/USD recovered from a low of 1.076 to 1.0805. The DXY (trade-weighted dollar) eased from the highest level since mid-March (103.58) to 103.2. Sterling consolidated near the highest level since December last year. EUR/GBP settled in the upper range of 0.86.

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The Fed’s two biggest hawks yesterday coloured trading which until then turned out to be non-directional. Kashkari from the Minneapolis Fed said it’s a close call between a pause and a hike in June, adding that the former wouldn’t mean tightening is over per se. St. Louis Fed president Bullard called US recession worries overstated and expects some 50 bps more rate hikes sooner rather than later this year.

SF’s Daly and Atlanta’s Bostic argued for caution but their comments were largely dismissed. US yields went from losing almost 5 bps to similar-sized gains at the front end of the curve. Longer tenors also added between 3.8-4.2 bps. German yields followed suit, adding 3.1-5.2 bps with the front underperforming. ECB’s Villeroy warned about persistent underlying price pressures. Especially services inflation needs to be monitored as it is likely to become the dominant inflation source. Peripheral spreads narrowed with Greece hugely outperforming (-17 bps, to the lowest since Nov 2021) following incumbent PM Mitsotakis’s election victory last Sunday.

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The RBNZ tightened by 25 points to 5.5 percent and expressed confidence that this will be sufficient to bring inflation back to target. We continue to see risks that the large migration surge will ultimately require more action after July.

RBNZ Monetary Policy Statement, May 2023

The RBNZ increased the OCR as expected to 5.5 percent.

However, the big surprise was in the forward profile, in which the RBNZ strongly suggests that it is on hold from here until at least mid-2024. We see some upside risks to the RBNZ’s view, but for now see the RBNZ on hold in July, with some potential of a 25 point rise in the OCR in August.

Migration pressures are acknowledged, but the RBNZ takes a sanguine view on their impact on capacity pressures. The RBNZ’s net migration estimates are higher and imply a net 75,000 net inflow in the year to December. This is only slightly lower than Westpac’s equivalent forecast of a net 83,000 inflow (on a working-age population basis). Despite the upgrade, the RBNZ’s view is that this adds significantly to supply as well as demand. Migration is seen as having some supportive impact on house prices but by not as much as we have taken in our recent Economic Overview.

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The minutes from the May 2-3 Federal Open Market Committee (FOMC) meeting reiterated that curtailing inflation remains the principal objective of the Fed.

On the current state of the economy, the Committee members noted that “economic activity had expanded at a modest pace in the first quarter. Nonetheless, job gains had been robust in recent months, and the unemployment rate had remained low. Inflation remained elevated. Participants agreed that the U.S. banking system was sound and resilient.”

When discussing credit conditions, participants noted that, “stress in the banking sector would, in coming quarters, likely induce banks to tighten lending standards by more than they would have in response to higher interest rates alone.” Participants noted however, that the economic impact was uncertain at this time.

On the future path of monetary policy, committee members stated that “in light of the lagged effects of cumulative tightening in monetary policy and the potential effects on the economy of a further tightening in credit conditions, the extent to which additional increases in the target range may be appropriate after this meeting had become less certain.” Several participants noted however, that if the economy progressed in line with their current projections, future rate hikes may not be warranted.

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UK bonds crashed for a second day straight with yields adding 10.6-19.2 bps across the curve. UK money markets discount an additional 100 bps tightening by December following the big upside CPI surprise Wednesday morning. Sterling initially revisited YtD highs but unable to force a break higher, technical return action kicked in. EUR/GBP eventually closed narrowly above 0.87. Bonds in the US and Germany slid as well with huge underperformance of the former. US yields ripped between 0.9 (30-y) and 15.6 (2-y) bps higher. Second-tier but above-consensus data including weekly jobless claims spurred the move with recessionary along with financial stability concerns easing. Markets even fully priced in a July rate hike. Optimism about US negotiators reaching a debt ceiling deal also helped sentiment. A two-year suspension in return for spending cuts is on the table. German yields followed from a distance. Changes varied from +3.7 to 6.2 bps with the belly underperforming the wings and the 10-y yield testing the 2.53% resistance area. ECB’s Nagel, Knot and Villeroy hit the wires on a hawkish note. The US dollar performed strongly, even as Wall Street posted gains up to 1.7% (Nasdaq, Nvidia-sparked rally). EUR/USD closed around important support of 1.0727. The trade-weighted index took a look beyond 104.089 resistance to close at 104.25 – the highest since mid-March. USD/JPY ventured north of 140 for the first time since November last year.

The Asian session this morning is a quiet one. Aside from Tokyo CPI (see below) there’s little news. Speaker of the House McCarthy vowed to continue working until a debt ceiling deal is reached. We wouldn’t be surprised if they’d strike one during the weekend. In the run-up, we still have US PCE deflators and durable goods orders scheduled for release today. The former are the Fed’s preferred inflation gauge and seen accelerating from 4.2% to 4.3% on a 0.3% m/m pace for the headline. Core PCE should come in at an unchanged 4.6% (0.3% m/m). An outcome in line with expectations probably is enough to sustain the current bond yield trend, be it on a less blistering pace. The technical charts offer help as well with the US 2-y and 10-y yield surpassing 4.50% and 3.80% levels respectively. A weekly close above that level would be a major plus. This also goes for the DXY dollar closing above 104.089 level and EUR/USD sub 1.0727. Both levels are being tested as we write. UK April retail sales this morning surprised to the upside, with the core gauge double the 0.4% that was expected. It comes with a downward revision of the March figure though. EUR/GBP in a first reaction barely budges. The 0.87 big figure for the time being survives.

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