Daily Market Outlook by Kate Curtis from Trader's Way

[katetrades]

Forex Major Currencies Outlook (Mar 7 – Mar 11)

ECB meeting, inflation data from the US and China as well as GDP data from the UK and Japan will be highlights of the week ahead of us.​

USD

ISM Manufacturing PMI for the month of February came in at 58.6 vs 58 as expected and up from 57.6 in January. New orders index jumped to 61.7 with production improving to 58.5. Backlog of orders surged to 65 with new export orders also surging. Prices slipped to 75.6 from 76.1 indicating potentially better situation regarding supply chains disruptions. The only dent on a hugely impressive report was employment index which dropped to 52.9 from 54.5 in January, However, the reading is still above 50 so there is no big concern there. Additionally, the only industry that reported a decrease from January was Wood Products. Non-manufacturing was not as impressive as it came in at 56.5 vs 61 as expected. Business activity and new orders dropped around 5 index points while employment index fell into contraction (48.5). Inventories, backlogs of orders, new export orders and prices paid all rose indicating stronger foreign demand as well as growing price pressures.

Fed Chair Jerome Powell confirmed a 25bp rate hike at the March meeting on the back of high inflation and strong labor market. On the balance sheet reduction he stated that it will “commence after the process of raising interest rates has begun, and will proceed in a predictable manner primarily through adjustments to reinvestments".The yield on 10y T-Note fell to 1.687% as flight to safety and risk off mood dominated the markets at the beginning of the week but it rebounded later on going as high as 1.9% only to finish the week around 1.79%.

We had another strong jobs report with headline number coming in at 678k vs 400k as expected. The unemployment rate has dropped to 3.8% from 4% in January, indicating that labour market has potentially reached full employment. Even the participation rate improved to 62.3% giving strength to the drop in the unemployment rate. On the other hand, average earnings data has missed expectations and came in weaker than expected (flat m/m and 5.1 y/y). Leisure and hospitality added 178k with food service and drinking places adding 124k. They are low-paying jobs so they brought the average earnings down.

This week we will have inflation data that could get very close to 8% or even surpass that level.

Important news for USD:

Thursday:

• CPI

EUR

Final Eurozone PMI for the month of February were revised lower on the back of downward revisions to German and French reading. Italy and Spain surprised positively to the upside. Services reading was a mirror image of the manufacturing reading. It was revised down due to revisions in German and French readings while Italy and Spain surprised to the upside. Composite was also dragged down from the preliminary reported figure.

Preliminary CPI data showed headline reading jump to 5.8% y/y vs 5.4% y/y as expected on the back of increases in energy and food prices. Core reading came in at 2.7% y/y vs 2.5% y/y as expected. Both EU and German reading showed inflation accelerating at 0.9% m/m vs 0.3% m/m in January. With energy pricing rising out-of-hand, WTICrude above $110, we can expect inflation to continue increasing in the coming months and putting pressure on ECB to act.

This week we will have ECB meeting. There was hawkishness in minutes from the previous meeting, however with Russia-Ukraine situation escalating further we cannot see ECB moving towards tightening as stagflation risks increase. PEPP program should end and APP purchases should be increased by €20-40bn at the meeting.

Important news for EUR:

Thursday:

• ECB Interest Rate Decision

GBP

The UK's February manufacturing PMI was revised up to 58.0 from 57.3 as preliminary reported. It is the first rise in two months. Services reading, on the other hand, was revised down to 60.5 but it is still very well into expansionary territory. Omicron related restrictions were cancelled and it led to big jump in business activity as well as in new orders. Composite was at 59.9.

This week we will get January GDP data and it is expected that the UK strongly started in new year.

Important news for GBP:

Friday:

• GDP

AUD

RBA March meeting did not bring any new information. The rate was left unchanged at 0.10% as widely expected. Board members have reiterated their willingness to be patient and affirmed that they are not prepared to increase the cash rate until inflation is sustainably within the 2-3% target range. They have acknowledged wage growth, however they are still low and members expect them to gradually rise towards the desired 3% level. Q4 GDP data came in at 3.4% q/q vs 3% q/q as expected due to the strong rebound in household consumption (6.3% vs -4.8% in Q3).

Official PMI data from China showed a struggling but resilient economy. Manufacturing ticked up to 50.2 from 50.1 in January while expectations were for it to slip into contraction with 49.9. Non-manufacturing fared much better and came in at 51.6, thanks to big jump in construction reading and it propelled composite to 51.2. Caixin manufacturing also managed to escape the contraction and came in at 50.4 vs 49.1 as expected. The report shows that business confidence started to pick up while new order rose above the 50 level (50.7, up from 49.3 the previous month) indicating that demand is pushing the recovery up. Caixin services dropped to 50.2 from 51.4 the previous month and that left composite barely hanging in the expansion territory at 50.1.

This week we will get trade and inflation data from China.

Important news for AUD:

Monday:

• Trade Balance (China)

Wednesday:

• CPI (China)

NZD

GDT auction brought another impressive result. Change in index came in at 5.1% for a fourth consecutive auction of dairy price increases above 4%. Average price has crossed the $5000 mark. Terms of trade for New Zealand in Q4 were -1% q/q and considering latest dairy auctions that number will turn into a positive in Q1 of 2022. Combined with aggressive hiking path by RBNZ we see NZD going higher.

CAD

BOC has delivered a rate hike of 25bp now lifting the rate to 0.50% as was widely expected. Unlike New Zealand and the UK, BOC decided to continue reinvesting proceeds from maturing bonds until they find appropriate time to start balance sheet reduction. Members have noted the war in Ukraine as a new source of instability that will lead to inflation worries around the world as well as additional supply disruptions which will weigh on global growth. Economic growth in Q4 in Canada has been stronger than expected indicating that economic slack has been absorbed and that Q1 will also be stronger than expected. The bank members see policy rate as primary tool of monetary policy and agree that rates will need to rise further as economy expands and price pressures remain. In regards to reduction of balance sheet and timing of rate hikes bank members stated “The resulting quantitative tightening (QT) would complement increases in the policy interest rate. The timing and pace of further increases in the policy rate, and the start of QT, will be guided by the Bank’s ongoing assessment of the economy and its commitment to achieving the 2% inflation target.”

Q4 GDP came in at 6.7% annualized vs 6.3% as expected and showed a growth of 1.6% q/q vs 1.3% q/q as expected. Investments in business inventories and gross fixed capital formation contributed to the jump while net external demand was a drag on growth with growth in imports outpacing growth of exports.6

This week we will get a February employment report.

Important news for CAD:

Friday:

• Employment Change
• Unemployment Rate

JPY

Preliminary January data were a mixed bag. Industrial production declined at the start of the year and came in at -1.3% m/m and -0.9% y/y. On the other hand, retail sales recorded another drop on the month (-1.9% m/m) but improved for the year, coming in at 1.6% y/y for the fourth consecutive month of increases. Social restrictions made it hard for consumers to spend more. Capex data for the Q4 showed a smaller than expected increase. It came at 3.4%, up from 1.2% in Q3, but less than 4.3% as expected. Corporate profits were also down compared to the Q3 as covid struggles were gripping the economy.

This week we will have a final Q4 GDP reading.

Important news for JPY:

Wednesday:

• GDP

CHF

Q4 GDP data came in at 0.3% q/q vs 0.4% q/q as expected and 3.7% y/y. Private consumption came in at just 0.3% q/q vs 2.7% q/q in Q3 with net exports negatively contributing to the reading. Government consumption was up 1% q/q vs -0.4% q/q in the previous quarter and that helped keep the reading positive. Retail sales rebounded strongly in January coming in at 5.1% y/y vs -0.4% y/y in December indicating that consumers started the year on a strong foot. SNB total sight deposits for the week ending February 25 were unchanged at CHF725.2bn. Inflation has crept in into Switzerland with February reading showing headline at 2.2% y/y vs 1.8% y/y as expected and core at 1.3% y/y vs 0.9% y/y as expected. Higher fuel prices and housing rents were the main contributors.

 

[katetrades]

Forex Major Currencies Outlook (Mar 14 – Mar 18)

Fed meeting will be front and centre followed by BOE and BOJ meetings, consumption data from the US and China and employment data from the UK and Australia.​

USD

Inflation in February has set a new record high by coming in at 7.9% y/y. The good news is that it did not surpass expectations. The bad news is that monthly figure came in at 0.8% m/m indicating that new record high will be set in the coming months. Talks about inflation rising over 9% y/y in the near-term are mounting. Core reading came in at 6.4% y/y vs 6% y/y in January with a 0.5% m/m increase. The 10y breakeven, which represents the difference between the nominal yield and the yield of the inflation-protected security, reached a new record high of around 2.96% on March 8. Yield on 10y has returned above the 2% level.

This week we will have consumption data as well as the big Fed meeting. Chairman Powell already announced that Fed will raise interest rate by 25bp. This will mark the beginning of a rate hike cycle and the first rate hike since December of 2018. We will also get new dot plot projections.

Important news for USD:

Wednesday:

• Retail Sales
• Fed Interest Rates Decision

EUR

ECB has left key rates unchanged at their March meeting as was widely expected. On the QE front, APP purchases will be €30bn in May and €20bn in June before being stopped in Q3. Interest rate hikes will be done gradually and only after APP purchases end which leaves possibility for a rate hike in Q4. At the press conference, ECB President Lagarde stated that that conflict between Russia and Ukraine is the main source of uncertainty. She emphasized lower expected growth and higher expected inflation. According to ECB GDP in 2022 is now seen at 4.2% vs 4.6% in their previous forecast. On the inflation front, HICP for 2022 is now seen at 5.1% vs 3.2% as expected in December. That is over 50% increase in expected inflation! Core inflation for 2022 is expected to be around 2.6%. HICP for 2023 is seen at 2.1%, up from 1.8% as previously seen indicating that ECB expects inflation to slow down. Decision to continue with the tightening despite Russia’s escalation give hawkish feel.

GBP

January GDP data showed that the UK had a strong start to 2022. GDP came in at 0.8% m/m vs 0.2% m/m as expected. Services were up 0.8%, production was up 0.7% while construction posted the biggest gain of the three with 1.1%. Goods trade balance posted a record high deficit of -£26.5bn, more than doubling previous month’s deficit of £-12.3bn, on the back of exports tumbling -15.8% y/y while imports surged 21.8% y/y.

This week we will have employment data as well as BOE meeting. We expect BOE to raise interest rate by 25bp at this meeting.

Important news for GBP:

Tuesday:

• Claimant Count Change
• Unemployment Rate

Thursday:

• BOE Interest Rate Decision

AUD

Chinese trade balance data for the period January-February posted new record surplus in USD terms by coming in at $115.95bn. Exports have risen 16.3% y/y while imports rose 15.5% y/y. Trade volumes of certain export items have declined, however inflation caused overall exports to grow. Inflation data for February showed CPI come in at 0.9% y/y as expected and unchanged from January reading, however there was a 0.6% m/m jump which may cause concern. PPI continued to decline, but at a slower pace than expected. It came in at 8.8% y/y vs 8.7% y/y as expected, down from 9.1% y/y in January. Monthly jump was 0.5%, a rather big monthly rise.

“Two Sessions” meeting, the biggest annual political meeting, saw Chinese GDP penned at 5.5%, which is a 30-year low and set employment as the biggest challenge in 2022. Additionally, China is facing a triple threat of shrinking demand, disrupted supply and weakening expectations, stated by Premier Li. Inflation is expected to be below 3% for the year.

This week we will have employment data from Australia as well as production and consumption data from China.

Important news for AUD:

Tuesday:

• Industrial Production (China)
• Retail Sales (China)

Thursday:

• Employment Change
• Unemployment Rate

NZD

Electronic card retail sales, which comprise almost 70% of total retail sales, had a dreadful month and fell -7.8% m/m. Yearly figure was able to make a small gain of 1.1% y/y. NZDUSD had an up and down week finishing almost at the same level where it started it. NZDJPY, on the other hand, had a good week with pair rising around 150 pips since the week started.

This week we will have Q4 GDP data.

Important news for NZD:

Wednesday:

• GDP

CAD

February employment report was a complete success. After January report was heavily distorted due to the Omicron outbreak February employment change came in at 336.6k, more than double the 160k as expected. Of all the jobs added 121.5k were full-time jobs while 215.1k were part-time jobs. The unemployment plunged a full percentage point to 5.5% from 6.5% in January and participation rate increased to 65.4% from 65% the previous month. To top the stellar report, wages rose 3.3%. BOC will be delighted with the report and they will remain on course for additional 25bp rate hike at their next meeting.

This week we will have inflation data.

Important news for CAD:

Wednesday:

• CPI

JPY

Some good data from Japan regarding wages. Nominal wages in January rose 0.9% y/y while real wages rose 0.4% y/y thus posting first positive reading in almost 6 months. Final Q4 GDP reading saw revisions to the downside. GDP came in at 1.1% q/q and 4.6% y/y, down from 1.3% q/q and 5.4% y/y as preliminary reported. Both private consumption and business investment were revised to the downside while contribution of the net external demand remained unchanged. The economy was not as strong as hoped in Q4, but it will serve as a lower base for the Q1 reading. Household spending in January was a bright spot as it rose 6.9% y/y for the first increase since July.

This week we will have BOJ meeting. No changes to rate or monetary policy are expected.

Important news for JPY:

Friday:

• BOJ Interest Rate Decision

CHF

SNB total sight deposits for the week ending March 4 came in at CHF725.7bn vs CHF725.2bn the previous week. EURCHF has reached parity at the start of the week and SNB is well aware that it cannot fight the market now in order to keep the pair at desired level. They have, however, came out and reiterated their readiness to intervene if deemed necessary.

 

[katetrades]

Forex Major Currencies Outlook (Mar 21 – Mar 25)

After a big week that brought more clarity on central bank policies the week ahead of us will be quiet from the economic data standpoint with SNB rate decision, preliminary PMI from the EU and the UK as well as inflation from the UK being the highlights as investors digest central bank’s decisions and prepare to position themselves for Q2.​

USD

Retail sales in February showed that surging gas prices start to impact consumers’ disposable income. Headline number was up 0.3% m/m vs 0.4% m/m as expected. Control group, it includes autos, food and energy and is used for GDP calculation as it has good correlation with overall consumer spending, came in at -1.2% m/m vs 0.4% m/m as expected. There was a big revision to the prior months’ control group reading (6.7% m/m vs 4.8% m/m as preliminary reported), however it may represent a prelude to a negative trend. Ex autos and gas category fell -0.4% m/m as majority of spending went into gasoline.

Fed chair Powell stayed true to his word given under an oath in his Congress testimony and raised interest rate by 25bp. This is the first rate hike since December of 2018 new range is now 0.25-0.50%. New projections in the Dot Plot showed the median rate at the end of 2022 at 1.9% vs 0.9% in December. This represents seven hikes in 2022! Expectations for 2023 and 2024 are at 2.8% which is above the Fed's long-term neutral rate. The Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting. Additionally, they are ready to adjust the stance of monetary policy as appropriate. St. Louis Fed president Bullard wanted a 50bp rate hike at March meeting stating that "The combination of strong real economic performance and unexpectedly high inflation means that the Committee’s policy rate is currently far too low to prudently manage the U.S. macroeconomic situation". If the tensions between Russia and Ukraine ease we could see a 50bp hike in May.

Summary of projections sees GDP at 2.8% in 2022 and 2.2% in 2023. The unemployment rate is seen at 3.5% for both 2022 and 2023 while in the longer run it is expected to be 4%. Core PCE inflation is expected to be at 4.1% in 2022, December production saw it at 2.7% and then drop to 2.6% in 2023. Prior to the Fed meeting the yield on 10Y T-note went as high as 2.196% and up to 2.226% post Fed meeting before dropping down below the 2.15% level. The 2-10y yield curve flattened post meeting as the 2y rose faster to reflect new rate hike projections.

EUR

Results of the ZEW survey for March were abysmal. Current conditions for the German economy dropped to -21.4 from -8.1 in February while expectations plunged to -39.3 from 54.3 the previous month. Notes accompanying report show that stagflation is expected in the coming months as all sectors of the economy have been impacted. Eurozone final CPI for February came in at 5.9% y/y vs 5.8% y/y as preliminary reported. Both monthly and core readings were unchanged at 0.9% m/m and 2.7% y/y respectively. ECB President Lagarde stated that it is increasingly likely that inflation will stabilise at 2% over the medium-term. Inflating energy prices reflected in Eurozone’s trade balance for January which posted a record deficit of -€27.2bn with energy imports increasing staggering 133% y/y.

This week we will have preliminary March PMI readings and a deterioration in numbers is expected.

Important news for EUR:

Thursday:

• Markit Manufacturing PMI (EU, Germany, France)
• Markit Services PMI (EU, Germany, France)
• Markit Composite PMI (EU, Germany, France)

GBP

The employment report added another proof for the tightness of the labour market. The ILO unemployment rate dropped to 3.9% from 4.1% in January while wages, both with bonus and without bonus, showed improvements (4.8% and 3.8% vs 4.6% and 3.8% respectively). Claimant count change dropped by additional 48.1k pulling the claimant count rate with it to 4.4%.

BOE has delivered a 25bp as was expected, now bringing the rate up to 0.75%. The vote showed much less confidence in a rate hike path than at the previous meeting. It was a 8-1 vote in favour of a 25bp hike with MPC member Cunliffe voting to keep the bank rate at 0.50%. Remember, last time the rate was hiked vote was 5-4 in favour of a rate hike with 4 members voting for a 50bp hike. MPC members stated that "some further modest tightening in monetary policy may be appropriate in the coming months". Markets have interpreted it to mean uncertainty about the path of future rate hikes and GBP dropped about 100 pips after the release. We see additional rate hike in May, to bring the rate up to 1%, after which there will be a pause and reassessment of “developments in the light of incoming data and their implications for medium-term inflation, including the economic implications of recent geopolitical events”.

This week we will have preliminary March PMI readings as well as inflation and consumption data.

Important news for GBP:

Wednesday:

• CPI

Thursday:

• Markit Manufacturing PMI
• Markit Services PMI
• Markit Composite PMI

Friday:

• Retail Sales

AUD

RBA meeting minutes from the March meeting saw members reiterate that they will not increase the cash rate until actual inflation is sustainably within the 2-3% target band. Members have acknowledged pick up in inflation, however it is too early to say that it will be sustainably within the target band. They have stated that the war Ukraine is a major new source of uncertainty. February employment report was a stellar success. Employment change came in at 77.4k, more than double of 37k as expected. The unemployment rate fell to 4% from 4.2% in January while participation rate rose to 66.4% from 66.2% the previous month. To top off the report, 121,9k jobs added were full-time jobs while part-time jobs fell by -44.5k. AUDUSD has crossed the 0.73 level on strong jobs report and some banks stared to call for a rate hike at a June meeting despite what RBA stated. We still think that RBA will not move before wage growth goes over 3%, as they stated multiple times.

China is fighting with new covid outbreak and there are lockdowns for the Shenzhen and the entire province of Jilin. The population of Jilin province is roughly 24 million while the city of Shenzen hosts around 18 million people. February data were encouraging. Industrial production came in at 7.5% ytd vs 3.8% ytd as expected, retail sales were up 6.7% ytd vs 3.5% ytd as expected. PBOC members were satisfied with data and decided to leave MLF rate unchanged at 2.85%. Chinese officials made a shift and promised to keep the stock market stable which prompted a rally in the stock market with Hang Seng index jumping 9%.

NZD

Q4 GDP data, a very dated data since we are closing down on Q1 of 2022, came in at 3% q/q and 3.1% y/y. The data showed a healthy rebound from the Q3 that was impacted by covid restrictions. Leading the way were services which expanded by 6.7% with goods-production industries rising by 6.5% while primary industries contracted by 2.2%.

CAD

Inflation continues to run hot in Canada and it confirms that BOC will not take the foot of the gas pedal in regards to the rate hikes. February data show headline inflation rising to 5.7% y/y vs 5.5% y/y as expected and up from 5.1% in January. Headline inflation rose 1% m/m due to surging energy prices followed by rise in food prices and household appliances. All three of the core measures rose with median coming in at 3.5% y/y, common at 2.6% y/y and trimmed at 4.3% y/y. Retail sales is January rose by 3.2% m/m vs 2.4% m/m as expected. The increase was led by higher sales at motor vehicle and parts dealers Sales were up in 9 of 11 sub sectors, representing 85.5% of retail trade.

JPY

BOJ meeting was another snooze fest. Both the rate (-0.10%) and the monetary policy were left unchanged as widely expected. The overall assessment of the economy was downgraded however, economy is likely to recover as impact of virus subsides. They have noted that exports are increasing but that they are stifled by the supply constraints. The bank members highlighted new risks from the Ukraine crisis and how it can have destabilising impact on financial markets as well as sharply pushing up raw material costs. Inflation data for February saw headline number rise to 0.9% y/y on the back of surging energy prices, however “core-core” reading, ex-frsh food and energy came in at abysmal -1% y/y.

CHF

SNB total sight deposits for the week ending March 11 came in at CHF728bn vs CHF725.2bn the previous week. There was a noticeable jump from the previous week as EURCHF hit parity on Monday. After that, the pair is hovering around the 1.02 mark.

This week we will have SNB meeting. No changes to monetary policy or rate are expected.

Important news for CHF:

Thursday:

• SNB Interest Rate Decision

 

[katetrades]

Forex Major Currencies Outlook (Mar 28 – Apr 2)

The week ahead of us, last week of the Q1, will be dominated by NFP release as well as inflation data from the US and the EU.​

USD

Talks about a 50 bp rate hike in May are mounting as Chairman Powell stated that they are ready to hike by more than 25 bp, if appropriate. Prospect of a 50bp rate hike has been supported by a fair amount of FOMC members. FedWatchTool now sees the probability of the event at 70.5%. Yield on 10y T-note was up to 2.489%, however the 2-10y spread went as low as 0.137 before stabilizing around 0.21.

This week we will have Fed’s preferred inflation measure PCE and NFP data on Friday. Headline number is projected at around 475k, while the unemployment rate should tick down to 3.7% with wages rising about 0.2% m/m.

Important news for USD:

Thursday:

• PCE

Friday:

• Nonfram Payrolls
• Unemployment Rate
• Average Hourly Earnings

EUR

Preliminary PMI readings for the Eurozone, German and France in the month of March had a common team of smaller than expected slowdowns and mounting price pressures led by surging input prices index. French services reading deviated from the trend as it improved compared to the February reading (57.4 vs 55.5 the previous month) and dragged with it composite up to 56.2 from 55.5 in February. Eurozone manufacturing came in at 57, services at 54.8 and composite at 54.5. The numbers are still elevated but with ongoing Russia – Ukraine situation and with backlog of orders declining we can see them dropping in the coming months.

Ifo report for March showed German business climate deteriorating to 90.8 from 98.5 in February and now barely holding above the level from January of 2021. Expectations plummeted even faster coming in at 85.1, down from 98.4 for the lowest reading since May of 2020, at the heart of first Covid wave. Ifo economist, Klaus Wohlrabe, stated that firms are facing bigger and bigger price pressures and are planning to increase prices. He added that supply chain issues have worsened since February.

This week we will have preliminary inflation data for the month of March and continuation in trend is expected with a rise to 6.4% y/y for the headline reading and 3.2% y/y for the core reading.

Important news for EUR:

Friday:

• CPI

GBP

Inflation shows no signs of slowing down. Headline number for the month of February came in at 6.2% y/y vs 5.9% y/y as expected and up from 5.5% y/y in January with 0.8% m/m increase. Core reading came in at 5.2% y/y vs 5% y/y as expected and up from 4.4% y/y the previous month. The reading is highest in 30 years. It was led by higher energy prices, however food prices also contributed strongly with a 1% m/m rise. Inflation should continue rising and reach its peak in April. BOE will be forced to continue with hiking rates to achieve price stability and probability of a 50bp rate hike at the next meeting increased substantially after the report.

Preliminary PMI data for the month of March showed a divergence between sectors. Manufacturing fell to 55.5 from 58 in February while services rose to 61 from 60.5 the previous month. Composite has followed manufacturing and slipped to 59.7 from 59.9 in February. Retail sales for February both missed expectations and were weaker than in January. Sales were down in non-store sales (-4.8%) and in food stores (-0.2%), with large falls in alcohol and tobacco stores. The readings indicate that mounting energy costs are starting to weigh in on consumer. Spring Budget statement showed a cut in projection for a 2022 GDP to 3.8% from 6% while GDP for 2023 is seen at 1.8%. The fuel duty has been cut until March of 2023 to help people cope with the surging fuel prices.

AUD

China has signaled its support for the economy in the previous week, however there were no changes to the rates. The 1-year loan rate is still at 3.7% while the 5-year is at 4.6%. Expectations are now that we will see a cut in reserve requirement as a way to stimulate the economy. City of Tangshan that boasts a population of more than 7 million people has been put into full lockdown. The city is located in a Hebei province, renowned for steel production, so the lockdown can negatively impact both supply chains and commodity prices.

This week we will have official PMI data for the month of March from China.

Important news for AUD:

Thursday:

• Manufacturing PMI (China)
• Non-Manufacturing PMI (China)
• Composite PMI (China)

NZD

Trade balance data for the month of February showed improvement compared to the January reading and lead to a smaller deficit of -NZD385m vs -NZD1126m the previous month. Exports rose significantly as dairy prices continued to rise while imports declined somewhat, although there was still increase in import of petroleum and petrol products.

CAD

Preliminary manufacturing sales for the month of February rose 3.7% m/m. CAD has enjoyed a strong week on the back of rising oil prices and taking Russia’s place in exports. USDCAD has dropped below the 1.25 level at the end of the week.

JPY

Preliminary PMI data for the month of March showed improvement as manufacturing rose to 53.2, services to 48.7 and composite was pulled almost to the expansion level with 49.8. However, when we dig into the details of the report we see that main culprit for the rise in the reading are input prices. The report notes “Input prices rose at the fastest pace since August 2008 with businesses attributing the rise to surging raw material prices, notably energy, oil and semiconductors amid deteriorating supplier performance.” Additionally, new export orders have continued to plummet with manufacturing ones turning from growth to decline. Inflation data for the Tokyo area in the month of March were up from February numbers across the readings. Headline came in at 1.3% y/y, ex fresh food came in at 0.8% y/y while ex fresh food and energy came in at -0.4% y/y.

CHF

SNB total sight deposits for the week ending March 18 came in at CHF728.9bn vs CHF728bn the previous week. There was a small increase in the deposits but nothing noticeable as markets pushed EURCHF pair away from the parity toward the 1.03 level by the mid-week. SNB has published its 114 annual report for the year 2021 and it showed that total intervention in the markets was CHF21.1bn, more than five times lower than CHF109.7bn in 2020.

SNB has decided to leave policy rate unchanged at -0.75% as widely expected. The usual comments about Swissy being highly valued and bank’s readiness to intervene if need arises were present. New inflation forecasts see it now at 2.1% for the 2022 before dropping to 0.9% in 2023 and 2024. Accompanying statement showed that “SNB assumes that energy prices will remain high for the time being, but that there will be no acute energy shortages in the major economic areas. It also anticipates that the global economic recovery will continue overall despite the war in Ukraine, albeit somewhat subdued. The higher commodity prices will lift inflation further in the short term.” They now see 2022 GDP growth at 2.5% and assess that risks for growth, for both global economy and Swiss economy, are considerable and skewed to the downside.

 

[katetrades]

Forex Major Currencies Outlook (Apr 4 – Apr 8)

We will be entering first full week of Q2 with RBA meeting and FOMC minutes from the March meeting as highlights of the week.​

USD

President Biden announced that SPR will be tapped for the amount of 1 million barrels per day. The program should last for 6 months, which means 180 million barrels in total. This move will decrease oil prices in the short run, however, it will not resolve the bigger structural issues concerning supply and demand. It seems more as a political move to gain favour for the mid-term elections.

We had yet another strong employment report. Headline number came in at 431k while previous month’s reading was revised up almost 80k to 750k. The unemployment rate dropped to 3.6% with participation rate ticking to 62.4% and moving in the right direction. Wages have continued to improve and add additional shine to the bright report. Hourly earnings rose 0.4% m/m and 5.6% y/y. Another strong report will nudge Fed toward 50bp rate hike in May.

The yield on 10y T-note went as high as 2.55% and then proceeded to fall for the rest of the week while the 2-10s curve inverted on Thursday for a short period before going back to positive spread. Inversion of 2-10s yield curve is considered to be the harbinger of recession in 6-12 months time. Important caveat is that inversion occurred when 10y was falling below the 2y indicating that 2.5% yield could be the top at the moment. FedWatchTool sees probability of a 50bp rate hike in May at 76.6%.

This week we will have ISM Non-Manufacturing PMI as well as the FOMC Minutes from the March meeting.

Important news for USD:

Tuesday:

• ISM Non-Manufacturing PMI

Wednesday:

• FOMC Minutes

EUR

Sentiment data from the EU showed decline induced by the Russia – Ukraine conflict. Economic sentiment dropped to 108.5 from 114, industrial sentiment to 10.4 from 14 while consumer confidence plunged to -18.7 from -8.8 the previous month. Only positive was services sentiment that rose to 14.4 from 13 in February on the back of recent reopening.

Preliminary inflation data for March shows scorching hot inflation. Spain reported CPI rise of 9.8% y/y, Italy of 6.7% y/y vs 5.7% y/y in the previous month while Germany reported CPI at 7.3% y/y vs 5.1% y/y in February and astonishing 2.5% m/m increase in prices. German inflation should continue going higher in the coming months and a double digit inflation cannot be ruled out. France reported a 4.5% y/y increase in prices, from 3.6% y/y the previous month. For the Eurozone the reading came in at 7.5% y/y vs 6.6% y/y as expected and up from 5.9% in February and 2.5% m/m, same as German reading. Energy and food prices were the main contributors. Core was up to 3% y/y from 2.7% y/y the previous month. ECB will find itself in a hot seat after these reports to raise interest rates at least to zero. Higher interest rates could negatively impact growth in the Eurozone thus leading to stagflation (low growth and high inflation).

GBP

BOE Governor Bailey stated that evidence of growth slowdown are becoming apparent and that it is still appropriate to tighten monetary policy in current circumstances. Markets interpreted his comments as a nod that monetary policy will not be as aggressive as thought. Q4 GDP was revised to 1.3% q/q from 1% q/q as preliminary reported on the back of rising exports and service industries that were boosted by the removal of restrictions.

AUD

Over the weekend industrial profits from China for the period of January-February 2022 came in at 5% y/y vs 4.2% y/y in December. Additionally, Shanghai has entered lockdown. All three PMI measures dropped below the 50 level in March. Manufacturing came in at 49.5 vs 49.9 as expected, non-manufacturing was at 48.4 vs 53.2 as expected and drops in both readings dragged composite to 48.8. Newly introduced covid restrictions subdued economic activity and led to declines in output and new new orders. There are signs that this drop is only temporary and that we should see a rebound in April when restrictions are retracted. Caixin manufacturing followed the official PMI and dropped into contraction with 48.1 vs 50.4 the previous month. The report shows drops in new orders and new export orders while input costs continue to surge.

This week we will have RBA meeting. Wages have still not reached RBAs target necessary for a rate hike, however we will see if recent strong job reports will make them change their narrative.

Important news for AUD:

Tuesday:

• RBA Interest Rate Decision

NZD

Consumer confidence in the month of March came in at 77.9, down from 81.7 in February. This represents a new low for the reading and ANZ notes “a perfect storm of Omicron, rising living costs, a retreating housing market and rising interest rates soured the mood”. Additionally, inflation expectations have risen to 6%.

CAD

January GDP came in at 0.2% m/m as expected as Canadian economy continued to grow entering the New Year. CAD has followed oil closely this week and finished it down in a 150 pips range for the week against USD. Next week’s employment report can be catalyst for CAD strength as it pushes BOC toward a 50bp rate hike.

This week we will have employment report which is expected to moderate after a blockbuster one in February.

Important news for CAD:

Friday:

• Employment Change
• Unemployment Rate

JPY

At the start of the week BOJ announced that it will conduct unlimited bond buying operations from March 29 to March 31 in order to defend the yield target of 0.25%. This is the second such operation this year, as previous one was done on February 10. BOJ’s announcement had a detrimental effect on JPY with currency dropping around 200 pips against the majors with USDJPY touching the major level of 125.

CHF

SNB total sight deposits for the week ending March 25 came in at CHF731.5bn vs CHF728.9.bn the previous week. This is a decent sized increase, first in a while, as SNB wishes to move EURCHF as far as possible from the parity. Inflation continued to increase in March and came in at 2.4% y/y vs 2.2% y/y in February with core printing 1.4% y/y vs 1.3% y/y the previous month.

 

[katetrades]

Forex Major Currencies Outlook (Apr 11 – Apr 15)

Three major central banks, ECB, RBNZ and BOC, will hold their April meetings this week with latter two expected to deliver rate hikes. That would be coupled with inflation data from the US, the UK and China as well as employment data from the UK and Australia.​

USD

ISM Non-manufacturing PMI in March rebounded to 58.3 from 56.4 in February. New orders made a huge positive jump along with the employment index which returned back to expansion after it showed contraction the previous month. Business activity continues to improve as well, however prices paid component also rises on the back of higher energy and commodity prices thus bringing more inflationary pressures.

Yield on the 10y started the week at around 2.4% while FedWatchTool saw the probability of a 50bp rate hike at the May meeting at around 70% when the week started. Fed Governor Brainard, a known dove, came out with hawkish comments stating “Currently, inflation is much too high and is subject to upside risks. The Committee is prepared to take stronger action if indicators of inflation and inflation expectations indicate that such action is warranted.” When a well known dove agrees with a typical hawkish stance the markets pay close attention and more weight is added to her words. She also added that talks about rapid BSR will likely be held at the May meeting. The dollar has gained around 100 pips across the markets on the back of her comments with yields on a 10 rising to 2.66%. FedWatchTool saw an increase in the probability of a 50bp rate hike at the May meeting to 76.6%.

FOMC minutes showed that many members would preferred a 50bp rate hike at March meeting. Additionally, minutes showed that members announced “commencement of balance sheet runoff at a coming meeting”. Regarding the amount of BSR “Participants generally agreed that monthly caps of about $60 billion for Treasury securities and about $35 billion for agency MBS would likely be appropriate”. Minutes resulted in lower yields on a 10y note, however the 2-10y spread improved to 15.2bp. FedWatchTool saw additional increase in the probability of a 50bp rate hike at the May meeting to 81%.

This week we will have inflation data expected to rise above 8% as well as consumption data.

Important news for USD:

Tuesday:

• CPI

Thursday:

• Retail Sales

EUR

Final services PMI for the month of March showed improvement in Eurozone reading to 55.6 from 54.8 as preliminary reported on the back of improvement in German reading. Composite was also improved to 54.9 from 54.5 as preliminary reported. Services reading improved thanks to the loosening of covid restrictions, however it will have a rocky path ahead. Rising input costs coupled with worsening of supply issues and uncertainty around Russia-Ukraine conflict will weigh heavily on the business activity in the coming months.

This week we will have ECB meeting. We expect to see announcement of ending APP purchases in Q3. March minutes showed members’ view that APP had fulfilled its stated objective. Additionally, we expect more clarity to forward guidance on policy normalisation (raising rates toward 0%). It seems that both hawks and doves found common ground and are willing to proceed with policy normalisation so we may see September emerging as a target for the first rate hike.

Important news for EUR:

Thursday:

• ECB Interest Rate Decision

GBP

Removal of covid restrictions and as Markit notes “stronger demand arising from the return to offices, alongside a resurgence in the travel, leisure and entertainment sectors.” led to final services PMI reading in March print 62 and pulls up with it composite reading to 60.9. There are, however, dark clouds over the services sector as optimism fell to the lowest level in 17 months.

This week we will have February GDP data, employment data as well as inflation and consumption data.

Important news for GBP:

Monday:

• GDP

Tuesday:

• Claimant Count Change
• Unemployment Rate

Wednesday:

• CPI

Friday:

• Retail Sales

AUD

RBA has left the cash rate unchanged at 0.10% as was widely expected, however there were some changes in the wording that investors interpreted as a gradual shift toward a tighter monetary policy. Guidance on cash rate was changed to “The Board has wanted to see actual evidence that inflation is sustainably within the 2 to 3 per cent target range before it increases interest rates.” The talk about patiently waiting has been omitted. Additionally, they have stated that they will closely monitor incoming employment and inflation data and make decisions based on that. AUDUSD shot past the 0.76 level after the announcement. We will have an employment report next week, inflation data at the end of the month while wage growth data will be published in mid-May. We believe that RBA will wait for the wages report before deciding to act, so that excludes May meeting and puts emphasis on the June 7 meeting. Australian elections will be held in late May so that is additional factor to exclude May meeting and set June meeting as the first possible for a rate hike.

Effects of China’s zero-covid policy are clearly seen in Caxin’s PM data for March. Services reading plunged to 42.2 from 50.2 in February and dragged down with it composite reading to 43.9 vs 50.1 the previous month. Asian Development Banks has already downgraded projections for Chinese 2022 GDP to 5%. The data raises probability of additional monetary easing by the PBOC.

This week we will have employment data from Australia as well as inflation and trade balance data from China.

Important news for AUD:

Monday:

• CPI (China)

Wednesday:

• Trade Balance (China)

Thursday:

• Employment Change
• Unemployment Rate

NZD

Kiwi had a strong start to the week with NZDUSD rising around 130 pips before reversing on Tuesday and giving it all back. Fed minutes pushed the pair even lower and it finished the week down some 70 pips from where it started. However, with RBNZ firmly on the rate hike path this could be case for buying the dips when price on charts presents the opportunity.

This week we will have RBNZ meeting. We will see continuation of rate hikes. Majority expects a 25bp rate hike, but a 50bp rate hike cannot be ruled out.

Important news for NZD:

Wednesday:

• RBNZ Interest Rate Decision

CAD

Canada produced another very strong employment report. Employment change in March came in at 72.5k, after a staggering 336.6k in February. The unemployment rate dropped to 5.3% from 5.5% thus making it the lowest unemployment rate in history of the reading which started in 1976. The rate was shaved while the participation rate stayed consistent at 65.4%. Wages were up 3.7% while full-time employment came in at 92.7 k and part-time employment at -20.3k. This will just give credence to the 50bp rate hike next week while also open the door for additional 50bp rate hikes in the future. Canada is set to announce a ban on foreign purchases of real estate in order to cool off the bubble building in the housing sector. The ban will refer to the period of two years.

This week we will have BOC meeting. A 50bp rate hike seems to be fully discounted by the markets as output gap is closed and employment is above pre-pandemic levels. There will be talks about QT as Canada had the biggest QE response after pandemic struck.

Important news for CAD:

Wednesday:

• BOC Interest Rate Decision

JPY

Nominal wages in the month of February rose 1.2% y/y but were eaten away by inflation and were flat in real terms. Still, they were much stronger than expected and thus represent positives for the economy. Household spending improved only 1.1% y/y vs 2.7% y/y as expected. BOJ Governor Kuroda characterised JPY’s fall as rapid which could indicate that recently reached USDJPY level of 125 represents top for the pair and bottom for the JPY.

CHF

SNB total sight deposits for the week ending April 1 showed a much bigger jump in deposits than in the previous months. The reading came in at CHF737.2bn vs CHF731.5bn the previous week. It is interesting that such a jump is seen when EURCHF moved away from parity. However, it seems that SNB deems the current level as too close to parity and finds it necessary to ramp up the intervention. Seasonally adjusted unemployment rate in March stayed unchanged at 2.2%.

 

[katetrades]

Forex Major Currencies Outlook (Apr 18 – Apr 22)

Preliminary PMI data from Eurozone and the UK coupled with inflation data from Canada and New Zealand along with Q1 GDP reading, production and consumption data from China will be the most watched economic releases of the week.​

USD

March inflation data posted a new 40-year high and showed CPI rise to 8.5% y/y vs 7.9% y/y in February and 1.2% m/m vs 0.8% m/m the previous month. Core CPI came in at 6.5% y/y vs 6.6% y/y as expected but up from 6.4% y/y in February. Gasoline was the main contributor with a whopping 18% y/y increase with energy overall rising 11% y/y. Used vehicles dropped -3.8% m/m which may be a harbinger of inflation nearing the peak. With oil prices falling due to lower demand and SPR release we may see gasoline prices slowing down and dragging the inflation down.

Retail sales in March posted a gain of 0.5% m/m vs 0.6% m/m as expected with February reading being revised up to 0.8% m/m from 0.3% m/m as reported. Sales at gasoline stores led the way with big surge in gasoline prices. Electronic store sales and clothing followed suit. The drops were seen in non-store and car sales. Yield on 10y Treasuries has started the week at a high of 2.78% and then proceeded up to 2.83%. FedWatchTool sees the probability of a 50bp rate hike in May at 91%.

EUR

ECB has left key interest rates unchanged as expected. The Governing Council has reiterated that APP will conclude in Q3. Monthly net purchases under the APP will amount to €40 billion in April, €30 billion in May and €20 billion in June. The statement said that rate hikes will come “some time” after the end of APP. The Governing Council will continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time even after the key ECB interest rates have been rates. Principal payments of PEPP will be reinvested until at least the end of 2024. Optionality, flexibility and data dependence when deciding on future moves has been emphasized. At the press conference ECB President Lagarde clarified the phrase “some time” as ranging from a week to few months.

This week we will have preliminary PMI readings for April.

Important news for EUR:

Friday:

• Manufacturing PMI (EU, Germany, France)
• Services PMI (EU, Germany, France)
• Composite PMI (EU, Germany, France)

GBP

March employment report showed more tightness in the labour market. Claimant count change came in at -46.9k with the ILO unemployment rate slipping to 3.8%. Average wages, regular and ex bonus, are rising due to skill shortages and are trying to keep up with the speeding inflation. They came in at 5.4% y/y and 4% y/y respectively. The employment is above the pandemic levels and the unemployment rate returned to levels seen before the pandemic. Inflation data posted a new record high in the 30 years that data is recorded. Headline number came in at 7% y/y vs 6.7% y/y as expected and up from 6.2% y/y in February with a 1.1% m/m increase. Core came in at 5.7% y/y vs 5.4% y/y as expected and up from 5.4% y/y the previous month. Gas and electricity price increases were the main contributors.

This week we will have preliminary PMI readings for April as well as consumption data.

Important news for GBP:

Friday:

• Manufacturing PMI
• Services PMI
• Composite PMI
• Retail Sale

AUD

March employment report can be assessed as a decent one. Employment change came in at 17.9k vs 40k as expected. Both the unemployment rate and participation rate where unchanged at 4% and 66.4% respectively. The unemployment rate is at its 14-year low. Another big positive from the report is that all of the jobs added were full-time (20.5k). Part-time employment came in at -2.6k. Signs of a tight labour market are persistent. We think that RBA will wait for data from the CPI reading in two weeks as well as wage growth data on May 19 before deciding to act. Elections will be held in late May so we stick with our call that although inflation will be high they will not act before June.

Inflation in China started to accelerate in March and came at 1.5% y/y vs 1.2% y/y and up from 0.9% y/y in February. The number is still very low compared with other countries around the word, excluding Japan, so it should not deter PBOC from acting to further ease monetary policy conditions and spur the economy. PPI came in at 8.3% y/y, larger than 7.9% y/y as expected, but still down from 8.8% y/y in February. Trade balance data showed a big decline in trade surplus as it came in at $47.4bn vs $115.95bn the previous month. Exports were down to 14.7% y/y while imports shrunk -0.1% y/y indicating deterioration in domestic demand caused by reintroduction of covid restrictions, exacerbating supply chain disruptions and Russia – Ukraine conflict. ING analyst Iris Pang stated that a drop in imports cannot be attributed to those factors alone and according to her the main culprit is oil imports. They plunged 8.1% y/y.

This week we will have minutes from the RBA meeting as well as Q1 GDP reading, production and consumption data from China.

Important news for AUD:

Monday:

• GDP (China)
• Industrial Production (China)
• Retail Sales (China)

Tuesday:

• RBA Meeting Minutes

NZD

RBNZ has stepped up and delivered a 50bp rate hike, thus bringing the OCR to 1.5%. NZD gained on the announcement but as the details of how board members assessed the situation arrived NZD’s fortunes reversed. Members noted that 50bp rate hike now provides more flexibility to the policy ahead in light of the highly uncertain global economic environment. Although the committee confirmed that further increases in the OCR are needed in order to meet their mandate it seems that they are front loading the rate hikes now and then waiting to see how things in global economy and at home will develop before acting again. Markets have characterized this as a “dovish hike” and that sent NZD down. Minutes of the meeting also show that members expect inflation to peak at around 7% in H1 of 2022.

This week we will have Q1 inflation data.

Important news for NZD:

Thursday:

• CPI

CAD

BOC delivered a much anticipated 50bp rate hike and brought cash rate to 1%. Unlike the RBNZ statement that was delivered few hours earlier it did not show any signs of dovish rhetoric. They will cease buying government bonds on April 25 thus effectively starting the QT program. BOC members opted to let assets mature and since almost half of their holding mature in less than two years it will represent a fast reduction in their balance sheet. New projections see CPI averaging 6% during H1 of 2022 and then gradually declining to 2.5% in the H2 of 2023 and 2% level as we get into 2024. Projections for GDP see it at 4.25% in 2022, 3.25% in 2023, and 2.25% in 2024. Opening statement of Monetary Policy Report Press Conference presented three main messages. First, the Canadian economy is strong. Second, inflation is too high. Third, higher interest rates are needed as they are main policy instrument to bring inflation down to 2%. The third point may indicate that we could see additional 50bp rate hike at June meeting.

This week we will have inflation data.

Important news for CAD:

Wednesday:

• CPI

JPY

The ongoing covid difficulties have led BOJ to downgrade assessment for 8 out of 9 regions while leaving the outlook for ninth unchanged. PPI data for March showed a rise of 9.5% y/y vs 9.3% y/y as expected. Additionally, wholesale index in March is at 112, which is the highest reading in 40 years. Price pressures are mounting everywhere in Japan except in the CPI numbers which remain conspicuously low. Core machinery orders, a proxy used for capex in the next 6 months, plunged in February almost 10% (-9.8% m/m). This could mean that business decided to delay investments during the pandemic induced restrictions which will have negative impact on GDP for the year.

CHF

SNB total sight deposits for the week ending April 8 came in at CHF739.4bn vs CHF737.2bn the previous week. SNB continued to intervene in the markets as the EURCHF got closer to the parity, finishing the week at around 1.015 level.

 

[katetrades]

Forex Major Currencies Outlook (Apr 25 – Apr 29)

BOJ meeting coupled with Q1 GDP and inflation data from the US, the EU and Australia will be highlights of the week ahead of us. Also this will be a week filled with earnings reports.​

USD

St Louis Fed President James Bullard, the most hawkish Fed president by far, stated in an interview that he would not rule out a 75bp rate hike but the base case is for a 50bp rate hikes. He stated desire to get to neutral rates expeditiously and get above neutral rates as early as Q3. Inflation is way high to their liking. Both the IMF and the World Bank have downgraded global GDP forecast for the 2022. IMF cut it to 3.6% from 4.4% in January citing war in Ukraine as the main reason followed by the prolonged lockdowns in China. Inflation was also added to the list of concerns as it will lead to central banks rising interest rates and thus stifling growth.

Interest rate futures steepened and we have 225bps in hikes are now priced in for this year, implying that three of the remaining six policy meetings this year will bring a 50bp increase. Chairman Powel was quoted saying “I would say that 50 basis points will be on the table for the May meeting.” and markets now see the 50bp rate hike as a done deal. Treasuries continued to be sold heavily at the start of the week and yield on 10y got very close to 3%. It peaked at 2.977%.

This week we will have an advanced reading of Q1 GDP as well as Fed’s preferred PCE inflation data.

Important news for USD:

Thursday:

• GDP

Friday:

• PCE

EUR

Preliminary PMI data for April from Eurozone saw declines in manufacturing but increases in services sector. Those increases in services managed to push composite higher. Manufacturing PMI came in at 55.3 vs 56.5 the previous month. French reading managed to improve compared to the previous month, but the German reading was much weaker due to increasing supply chain frictions and rising input costs. Services came in at 57.7 vs 55 as expected and up from 55.6 in February. Both Germany and France showed improvement in services sector thanks to effects of reopening. Composite came in at 55.8 vs 54.9 in February. ECB member Kazaks has advocated for an end to APP in July and a rate hike in the same month. His calls were echoed by Vice President Luis de Guindos which gave EUR a boost through the week.

This week we will have a preliminary Q1 GDP and April inflation readings.

Important news for EUR:

Friday:

• GDP
• CPI

GBP

Retail sales data for March disappointed. Headline number fell by -1.4% m/m and with a downward revised February reading to -0.5% m/m it marks two consecutive months of falling data. Retail sales were up only 0.9% y/y. The main drop was seen in the online sales, however with consumer confidence dropping to almost the lowest on record and with surging energy prices the question is how much more can consumer take? BOE is on path to raise rates one or two more times before pausing.

Preliminary PMI data for April saw services deteriorate to 58.3 from 62 in February and drag with them composite to 57.6 from 60.9 the previous month. Mounting inflation pressures through surging input prices put a strain on demand and dragged the readings down. Manufacturing managed to eek a small gain and rose to 55.3 from 55.2 the previous month.

AUD

Minutes from the RBA April meeting painted a more hawkish picture. There was a mention that in the light of the recent events “likely timing of the first increase in interest rates" has been brought forward. The bank remains data dependent and statement "Over coming months, important additional evidence will be available on both inflation and the evolution of labour costs" undoubtedly puts inflation and wages data as the most important data poinys. We will get inflation data for Q1 next week and it is expected for it to move further away from bank’s 2-3% range. Wages will be published on the May 18 and we do not see them rising above the bank’s desired level of 3%. They will get closer to it and it may prompt some action from the central bank. We see June meeting as the date for the first rate hike.

Q1 GDP data from China came in at 1.3% q/q vs 0.6% q/q as expected and 4.8% y/y vs 4.4% y/y as expected. Data for March were much less rosy. Industrial production did beat expectations by coming in at 5% y/y vs 4.5% y/y as expected, however retail sales were hammered and came in at -3.6% y/y vs -1.6% y/y as expected. Harsh lockdowns have crippled the consumption.

This week we will have Q1 inflation data from Australia, very important for the RBA’s decision on rates going forward, as well as official PMI data from China.

Important news for AUD:

Wednesday:

• CPI

Saturday:

• Manufacturing PMI (China)
• Services PMI (China)
• Composite PMI (China)

NZD

RBNZ Governor Orr stated in his speech that bank’s main challenge is to orchestrate a “soft landing” over the next couple of years, avoiding a recession. He added that policy is geared toward containing mounting inflation expectations. More rate hikes are expected to come in the coming quarters in order to contain those rising inflation expectations in the medium term within bank’s target range of 1-3%. GDT auction saw a drop in prices of -3.8%. This is a third consecutive auction of falling prices after a long string of rising auctions and this one reported a first significant drop.

Q1 inflation data came in at 6.9% y/y vs 7.1% y/y as expected and up from 5.9% y/y in Q4. On quarterly level it came in at 1.8% q/q vs 1.4% q/q in the previous quarter. RBNZ’s core measure came in at 4.2% y/y vs 3.2% y/y in Q4. Targeted band for core is 1-3%. At their last meeting RBNZ has raised by 50bp

CAD

Inflation in Canada continued to rise. March headline reading printed a whopping 6.7% y/y vs 6.1% y/y and 5.7% y/y in February and a 1.4% m/m. This is the highest inflation reading since 1991. All eight of the major price components showed an increase when compared to the previous month with transportation leading the way followed by food and shelter. Core measures also brought increases with trim printing 4.7% y/y, median 3.8% y/y and common 2.8% y/y. With inflation heading north BOC will stay on its 50bp rate hike path and CAD is loving it, gaining against all of the major currencies.

JPY

BOJ Governor Kuroda stated that yen's rapid weakening can have negative impact, weak yen is a positive for the economy as a whole while its impact is not evenly distributed among sectors and corporate sizes. He reiterated that it is appropriate to continue with monetary easing and that it is still too early to talk about the exit from the stimulus policy. 10y JGB’s have been rapidly approaching the 0.25% level and JPY has been weakening as a result since investors see that BOJ will defend that level. And they did on Wednesday April 20 when they announced unlimited purchases of 10y JGBs at a fixed rate of 0.25% adding that purchases will continue for the entire week until April 26. Preliminary PMI data showed services at 50.5, returning to expansion territory for the first time after four months of contractions. Manufacturing came in at 53.4 with composite at 50.9.

This week we will have a BOJ meeting. There will be no changes to monetary policy. The bank will publish its outlook report showing new projections of lower growth and higher inflation.

Important news for JPY:

Thursday:

• BOJ Interest Rate Decision

CHF

SNB total sight deposits for the week ending April 15 came in at CHF740.1bn vs CHF739.4bn the previous week. A small increase as the EURCHF pair is moving further away from the parity level and is now hovering at around the 1.02 level.

 

[katetrades]

Forex Major Currencies Outlook (May 2 – May 6)

We have a huge week ahead of us with Fed, BOE and RBA meetings. Fed and BOE are raising rates while there is a slightly higher than 50% chance that RBA will do the same. Additionally, there will be NFP as well as employment data from New Zealand and Canada.​

USD

Advance reading of Q1 GDP came in at -1.4% vs 1.1% as expected. Consumer spending and non-residental business investment have lead the way with former printing 2.7% vs 2.5% in Q4 and latter increasing 9.2% vs 2.9% the previous quarter. Net trade was the biggest drag on the growth subtracting 3.2pp from the result followed by inventories which deducted 0.84pp from the growth. Inflation was staggering 8%. Fears of stagflation, low growth and high inflation will mount, however lack of foreign demand is the main culprit for the weak reading. Domestically economy is going strong as indicated by consumption and investment.

PCE inflation data for the month of April came in at 6.6% y/y vs 6.3% y/y in March. However, core reading eased slightly to 5.2% y/y vs 5.3% y/y the previous month. This is the first reading since February of 2021 that core CPI declined compared to the previous month. The yield on 10y notes has started the week at 2.88% and finished it over 2.9%. Probability of a 50bp rate hike in May according to FedWatchTool is now seen at 96.5%.

This week we will Fed meeting as centre stage followed by NFP data on Friday and ISM PMI data in distant third. A 50bp rate hike is fully priced in so the language about Balance Sheet Reduction and further pace of rate hikes will be the most important. NFP is expected to print around 400k with the unemployment rate staying at 3.6%.

Important news for USD:

Monday:

• ISM Manufacturing PMI

Wednesday:

• ISM Non-Manufacturing PMI
• Fed Interest Rate Decision

Friday:

• Nonfarm Payrolls
• Unemployment Rate

EUR

Ifo survey in April showed improvements across the board. Business climate improved to 91.8 from 90.8 in March with both current conditions and expectations rising (97.2 and 86.7 from 97.1 and 85.4 respectively). Ifo economist state that economy proved to be resilient after first shock of Russian invasion in Ukraine. Additionally, although supply chain problems dominate the economy the mood of the economy has stabilized.

Preliminary reading of Q1 GDP came in at 0.2% q/q vs 0.3% q/q as expected and 5% y/y vs 4.6% y/y as expected. Germany was the only major economy whose reading beat the forecasts on the back of stronger investments while France, Italy and Spain printed lower readings. France barely avoided going into negative with reading printing 0% q/q while Italy contracted -0.2% q/q. Preliminary CPI reading for the month of April showed headline number tick to 7.5% y/y as expected from 7.4% y/y in March. The cause for concern for ECB is that core reading came in at 3.5% y/y vs 3.2% y/y as expected and up from 2.9% y/y the previous month. Inflation is not showing signs of slowing down which may be another nudge toward July rate hike.

GBP

BOE is expected to raise rates by 25bp. This will lift the rate to 1%. Previously bank members stated that when rate reaches 1% it may be appropriate to start selling bonds as part of QT. However, with financial conditions being unstable the bank may postpone outright sales of bonds and provide us with new guidance.

This week we will have a BOE meeting.

Important news for GBP:

Thursday:

• BOE Interest Rate Decision

AUD

Q1 inflation data were hotter than expected. Headline number came in at 2.1% q/q and 5.1% y/y, higher than 1.7% q/q and 4.6% q/q as expected and much higher than 1.3% q/q and 3.5% y/y in the Q4 of 2021. This is the highest inflation reading in over 20 years. Price increases have been broadly spread between components. Trimmed mean, which represents core reading and is RBA’s preferred inflation data point, came in at 1.4% q/q and 3.7% y/y. RBA’s target for the core inflation is 2-3% y/y. Now that core inflation has jumped out of the target there are growing calls for a rate hike next week. RBA still wishes to see wage growth north of 3%, data will be available on May 18 and with Federal elections on May 21, June meeting seems to be the safer option. Markets are, however, pricing in at least a 15bp rate hike.

PBOC has cut RRR (Reserve Requirement Ratio) by 1% in order to stimulate the economy. New RRR is at 8%, down from 9% previously. Industrial profits in March printed a 5% y/y increase, same as in February.

This week we will have RBA meeting. More than half of market participants see the bank raising interest rates by 15bp to 0.25% in order to keep the pace with rising inflation.

Important news for AUD:

Tuesday:

• RBA Interest Rate Decision

NZD

The ANZ Business Outlook Index came in at -42.0 in April vs -41.9 the previous month. This marks the tenth straight month of negative reading, cause by mixed activity indicators and intense inflation pressures. Kiwi has been smashed around during the week due to a one-two punch of China lockdowns and crushing USD strength.

This week we will have employment data.

Important news for NZD:

Wednesday:

• Employment Change
• Unemployment Rate

CAD

BOC Governor Macklem spoke at the parliament stated bank’s intent to use interest rate hikes to fight the rising inflation adding that they will be adamant at it. He stated that business have hard time filling in demand. In the Q&A section he stated that additional 50bp rate hike will be considered at the June meeting. Later on, in the Senate hearing he was quoted saying "...But we do need to raise interest rates to moderate that spending growth and get inflation back to target."

This week we will have employment data.

Important news for CAD:

Friday:

• Employment Change
• Unemployment Rate

JPY

BOJ continues with loose monetary policy. At their May meeting they have kept the rate unchanged at -0.10% and yield on 10y JGB at 0%. They have reiterated their willingness to defend 0.25% level as the upper limit on 10y JGB and stated it will purchase bonds in order to preserve that level every day. The statement showed clarification on bond purchases “Bank will offer to purchase 10-year JGBs at 0.25 percent every business day through fixed-rate purchase operations, unless it is highly likely that no bids will be submitted.” The bank members stated their resolve to keep the monetary policy stimulative in order to fight the impact of pandemic, while aiming to keep market stability. New forecasts see core CPI at 1.9% in 2022, so close to the 2% target. Core CPI will then retreat toward 1.1% level which is projected for both 2023 and 2024. Governor Kuroda stated in a press conference that risks for the economy are skewed toward the downside but they will become balanced in time. He added that inflation will not be sustained at 2% level as energy prices fall, indicating that he still thinks inflation is transitory.

CHF

Trade balance in February almost halved that from January and came in at CHF2.99bn. Imports rose staggering 23% on the back of rising energy costs while exports posted a healthy 5% increase. SNB total sight deposits for the week ending April 22 came in at CHF742.6bn vs CHF740.1bn the previous week. A bit higher increase than recently. SNB is gradually helping market move EURCHF from parity and they pushed it over the 1.02 level. SNB Chairman Jordan stated that higher inflation does not justify rate hike increases. He added that inflation is expected to decline in foreseeable future.

 

[katetrades]

Forex Major Currencies Outlook (May 9 – May 13)

We are in for a slow week ahead of us dominated by inflation data from the US and China as well as preliminary Q1 GDP from the UK and trade data from China.​

USD

The Fed delivered on its promise and raised the rate by 50bp. The new rate now stands in the 0.75-1% range. The Fed has announced a balance sheet run off, Quantitative Tightening (QT). They will sell both agency MBS and Treasuries at a pace of $47.5bn per month in June ($30bn Treasuries and $17.5bn agency MBS) and then proceed to $95bn in September ($60bn Treasuries, $35bn agency MBS). Bank members agreed that $95bn per month in tightening would be the maximum. During the press conference Chairman Powell repeated several times their worries about high inflation. The plan is to deliver more 50bp rate hikes at the next couple of meetings in order to bring inflation down, however Powell stated that 75bp rate increase is not being considered. Markets took this as a sign that USD is overvalued and brought it down.

NFP data for April beat the expectations coming in at 428k vs 390k as expected. The March reading was revised down to 428k. The unemployment rate stayed the same at 3.6% while participation rate dropped to 62.2% from 62.4% in March. Wages were closely monitored and they came in at 0.3% m/m, down from 0.5% m/m the previous month and 5.5% y/y, same as in March.

The yield on a 10y note climbed over the 3% level on Monday, then slipped below on Tuesday only to return above before the Fed meeting and stay above it for the remainder of the week. Despite Chairman Powell’s words FedWatchTool sees the probability of a 75bp rate hike in June at 91.4%.

This week we will get inflation data for the month of April.

Important news for USD:

Wednesday:

• CPI

EUR

Final manufacturing PMI for the April showed an improvement to 55.5 from 55.3 as preliminary reported on the back of upward revisions to German and French readings. Spanish and Italian reading missed the expectations. A dangerous cocktail of supply chain disruptions, higher input prices and Russia-Ukraine conflict is keeping the sector under pressure. S&P Global notes that “Production trends look set to worsen. Future output expectations remain very subdued by historical standards, and the slowdown in new order growth is indicative of factory output across the eurozone falling in the coming month” They conclude with a bleak view of “In short, the eurozone manufacturing sector looks set for a difficult period of falling production and surging prices.”

Services reading, final for April, came in unchanged at 57.7 thus making it the highest reading since August of last year. Italian and Spanish readings beat the expectations, French was slightly improved while German was gently downgraded. Overall, unchanged as business activity and demand increase while new export orders decline and input prices continue to surge. S&P Global notes that “The survey data are consistent with GDP rising at a quarterly rate of around 0.7%”. Consumer confidence continued to deteriorate and reached -22 in April, down from -18.4 in March. Other sentiment indicators also dropped on the month.

GBP

On Thursday, BOE has delivered a widely expected rate hike of 25bp. The vote was a 6-3 with three members (Haskel, Mann and Saunders) wanting a 50bp rate hike. The accompanying statement warns of impending doom for the World and the UK growth. The Committee’s new projections see bank rate rising to 2.5% by mid-2023 and then falling to 2% by the end of the forecast period. CPI inflation is expected to rise further to just over 9% in 2022 Q2 and averaging slightly over 10% at its peak in 2022 Q4. CPI inflation is expected to fall to a little above 2% in two years’ time. UK GDP growth is expected to slow sharply over the first half of the forecast period with recession starting in 2023 while the unemployment rate is seen rising to 5.5% in three years’ time due to a slowdown in demand growth. The statement shows that “most members of the Committee judge that some degree of further tightening in monetary policy may still be appropriate in the coming months.” The Bank Rate remains the primary tool of monetary policy. Additionally, now that Bank Rate is at 1%, the Committee will consider to start a process of selling government bonds. The plan for it will be drawn by the August meeting which will give members time to conclude whether to start the sale. Governor Bailey stated in a press conference that recession is a rather certain outcome.

This week we will have a preliminary Q1 GDP reading.

Important news for GBP:

Thursday:

• GDP

AUD

RBA has delivered a 25bp rate hike thus raising the rate to 0.35%. Expectations were for either a 15bp or a 40bp rate hike. Interest rate on Exchange Settlement was also increased by 25bp and it now stands at 0.25%. They have assessed the economic outlook as positive and concluded that “it is appropriate to start the process of normalising monetary conditions.” Inflation has surprised to the upside and although they see it reaching 6% in 2022 members see it returning into its target range as supply issues resolve itself. The bank is prepared to do what is necessary to return inflation into the target range which will mean more rate hikes in the future. Bank members do not plan to sell the government bonds purchased during the pandemic. The statement showed “The central forecast is for Australian GDP to grow by 4¼ per cent over 2022 and 2 per cent over 2023.” During the press confidence Governor Lowe stated that more normal level of rates would be 2.5% confirming that we have started on a rate hike path and there is a long way to go.

PMI data from China for the month of April plunged into contraction territory due to the lockdowns in Shanghai and other regions. Manufacturing came in at 47.4, non-manufacturing collapsed to 41.9 and pulled with it composite to 42.7. Caixin manufacturing, measures smaller companies, did not fare batter and also dropped to 46. Services reading was more devastating as the reading dropped to 36.2 from already low 42.2 in March. Drops were seen everywhere in the services reading, in the new business component in employment component, both domestic and external demand were weak.

This week we will have trade balance and inflation data from China.

Important news for AUD:

Monday:

• Trade Balance (China)

Wednesday:

• CPI (China)

NZD

Employment data from New Zealand showed employment change of 0.1% q/q and 2.9% y/y in Q1. The unemployment rate remained at 3.2% while participation rate dropped to 70.9% from 71.1% in Q4. Wages are rising and are at 1.8% q/q vs 1.4% q/q the previous quarter. The report indicates that New Zealand economy is close to the full levels of employment and with wages going up it will intensify inflation pressures. RBNZ should not be discouraged to continue raising interest rates after this report.

CAD

April’s employment report was a mixed bag of data leaning to the downside. Employment change came in at 15.3k vs 55k as expected. The unemployment rate slipped to 5.2% thus printing a record high, however participation rate also slipped to 65.3% from 65.4% in March. Wages were weaker, at 3.4% y/y vs 3.7% y/y the previous month. The biggest disappointment came at full-time jobs which dropped to -31.6k thus marking that all of the jobs added were part-time jobs (47.1k). BOC will not be deterred by the report from the rate hike path as new record unemployment rate indicates big tightness in the labor market.

JPY

Final manufacturing PMI for the April saw a tick up to 53.5 from 53.4 as preliminary reported. Japan was on holiday for the entire week and then on Friday Tokyo area inflation was reported. Headline number came in at 2.5% y/y vs 1.3% y/y in March, thus printing a higher reading than much desired 2%. Ex energy component came in at 1.9% y/y vs 0.8% y/y the previous month, while ex energy, fresh food reading, the closest to the US “core”, printed 0.8% y/y vs -0.4% y/y in March. Yields on 10y JGB have been below BOJ’s upper limit of 0.25%, not warranting intervention in the market, so JPY has gained some ground.

CHF

SNB total sight deposits for the week ending April 29 came in at CHF744.bn vs CHF742.6bn the previous week. SNB gently adds more pressure to the Swissy attempting to steer EURCHF away from the parity. Inflation in April printed 2.5% y/y for a headline reading, up from 2.4% y/y in March while the core came in at 1.5% y/y vs 1.4% y/y the previous month. SNB Maechler stated that strong Swissy is helping keep the inflation pressures down.

 

[katetrades]

Forex Major Currencies Outlook (May 16 – May 20)

This week we will have consumption data from the US, UK and China as well as inflation data from the UK and Canada and employment data from the UK and Australia.​

USD

Inflation data for the month of April came in at 8.3% y/y, down from 8.5% y/y, however the drop was smaller than expected (8.1% y/y). Shelter, food, airline fares and new vehicles were the biggest contributors. Gasoline fell 6.1% m/m followed by prices of used cars. Core CPI rose 6.2% y/y, down from 6.5% y/y the previous month. Core inflation rose 0.6%m/m, beating the estimates while core services prices rose at their fastest monthly pace (0.7% m/m) since 1990. At first, the fact that inflation did not fall as fast as expected brought strength to dollar, however very quickly markets reverted and reacted as too many rate hikes have been priced in and brought USD down. Later on, deleveraging in the markets continued and USD rallied again. If today’s reading should be interpreted as inflation peaking in March, then certainly it will take a long time for it to go back to the 2% target.

The yield on 10y Treasuries started the week at 3.17% climbed to as high as 3.2%, then dropped below 3% on Tuesday and stayed there for the entire week. FedWatchTool sees probability of a 50bp rate hike at 87.2%.

This week we will have consumption data, expected to show a slowdown.

Important news for USD:

Tuesday:

• Retail Sales

EUR

A slew of central bank members spoke in favour of a July rate hike and ending of APP purchases in late June. Most of them were known hawks so markets were not phased by it. However, when President Lagarde hinted at possible July rate hike markets listened and EUR gained ground against weaker currencies, GBP and antipodeans. The tables have turned against EUR in the second half of the week and EURUSD fell to a new five-year low.

GBP

Preliminary Q1 GDP reading came in at 0.8% q/q vs 1% q/q as expected and 8.7% y/y vs 9% y/y as expected. ONS notes that the level of quarterly GDP in Quarter 1 2022 is now 0.7% above its pre-pandemic level (Quarter 4 (Oct to Dec) 2019). Personal consumption slipped to 0.4% q/q while business investment jumped 5.4% q/q. Government spending retreated -1.7% q/q and net exports were also a drag, with exports plunging and imports surging on rising energy prices.March GDP reading slipped into negative territory and came in at -0.1% m/m vs flat as expected as increases in cost of living hurt the growth. Both services and industrial output dropped in March -0.2%.

This week we will have employment, inflation and consumption data.

Important news for GBP:

Tuesday:

• Claimant Count Change
• Unemployment Rate

Wednesday:

• CPI

Friday:

• Retail Sales

AUD

Trade balance data from China for April showed increase in surplus to $51.12bn, however exports slumped to just 3.9% y/y from 14.7% y/y in March while imports were flat. The continuation of lockdowns in China’s main cities is crushing the demand and it presents a huge problem for all countries exporting to China. Inflation data showed CPI rise to 2.1% y/y from 1.5% y/y in March (expectations were for a 1.8% y/y rise). PPI rose 8% y/y, down from 8.3% y/y the previous month, but not as much as it was expected (7.7% y/y). Transportation and communication category saw the largest increase in prices and there was also a food price increase, the first one in five months. PBOC has set the inflation target at 3% so there is more room for them to ease monetary policy.

This week we will have employment data from Australia as well as production and consumption data from China.

Important news for AUD:

Monday:

• Industrial Production (China)
• Retail Sales (China)

Thursday:

• Employment Change
• Unemployment Rate

NZD

Electronic card retail sales for the month of April rebounded very nicely and came in at 7% m/m and 2.1% y/y. They make up to 70% of total retail sales so consumption in Q2 has started strong. Prime Minister Ardern confirmed that international borders will be reopened on July 31 which helped kiwi regain composure against other currencies.

CAD

CAD did not manage to profit from increase in oil prices. USDCAD spent majority of the week above the 1.30 level as relentless dollar strength dominated across the markets. CAD managed to make gains against antipodeans.

This week we will have inflation data.

Important news for CAD:

Wednesday:

• CPI

JPY

Wage data from March showed nominal wages increase 1.2% y/y, same as in February but with inflation rising it brought down real wages into negative territory (-0.2% y/y) for the first time in 3 months. Household spending declined -2.3% y/y as lower income and higher prices took their toll on the consumer. Final services PMI for April improved slightly to 50.7. New orders have been falling but activity, new export orders and business optimism all showed signs of improvement.

This week we will have preliminary Q1 GDP data.

Important news for JPY:

Wednesday:

• GDP

CHF

SNB total sight deposits for the week ending May 6 came in at CHF750.9bn vs CHF744.4bn the previous week. This is a rather big jump as SNB is helping the markets push EURCHF pair over the 1.04 level.

 

[katetrades]

Forex Major Currencies Outlook (May 23 – May 27)

RBNZ meeting, preliminary PMI from Eurozone and the UK combined with FOMC minutes will dominate the week ahead of us.​

USD

Retail sales report for April was a very encouraging one. Headline number came in at 0.9% m/m as expected with control group rising 1% m/m. The shine of the report was in revisions, all groups, headline, control, ex autos, ex autos and gas, were revised higher. The report today shows that consumers were not hurt by rising prices which will give Fed green light to continue with rate hikes. Additionally, April reading indicates a strong start for Q2 GDP and after industrial production printed a healthy number and shown filled order books Atlanta Fed sees it now at 2.5%.

Fed Chairman Powell gave speech at Wall Street Journal event and stated that there is a broad support for two 50bp rate hikes at the next two meetings. He added that inflation is way too high and that Fed is determined to bring it down. Exact words on inflation were “What we need to see is inflation coming down in a clear and convincing way, and we’re going to keep pushing until we see that: we clearly have still a job to do when it comes to cooling down demand”. He stated that there is a need for supply to catch up but that their models are not based on that assumption. Yield on 10y Treasuries started the week at around 2.93%, it briefly touched the 3% level on Wednesday and then retreated. FedWatchTool now sees a 50bp rate hike in June as certain with a probability of 98.2%.

This week we will have minutes from the latest FOMC meeting as well as Fed’s preferred inflation metric PCE.

Important news for USD:

Wednesday:

• FOMC Minutes

Friday:

• PCE

EUR

Member of the ECB’s Governing Council Francois Villeroy stated that June meeting will be a decisive one and that we will have an active summer. In the light of economic slowdown caused by conflict in Ukraine, supply chain disruptions, as well as surging energy prices, European Commission has downgraded EU GDP for 2022 to 2.3% from 2.7% in February. Final April CPI came in at 7.4% y/y vs 7.5% y/y as preliminary reported while core remained unchanged at 3.5% y/y. Eurozone posted in March its first current account deficit in 10 years. The reading came in at -€1.57bn, down from healthy €20.7bn in February. Goods imports outweighed goods exports, due to rising energy costs, and pushed the reading into deficit.

This week we will have preliminary PMI data for the month of May.

Important news for EUR:

Tuesday:

• Manufacturing PMI (EU, Germany, France)
• Services PMI (EU, Germany, France)
• Composite PMI (EU, Germany, France)

GBP

Employment report contained upbeat data. Claimant count change for April dropped -56.9k vs -42.5k as expected. The ILO unemployment rate for March slipped to 3.7% from 3.8% the previous month and employment change for the last three months came in at 83k. Workers had additional reasons to be joyful as average weekly earnings rose 7% y/y. Employment rate climbed to 75.7%, but it is still lower than pre-pandemic. Additionally, there is more than one job open for every unemployed worker.

Inflation skyrocketed in April to 9% y/y from 7% y/y in March printing a 2.5% m/m increase. This is the highest reading in over 40 years. Core inflation climbed to 6.2% y/y from 5.7% y/y the previous month. BOE will be pushed by the combination of tight labour market and scorching hot inflation to continue raising interest rates, however the economy does not seem to be able to cope with this so we can see fears of stagflation mounting. BOE chie economist Pill stated that inflation projections are going to run into double digits.

This week we will have preliminary PMI data for the month of May.

Important news for GBP:

Tuesday:

• Manufacturing PMI
• Services PMI
• Composite PMI

AUD

Minutes from the latest RBA meeting saw members discussing 15bp, 25bp and 40bp rate hike. Members noted the underlying strength of the Australian economy and its ongoing resilience, particularly in the labor market. The unemployment rate is expected to drop to 3.5% by the early 2023 and such tight labor market conditions will lead to further pick-up in wages. Members noted that inflation was now above the target and was not forecast to return to the target range until mid-to-late 2024. The report also shows that recent evidence regarding wages was clearly showing increases and that is why they did not need to wait for official Q1 wage data before raising interest rate. Minutes show that “Members agreed that the condition the Board had set to increase the cash rate had been met. They also agreed that further increases in interest rates would likely be required to ensure that inflation in Australia returns to the target over time.” Wages data for Q1 came in at 0.7% q/q vs 0.8% q/q as expected and 2.4% y/y vs 2.5% y/y as expected. They were basically unchanged from Q4 2021 and although RBA constantly reminds us of their gradual increase, it is simply not there in the data. With inflation running at around 5% real wages are deep into negative.

Employment report for the month of April saw employment change at 4k vs 30k as expected, however the unemployment rate slipped to 3.9% and it is now at the lowest level since 1974! Participation rate did help it by slipping to 66.3% from 66.4% in March, but the additional highlight of the report is a huge increase in full-time jobs (92.4k).

April data from China continues to show negative impact of lockdowns. Retail sales plunged -11.1% y/y vs -6.1% y/y as expected. Sales for majority of goods dropped, led by jewelry, garments and cosmetics. Industrial production fared a bit better (-2.9% y/y vs 0.4% y/y as expected). Drops were seen in manufacturing production, mainly in automobiles and in general equipment. Retail sales printed second straight month of negative growth and with industrial production declining we can see negative Q2 GDP reading. PBOC still decided to leave the rate in 1-year MLF (Medium-term Lending Facility) unchanged at 2.85%. They will need to loosen monetary conditions in order to reach official projected GDP target for the year (5.5%). Analysts from big banks have lowered their projections to around 4.2%. Interest rates for first home buyers was decreased by 20bp to 4.4%. 1-year LPR (Loan Prime Rate) was unchanged at 3.7% while 5-year LPR was cut to 4.45% from 4.6% previously. This move could provide additional support to home buyers by lowering mortgage costs.

NZD

GDT price auction came in at -2.9% thus making it fourth consecutive auction of falling dairy prices. Whole milk powder prices recorded the biggest drop (-4.9%). PPI data for Q1 showed the burden that producers are facing. Input prices rose 3.6% q/q while output prices rose 2.6% q/q. This is the largest increase since the Global Financial Crisis in 2008 and it will seriously hurt profit margins. One way for producers to avoid this scenario is to transfer costs to consumers which will have inflationary effect.

This week we will have Q1 consumption data and RBNZ rate decision. We see the bank continuing with rate hikes and delivering a 50bp rate hike.

Important news for NZD:

Tuesday:

• Retail Sales

Wednesday:

• RBNZ Interest Rate Decision

CAD

Canadian inflation data for the month of April reflects inflation troubles that all developed countries, except Japan, around the world experience. Headline number came in at 0.6% m/m vs 0.5% m/m as expected and 6.8% y/y vs 6.7% y/y in March. Core numbers came in at 4.4% for Median, 5.1% y/y for Trim and 3.2% for Common. BOC will keep themselves at the rate hike path after the latest inflation report and 50bp at the next meeting is almost cemented.

JPY

Preliminary Q1 GDP data show that Japan has had a bad quarter but not as bad as feared. GDP came in at -0.2% q/q vs -0.4% q/q as expected and -1% y/y vs -1.6% y/y as expected. Private consumption was flat while business spending increased 0.5% q/q vs 0.3% q/q in the previous quarter. Net external demand subtracted -0.4pp from the final reading as exports rose 1.1% while imports rose 3.4%. Higher energy prices were the main culprit for the higher imports. April showed a ninth consecutive month of deficit in trade balance as imports outweighed exports by large amount due to rising energy and commodity prices combined with weaker JPY. National inflation data for the month of April saw headline number at 2.5% y/y, highest in eight years with ex fresh food category rising to 2.1% y/y, highest in seven years and ex fresh food, energy category return into positive territory after more than a year with a 0.8% y/y reading. BOJ has finally gotten their 2% target, question is how will they react to it.

CHF

SNB total sight deposits for the week ending May 13 came in at CHF753.3bn vs CHF750.9bn the previous week. Another increase, however much smaller than the previous week, indicates that SNB is still acting to push the EURCHF as far as possible from parity. SNB Chairman Jordan stated that expectations for inflation are to rise above the target but then to quickly revert back down. He added that SNB considers higher inflation when making monetary policy decision. The sentence that moved the market was "The SNB is watching inflation closely and is ready to act if inflation solidified in Switzerland." If SNB decides to raise rates in order to fight inflation it will bring a massive inflow of funds into CHF.

 

[katetrades]

Forex Major Currencies Outlook (May 30 – June 3)

BOC meeting, NFP, official PMI data from China and inflation data from the Eurozone will be the highlights of the week ahead of us. Monday is a holiday in the US, some markets will be closed so liquidity will be thinner and caution is advised.​

USD

New home sales for the month of April showed a significant drop. They came in at 591k, down from 709k in March. Additionally, March reading was revised lower from 763k as initially reported. Higher interest rates lead to higher mortgage rates which in turn lead to lower demand for houses. Couple that with hose prices that have been skyrocketing during past two years and we have a dangerous cocktail for the housing sector. Construction represents 4% of the total economy and great number of key retail sales components such as building materials and furniture all correlate with housing activity thus we can see construction negatively impacting GDP in the coming quarters.

Minutes from the latest FOMC meeting showed that all participants were in favour of a 50bp rate hike. Determination of members to move quickly and bring policy rate to neutral as fast as possible was palpable in the minutes as they showed that 50bp rate increases are appropriate at next couple of meetings. Inflation pressures remain skewed to the upside and effects of Ukraine conflict are highly uncertain. The board confirmed their intention to start BSR (Balance Sheet Reduction) on June 1 at the tone of $30bn/month and $60bn/month after three months for Treasuries and $17.5bn/month and $35bn/month after three months for MBS. Atlanta Fed President Bostic hinted at the possible pause in rate hikes in September, depending on the economy.

PCE inflation for April came in at 6.3% y/y, down from 6.6% y/y in March. Core PCE came in at 4.9% y/y, down from 5.2% the previous month and thus made it second consecutive month of declining inflation. If we see inflation pressures waning it will be a huge boost for the consumer and the economy. It will also lead Fed to reconsider the pace of their rate hikes. The yield on 10y Treasuries started the week at around 2.84% and stayed below that level in the second part of the week. FedWatchTool now sees the probability of a 50bp rate hike at 97.6%.

This week we will have ISM PMI data as well as NFP data on Friday. Headline number is expected to print around 350k with the unemployment rate sliding to 3.5%.

Important news for USD:

Wednesday:

• ISM Manufacturing PMI

Friday:

• Nonfarm Payrolls
• Unemployment Rate
• ISM Non-Manufacturing PMI

EUR

ECN President Lagarde stated that the bank is likely in position to exit negative rates by the end of Q3. This is a huge statement that propelled EUR toward the new monthly high against the USD and helped it gain against other currencies. She added that APP should end early in Q3 which would allow for the first rate hike to occur in July. She Noted further that situation is complicated due to supply shocks. They have already brought demand down and if they continue to strengthen it would mean that ECB will slow down the pace of policy normalization. In a later interview she stated that ECB’s approach to policy is “perfectly on time”, not behind the curve. When asked about the level of the EUR she just stated that they are attentive to it.

Preliminary May PMI data showed declines across the board for the Eurozone. Manufacturing slipped to 54.4, fourth consecutive month of declining data, services was at 56.3, down from 57.7 in April and composite fell to 54.9 vs 55.8 the previous month. The report shows “Although there are signs that inflationary pressures could be peaking, with input cost inflation down for a second successive month and supply constraints starting to be less widely reported, inflationary pressures remain elevated at previously unprecedented levels." ECB should not be deterred from normalizing monetary policy after the reading as numbers are still well into expansion territory.

This week we will have preliminary CPI data for the month of May.

Important news for EUR:

Tuesday:

• CPI

GBP

Preliminary PMI data in May painted a very grim picture of the UK economy. Manufacturing has dropped to 54.6 from 55.8 in April, however the real pain is seen in services. They plunged to 51.8 from 58.9 the previous month. Expectations were for a drop to 57.3. Forward looking indicators are showing that the worse is yet to come. Increasing inflationary pressures led to big slowdown in services sector as costs of living take bigger and bigger toll on the consumer. The GBP got smashed after the report with GBPUSD falling 100 pips and GBPJPY dropping 200 pips. However, GBP rebounded after that and continued to advance for the week. The UK government announced a £15bn support package for households. The package will target the lowest income households and should help them fight with a “cost of living” crisis. Additionally, BOE may find it much easier now to continue with the rate hike cycle when government is helping with fiscal support.

AUD

RBA Assistant Governor Kent reiterated that the bank will not be re-investing the proceeds from maturing bonds. By letting bonds roll off the bank is essentially doing QT (Quantitative Tightening). He added that RBA’s estimate of neutral rate is somewhere between 2 and 3%. CAPEX data for Q1 disappointed and came in at -0.3% q/q vs big upward revision to Q4 of 2021 of 2.3% q/q. Spending on buildings and structures fell by 1.7% while spending on equipment, plant and machinery grew by 1.2%.

This week we will have Q1 GDP data from Australia and official PMI data from China.

Important news for AUD:

Tuesday:

• Manufacturing PMI (China)
• Services PMI (China)
• Composite PMI (China)

Wednesday:

• GDP

NZD

RBNZ has delivered on its promise and raised Official Cash Rate (OCR) by 50bp to 2%. The accompanying statement shows that inflation pressures are prevalent and that RBNZ’s core inflation measure is running above 3%. For the record, they target core inflation in range of 1-3%. The statement shows that “Employment remains above its maximum sustainable level, with labor shortages now the major constraint on production.” The bank remains firmly on the path of rate hikes in order to bring inflation into their targeted range. New projections show OCR at 2.68% in September vs 1.89% previously, 3.88% in June of 2023 and 3.95% in September of 2023. Speaking at the press conference Governor Orr reiterated bank’s determination to control inflation and firmly anchor inflation expectations. He stated that labor shortages present the biggest problem for the economy. Neutral rates should be within 2-3% range so the bank is prepared to raise above the neutral in order to tame inflation.

CAD

Retail sales in March came in flat vs 1.4% m/m as expected. They were falling all through the Q1 so we can see a very slow start of Q2 consumption wise. Ex autos category fared much better and came in at 2.4% m/m vs 2.1% m/m in February. Average weekly earnings rose 4.3% y/y, almost doubling from 2.4% y/y in February. It was a 0.9% m/m increase.

This week we will have Q1 GDP data and BOC meeting that will deliver another 50bp rate hike. Markets will look for the remarks about future rate hikes and economic activity and act based on them.

Important news for CAD:

Tuesday:

• GDP

Wednesday:

• BOC Interest Rate Decision

JPY

Preliminary PMI data for the month of May showed manufacturing easing to 53.2 from 53.5 in April while services PMI continued to improve after restrictions have been lifted. They came in at 51.7, up from 50.7 the previous month which pushed composite to 51.4 from 51.1 in April. The report showed stronger growth in services output while both readings declined in new export orders. Additionally, both manufacturing and services reported drops in new export orders and stronger inflation pressures. Both have positive outlook for the future, although it is stronger in the manufacturing.

Headline inflation for Tokyo area in the month of May came in at 2.4% y/y vs 2.5% y/y in April. Ex fresh food was unchanged from April at 1.9% y/y while ex fresh food and energy component ticked up to 0.9% y/y from 0.8% y/y the previous month. Japanese government has kept overall view of the economy unchanged but upgraded its outlook for employment and housing sector.

CHF

SNB total sight deposits for the week ending May 20 came in at CHF754.1bn vs CHF753.3bn the previous week. Swissy has gained a lot of strength in the past week due to Chairman Jordan’s comment on inflation so the bank did not want intervene a lot in the markets.

This week we will have Q1 GDP and inflation data.

Important news for CHF:

Tuesday:

• GDP

Thursday:

• CPI

 

[katetrades]

Forex Major Currencies Outlook (June 6 – June 10)

RBA meeting, rate hike expected, ECB meeting, no rate hike expected and inflation data from the US and China will be the highlights of the coming week.​

USD

ISM manufacturing PMI in May improved to 56.1 from 55.4 in the previous month. New orders and production components improved. Prices paid, although still very elevated, above 80, slipped more than expected. Customer inventories are still very low which gives hope for prolonged increases in production. Employment index has slipped into contraction but that is more likely due to issues with supply of labour than slowing of demand. Non-manufacturing PMI fared worse and came in at 55.9 vs 57.1 in April. Looking into data we could see a big drop in business activity (54.5 vs 59.1 the previous month) and backlog of orders (52 vs 59.4 in April) that caused the decline in reading. On the positive side, new orders, new export orders and employment components showed improvement while prices paid dropped.

Headline NFP number for the month of May came in at 390k vs 325k as expected. Leisure and hospitality contributed with 84k jobs added followed by professional business services at 75k. On the other side, retail trade saw a decline of 60.7k. The unemployment rate stayed at 3.6% but participation rate ticked up to 62.3% from 62.2% in April. Average hourly wages came in at 0.3% m/m, same as previous month and 5.2% y/y vs 5.5% y/y in April. Tight labor market conditions will prompt Fed to stay on the path but the slowdown in wages may indicate that wage-price inflation will not get worse which could in turn cause Fed to be less aggressive with rate hikes. The yield on a 10y Treasury started the week at 2.745% and slowly climbed to almost 3% (2.984%) by the end of the week. FedWatchTool sees almost a 100% probability of a 50bp rate hike on June 15.

This week we will have inflation data. Headline number is expected to remain the same y/y due to base effects slowly falling out of the calculation so much more attention will be given to m/m figure which is expected to continue rising.

Important news for USD:

Friday:

• CPI

EUR

ECB Chief Economist Lane stated that ECB should go with 25bp rate hikes in July and September and end negative interest rate policy by the end of Q3. This is a pushback against the hawks that are screaming for a 50bp rate hike in July. EU has imposed ban on import of Russian oil via sea over the next six months. Imports via the pipeline are not impacted, however it is expected that ban on them will also be introduced in the coming months.

Preliminary CPI data for the month of May continued to move to the up and came in at 8.1% y/y vs 7.7% y/y as expected and up from 7.4% y/y in April. Monthly figure printed 0.8% m/m indicating that inflation is not slowing and not going anywhere any time soon. ECB may be nudged toward a 50bp rate hike in July after the reading. Core CPI rose to 3.8% y/y vs 3.5% y/y the previous month. Increase in rates will bring additional difficulties as French Q1 GDP reading was revised down and entered negative territory.

This week we will have ECB meeting. There will be no changes in the rate, as the bank plans to first finish APP program in Q3 and then raise rates at July meeting. We will see new bank projections, most likely inflation revised up and growth revised down.

Important news for EUR:

Thursday:

• ECB Interest Rate Decision

GBP

Final manufacturing PMI for May was unchanged at 54.6. Output growth declined while input and output prices remained elevated reflecting increasing price pressures. The report paints a bleak picture showing “Forward-looking indicators from the survey suggest that a further slowdown may be in the offing. Business optimism dipped to a 17-month low and weaker demand growth led to surplus production, meaning warehouse stock levels are rising."

AUD

Q1 GDP data showed a rise of 0.8% q/q vs 3.6% q/q in Q4 and 3.3% y/y vs 4.2% q/q in the previous quarter. There was a huge improvement in terms of trade of 5.9%. Household spending rose 1.5% q/q and great bulk of that was on transport services, which rose astonishing 60% on the back of lower restrictions and reopening. Government spending was up 2.7% q/q while net trade detracted -1.7pp from GDP with exports dropping -0.9% and imports rising 8.1%.

Official PMI numbers from China for the month of May have beaten expectations and improved from the April lows. Manufacturing came in at 49.6, up from 47.4, services were at 47.8, up from abysmal 41.9 the previous month which helped composite rise to 48.4 from 42.4 in April. A slow removal of covid restrictions lead to the improvements, however numbers are still below the 50 level. Caixin manufacturing PMI improved to 48.1 fro 46 the previous month on the back of rising input prices while new export orders and employment continued to weaken.

This week we will have RBA meeting where 25bp rate hike is penciled in based on the latest inflation data. A rise of 40bp, which is also possible, would bring rate back to 0.75%. We will also get trade balance and inflation data from China.

Important news for AUD:

Tuesday:

• RBA Interest Rate Decision

Thursday:

• Trade Balance (China)

Friday:

• CPI (China)

NZD

RBNZ Chief Economist Paul Conway stated that there was no serious discussion about a 75bp rate hike at the last meeting. He added that there are more 50bp rate hikes on the way, but if economic indicators change there will be a revision to a rate hike path and warned about dramatic rise in inflation expectations.

CAD

BOC has delivered widely expected 50bp rate hike and raised the rate to 1.50% while continuing QT program. Inflation will continue to rise before starting to slowdown and the risk of inflation expectations becoming entrenched has risen. The statement shows that around 70% of CPI categories now show inflation above 3% Housing market activity is moderating from exceptionally high levels. The economy is strong and is "clearly operating in excess demand". There is a firm belief that interest rates will need to continue going up and bank is ready to act more forcefully in order to achieve a 2% inflation target. With all being said, we can see two more 50bp rate hikes at next two meeting which will bring rate to 2.5%. After that, if the data supports it, we could see more rate hikes and ultimately rates between 3 and 3.25% by the year end.

Q1 GDP came in at 3.1% annualized vs 5.4% annualized. This was a big miss lead by exports whose volumes declined -2.4%. Household spending rose 0.8% q/q for a third consecutive quarter of growth. The report also notes improvement in household saving, compensation for employees and terms of trade.

This week we will have employment data.

Important news for CAD:

Friday:

• Employment Change
• Unemployment Rate

JPY

The unemployment rate in April continued to improve, now sliding to 2.5% from 2.6% in March while jobs/applicants ration increased to 1.23 from 1.22 the previous month. The rate is returning to pre-pandemic levels of March 2020. Retail sales for the same time period rose 0.8% m/m and 2.9% y/y vs 2.6% y/y as expected. Sales for general merchandise, food and beverage as well as fuel sales were the biggest contributors. Industrial production came in at -1.3% m/m so the combination of rising retail sales, improving labor market on the one hand and falling industrial production on the other hand will have a mixed impact on Q2 GDP reading. Capex for Q1 came in at 3% y/y vs 4.3% y/y thus making it fourth consecutive quarter of increasing business investment.

This week we will have final Q1 GDP data.

Important news for JPY:

Wednesday:

• GDP

CHF

SNB total sight deposits for the week ending May 27 came in at CHF754bn vs CHF754.1bn the previous week. Q1 GDP data came in at 0.5% q/q and 4.4% y/y vs 0.3% q/q and 4.3% y/y as expected. Inflation continued to rise and came in at 2.9% in May vs 2.5% in April. Swissy has gained strength as markets recalled Jordan’s warning about reacting if the inflation goes above their targeted level.

 

[katetrades]

Forex Major Currencies Outlook (June 13 – June 17)

This week will be a massive one as we will have four central bank meetings (Fed, BOE. BOJ and SNB) coupled with employment data from the UK and Australia as well as production and consumption data from China.​

USD

World bank has downgraded the global GDP for 2022 to 2.9% from 4.1% in January. Conflict in Ukraine and China lockdowns are hurting growth and with rampant inflation case for stagflation rises. According to their estimates avoiding recession will be very hard for some economies. If many of the downside risks come to fruition, global growth could see a drop of 2.1% in 2022 and 1.5% in 2023.

Inflation in May continued to rise. Headline CPI came in at 8.6% y/y vs 8.3% y/y in April and 1% m/m vs 0.7% m/m as expected. Core CPI rose 6% y/y, it was lower than 6.2% y/y the previous month, but still higher than 5.9% y/y as expected with a 0.6% m/m increase. Markets are now pricing three rate hikes of 50bp (June – July – September) with around 40% chance of a 25bp hike in November. USD has surged across the markets as investors now see rate at around 3% by the end of the year. The yield on a 10y Treasury started the week at 2.964% and quickly climbed above 3% and hovered around that level for the entire week.

This week we will have Fed meeting as well as retail sales data. A 50bp rate hike is fully priced in for both June and July meetings. We will get a new hawkish dot plot.

Important news for USD:

Wednesday:

• Fed Interest Rate Decision
• Retail Sales

EUR

ECB has left the key rates unchanged as was widely expected. APP purchases are announced to end on July 1 and first interest rate hike will be a 25bp rate hike at July meeting with further rate hike coming in September. If the economic conditions require the Governing Council is prepared to hike by higher amount in September. Statement shows that inflation pressures broadened and intensified. They will stay elevated for some time which lead to upward revision in inflation projections. Inflation is now seen at 6.8% in 2022, 3.5% in 2023 and 2.1% in 2024. Core inflation is seen at 3.3% in 2022, 2.8% in 2023 and 2.3% in 2024. Projections for GDP growth are seen at 2.8% in 2022, 2.1% in 2023 and 2.1% in 2024. The outlook has been revised down significantly for 2022 and 2023, while for 2024 it has been revised up when compared to projections made in March. New projections show risks of stagflation increasing.

During the press conference ECB President Lagarde stated that decision on rates was unanimous. She added that fighting inflation was the main focus of the meeting. Additionally, she remarked that new instruments can be deployed in the future in order to tackle fragmentation in the Eurozone bond market. Fragmentation refers to the fact that borrowing costs in so-called peripheral countries (Italy, Greece and other highly-indebted countries) are rising faster than in the core countries (Germany, France, the Netherlands). ECB policymaker Villeroy stated that “neutral rate” is within a 1-2% range and that ECB may be forced to go over that level.

Final Q1 GDP reading saw number revised up to 0.6% q/q vs 0.3% q/q in the second estimate and 5.4% y/y vs 5.1% y/y in the previous estimate. Digging into the details we can see the net exports were the biggest contributors while both private and government spending were drags. With net exports being a very fickle category and after the eruption of Ukraine – Russia conflict we can see them being a drag on Q2 GDP and unless private consumption and government expenditure improve we can see a negative print.

GBP

Final services reading improve considerably to 53.4 from 51.8 as preliminary reported which gave a boost to the pound. S&P Global notes that: “May data illustrate a worrying combination of slower growth and higher prices across the UK service sector.” However, the reading is still the lowest since February of 2021 and pound could not sustain gains made on the announcement. Prime Minister Boris Johnson survived a no-confidence vote, however it showed that a large amount of MPs were for his resignation (211-148). He made an announcement following the vote that there will be no snap election called.

This week we will have GDP for the month of April, employment data and finally BOE meeting. BOE is expected to deliver a 25bp rate hike but the language of the statement will be scrutinized for any ideas of how much more they can raise interest rates without plunging economy into deep recession.

Important news for GBP:

Monday:

• GDP

Tuesday:

• Claimant Count Change
• Unemployment Rate

Thursday:

• BOE Interest Rate Decision

AUD

RBA gave us a hawkish surprise and raised rates by 50bp to 0.85%. Expectations were for a 25bp to 40bp rate increase. Inflation has increased significantly and is expected to continue rising in the coming months before falling into 2-3% range in 2023. The statement showed that “the resilience of the economy and the higher inflation mean that this extraordinary support is no longer needed.” The statement ends with: “The Board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead. The size and timing of future interest rate increases will be guided by the incoming data and the Board's assessment of the outlook for inflation and the labour market.” We will see further rate hikes in the coming months, however next inflation data point (Q2 CPI) will be available on July 27. We may see “only” 25bp rate hike at July meeting and then a 50bp at August, after inflation data is published.

Caixin PMI data for the month of May showed services improve to 41.4 from 36.2 in April, but expectations were for a rise to 47.3. Lockdowns have taken a heavy toll on services industry in China and the reading shows it. There was a continuation of a downtrend in employment sub-index. Composite rose to 42.2 from 37.2 the previous month. Once the restrictions are lifted the readings will move into the expansion territory (above 50). Trade Balance data for the month of May showed a huge jump in trade surplus as restrictions eased. The number came in at $78.76bn vs $57bn as expected and up from $51.12bn in April. Exports jumped 16.9% y/y due to increase in factory operations and improving logistical conditions while imports rose 4.1% y/y on the back of improving domestic demand. Inflation in May came in unchanged at 2.1% y/y while PPI came in at 6.4% y/y vs 8% y/y.

This week we will have employment data from Australia and production and retail sales data from China.

Important news for AUD:

Wednesday:

• Industrial Production (China)
• Retail Sales (China)

Thursday:

• Employment Change
• Unemployment Rate

NZD

GDT auction showed a 1.5% increase in GDT price index. This breaks a streak of 5 auctions with declining dairy prices. Butter and butter milk prices showed the biggest increase. This data input will help improve terms of trade for Q2. RBNZ has put forth their plan for selling government bonds accumulated during QE program. It will start on July 1 and bonds will be sold in order of maturity to the total amount of NZD5bn per year.

CAD

We had another stellar employment report from Canada. Employment change in May came in at 39.8k vs 30k as expected. The unemployment rate slipped to 5.1% and is now at the lowest level on record. This was achieved with participation rate staying the same at 65.3%. Average wages rose 3.9% y/y vs 3.4% y/y in April. All of the jobs created were full-time (135.4k) while part-time jobs dropped (-95.8k). Service producing jobs rose by 81k while goods producing jobs decreased by 41k. The labor market is getting tighter and there is nothing in this report that will deter BOC from the rate hike path.

BOC has flagged high housing prices over the past few years as leading to increasing vulnerability but stated that it is still too early to say that recent decrease in housing activity is the start of a substantial correction. Governor Macklem said that some moderation in housing would be healthy as housing market has been unsustainably strong. He reiterated that bank’s top priority is to bring back inflation to the target, that economy needs higher rates and that they will likely need to go above neutral rates of 2-3% in order to achieve their goal.

JPY

Average wages in April rose by 1.7% y/y but when factoring in inflation real wages were negative at -1.2% y/y. Household spending dropped -1.7% y/y which indicates a very slow start to Q2. Falling wages in real terms cannot bode well for consumer confidence and that is reflected in drops in spending. Final GDP reading showed that economy contracted by less than preliminary reported as it came in at -0.1% q/q and -0.5% y/y. Private consumption came in at 0.1% vs 0% as preliminary reported while business investment dropped -0.7% vs 0.5% in preliminary reading. Government spending increased by 0.5% while net demand was still still a drag on the reading as imports were higher than exports.

This week we will have a BOJ meeting. No changes in rate are expected but comments on rising inflation and weakness of yen will be of importance.

Important news for JPY:

Friday:

• BOJ Interest Rate Decision

CHF

SNB published Swiss foreign exchange reserves for the month of May and they totalled CHF925.4bn vs CHF926.1bn the previous month. Seasonally adjusted unemployment rate in April came in at 2.2%, unchanged from previous two months showing the incredible tightness of Swiss labor market.

This week we will have a SNB meeting. Markets see the probability of a rate hike around 70% but we do not see them acting before ECB. We will see how closely SNB decides to follow ECB and if they also plan to raise rates in July.

Important news for CHF:

Thursday:

• SNB Interest Rate Decision

 

[katetrades]

Forex Major Currencies Outlook (June 20 – June 24)

After an immensely packed week we will have a much quieter week with preliminary June PMI data from the Eurozone and the UK as well as inflation data from the UK and Canada. Additionally, Monday is a holiday in the US an Chairman Powell will testify before Congress on Wednesday and Thursday.​

USD

Advanced retail sales for the month of May came in at -0.3% m/m vs 0.2% m/m as expected. Control group, the one used for GDP calculation, was flat while ex-autos came in at 0.5% m/m vs 0.4% m/m in April. US consumer is winding down its purchases which is what Fed wants as a way to bring inflation down. The report shows auto sales as the biggest drag (-3.5% m/m and -3.7% y/y) while gasoline stations sales were the biggest contributor (4% m/m and 43.2% y/y) due to surging gasoline prices.

Fed delivered a 75bp, highest single rate increase since 1994, which was the consensus from the beginning of the week. Before that markets were bracing for a 50bp rate hike. The new rate is now in the 1.50 to 1.75% range. The newly published dot plot shows median rate at the end of the year at 3.4%, indicating a fast pace in rate hikes until the end of the year. It was at 1.9% in March dot plot. Median rate for the end of 2023 is seen at 3.8% vs 2.8% in March and long-term rate is now seen at 2.5%. Summary of Economic Projections (SEP) shows GDP in both 2022 and 2023 dropping to 1.7% from 2.8% and 2.2% as seen in March. Unemployment is seen at 3.7% in 2022 and 3.9% in 2023. In March it was seen at 3.5% for both years. PCE inflation is seen at 5.2% in 2022 from 4.3% in March and dropping to 2.7% in 2023. With rates going that high the odds of a hard landing, recession, are increasing.

Powell stated in his press conference that bringing inflation down is essential. He added that growth in business investment and housing are slowing but that labour market remained extremely tight. Since last meeting inflation has surprised to the upside and that is the main reason why they decided for a 75bp rate hike The pace of the future rate hikes will depend on the incoming data and he sees 50bp or 75bp rate hike most likely scenario at the July meeting. During the Q&A session he stated that bank members expected inflation to start flattening by now. He did not mention neutral rate or terminal rate, instead of neutral rate he used a term “more normal range”. The yield on the 10y Treasury reached highest level since 2018 at the beginning of the week at 3.24%, it rose toward 3.486%, the highest since 2011, before easing after the FOMC meeting. FedWatchTool now sees 90.9% probability of a 75bp rate hike in July.

EUR

Fears of fragmentation in the bond market were exacerbated this week as the yield on Italian 10y bonds rose over 4% with spread between them and the Bunds, 10y German bonds, climbing to over 250bp. During the week ECB Governing Council had an emergency meeting to discuss current market conditions, the mounting risks of fragmentation in the bond markets. They have decided to apply flexibility in reinvesting PEPP in order to suppress spreads as well as “to accelerate the completion of the design of a new anti-fragmentation instrument for consideration by the Governing Council.” Markets were at first unimpressed with their decision and pushed EUR lower, only to see spread between Italy and German 10y bonds slip below 200bp by the end of the week.

ZEW survey for the month of June showed improvements in both current conditions for the German economy as well as future outlook for German and EU economy. Trade balance in May showed a huge widening of trade deficit to -€32.4bn from -€16.4bn in April. Imports rose 39.4% as energy imports skyrocketed while exports rose 12.6%.

This week we will have preliminary June PMI data.

Important news for EUR:

Thursday:

• S&P Global Manufacturing PMI (EU, Germany, France)
• S&P Global Services PMI (EU, Germany, France)
• S&P Global Composite PMI (EU, Germany, France)

GBP

April GDP came in at -0.3% m/m vs 0.1% m/m as expected. This is a second consecutive month of negative growth and it presents a bleak start for the Q2 confirming BOE’s recession fears. The cost of living crisis shows fears of stagflation. All three majors sectors recorded declines (services -0.3%, production -0.6% and construction -0.4%) which is, as ONS notes, the first time since January of 2021.

Employment report in May showed tightness in the labor market with a twist. ILO unemployment rate for April ticked to 3.8% from 3.7% in March marking the first rise in the rate since May of last year. Still, the level of 3.8% equals to the pre-pandemic unemployment. Average weekly earnings came in at 6.8% vs +7.6% as expected and down from 7% in March while ex bonus earnings stayed unchanged at 4.2%.

BOE delivered a 25bp rate hike as expected and lifted the rate to 1.25%. Vote was 6-3 in favor of a 25bp rate hike with three members wishing for a 50bp rate hike. Inflation is now seen hovering above 9% for the next few months before reaching its maximum of 11% in October! At the beginning of the year it was thought that inflation will max out in April. MPC members are determined to act more forcefully if the cost pressures become more persistent. Next BOE meeting in in August and a 50bp rate hike cannot be ruled out. Inflation pressures will be key economic data point influencing BOEs decisions. Investors are pricing in a terminal rate of around 3.5% which is much too high given the strength of the economy.

This week we will have inflation and preliminary June PMI data.

Important news for GBP:

Wednesday:

• CPI

Thursday:

• S&P Global Manufacturing PMI
• S&P Global Services PMI
• S&P Global Composite PMI

AUD

Minimum wages have been increased by 5.2% which could in turn lead to sustained inflation and cause RBA to hike more aggressively in the future. RBA governor Lowe came out with hawkish statement in which he said that “Australians need to prepare for higher interest rates” and added “it’s reasonable that the cash rate gets to 2.5% at some point… How fast we get to 2.5%, and indeed whether we get to 2.5%, is going to be determined by events.” Employment report in May was another stellar one. Employment change came in at 60.6k vs 4.5k in April. The unemployment rate stayed the same at 3.9% while participation rate improved to a record high of 66.7%. All of the jobs created were full-time jobs (69.4k) while part-time jobs saw a decline (-8.8k).

Data from China showed improvements compared to April lockdown-impacted, but it is a slow move up. Retail sales continued to decline, but at a slower pace than expected (-6.7% y/y vs -7% y/y) and better than -11% y/y the previous month. Catering, clothes, cars and jewelery were down in double digits y/y. Industrial production returned into positive territory for the year and came in at 0.7% y/y vs -0.7% y/y as expected and up from -2.9% y/y the previous month. PBOC has kept the 1-year MLF rate unchanged at 2.85%.

NZD

Q1 GDP saw New Zealand economy slide into contraction as it came in at -0.2% q/q vs 0.6% q/q as expected and 1.2% y/y vs 2.4% y/y as expected. Current Account/GDP ratio for Q1 came in at -6.5% vs -6.3% as expected and down from -5.8% in Q4 of 2021.

CAD

Finance Minister Freeland stated that BOC has tools to prevent inflation from becoming entrenched. She stated that she could not guarantee soft landing but that country is in a good condition to avoid recession. One of her main objectives is to bring down Canada’s unfavorable debt to GDP ratio. CAD has had a down week as first it was crushed by USD strength and then by weakness in oil.

This week we will have inflation data.

Important news for CAD:

Wednesday:

• CPI

JPY

BOJ offered to buy unlimited amounts of 10-year JGBs at 0.25% in their pursuit for yield curve control on June 16 and 17. Core machinery orders, a good proxy for CAPEX 6-9 months in the future, surged 10.8% m/m and 19% y/y. In the manufacturing sector, electrical machinery, information technology and auto sectors rose while in the service sector, transportation, finance, and retail sales were leaders. Additionally, orders from abroad surged 52.1%. It is possible that weakness in JPY contributed to such a massive surge in demand from overseas. Trade balance data for May saw imports rise 48.9% y/y, almost 50%, which is a new record and shows how dependent Japan is on energy imports and what dangerous combo weaker JPY and higher energy prices makes make.

BOJ managed to stand firm against the market pressures and held monetary policy unchanged. The rate is still at -0.1% while upper band of a yield curve control is set at 0.25% for 10y JGBs. They reiterated their offer to buy 10y JGBs every day at fixed yield of 0.25%. Additional easing steps will be taken if need arises. Japan’s economy is seen picking up and inflation expectations have risen. BOJ Governor Kuroda stated that there is no limit to the yield curve control adding that raising yield on target on 10y JGBs would have negative impact on the economy. They have stood their ground, but markets will keep on testing their resolve in the months to come.

CHF

SNB total sight deposits for the week ending June 10 came in at CHF753.1bn vs CHF753.8bn the previous week. There was a small decline as SNB is satisfied with the way markets are treating Swissy. Swiss government came out with new projections. They lowered growth expectations and raised inflation expectations. 2022 GDP is now seen at 2.6% vs 2.8% previously, 2023 GDP is now seen at +1.9% vs +2% previously while 2022 CPI is now seen at 2.5% vs 1.9% previously and 2023 CPI is now seen at 1.4% vs 0.7% previously. Russia – Ukraine conflict and China lockdowns are cited as main risks.

In a surprise move SNB raised it’s policy rate by 50bp and it now stands at -0.25%. The decision was made in order to counter the mounting inflation pressures and to prevent it from spreading more broadly. The bank will not hesitate to intervene in the FX market if the need arises. They have stated that further increases in the policy rate cannot be ruled out to stabilise inflation. With the new rate new inflation forecast for 2022 is at 2.8%, 1.9% for 2023, and 1.6% for 2024. All three are higher than in March and would be even higher if the rate was not raised. GDP for 2022 is still seen at 2.5%. SNB Chairman Jordan stated that price stability is priority and that Swissy is no longer highly valued. SNB has moved in front of the ECB and markets were caught off guard by the move as EURCHF plunged more than 200 pips in the first hour of the rate hike.

 

[katetrades]

Forex Major Currencies Outlook (June 27 – July 1)

Inflation data from the US and Eurozone as well as official PMI data from China will be highlights of the week ahead of us.​

USD

Existing home sales in May came in at 5.41m, in line with expectations, down from 5.6m in April. Most of the deals were done using the rates from late March and early April so they do not reflect sentiment caused by Fed’s aggressive hiking. With mortgage rates standing at around 6% currently we can expect much bigger drops in the sales in the coming months. New home sales in May surged to 696k from 629k in April as home buyers take last chance to buy a house before mortgage rates go up.

Fed Chairman Powell stated in his testimony before Congress that ongoing rate increases will be appropriate and added their strong commitment to bring inflation down. He reiterated Fed’s stance of data dependence in deciding about the pace of future rate hikes and added that recent data suggests that GDP picked up in the current quarter. Consumer remains strong while housing softened a bit. Powell commented that recession is “certainly a possibility” and admitted that achieving soft landing is “very challenging”.

University of Michigan’s survey shows 5-year inflation expectations at 3.1% vs 3.3% as preliminary reported. Fed Chairman Powell used this reading as one of the main reasons to go for a 75bp at the June meeting. Now that it has come down to more appropriate levels markets are pricing in new, slower pace of rate hikes and USD is suffering at the end of the week. The yield on 10y Treasury started the week at 3.236% rising toward 3,3% on Tuesday and then tumbling down toward 3% during the week. After Michigan report came out FedWatchTool reversed odds of a 75bp rate hike from a 90.9% probability to 87.9% for July meeting and now sees a 12.1% probability of a 50bp rate hike.

This week we will have PCE, expected to show another increase, personal spending and income data as well as ISM manufacturing PMI data.

Important news for USD:

Thursday:

• PCE

Friday:

• ISM Manufacturing PMI

EUR

ECB's policymaker Kazaks said that he would support 25bp hike in July and 50 bp hike in September, adding that only way a 50bp would not materialize in September is if inflation surprises to the downside. He also added that investors should not expect 50bp hikes to become default. ECB President Lagarde confirmed at the testimony in European Parliament that they intend to raise rates by 25bp at July meeting and that there will be additional rate hike in September adding that wages have picked up.

Preliminary PMI data for the month of June started to show demand destruction in the Eurozone caused by the increase in cost of living. Manufacturing PMI came in at 52, same as German, lower than 53.9 as expected and 54.6 the previous month. Services were at 52.8 vs 55.5 as expected and down from 56.1 in May. Both business and consumer confidence are on the decline. Inflation pressures remain elevated, but they could be cooled down by such a low demand. Inventories in manufacturing are at high levels indicating probable reduction of activity in H2. Data for Q2 point to a positive GDP reading, however if negative trends continue we cannot exclude recession for Q4. Markets are lowering expectations for the rate hike path and currently price around 160bp of rate hikes for 2022.

This week we will have preliminary June inflation reading expected to continue to rise.

Important news for EUR:

FridayI
GBP

Inflation data in May showed headline number at 9.1% y/y as expected. Monthly figure printed 0.7% indicating that inflation is not close to slowing down. Food and fuel prices were the biggest contributors. Core inflation gave a bit of a positive for consumers as it came in at 5.9% y/y, less than 6% y/y as expected and down from 6.2% y/y in April. Still, the printings are in line with BOE’s forecasts and there will be no change to their stance after this set of data. Retail sales in May continued to drop with headline number coming in at -0.5% m/m and -4.7% y/y. The more important ex fuel category fell -0.7% m/m and -5.7% y/y as cost-of-living squeezes consumers. Additionally, consumer confidence fell to the lowest level on record.

UK’s preliminary PMI data for the month of June fared much better than Eurozone’s. Services and composite readings were unchanged from May at 53.4 and 53.1 respectively while manufacturing dropped to 53.4 from 54.6 the previous month. S&P Global notes that “Current business growth is being supported by orders placed in prior months as companies report a near-stalling of demand. Manufacturers in particular are struggling with falling orders, especially for exports”. Business confidence is declining and businesses see greater need to pass the rising input costs to consumers thus intensifying inflation pressures.

AUD

Minutes from the June RBA meeting showed that board members see the need to normalize monetary conditions in the coming months and that more rate hikes will be needed. They agree that pace of 25bp rate hikes every meeting this year would be a rapid tightening. Inflation is expected to increase further in the coming months before eventually dropping down into the 2-3% targeted range. Future path of rate hikes will be data driven, particularly by data on inflation and employment. Governor Lowe stated in a speech that interest rates are too low considering the state of the economy (low unemployment and high inflation) and reiterated that Australians need to prepare for higher interest rates. He added that inflation is expected to peak at 7% in Q4. Chinese banks have decided to keep the 1-year and 5-year LPR (Loan Prime Rates) unchanged at 3.70% and 4.45% respectively.

This week we will have official PMI data and Caixin manufacturing data from China.

Important news for AUD:

Thursday:

• Manufacturing PMI (China)
• Services PMI (China)
• Composite PMI (China)

Friday:

• Caixin Manufacturers PMI (China)

NZD

GDT Price Index came in at -1.3% thus making it sixth auction of declining prices in the last seven auctions. NZD was battered for the majority of the week, holding its ground only against the JPY where it created a double top on Tuesday and then started to head down.

CAD

Inflation in the month of May printed another unpleasant surprise. Headline number came in at 7.7% y/y vs 7.4% y/y as expected and up from 6.8% y/y in April. Monthly inflation printed staggering 1.4% m/m. Energy and shelter prices are the biggest causes for the rising prices. All three core readings came in higher than previous month with Median printing 4.9% y/y, Trim 5.4% y/y and Common 3.9% y/y. BOC will be nudge by the report to give more weight to 75bp increase in order to contain inflation that is at 40-year high.

JPY

Preliminary June PMI data showed manufacturing tick down to 52.7 from 53.3 in May while services staged a nice rebound to 54.2 from 52.6 the previous month. As restrictions get removed and we are entering the summer months demand for services increases significantly improving the performance of the whole sector. Composite PMI also improved to 53.2 from 52.3 in May. National inflation data for May came in at 2.5% y/y for headline number, 2.1% y/y for ex fresh food category and 0.8% y/y for ex fresh food, energy category. The numbers match yearly rise from the previous month.

CHF

SNB total sight deposits for the week ending June 17 came in at CHF751.8bn vs CHF753.1bn the previous week. SNB surprised everyone last week with a 50bp rate hike and absence of the phrase “highly valued” regarding the Swissy. They seem to accept stronger Swissy in order to combat inflation and sight deposits show their abstination from intervening in the markets. SNB Chair Jordan stated that incoming data gives signs that further tightening is necessary, but it is still not clear when it will occur.

 

[katetrades]

Forex Major Currencies Outlook (July 4 – July 8)

RBA meeting, Nonfarm Payrolls, employment data from Canada and inflation data from China and Switzerland will highlight the week ahead of us. Reminder that Monday is holiday in the US, both bonds and stock markets will be closed so liquidity will be thin which may cause some volatile movements.​

USD

Durable goods for the month of May came in at 0.7% m/m vs 0.1% m/m as expected. Core capital goods rose by 0.5% m/m. Despite inflationary pressures rising we see that business investment is not slowing down. Conference Board consumer confidence for June plunged to 98.7 from downward revised 103.2 in May. The biggest drop was in the expectations category as people seem to brace themselves for the recession.

Headline PCE number in May came in unchanged at 6.3% y/y, with monthly reading increasing 0.6% m/m vs 0.2% m/m in April. Core PCE recorded second consecutive month of declines and came in at 4.7% y/y vs 4.9% y/y the previous month. On the monthly basis it rose 0.3% m/m compared to expectations of 0.4% m/m. Personal income came in at 0.5% for the third straight month while personal consumption increased 0.2%. However, real personal consumption continued to be in the negative territory. Additionally, contribution of personal consumption to Q1 GDP was downward revised adding the worries about the strength of consumer. Atlanta Fed now sees Q2 GDP at -1%.

ISM Manufacturing PMI for the month of June dropped to 53 from 56.1 in May. New orders slipped below the expansion level and are at 49.2 while new export orders still hold above 50. Backlog of orders also declined by substantial amount. Employment index continued to decline and is now deeper into contraction with 47.3. The report added fuel to the recession story and Atlanta Fed Q2 GDP projection slipped deeper into the recession at -2.1%. The 10y Treasury started the week with yield of around 3.15% and continued to decline through most of the week finishing it with yield below 3%. FedWatchTool now sees the probability of a 75bp rate hike in July at 74.8% with 25.2% of a 50bp rate hike.

This week we will have ISM Non-Manufacturing PMI, FOMC Minutes and Nonfarm Payrolls data. Headline number is expected to be around 300k with the unemployment rate staying at 3.6%.

Important news for USD:

Wednesday:

• ISM Non-Manufacturing PMI
• FOMC Minutes

Friday:

• Nonfarm Payrolls
• Unemployment Rate

EUR

ECB policymaker Martins Kazaks stated in an interview with Bloomberg TV that 25bp rate hike in July and 50bp rate hike in September represent the base case scenario. At the meeting in Sintra, Portugal ECB President Lagarde confirmed the July 25bp rate hike and added that they are data dependent. She continued saying that inflation is “undesirably high” and if the incoming inflation data do not improve ECB will move faster. They will use the flexibility of PEPP reinvestments to fight the fragmentation in the bond market. They will also accelerate the completion of the design of a new instrument intended to combat fragmentation risks.

Preliminary German CPI data for the month of June showed the first decline since January as headline number came in at 7.6% y/y vs 7.9% y/y in May. It was only a 0.1% m/m increase. We need to take into account that government measures, namely their energy relief package that was implemented on June 1. This will be a temporary relief and it will not derail ECB from their rate hike path as Spain’s preliminary reading printed above 10% for the first time since 1985. French reading showed inflation rising to 5.8% y/y from 5.2% y/y in May with a second consecutive month of 0.7% m/m increases. Ultimately, preliminary Eurozone CPI showed headline at 8.6% y/y vs 8.4% y/y as expected and up from 8.1% y/y in May and terrifying 0.8% m/m. The slight comfort can be found in core reading which eased to 3.7% y/y from 3.8% y/y the month before.

ECB source stated that anti-fragmentation policy will divide countries in three tiers: 1. Donors; 2. Recipients and 3. Neutral. In the Donor group we have: Germany, Netherlands and France while in Recipients group we have Italy, Spain, Portugal and Greece. All of the other EU countries are in the Neutral group.

GBP

Final Q1 GDP reading came in unchanged at 0.8% q/q. Personal consumption was unchanged at 0.6% q/q while business investment and government spending took a dive. The UK government is considering temporary cut to VAT from 20% to 17.5% in order to assist its citizens to cope with rising costs of living.

AUD

Official PMI data from China for the month of June saw all three readings return to expansion (above the 50 level). Manufacturing was at 50.2 vs 49.6 in May, although, expectations were for a bigger rise, to 50.5. Non-Manufacturing came in at 54.7, up from 47.8 in May and composite was at 54.1 up from 48.4 the previous month. Easing of lockdowns naturally brought increased economic activity and it is reflected in the data. The devil hides in the details and sub-indices show cracks in economic recovery. The employment and selling prices indices showed declines. Declines in selling prices will negatively impact profit margins of companies which in turn can lead to further drops in employment. Caixin manufacturing PMI came in at 51.7 vs 48.1 the previous month reaching the highest level since May of 2021 on the back of increased production.

This week we will have RBA meeting where a 50bp rate hike is expected. From China we will get Caixin services and composite PMI as well as latest CPI data.

Important news for AUD:

Tuesday:

• RBA Interest Rate Decision
• Caixin Services PMI (China)
• Caixin Composite PMI (China)

Saturday:

• CPI (China)

NZD

Business confidence in June continued to decline and came in at -62.6 vs -55.6 the previous month. Activity outlook also plunged to -9.1 from -4.7 in May. A deadly combination of supply side issues and inflation pressures is wrecking chaos on the economy. Inflation expectations are still above 6% and show no signs of a meaningful weakening. Consumer confidence also dropped as the situation with high inflation remains bleak.

CAD

Finance Minister Freeland stated that there is no guarantee that recession will be avoided but that country still has a path toward “soft landing”. She expressed her confidence in BOC’s ability to control the inflation.

This week we will have employment data.

Important news about CAD:

Friday:

• Employment Change
• Unemployment Rate

JPY

BOJ published Summary of Opinions from their June meeting in which they reiterated that it is appropriate to continue with monetary easing in order to support the economy. The continuation of monetary easing is necessary to achieve sustained wage growth and if it exceeds 2% it will in turn lead to sustainable inflation of 2%. Japan still has negative output gap and in order for it to be closed as well as improve inflation expectations the bank should strengthen its monetary stance.

Preliminary industrial production for the month of May plunged -7.2% m/m vs -0.3% m/m as expected. A drop of this magnitude has not been seen in two years. This has prompted the government to cut their outlook for industrial production stating that output is weakening and that is led by drops in motor vehicle production. Chinese lockdowns accentuated supply chain issues as Japanese car makers could not get auto parts in time.

Inflation report for the Tokyo area in the month of June showed headline number at 2.3% y/y vs 2.2% y/y as expected, Ex fresh food category came in at 2.1% y/y as expected and up from 1.9% y/y in May while ex fresh food, energy rose to 1% y/y from 0.9% y/y the previous month. BOJ Tankan survey showed that firms expect prices to rise 2.4% in 2023, 2% three years from now and 1.9% five years from now. Indices measuring large manufacturers and non-manufacturers output prices reached high levels not seen since the 1980.

CHF

SNB total sight deposits for the week ending June 24 came in at CHF748.5bn vs CHF751.8bn the previous week. The bank omitted reference to “highly valued” CHF so they are not intervening and are only monitoring market movements.

This week we will have inflation data.

Important news for CHF:

Monday:

• CPI

 

[katetrades]

Forex Major Currencies Outlook (July 11 – July 15)

RBNZ and BOC meetings, rate hikes will be delivered, inflation from the US and a slew of data from China including Q2 GDP will highlight the week ahead of us. Gas pipeline bringing Russian gas to Germany, NordStream 1, will be temporarily offline starting on Monday. Additionally, first earnings for Q2 will be published.​

USD

ISM Non-manufacturing PMI in June, unlike its manufacturing counterpart, surprised to the upside and came in at 55.3 vs 54.3 as expected. The employment sub index slipped into contraction with new orders also declining but staying well into expansion territory. Prices paid index returned to 80 and although it is still very elevated it indicates easing of price pressures. Both production and backlog of orders rose while inventories dropped.

The minutes of the June FOMC meeting showed that participants were wary of deterioration in inflation picture and that restrictive monetary policy is needed. Interest rate hike of 50-75bp will be the most appropriate at the July meeting. The participants saw downside risks to growth and danger that higher inflation could stay entrenched if public looses faith in their resolve to bring it down. USD has rallied after the minutes but then it reversed and continued on a downward trajectory as relief rally took over.

Nonfarm Payrolls came in at 372k vs 268k as expected. The unemployment rate was steady at 3.6% while participation rate slipped to 62.2% from 62.3% in May. Wages were at 0.3% m/m same as in May and 5.1% y/y vs 5.2% y/y the previous month. There are no signs of easing in the labour market which should keep Fed firmly at a pace for a 75bp rate hike in July. The yield on a 10y Treasury started the week at 2.89% and shortly crossed the 3% level during the week before firmly crossing it after NFP. FedWatchTool sees the probability of a 75bp rate hike at 97.7% post NFP and 2.3% chance of a full 100bp rate hike.

This week we will have inflation data for June expected to show another increase and consumption data for the same period.

Important news for USD:

Wednesday:

• CPI

Friday:

• Retail Sales

EUR

Final Eurozone services reading for the month of June was slightly revised up to 53 from 52.8 as preliminary reported and it nudged composite up to 52 from 51.9 as preliminary reported. S&P Global report notes that “The sharp deterioration in the rate of growth of eurozone business activity raises the risk of the region slipping into economic decline in the third quarter. The June PMI reading is indicative of quarterly GDP growth moderating to just 0.2%, with forward-looking indicators such as the survey’s new orders and business expectations gauges pointing to falling output in coming months.” Additionally, they not that there are signs of inflationary forces peaking in April. EURUSD dropped heavily on London open on Tuesday and broke lows for the year to reach levels not seen since 2003. The pair fell below 1.03 and below 1.02 the day after as fears of recession in the Eurozone as well as natural gas shortages grip markets attention.

GBP

The UK final services reading for the month of June saw an improvement to 54.3 from 53.4 as preliminary reported and in May. Composite was lifted on the back of it to 537. from 53.1 as preliminary reported and in the previous month. S&P Global notes that inflation pressures may cause issues for services spending going forward and add that new orders were weakest since beginning of 2021. Input prices are still rising rapidly which will in turn raise cost-of-living.

There were disturbances in the political scene of the UK with current Chancellor of the Exchequer Rishi Sunak and former Chancellor and current Health Minister Sajad Javid resigning. Prime Minister Johnson will not leave his post adding that he will “keep going”. However, the pressures against him were too great and he has resigned as well. New ministers have been appointed. Nadhim Zahawi is appointed as Chancellor of the Exchequer while Steve Barclay is the new Health Minister.

AUD

RBA has delivered a 50bp rate hike as expected and lifted the cash rate to 1.35%. This is the first time that they have raised rate by 50bp in two consecutive meetings and if data supports it they could go for another 50bp rate hike in August. They are determined to bring back down inflation and take further steps to normalize monetary policy. The pace of future rate hikes will depend on incoming data and outlook for inflation and labor market. Inflation is seen peaking later in the year and then returning to the target range of 2-3% in 2023. Medium-term inflation expectations remain well anchored. One source of uncertainty is the behavior of household spending. Although savings rates remain high and households accumulated wealth during the pandemic it is still unclear how higher prices and higher rates will impact the consumer.

Caixin services for the month of June returned to expansion with 54.5 vs 47.3 after abysmal May reading of 41.4. The May reading showed us pain that economy felt due to lockdowns in China while June reading shows us a rebound caused by loosening of restrictions. Composite also returned to expansion with a reading of 53.

This week we will have employment data from Australia as well as trade balance, GDP, production and consumption data from China.

Important news for AUD:

Wednesday:

• Trade Balance (China)

Thursday:

• Employment Change
• Unemployment Rate

Friday:

• GDP (China)
• Industrial Production (China)
• Retail Sales (China)

NZD

The latest GDT auction printed -4.1% following other global commodity prices down. This is the seventh negative auction in the last eight and it was lead by butter prices which plunged 9%.

This week we will have RBNZ meeting at which the bank is expected to continue with 50bp rate hikes.

Important news for NZD:

Wednesday:

• RBNZ Interest Rate Decision

CAD

BOC quarterly business outlook survey showed that almost 80% of businesses expect inflation to be above 3% on average for the period of two years. One quarter of businesses expect it to be above 2% for three years or more. Almost half of the businesses see supply issues persisting until the end of 2023 while expectations for average wage increases in the next 12 months are at 5.8%. Given the danger of inflation expectations getting unanchored we see BOC proceeding with 75bp rate hike next week.

Employment change for the month of June showed a decline of 43.2k vs 23.5k as expected. It was a big miss on the reading as majority of jobs that were lost were part-time jobs. The unemployment rate fell to a new record low of 4.9% from previous record low in May of 5.1%. Unfortunately, this was achieved with a sharp drop in the participation rate (64.9% from 65.3% the previous month). Ultimately, average wages jumped to 5.2% from 3.9% in May. It was a mixed report, however we do not see it will deter BOC from a 75bp rate hike next week.

This week we will have BOC meeting. Incoming data are suggesting very strong economy with rapidly growing inflation, therefore we see a 75bp rate hike.

Important news for CAD:

Wednesday:

• BOC Interest Rate Decision

JPY

Average cash earnings in May came in at 1% y/y vs 1.7% y/y in April and on a real terms, taking into account inflation, they fell -1.8% y/y. BOJ stated that rise in wages is necessary to keep inflation sustainable and with them moving in the wrong direction there will be no need for any changes in monetary policy in the near future. Sources are starting to pop up that BOJ will raise its inflation forecast at their next BOJ meeting, however there will be no tightening of monetary conditions, ultra low rate policy will persist in order to prop up the economy. Former Prime Minister Shinzo Abe was holding a speech in Nara as part of election campaign when he was shot in the back two times with a shotgun. Unfortunately he was not able to push through this fight and passed away.

CHF

SNB total sight deposits for the week ending July 1 came in at CHF748.5bn vs CHF748.4bn the previous week. Virtually unchanged as SNB takes a back seat and lets market dictate the way for Swissy. Inflation in Switzerland showed another unexpected jump as it printed 3.4% y/y vs 3.2% y/y as expected and it rose 0.5% m/m. Inflation is now at a 30-year high with transport, housing and energy prices contributing the most. Core inflation rose 1.7% y/y vs 1.5% y/y in May. SNB indicated their willingness to reign in inflation so this is a nudge for a rate hike in September.

 

[katetrades]

Forex Major Currencies Outlook (July 18 – July 22)

ECB and BOJ meeting, preliminary PMI data from the Eurozone and the UK as well as inflation data from the UK, Canada and New Zealand will be highlights of another packed week. We will also get US housing data and if they come "materially stronger than expected” it will increase chances of a 100bp rate hike in July.​

USD

Inflation in June printed an unwelcome surprise. It rose 9.1% y/y vs 8.8% y/y as expected and up from 8.6% y/y in May. This is a new 40-year high. Monthly reading came in at 1.3% m/m vs 1.1% m/m as expected and up from 1% m/m the previous month. Gasoline posted the biggest rise in prices. With oil prices dropping below $100 in the past few weeks we could see this reverse in July reading. Energy component of the CPI contributed 7.5%, nearly half of the all items increase. Fuel oil prices rose 98.5% y/y. The report shows that almost 75% of components that go into CPI basket saw price increases of more than 4% in the last 12 months. With inflation running scorching hot the markets were pricing almost 25% chance of a 100bp rate hike at July meeting after the CPI print. Advance retail sales for the month of June came in at 1% m/m vs 0.8% m/m. Control group came in at 0.8% m/m vs 0.3% m/m as expected. Ex autos and ex autos and gas also beat the expectations.

The yield on a 10y Treasury had a roller coaster ride. It started the week at around 3.09%, then fell below 3% only to jump over it again after the CPI print and come back below it shortly after. The spread between 2y and 10y Treasuries dropped to -27bp thus making the infamous yield curve inversion. After the CPI report FedWatchTool sees the probability of a 75bp rate hike at 16.7% with other 83.3% seeing a full 100bp rate hike. Once Fed Weller, biggest hawk in the Board of Governors, stated that he is leaning more toward 75bp rate hike in July, but if retail sales and housing data “materially stronger than expected” he will be up for a 100bp rate hike, the probability turned to 50:50. Markets concluded that results of retail sales were not “materially stronger than expected”, therefore the USD declined and probability of a 75bp rose to 64.4% with the remaining 35.6% expecting 100bp rate hike.

EUR

ZEW survey for the month of July showed atrocious numbers. Current situation fell to -45.8 from -27.6 in June, expectations were for a decline to -34.5. Economic sentiment slumped to -53.8 from -28 the previous month while it was expected to drop to -38.3. ZEW cites rising energy prices, ECB rate hikes, war in Ukraine and supply chain issues from further restrictions in China as detriment to the outlook.

Forward looking 5y5y swaps, widely used as a sign for inflation expectations, dropped below 2% for the first time since March of this year indicating that fears of slowing growth are gripping the markets. Political crisis in Italy, nothing out of ordinary for that region, led to yield on Italian government bonds rising. As a result of it, the spread between them and German government bonds widened causing additional worries about “fragmentation” in the European bond markets.

This week we will have preliminary July PMI numbers as well as ECB meeting. A 25bp rate hike was telegraphed last month and it will be first rate hike in more than a decade (last rate hike was in 2011).

Important news for EUR:

Thursday:

• ECB Interest Rate Decision

Friday:

• S&P Global Manufacturing PMI (EU, Germany, France)
• S&P Global Services PMI (EU, Germany, France)
• S&P Global Composite PMI (EU, Germany, France)

GBP

BOE Governor Bailey stated that there are options other than a 25bp rate hike in August on the table. He reiterated their commitment to act forcefully if inflation shows signs of persistence. It is expected that inflation will come down sharply in 2023. At the moment of his speech markets were pricing a probability of a 50bp rate hike in August at almost 60%,

GDP data surprised in May as it came at 0.5% m/m vs flat as expected. Additionally, April’s reading was revised higher. Services expanded 0.4%, production 0.9% and construction activity grew by 1.5% m/m. If June reading comes in positive the UK could escape a quarter of negative growth. After the second round of votes for the leadership place in Conservative Party there are still 5 members in the running with former Chancellor of the Exchequer Rishi Sunak leading the way with 101 votes. His closest follower is Penny Mordaunt with 83 votes. All members will be going into the next round of voting.

This week we will have employment, inflation and preliminary July PMI numbers.

Important news for GBP:

Tuesday:

• Claimant Count Change
• Unemployment Rate

Wednesday:

• CPI

Friday:

• S&P Global Manufacturing PMI
• S&P Global Services PMI
• S&P Global Composite PMI

AUD

Employment report for the month of June was a stellar one. The employment change came in at 88.4k vs 25k as expected. The unemployment rate dropped to 3.5% from 3.9% in May and is now at the lowest level in history. This was all accomplished along with participation rate ticking up to 66.8% from 66.7% the previous month, making the feat of falling unemployment rate even more impressive. Full-time employment was at 52.9k while part-time was at 25.5k. Now the pressure is on the RBA with 50bp rate hike in August being the base case while 75bp rate hike talks gather momentum.

Inflation data from China for the month of June saw CPI continue to rise and coming in at 2.5% y/y vs 2.1% y/y in May while PPI continued to decline coming in at 6.1% y/y vs 6.4% y/y the previous month. PPI has been on the decline since November of 2021 and it is at levels not seen since March of 2021. With CPI inflation low compared to the rest of the world China will have easier job introducing monetary easing to stimulate the economy. In CNY terms exports in H1 have risen by 13.2% y/y while imports rose 4.8% y/y. Trade balance data for June showed trade surplus widening to $97.94bn from $78.76bn in May with exports rising 17.9% while imports rose meekly 1%. Imports were impacted by the restrictions and they should bounce back in the next couple of months.

Q2 GDP data saw economy plunge -2.6% q/q vs -1.5% q/q as expected. Lockdowns and restrictions have impaired economic activity much more than expected. Yearly figures managed to print a positive number, but it was a measly 0.4% y/y vs 1% y/y as expected. June data show a much welcomed relief after restrictions were lifted. Industrial production rose 3.9% y/y vs 0.7% y/y in May while retail sales showed first growth in three months and came in at 3.1% y/y vs -6.7% y/y the previous month.

NZD

RBNZ has delivered a much expected 50bp rate hike thus raising the Official Cash Rate to 2.5%. The accompanying announcement saw that Committee is comfortable with rate hike path outlined in the May Monetary Policy Statement. They will continue increasing OCR in order to bring inflation down to the targeted range of 1-3% while supporting maximum employment. Currently core CPI is around 4%. Members have acknowledged near-term upside risks to inflation as well as medium-term downside risks to economic activity. The statement ends with “Once aggregate supply and demand are more in balance, the OCR can then return to a lower, more neutral, level.” which indicates that they are prepared to raise above neutral rate.

This week we will have inflation data for Q2.

Important news for NZD:

Monday:

• CPI

CAD

BOC decided to surprise the markets and raise rates by full 100bp. Expectations were for a 75bp rate hike. The hike brought rate to 2.5%, matching it with New Zealand’s. The accompanying statement showed that rate BOC decided to front-load the path to higher interest rates which are to come at the following meetings. The statement shows that CPI will likely to remain around 8% in the next few months and that more than half of the components that make up the CPI are now rising by more than 5%. Inflation is expected to come down to 3% by the end of 2023 and return to bank’s 2% target by the end of 2024. The Canadian economy is characterized as overheated and in excess demand and labor market conditions are tight. New projections for GDP are downgraded and are expected to be at 3.5% in 2022, 1.75% in 2023 and 2.5% in 2024. During the press conference BOC Governor Macklem stated that front-loading of rates is necessary in order to avoid need for even higher rates in the future. Additionally, front-loading should help in achieving “soft landing”, reaching of which he finds doable. When asked about the terminal rate he said that it will all depend on the economy. The biggest problem is the housing market. Housing prices are notoriously sensitive to interest rate hikes. With the market already being in the bubble cracks will soon start to appear and if BOC pushes on with aggressive hiking we could see a bubble bursting with an innumerable consequences for the economy.

This week we will have inflation data

Important news for CAD:

Wednesday:

• CPI

JPY

Core machinery orders for the month of May fell -5.6% m/m while rising 7.4% y/y. The biggest drops were seen in petroleum and coal products followed by transportation & postal activities. Finance and insurance also saw big declines as was the case with business-oriented machinery. There are talks that companies are delaying investments due to surging energy and raw material prices. Prime Minister Kishida gave orders to bring back online nine nuclear power plants in order to help economy and citizens with surging energy prices. Nuclear plants should be online by the winter in Japan. Covid cases are again on the rise and government is considering introducing extraordinary measures.

This week we will have a BOJ meeting. No changes to the monetary policy are expected.

Important news for JPY:

Thursday:

• BOJ Interest Rate Decision

CHF

SNB total sight deposits for the week ending July 8 came in at CHF745bn vs CHF748.4bn the previous week. Deposits continue to decline as SNB is satisfied with current Swissy strength and lets market do its job.