Daily Market Outlook by Kate Curtis from Trader's Way

[katetrades]

Forex Major Currencies Outlook (June 5 – June 9)

RBA and BOC meetings, both expected to deliver no changes to rates or policy, will be the highlights of the week ahead of us.

USD

Over the weekend a deal in principle was reached on lifting the debt ceiling between US President Biden and House Speaker McCarthy. Debt ceiling should be raised by around $4tn in the next two years. Now the deal is passed to Congress for voting. ISM Manufacturing PMI for the month of May slipped to 46.9 from 47.1 in April. The details of the report show drops in new orders, inventories and backlog of orders. On the other hand, there are improvements in employment and production components with both of them printing above 50. The biggest decline was seen in prices paid index (44.2). It indicates waning price pressures, lower inflation in the coming months.

May NFP saw a headline number of 339k vs 190k as expected. This is fifteenth consecutive month that the reading smashed expectations. The unemployment rate rose to 3.7% vs 3.5% as expected and up from 3.4% the previous month while participation rate remained at 62.6%. Wages rose 0.3% m/m and 4.3% y/y as expected. Professional and business services added 64k jobs followed by government employment at 56k and healthcare at 52k while manufacturing and IT saw job losses. It is a mixed report as headline number beat again but the unemployment report jumped more than expected.

The yield on a 10y Treasury started the week and year at around 3.77%, fell to 3.6% and finished the week post NFP at around the 3.65% level. The yield on 2y Treasury reached around 4.6%. Spread between 2y and 10y Treasuries started the week at -76bp then widened to -78bp. Markets completely reversed probabilities of Fed moves after Fed Jefferson and Parker hinted at a pause in June while NFP numbers added more to the chances of a raise in June. FedWatchTool sees the probability of a 25bp hike at 33.3% while probability of no change in June is at 66.7%.

This week we will have ISM Non-Manufacturing PMI data for the month of May.

Important news for USD:

Monday:​

• ISM Non-Manufacturing PMI​

EUR

French inflation reading for May fell by more than expected to 5.1% y/y from 5.9% y/y in April with a negative monthly reading of -0.1%. Expectations were for a drop to 5.5% y/y. German reading came in at 6.1% y/y vs 7.2% y/y previous month with monthly reading also falling 0.1% m/m. Expectations were for a drop to 6.5% y/y. Preliminary Eurozone CPI came in at 6.1% y/y vs 6.3% y/y and down from 7% y/y the previous month with prices staying the same month over month. Services inflation came down to 5% y/y from 5.2% y/y in April. Core inflation fell to 5.3% y/y from 5.6% y/y while expectations were for a 5.5% y/y reading. ECB will be very pleased with inflation data, however be mindful that ECB President Lagarde stated that they are still not satisfied with inflation outlook and will need to continue raising rates as inflation is too high and will stay high for too long.

GBP

Final May manufacturing PMI was revised up to 47.1 from 46.9 as preliminary reported. The reading is still lower than April (47.8). New order and employment indexes declined at a faster pace. On the positive side, input costs have continued to decline thus easing the inflation pressures and companies report improvements in supply chains.

AUD

Building permits in April plunged -8.1% m/m vs expected increase of 2% m/m. Housing is a big part of Australian economy. Higher interest rates cause mortgage payments to increase making houses less affordable thus bringing demand for them. Monthly CPI data for the month of April fell to 6.8% y/y from 7% in March, but larger fall was expected (6.4% y/y). RBA Governor Lowe stated that in September there will be a great number of fixed-rate mortgages rolling off into much higher current rates. Q1 CAPEX data came in at 2.4% q/q vs 1% q/q as expected, down from upwardly revised Q4 reading of 3% q/q.

Official PMI from China for the month of May saw readings decline across the board. Manufacturing fell to 48.8 from 49.2 in April while a rebound to 51.4 was expected. Non-Manufacturing holds strong with 54.5, but is still down from 56.4 the previous month. Composite was dragged down to 52.9 from 54.4 in April. Weaker than expected readings pulled AUD down. Every time that PMI data show declines in economic activity talks regarding stimulus from China become louder. Caixin manufacturing PMI returned to expansion with 50.9, up from 49.5 in April due to strong jump in output and new orders. On the other hand, employment index has made a big drop as companies are reluctant to hire new workers.

This week we will have RBA meeting as well as trade balance and inflation data from China. Markets are pricing in no change from the RBA, although higher inflation reading may bring some murmurs during the meeting.

Important news for AUD:

Tuesday:​

• RBA Interest Rate Decision​

Wednesday:​

• Trade Balance (China)​

Friday:​

• CPI (China)​

NZD

ANZ survey showed business confidence improving in May to -31.1 from -43.8 in April. The biggest improvement were seen in residential construction, profit expectations and ease of credit. Inflation expectations have dropped to 5.47% from 5.7%.

CAD

Q1 GDP came in at 3.1% vs 2.5% annualized as expected and 0.8% q/q. The beat was achieved thanks to positive contributions from household spending and net exports while business investment and inventories were drag. Advance reading for April, first month of Q2, shows GDP increasing by 0.2% m/m.

This week we will have BOC meeting and employment data. BOC is expected to continue with their current monetary policy of leaving rates on hold.

Important news for CAD:

Wednesday:​

• BOC Interest Rate Decision

Friday:​

• Employment Change​
• Unemployment Rate​

JPY

Emergency meeting that consisted of members of BOJ, FSA and MOF produced nothing more than a verbal warning. Top currency diplomat Kanda stated that top currency officials are closely monitoring movements in FOREX markets. Industrial production and retail sales both missed in April coming in at -0.4% m/m and -1.2% m/m vs 1.5% m/m and 0.5% m/m as expected respectively. Q1 CAPEX data saw a tremendous increase in investment of 11% q/q, double than expected 5.5 q/q and up from 7.7% q/q in Q4.

CHF

SNB total sight deposits for the week ending May 26 came in at CHF516.7bn vs CHF515.7bn the previous week. Q1 GDP surprised to the upside as it came at 0.3% q/q vs 0.1% q/q as expected and up from being flat in Q4 of 2022. The increase was supported by domestic demand as consumer spending rose 0.6% q/q.

This week we will have inflation data.

Important news for CHF:

Monday:​

• CPI

[katetrades]

Forex Major Currencies Outlook (June 12 – June 16)

Fed, ECB and BOJ meetings, inflation from the US, employment data from the UK and Australia as well as retail sales from the US and China will be highlights of the massive week ahead of us.

USD

ISM Services PMI for May came in at 50.3 vs 52.2 as expected and down from 51.9 in April. The reading barely held above the 50 level. Prices paid index has declined to the lowest levels since the start of the pandemic in March of 2020 and good news from this report basically ends there. New orders declined, but is still above the 50 level while backlog of orders plunged to 40.9. There was also a huge rise in inventories index. Employment fell into contraction which is contradicting the payroll support that showed services sector gaining jobs. With services sector moving dangerously close to restrictive territory the chances of recession are rising while chances of June rate hike are falling.

The yield on a 10y Treasury started the week and year at around 3.7%, rose to 3.82% and finished the week at around the 3.75% level. The yield on 2y Treasury reached around 4.6%. Spread between 2y and 10y Treasuries started the week at -80bp then widened to -84bp. FedWatchTool sees the probability of a 25bp hike at 22% while probability of no change in June is at 78%. However, after hikes by RBA and BOC the probability of a skip, meaning no hike in June but hike in July is at 63%.

This week we will have inflation and consumption data as well as Fed meeting. Markets are leaning toward the pause in June. This meeting will present us with new Summary of Economic Projections and dot plot.

Important news for USD:

Tuesday:​

• CPI​

Wednesday:​

• Fed Interest Rate Decision​

Thursday:​

• Retail Sales​

EUR

Final services PMI reading for the month of May was revised down to 55.1 from 55.9 as preliminary reported and came in lower than 56.2 in April. The report says that services sector is supported by strong labor market and tourism sector that enjoys potent recovery. Price data points to increases in services sector which will have negative impact on inflation, meaning it will add upside pressures to inflation that just started to fall. Composite was also revised down and it printed 52.8 vs 53.3 as preliminary reported and down from 54.1 the previous month.

Final Q1 GDP reading was revised down and now it shows that economy contracted in the first quarter (-0.1% q/q). Annual reading was also revised down to 1% y/y from 1.3% y/y as reported in preliminary and second readings. Q4 GDP was also revised down from 0% q/q into negative territory of -0.1% q/q so now the economy has officially entered a technical recession. Technical recession constitutes two consecutive quarters of negative growth.

This week we will have ECB meeting. New growth (revised down) and inflation projections will be announced and 25bp rate hike is widely accepted consensus.

Important news for EUR:

Thursday:​

• ECB Interest Rate Decision​

GBP

Final Services PMI for the month of May were slightly revised up to 55.2, but are down from 55.9 in April. Composite was also revised up to 54 and is down from 54.9 the previous month. Although the numbers are down compared to the previous month, they are still at a very healthy levels. We see in the UK strong divergence between manufacturing and services sector that is seen in many other developed economies. The report shows that main driver is domestic demand and consumers switching from spending on goods to services spending. It also notes strong wage pressures and increase in prices charged by companies.

This week we will have employment data.

Important news for GBP:

Tuesday:​

• Claimant Count Change​
• Unemployment Rate​

AUD

RBA has surprised the markets and raised cash rate by 25bp bringing it now to 4.10%. This is a second consecutive rate hike. The statement shows that inflation is past its peak but still way too high with upside pressures and rate hike was intended to bring inflation down to its targeted range of 2-3%. Wages have picked up and they are in line with inflation target “provided that productivity growth picks up.” The statement shows that “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve”. Additionally, inflation and labor market remain most watched data but now “trends in household spending” have been added to the watchlist.

Q1 GDP data came in at 0.2% q/q vs 0.3% q/q as expected and down from 0.5% q/q in Q4 of 2022. Domestic demand was the biggest driver of growth as it contributed 0.5pp to the GDP reading. Household consumption rose by 0.2% while government consumption rose by 0.1%. Net trade deducted 0.2pp as exports rose by 1.8% while imports rose by 3.2%. One of the notable data showing how inflation is hurting households is a drop in household saving ratio to 3.7% from 4.4% Terms of trade were improved by 2.8% but only because price of imports fell more than price of exports.

Caixin services PMI in May rose to 57.1 from 56.4 in April while expectations were for it to drop to 55.2. The reports shows that both supply and demand for services expanded and that indexes for business activity, new orders and new continued to increase and are now above the 50 level for five straight months. Input and output prices continued to increase, the former indicating higher labor and raw material costs while latter indicate increased demand for services. Input costs increased at higher rate than output prices.

Trade balance data for May was abysmal. In USD terms trade surplus plunged to $65.81bn from $90.21bn in April. Expectations were for it to rise to $92bn. Exports have collapsed and came in at -7.5% y/y from 8.5% y/y the previous month while imports fell 4.5% y/y vs fall of 7.9% y/y in April. There are base effects from last year’s reopening, but still this a much larger drop than anyone expected. Chinese banks have cut deposit rates in order to boost investments and stimulate the economy. Inflation data for the month of April ticked up to 0.2% y/y from 0.1% in March but expectations were fore a 0.3% y/y increase. PPI has continued to plunge and came in at -4.6% y/y vs -3.6% y/y the previous month. Calls for further rate cuts are getting louder post this report.

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

Important news for AUD:

Thursday:​

• Employment Change​
• Unemployment Rate​
• Industrial Production (China)​
• Retail Sales (China)​

NZD

Manufacturing sales in Q1 have continued to decline coming in at -2.1% q/q after a -4.7% q/q fall in Q4 as higher interest rates take its toll on the economy. GDT auction saw dairy prices drop by 0.9%. NZD has benefited from the risk on appetite that developed in the second half of the week and gained against USD and JPY.

CAD

Over the weekend OPEC+ meeting in Vienna resulted in an announcement of a reduction in the output target that will take effect from the July 1. Saudi Arabia will lower their production by 1 million barrels per day, their reduction will be highest of all members. Additionally, members agreed that their cuts will go on through 2024 as well while previously reductions should last only until the year end. WTICrude has gapped at the open to over $74 as a result.

BOC has surprised the markets and raised the rate by 25bp bringing it now to 4.75%. This is the first rate hike since January after a few meetings with pause. The bank sees inflation as stubbornly high and expect CPI inflation to slow down to around 3% in the summer but “concerns have increased that CPI inflation could get stuck materially above the 2% target”. They acknowledged that growth surprised to the upside. There is no commitment to further rate hikes but the bank will continue monitoring inflation outlook and expectations. BOC rate is now above the inflation rate.

Employment report was very disappointing. Jobs have fallen by 17.3k making it the first time they have fallen since August of last year. This has caused the unemployment rate to rise to 5.2% from 5% for the first increase in the rate also since August of last year. Wages have slipped to 5.1% y/y from 5.2% y/y the previous month. All of the job losses were in full-time (-32.7k) while part-time rose by 15.5k.

JPY

Final services PMI for the month of May was revised down to 55.9 from 56.3 as preliminary reported and up from 55.4 in April. It still represents a record high number. The report showed improvements in employment index, thus continuing a four-month trend of stronger employment. Input and output prices have continued to increase but their rise has moderated, they are now increasing at a slower pace. Due to revision in services reading composite was also revised down and it now prints 54.3 vs 54.9 as preliminary reported, still up from 52.9 the previous month.

Wages data saw nominal earnings rise 1% y/y in April vs 1.3% y/y in March. When we calculate inflation we see that real wages fell by 3% y/y, more then previous month when they fell by 2.3% y/y. Household spending was also abysmal falling 4.4% y/y vs falling 1.9% y/y in March. Final reading of Q1 GDP saw improvement to 0.7% q/q from 0.4% q/q as preliminary reported and up from 0.1% q/q in Q4 of 2022. The improvement was made on the back of stronger capital expenditure that rose 1.4% vs 0.9% as preliminary reported. Private consumption was at 0.5% making it the biggest increase in the last three quarters.

This week we will have BOJ meeting. No changes to monetary policy are expected but there is a perpetual fear that they may abandon Yield Curve Control or widen the YCC band which would lead to JPY strength.

Important news for JPY:

Friday:​

• BOJ Interest Rate Decision​

CHF

SNB total sight deposits for the week ending June 2 came in at CHF519bn vs CHF515.7bn the previous week. This is the second week that deposits are up and it may indicate a change in trend if SNB is happy with current level of CHF. May inflation data was encouraging as it came in line with expectations. Headline number fell to 2.2% y/y from 2.6% y/y in April while core reading fell below the 2% level and printed 1.9% y/y vs 2.2% y/y the previous month. SNB is on the path to hike one more time at their next meeting later in the month and after that, data is indicating, they should pause.

[fishmoyne1]

WTICrude has gapped at the open to over $74 as a result.
Where did WTi gap to 74?
Cheers

[katetrades]

Hello,

WTI Crude closed at around $72 on Friday June 2nd and gapped higher to over $74 on market open on Monday June 5th.

[katetrades]

Forex Major Currencies Outlook (June 19 – June 23)

BOE and SNB rate hikes, potential rate cut from PBOC, preliminary PMI data from the Eurozone and the UK as well as Fed Chairman Powell testify in front of the Senate on Thursday will highlight the week ahead of us.

USD

US CPI data for the month of May dropped to 4% y/y from 4.9% y/y in April with a 0.1% m/m increase. Yearly headline number has been declining for eleven straight months. Shelter was again the biggest contributor to inflation (0.6% m/m) followed by index for used cars. The food index also contributed positively to the reading with food price index increasing 0.2% m/m. The biggest drop down was seen in the energy components. Core inflation came in at 5.3% y/y from 5.5% in April. Core services ex-shelter, the metric closely watched by Fed, has increased 0.1% m/m which is well in line with 2% target.

Fed paused as was widely expected and left the rate in the range of 5-5.25%. This is the first meeting that there was no change in the rate after ten consecutive ones that saw rate hikes. Accompanying dot plot showed members expecting rate to be at 5.6% vs 5.1% in March which will imply at least two more rate hikes. Additionally, no members see rate cuts in 2023 and high for rates in 2024 is seen at 4.6% vs 4.3% in March indicating that rates will stay higher for longer. The reason for more rate hikes can be found in the Summery of Economic Projections (SEP) which show GDP will be much stronger in Q4 (1% vs 0.4% as previously forecast). SEP also shows that the unemployment rate will be lower than thought (4.1% vs 4.5% in March). The hawkish stance was confirmed by Chairman Powell in the press conference and that opens the door for a July hike.

Retail sales in May 0.3% m/m vs -0.1% m/m as expected. Control group, the one used to calculate the GDP, came in at 0.2% m/m as expected. When we exclude autos retail sales rose by 0.1% m/m as expected. Overall, the reading is a positive one, but still the numbers show that consumer is feeling the burden of high inflation and is adjusting its own purchases accordingly. In nominal terms sales are up 1.6% y/y and when we take inflation into the account, real retail sales are deeply negative.

The yield on a 10y Treasury started the week and year at around 3.75%, rose to 3.85% post FOMC and finished the week at around the 3.77% level. The yield on 2y Treasury reached around 4.8% after the FOMC meeting. Spread between 2y and 10y Treasuries started the week at -86bp then widened to -97bp. FedWatchTool sees the probability of a 25bp hike at 77% while probability of no change in July is at 23%.

EUR

German ZEW June survey was mixed. Current situation fell to -56.5 from -34.8 while expectations component improved to -8.5 from -10.7. It is the first improvement in four months. Industrial production for the Eurozone in the month of April improved by 1% m/m vs 0.8% m/m as expected. Q2 has started with a small bounceback but we have to remember that March reading was a very bad on. The data still shows underlying issues as new orders continue to be weak.

ECB has raised rates by 25bp as was widely expected and brought the deposit rate to 3.5%. Inflation has been coming down but it is projected that it will remain too high for too long. Inflation is seen averaging 5.4% in 2023, 3% in 2024 and 2.2% in 2025. Projections for core inflation has been revised up and are now at 5.1% in 2023, 3% in 2024 and 2.3% in 2025. GDP has been revised down to 0.9% in 2023, 1.5% in 2024 and 1.6% in 2025. The Governing Council is committed to bring inflation down to 2% and will continue to follow a data-dependent approach. Bundesbank has come with its own projections and they see German economy shrinking by 0.3% in 2023 and then to expand by 1.2% in 2024 and 1.3% in 2025. Inflation risks are seen tilted to the upside and current projections are for inflation to be at 6% in 2023, 3.1% in 2024 and 2.7% in 2025.

ECB President Lagarde started the press conference by acknowledging that the economy of Eurozone stagnated in recent months, as was seen by GDP data. She emphasized that data-dependent approach is the way to go further. Wages are increasing and are now seen as the important component of inflation. She explicitly said that ECB is not done with rate hikes, there is no thinking about pausing and if there is no material change in data rate hike in July will occur. Analysts are now putting terminal rate at 4% and see hikes in July and September.

This week we will have preliminary June PMI data.

Important news for EUR:

Friday:​

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

GBP

May Employment report was a scorching hot one. Payroll change showed adding of 23k jobs. Previous month’s number was revised from loss of 135k jobs to gain of 7k jobs. April unemployment rate has ticked down to 3.8% from 3.9% while expectations were for it to tick up to 4%. Employment change in previous three months amounted to 250k jobs added. Claimant count change was -13.6k and previous month;s reading was revised down. On the wages side number were even more hot with average weekly earnings coming at 6.5% 3m/y, up from upwardly revised 6.1% 3m/y in April. Ex bonus category jumped to 7.2% 3m/y from upwardly revised 6.8% 3m/y the previous month. Due to high inflation real wage growth is still negative but it is trending up. The report overall, particularly wages, screams rate hike next week. BOE policy member Haskel, a hawk, stressed the importance of keeping inflation expectations anchored and added that further rate hikes cannot be ruled out.

This week we will have inflation and preliminary June PMI data as well as BOE meeting. A 25bp rate hike is consensus with around 25% of a 50bp rate hike.

Important news for GBP:

Wednesday:​

• CPI​

Thursday:​

• BOE Interest Rate Decision​

Friday:​

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

AUD

After a lackluster April employment report, May report came in with a bang. Employment change saw 75.9k jobs added vs 15k as expected. The unemployment rate ticked down to 3.6% while participation rate reached record high level of 66.9%. Rounding up stellar jobs report was the fact that 61.7k jobs added were full-time with other 14.2k being part-time. Labour market is getting tighter and with high inflation running RBA may be forced to continue hiking rates. In any case, chances of another rate hike have increased.

PBOC has cut 7 day reverse repo rate to 1.9% from 2%. This is intended to release liquidity into the system and thus stimulate economic growth. Later in the week they have decided to cut 1-year MLF also by 10bp bringing it to 2.65% from 2.75%. MLF rate is used when banks borrow funds from the central bank. A 1-year rate refers to transactions with duration of 6 months to 1 year. Activity data from China in May disappointed. Industrial production came in at 3.5% y/y, down from 5.6% y/y in April while retail sales came in at 12.7% y/y vs 13.6% y/y as expected and down from 18.4% y/y the previous month. High retail sales numbers are distorted due to base effects from last year’s lockwodns. Incoming weak data was the main reason for rate cuts and looser monetary policy.

This week we may see continuation of rate hikes from China with a cut to Loan Prime Rates (1y and 5y).

Important news for AUD:

Tuesday:​

• Loan Prime Rate (China)​

NZD

Electronic retail card sales, constitutes about 70 of total retail sales, fell in May by 1.7% m/m while expectations were for an increase of 0.3% m/m. April reading was revised down to 0.4% m/m from 0.7% m/m. Consumption appears to be a drag on Q2 GDP. Q1 GDP came in at -0.1% q/q and 2.2% y/y. Considering that Q4 was at -0.7% q/q it signals that New Zealand economy entered a technical recession, two consecutive quarters of negative growth. Services industry contracted by 0.6% with net exports contracting 2.5% while household consumption expenditure contributed positively with 2.4%.

CAD

Housing starts in May came in at 202.5k vs 235k as expected and down from 261.4k in April. Existing homes sales also rose in May, A healthy migration is keeping demand for housing up despite higher mortgage costs. CAD took advantage of weak USD and JPY and gained against them, but it was weaker against other major currencies.

JPY

BOJ meeting was another snooze fest as there were no changes to monetary policy or the targeted band of Yield Curve Control (YCC). The rate is still at -0.1%, the only country with negative interest rates and YCC band is +/-50bp around 0%. BOJ stated that economy is picking up as a whore and that it is likely to continue improving moderately. They see core inflation growth slowing towards the middle of the current fiscal year, meaning towards the end of Q3 and start of Q4. JPY has been battered whole week with GBPJPY as the biggest mover gaining around 3.5% (around 700 pips).​

CHF

SNB total sight deposits for the week ending June 9 came in at CHF509.8bn vs CHF519bn the previous week. After couple of weeks of increases in sight deposits they are now continuing their longer term downward trajectory as SNB continues to strengthen Swissy in order to stabilize inflation.

This week we will have SNB meeting where a rate hike is guaranteed but markets are still unsure whether it will be a 25bp or a 50bp rate hike.

Important news for CHF:

Thursday:​

• SNB Interest Rate Decision

[katetrades]

Forex Major Currencies Outlook (June 26 – June 30)

Inflation week is ahead of us with US, Eurozone and Canada reporting, all expected to continue lower, additionally we will get official PMI data from China.

USD

Housing sector has posted great results despite high mortgage rates. Housing starts in May printed 1631k vs 1400k as expected and up from 1401k in April. Building permits also showed a strong print coming in at 1491k vs 1420k as expected and up from 1417k the previous month. So far there are no signs that recession will come from the housing sector.

In his testimony before Senate Fed Chairman Powell stated that there is a long way to go to bring inflation back to the 2% target and that nearly all FOMC members agreed about future rate hikes by the end of the year. He reiterated that Fed will continue with meeting by meeting approach and that reducing inflation will likely result in a period of below trend growth.

The yield on a 10y Treasury started the week and year at around 3.77%, rose to 3.82% and finished the week at around the 3.75% level. The yield on 2y Treasury reached around 4.81%. Spread between 2y and 10y Treasuries started the week at -95bp then widened over a full percentage point -103bp. FedWatchTool sees the probability of a 25bp hike at 77% while probability of no change in July is at 23%.

This week we will have Fed’s preferred inflation measure PCE as well as data on income and spending.

Important news for USD:

Friday:​

• PCE

EUR

ECB Chief Economist Phillip Lane stated that rate hike in July seems appropriate given current economic situations but that decision on September rate hike will depend on the incoming data. ECB member of the Executive Board Isabelle Schnabel stated that risks to inflation are skewed to the upside and added that although ECB will remain data-dependent they should err on the side of doing too much. According to her ECB needs to continue raising interest rates until they see convincing evidence that inflation is moving toward 2% targeted level. ECB member Villeroy stated that level of terminal rate is not as important as the time that bank will keep it. Ifo has downgraded their GDP forecast for Germany and they see the economy now shrinking by 0.4% in 2023 vs 0.1% as previously expected.

Preliminary June PMI data was disappointing, particularly French services which plunged into contraction with a reading of 48, down from 54.6 in May. Manufacturing for the Eurozone continued to decline and printed 43.6 vs 44.8 as was expected and as was in May. German manufacturing printed abysmal 41 which was the lowest since May 2020. Services for the Eurozone declined to 52.4 from 55.1 in May with expectations of a drop to 54.5. The report shows divergence between falling prices of goods and rising prices of services. Overall composite for the Eurozone barely hanged in expansion with 50.3 reading dragged down by misses in activity and especially heavy plunge in French reading to 47.3. Eurozone has finished Q2 on a very weak note and another negative GDP reading cannot be ruled out, particularly in France.

This week we will have preliminary June inflation reading.

Important news for EUR:

Friday:​

• CPI​

GBP

UK inflation in May refused to budge. Headline number was unchanged at 8.7% y/y while expectations were for a slower increase of 8.4% y/y. Monthly increase in prices was 0.7%, higher than 0.5% the previous month. Air travel, recreational and cultural goods and services and second-hand cars contributed most to price increases. Food inflation has been on decline but is still the main culprit with astonishing increase of 18.3% y/y. Core inflation posted additional problem for the BOE as it increased to 7.1% y/y from 6.8% y/y in April. This is the highest level of core inflation in over 30 years. Expectations were for it to remain at 6.8% y/y.

BOE has surprised markets and raised bank rate by 50bp thus bringing it to a round number of 5%. The vote for decision was 7-2 with two members voting for no change. The statement shows that core good inflation has been running hotter than expected. Still, members expect inflation to slow down significantly in the second half of the year due to drop in energy prices. Services inflation is expected to remain unchanged while food inflation is projected to fall further. Further tightening is on the table and markets are pricing in terminal rate between 5.75% and 6%. Business surveys show that Q2 GDP should be around 0.25%. Indicators of household spending have somewhat strengthened while labor market remains strong.

Preliminary PMI data for the month of June showed declines across the economy. Manufacturing slid further into contraction, continuing for the fourth consecutive month and printing 46.2. Services declined to still healthy 53.7 which kept composite at 52.8. The report shows that consumer spending on services started to decline due to increase in cost of living and bleak growth outlook. Strong pace of BOE rate hikes is taking negative toll on business activity although labor market still remains strong with firms in the service sector continuing to hire.

AUD

Minutes from the last RBA meeting showed that decision between raise and pause was highly debated. Members opted to act and hike expecting that will bring inflation faster to the targeted level. Balance of risks for inflation is skewed to the upside. Additionally, wage increases are been higher than expected with wages rising in the public sector as well. AUD was repriced down after the minutes were published as they show a less hawkish bank with no clear intentions on hiking in July.

PBOC has cut LPR rates by 10bp as was widely expected. The new 1-year LPR is now at 3.55% while 5-year LPR is at 4.20%. These rates are used as benchmarks, 1-year LPR for most new loans and 5-year LPR for most mortgages. If the economy continues to stumble we can see more cuts in the coming months, but the ball for stimulus is now passed to the fiscal side. Major banks are slashing their GDP forecast for 2023 as a result of weak economic data.

This week we will have official PMI data from China.

Important news for AUD:

Friday:​

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

NZD

Trade balance data for May saw a small surplus of NZD46m as exports printed NZD6.99bn while imports printed NZD6.95bn, a significant jump from NZD6.37bn in April. The jump in imports was due to aircraft and aircraft parts purchases which were followed by increases in medical equipment, machinery and vehicles and vehicle parts. Global dairy auction was flat, there were no changes to prices. Butter prices showed biggest increase while cheddar prices saw biggest decline.

CAD

Retail sales report for April was very strong. Headline number saw increase of 1.1% m/m vs 0.2% m/m as expected. General merchandise and food and beverage categories showed the biggest gains. Ex autos category rose by 1.3% m/m vs 0.4% m/m as expected. Advance reading for May see retail sales growing additional 0.5%.

This week we will have May inflation data.

Important news for CAD:

Tuesday:​

• CPI​

JPY

National inflation numbers for the month of May saw headline inflation fall to 3.2% y/y from 3.5% y/y in April. Ex fresh food category also printed 3.2% y/y, down from 3.4% y/y. However, ex fresh food, energy, so called core-core, printed 4.3% y/y vs 4.1% y/y the previous month. This is a new 42-year high for the reading. BOJ has been adamant in categorizing inflation as “transitory” as they expect it to fall significantly from September/October. Preliminary June PMI data showed that manufacturing stumbled and slipped back into contraction with 49.8 reading. Services PMI also came in weaker than in April (54.2 vs 55.9) but is still at a very healthy level. Composite was driven down to 52.3 from 54.3 the previous month. The report shows weaker growth for output, new orders, new export orders and employment for services with decline from growth for output and new orders for manufacturing. Both sectors show weaker output and input prices inflation.

CHF

SNB total sight deposits for the week ending June 16 came in at CHF510.6bn vs CHF509.8bn the previous week. Total sight deposits have been ranging for the last month and a half.

SNB has raised policy rate by 25bp as expected and brought it to 1.75%. Additional rate hikes and tightening of monetary policy cannot be excluded. Focus at the moment, in the current environment, is on selling foreign currency. This is done in order to strengthen Swissy and bring down inflation from import. We saw this through total sight deposits data. Inflation for 2023 was revised down to 2.2% from 2.6% while it was revised up to 2.2% for 2024 from 2% as previously forecast. Inflation is expected to remain persistent. SNB Chairman Jordan stated that most likely further tightening of monetary policy will occur but approach will be gradual.

[katetrades]

Forex Major Currencies Outlook (July 3 – July 7)

RBA meeting with almost 50/50 chance of a rate hike, followed by ISM PMI data from the US, latest FOMC meeting minutes, NFP and employment data from Canada will highlight the first week ahead of second half of 2023. Note that markets in the US will be closed on July 4 on Independence day which will lead to lower liquidity and potentially high volatility so we would advise caution in trading.

USD

New home sales in May printed a very strong 763k, up from 680k in April. This is the highest number since February of 2022 and it confirms that recession will not come from the housing sector. Consumer confidence in June printed 109.7, making it the highest reading since January of 2022 as consumers have upbeat view of labor market and falling inflation expectations. Final reading of Q1 GDP came in at 2% annualized vs 1.4% as expected on the back of huge jump in net exports. The report indicates that economy is still running hot, that recession is nowhere to be seen and that Fed will be pushed to hike at least two more times.

Fed Chairman Powell reiterated its hawkish stance at the ECB symposium in Sintra. He stated that there is a long way to go to reach inflation target of 2% and that he expects moderate pace of rate hikes to continue. Additionally he added that “Although the policy is restrictive, it may not be restrictive enough and it has not been restrictive for long enough.” This makes a July rate hike (25bp) a very viable option.

Headline PCE in May declined to 3.8% y/y from 4.3% y/y in April. Monthly increase was 0.1%. Core PCE slipped to 4.6% y/y from 4.7% y/y the previous month. Energy prices printed biggest declines while both foods prices and services prices increased. The rise of latter two can be seen in the core reading which is stubbornly high and proving to be very sticky. Personal spending rose 0.1% m/m and it spook markets and brought USD weakness.

The yield on a 10y Treasury started the week and year at around 3.74%, fell to to 3.7%, rose to 3.88% and finished the week at around the 3.8% level. The yield on 2y Treasury spiked to around 4.93%. Spread between 2y and 10y Treasuries started the week at -101bp then widened to -105bp. FedWatchTool sees the probability of a 25bp hike at 86% while probability of no change in July is at 14%.

This week we will have ISM PMI data, minutes from the June FOMC meeting and NFP data on Friday. Headline number is expected to print around 250k with the unemployment rate remaining at 3.7%.

Important news for USD:

Monday:​

• ISM Manufacturing PMI​

Wednesday:​

• FOMC Minutes​

Thursday:​

• ISM Non-Manufacturing PMI​

Friday:​

• NFP
• Unemployment Rate

EUR

German Ifo survey for the month of June saw very pessimistic results. Business climate fell by more than expected and printed 88.4, the lowest level in 2023. Current situation and business outlook also came down more than expected reflecting worsening conditions in the economy. Ifo economist, Klaus Wohlrabe noticed weak demand for industrial products as higher interest rates around the world suppress demand.

ECB president Lagarde offered hawkish signals at the ECB conference in Sintra as she wanted to reaffirm that the bank has price stability as their main goal as inflation is still too high. She emphasized the need to communicate clearly that rates will stay at elevated levels for as long as necessary and that they have not peaked yet. ECB Vice President Luis de Guindos stated that rate hike in July is certain.

Preliminary inflation figures for June saw headline number fall to 5.5% y/y from 6.1% y/y in May while core reading ticked up to 5.4% y/y from 5.3% y/y the previous month. We saw drops in headline number in French and Spanish reading while German ticked higher due to base effects. Core inflation is refusing to budge, it remains sticky and ECB will remain on the hiking path in July and most likely in September as previously signaled by members.

GBP

BOE MPC member Dhingra, a well known dove who voted for no change at the last BOE meeting, stated that sharp drop in PPI is promising but that it takes between one and two quarters for it to translate to drop in CPI. He also added that wages are having lagged response to the inflation. BOE Tenreyro, note that she will end her tenure as MPC on July 4, stated that forward-looking indicators point to declines in wage growth as well as core-goods inflation over the rest of the year. She added that so far they have seen very little pass through to economy from policy tightening. Final GDP reading was unchanged at 0.1% q/q. Services and production grew 0.1% while construction output increased by 0.4%.

AUD

CPI for the month of May plunged more than expected to 5.6% y/y from 6.8% y/y in April. Expectations were for a drop to 6.1% y/y. This is the lowest reading since April of 2022. The biggest declines were seen in motor fuel, recreation and clothing prices. Price increases have been evident in food prices and rents. Core reading has held higher at 6.4% y/y. The odds of a rate hike next week have been dialed down after the report. Retail sales in May heavily beat expectations by rising 0.7% m/m vs 0.1% m/m as expected.

Official Chinese PMI data for the month of June saw manufacturing improve slightly to 49 from 48.8 in May while non-manufacturing continued to decline and printed 53.2, down from 54.5 the previous month. This has dragged composite to 52.3 from 52.9 in May. New orders, new export orders and employment sub-components declined in both sectors.

This week we will have RBA meeting. Markets are leaning toward no change for RBA with a 25bp given around 40% probability, but big Australian banks and Reuters poll of economists are leaning toward a rate hike.

Important news for AUD:

Tuesday:​

• RBA Interest Rate Decision​

NZD

Both business confidence and activity outlook. as measured by ANZ, improved in the month of June. Business confidence printed -18, up from -31.1 in May. This is the best result since November of 2021. Activity outlook returned into positive territory for the first time after fourteen months and printed 2.7 vs -4.5 the previous month. The report shows fall in cost and wages expectations and improvement in construction, profit expectations and ease of credit. ANZ consumer confidence improved to 85.5 from 79.2. It is still at very low levels, but it is the highest since January of 2022.

CAD

CPI in May fell to 3.4% y/y as expected. It was 4.4% y/y the previous month. This is the lowest level of inflation since June of 2021. Gasoline prices were the biggest reason for decline as base effects kicked in and they dropped by -18.3% y/y. Core measures all declined with median printing 3.9% y/y vs 4.3% y/y in April, trim at 3.8% y/y vs 4.2% the previous month and common at 5.2% y/y vs 5.7% y/y in April. Economists from CIBC see inflation falling below 3% in June. April GDP came in flat vs 0.2% m/m as expected indicating that economy started Q2 on a slow foot. BOC has raised last meeting and these reports would nudge them to go back to pause. If next week’s employment data comes out weak we can be almost certain that BOC will not hike rates and that CAD will suffer.

This week we will have employment data.

Important news for CAD:

Friday:​

• Employment Change​
• Unemployment Rate​

JPY

Summary of opinions from the BOJ June meeting offered us something new. They have stated that current monetary easing stance is appropriate and that wage growth is needed in order to keep inflation sustainably at 2% but then added that there is a strong chance that inflation will not slow down below 2% by the middle of current fiscal year (which is September/October in Japan). BOJ has previously been adamant that inflation is transitory and that it will fall below 2% by September/October and now they are having doubts about it. This opens the room for some Yield Curve Control adjustments at their July meeting as a move toward normalization of monetary policy. However, BOJ Governor Ueda reiterated at Sintra forum the need for ultra-loose monetary policy and made it clear that it will stay that way for the foreseeable future. He also added that underlying inflation, according to BOJ’s estimates, is lower than 2%.

Inflation data for the Tokyo area in the month of June saw headline number slip down to 3.1% y/y from 3.2% y/y in May while increase of 3.8% y/y was expected. Ex fresh food also missed expectations and remained unchanged at 3.2% y/y. Ex fresh food, energy category, “core-core”, slipped to 3.8% y/y from 3.9% y/y the previous month while expectations were for a jump to 4.4% y/y. This is the first time “core-core” has declined after sixteen consecutive months of increases. This reading will give more credence to BOJ’s stance that inflation is transitory and that it will come down from September/October. Retail sales in May were very encouraging as they rose 1.3% m/m vs 0.5% m/m as expected and 5.7% y/y vs 5.4% y/y as expected.

CHF

SNB total sight deposits for the week ending June 23 came in at CHF508bn vs CHF510.6bn the previous week. Total sight deposits drop again signalling that SNB is still on the path of selling USD and EUR in order to strengthen Swissy and thus fight off inflation.

This week we will have inflation data.

Important news for CHF:

Monday:​

• CPI

[katetrades]

Forex Major Currencies Outlook (July 10 – July 14)

RBNZ and BOC meetings, inflation from the US and China as well as employment from the UK and trade data from China will highlight the week ahead of us.

USD

June ISM manufacturing slipped to 46 from 46.9 in May while expectations were for it to tick up to 47. Digging into subcomponents of the report we see a fascinating thing, all of indexes were in contraction territory, below the 50 level. This is the first time that happened since Covid outbreak. Production and employment were above the 50 level in May and now they are contracting. Demand remains weak with new orders and new export orders continuing to decline with backlog of orders at a very low level.

Minutes from the latest FOMC meeting saw almost all participants opting to keep rates unchanged. There were some members who wanted to continue with 25bp rate hikes stating: 1. Strong labour market; 2. Strong economy; 3. Not enough evidence of inflation going back to 2% target. Desk survey showed that majority of members expect recession to occur in the short-term but good economic data keeps pushing the date further into the future. Members agree overall that recession will not be deep or prolonged.

ISM Services PMI came in at 53.7 vs 51 as expected and up from 50.3 the previous month. Highlights of report include improvement in new orders and new export orders, employment index returning into expansion after being in contraction the previous month. Backlog of orders is improving while inventories are declining. Additionally, prices paid component continued to decline indicating that inflation pressures are easing.

NFP in June has broken a streak of 14 reports in a row in which it beat expectations. Headline number came in at 209k vs 225k as expected. The unemployment rate ticked down to 3.6% as expected while participation rate remained unchanged at 62.6%. Wages continued to run hot as they rose 0.4% m/m vs 0.3% m/m in May and 4.4% y/y vs 4.3% y/y the previous month. Government added 60k jobs, health care added 41k jobs while leisure and hospitality added 21k jobs. Construction added 21k jobs solidifying the case for a strong construction sector.

The yield on a 10y Treasury started the week and year at around 3.84%, rose to 4.10% and finished the week at around the 4.02% level. The yield on 2y Treasury spiked to highest level since 2007 of around 5.12%. Spread between 2y and 10y Treasuries started the week at -109bp then tightened to -90bp as the curve flattened. The 2y10y is has now been inverted for over a year. FedWatchTool sees the probability of a 25bp hike at 95% while probability of no change in July is at 5%.

This week we will get inflation numbers for the month of June. Headline number is expected to be around 3.6% due to base effects while core number should print around 5%.

Important news for USD:

Wednesday:​

• CPI​

EUR

Final manufacturing PMI for the month of June for Eurozone was revised down to 43.4 from 43.6 on the back of revision lower for German reading which printed measly 40.6. New orders and output declined at a faster rate owning to the slowing demand for industrial goods. There was a first decline in employment since January of 2021. The report also shows that supply delivery times are improving but companies are reporting shortage of materials. French reading was revised up and now makes it second consecutive month of improvements. The number is still well in contraction territory though and with ongoing protests across the France we may see it declining in the coming months. Final services was revised down to 52 from 52.4 on the back of lower than expected readings from Italy and Spain while German and French reading remained unchanged. This has caused composite to slip into contraction with 49.9. The report shows that “all major euro countries have again lost considerable momentum. The slowdown in business activity growth was accompanied by a weaker rise in new business, lower price increases and a decline in business expectations.” Employment continuing to improve and price pressures easing are the positives.

ECB policymaker and head of German Bundesbank Nagel, a well-known hawk, stated that rates must continue to rise but it is too early to say how far. On the other hand, ECB policymaker and head of Bank of Italy Visco, a well-known dove, stated that more rate hikes is not the only way to bring inflation down. Rates can also be held steady at high levels for sufficient period of time. He added that he is not going along with idea that tightening too much is better than tightening too little.

GBP

UK final June manufacturing reading was revised slightly up to 46.5 from 46.2 as preliminary reported, but still down from 47.1 in May. New orders, output and employment indexes showed further declines as weaker demand conditions are dominating. On the positive side, there was a further reduction in supply chains and price pressures. Services and composite were unchanged at 53.7 and 52.8 respectively as services sector starts loosing momentum with business activity increasing at a weak pace. On the other hand, price pressures are seen easing which is a very welcomed sign considering how high inflation in the UK is. BOE MPC member Silvana Tenreyro, a most dovish member of MPC, finished her mandate on July 4 and according to reports her replacement will lean much more hawkish.

This week we will have employment data.

Important news for GBP:

Tuesday:​

• Claimant Count Change​
• Unemployment Rate​

AUD

RBA has opted to keep the cash rate unchanged at 4.1%. They see rate hikes slowly working its way into the economy and combined with uncertainty surrounding the economic outlook they decided that pause is the best decision. They claim that inflation has peaked, that economy has slowed and that labour market has eased somewhat although it remains very tight. Wages have picked up and are in line with inflation target. Household consumption is a cause of concern as costs of living increase. The statement shows that “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve.” This decision may be viewed as a skip now and hike in August. Data still plays the central role in board’s decisions.

Caixin manufacturing PMI for the month of June came in at 50.5 vs 50.9 the previous month. It weakened but still managed to stay in expansion territory and beat the expectations of 50.2. The report pointed to slow in demand for goods but improvement in supply chains. Employment in manufacturing sector continued to decline and it was well below 50. Both output and input prices also continued to decline and are deep under the 50 level. Caixin services printed 53.9, down from 57.1 in May but still well in expansion territory. Composite was at 52.5 and report shows that production, exports, employment and demand all continued to improve albeit at a slower pace.

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

Important news for AUD:

Monday:​

• CPI (China)​

Thursday:​

• Trade Balance (China)​

NZD

Q2 business confidence has improved to -63 from -66 the previous quarter. First dairy auction of July saw GDT price index decline -3.3% with butter and butter milk prices plunging more than 10%.

This week we will have RBNZ meeting. At their last meeting it was stated that peak rate level is at current level of 5.5% and that there will be no rate changes until September of 2024.

Important news for NZD:

Wednesday:​

• RBNZ Interest Rate Decision​

CAD

June employment report was a scorching hot. Employment change came in at 59.9k vs 20k as expected and up from -17.3k in May, The unemployment rate ticked up to 5.4% but it was due to participation rate jumping to 65.7%. The real star of the report was the fact that full-time jobs added printed astonishing 109.6k! Part-time jobs declined by 49.8k. Wage data showed and increase of 4.2% y/y, slowly coming down which will make BOC happy.

This week we will have BOC meeting. With inflation coming down but labour market running hot markets are leaning toward no change in the policy rate with some pricing in a 25bp rate hike.

Important news for CAD:

Wednesday:​

• BOC Interest Rate Decision​

JPY

BOJ Tankan survey for Q2 saw improvements for both companies in manufacturing and services sector. Additionally, survey showed improved outlook for companies from both sectors indicating that they see strong Q3. Final manufacturing PMI was unchanged at 49.8. The report notes that both new orders and output regresses into contraction. Weak demand for goods dominated while on the positive side supply chain issues and inflation pressures eased. Final services reading was revised down to 54 from 54.2 as preliminary reported which dragged composite down to 52.1 from 52.3 as preliminary reported. The report accentuates divergence between sectors as demand for services remained positive.

Wages data saw nominal wages in May rising 2.5% y/y vs 0.8% y/y in April. Due to the high inflation this still puts real inflation into negative territory with a -1.2% y/y reading. Household consumption was affected by weak wage growth as it fell 4% y/y in May after a decline of 4.4% y/y the previous month. BOJ Deputy Governor Uchida stated “We will continue YCC”. This indicates that July meeting will again lead to no changes in monetary policy. Additionally, this prompted some thinking that BOJ will not intervene before USDJPY reaches the 150 level.

CHF

SNB total sight deposits for the week ending June 30 came in at CHF491.9bn vs CHF508bn the previous week. SNB is not letting go of selling USD and EUR to conduct its monetary policy. June inflation figures showed headline inflation dropping below 2% and printing 1.7% y/y vs 1.8% y/y as expected and down from 2.2% y/y in May. Core also declined and printed 1.8% y/y, down from 1.9% y/y the previous month. Inflation has dropped below the target and the rhetoric coming from SNB is still that they are prepared to further tighten monetary policy if need arises.

[katetrades]

Forex Major Currencies Outlook (July 17 – July 21)

Inflation data from the UK, Canada, New Zealand and Japan followed by retail sales data from the US, Q2 GDP from China and employment data from Australia will highlight the week ahead of us.

USD

Headline CPI in June plunged to 3% y/y vs 3.1% y/y as expected, down from 4% y/y in May. Monthly rise was 0.2% vs 0.3% as expected. Core reading slid to 4.8% y/y vs 5% y/y as expected and down from 5.3% y/y the previous month. Monthly core also increased by 0.2% vs 0.3% as expected. Shelter component, making more than 34% of the entire CPI index, rose by 0.4% m/m and 7.8% y/y which is slower increase from 0.6% m/m and 8% y/y increase we saw in May. Used cars and trucks saw biggest declines. The report shows “The energy index rose 0.6 percent in June after falling 3.6 percent in May. The gasoline index increased 1.0 percent in June, following a 5.6-percent decrease in the previous month.” The energy index declined by almost 17% y/y. Core services ex shelter has continued to decline and printed 3.2% y/y. July rate hike probability remained unchanged but probability of future rate hikes has diminished significantly. Still, food and rent prices stay very high.

Fed Board Governor Weller stated that he will vote for a rate hike at the July meeting and stated that September meeting will be a “live” meeting. He added that Fed will likely need two more 25bp rate hikes this year. He acknowledged that CPI coming down is a very welcoming situation but it is yet to be seen if it can be sustained. According to him, rate hikes so far have already impacted the economy, therefore more hikes are needed to further cool inflation down.

The yield on a 10y Treasury started the week and year at around 4.09%, fell to 3.76% and finished the week at around the 4.02% level. The yield on 2y Treasury reached the high of around 4.96% and then tumbled post CPI. Spread between 2y and 10y Treasuries started the week at -86bp then tightened to -85bp as the curve flattened. The 2y10y is has now been inverted for over a year. FedWatchTool sees the probability of a 25bp hike at 95% while probability of no change in July is at 5%.

This week we will have consumption data.

Important news for USD:

Tuesday:​

• Retail Sales​

EUR

July German ZEW survey, a survey of financiers, showed that current conditions continue to deteriorate but at slightly slower pace than expected (-59.5 vs -60). On the other hand, outlook for German economy is very bleak as it printed -14.7 vs -10.5 as expected and down from -8.5 in June. Sentiment for the EU has declined for the fifth straight month and printed -12.2, down from -10 the previous month.

ECB policymaker Villeroy, neutral member with hawkish leanings, stated that the bank is getting closer to the peak interest rates. He emphasized that once the peak is reached they will need to stay there for a prolonged period of time. His statement is adding to uncertainty around September meeting hike.

GBP

June employment report saw payroll change decline 9k vs positive 20k in May. ILO unemployment rate for May moved higher to 4% from 3.8% the previous month. Average weekly earnings rose again to 6.9% 3m/y from upwardly revised 6.7% 3m/ in April. Weekly earnings ex bonus were unchanged at 7.3% 3m/y but expectations were for them to decline to 7.1% 3m/y. Due to high inflation real wages are still negative, however strong wage pressures will keep inflation pressures to the upside and will move BOE towards a 50bp rate hike in August. GDP for the month of May came in at -0.1% m/m vs -0.3% m/m as expected showing that economy contracted less than expected and that economy can sustain high rates.

This week we will have inflation data for the month of June and headline number is expected to ease to 8.3% y/y.​

Important news for GBP:

Wednesday:​

• CPI​

AUD

RBA Governor Lowe stated that we could see more rate hikes in order to return inflation back to its target. It is still uncertain whether monetary policy has more work to do. There will be new updated economic projections at the August meeting. He is confident that monetary policy is working adding that there are variable lags to it. Governor Lowe will be stepping down in September and Michelle Bullock has been named as his successor. She is a current deputy governor. Additionally, from 2024, there will be reduction in board meetings as the board will meet eight times a year, rather than 11 times as it is the case now.

Inflation data from China run in stark contrast to the rest of the world. June CPI was flat vs 0.2% y/y in May. PPI has continued to decline and printed -5.4% y/y vs -4.6% y/y the previous month. Absence of inflation opens the door for new stimulus measures. Trade balance data for June showed improvement in surplus $70.2bn vs $65.81bn the previous month. However, exports data have plunged 12.4% y/y as weak international demand hurts Chinese exporters. Imports were down 6.8% y/y indicating that domestic demand is declining fast.

This week we will get employment data from Australia and Q2 GDP data from China combined with production and consumption data.

Important news for AUD:

Monday:​

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

Thursday:​

• Employment Change​
• Unemployment Rate​

NZD

RBNZ has kept its official cash rate at 5.5% as was widely expected. They have noted that tighter monetary conditions are putting constraints on inflation and spending as was intended. Inflation is still too high and that is why the Committee sees it necessary to keep the rates at restrictive levels for the foreseeable future, until inflation returns to the 1-3% targeted range. The Committee sees inflation coming down and expects it to return to the targeted range in the second half of 2024.

This week we will have inflation data.

Important news for NZD:

Wednesday:​

• CPI​

CAD

BOC has decided to raise rate by 25bp and bring it to 5%. Inflation is seen coming down globally but price pressures remain particularly in services sector. Inflation has come down fast since its peak due to drop in energy prices. Getting it further down will prove more challenging. CPI inflation is projected to be at 3.7% for 2023 (it was at 3.5% previously), then falling to around 3% in 2024 and then gradually declining toward 2% by mid-2025. Economic growth has been resilient and stronger than expected. New bank’s projections see it at around 1.8% for 2023, 1.2% for 2024 (both are higher than previous projections) and then economy picks up with 2.4% growth in 2025. There was no clear forward guidance as statement said “Governing Council will continue to assess the dynamics of core inflation and the outlook for CPI inflation. In particular, we will be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with achieving the 2% inflation target.”

BOC Governor Macklem stated that the bank remains data dependent with paying special attention to the outlook for inflation. He added that monetary policy is working but that underlying inflation pressures remain stubborn and that bank is prepared to raise interest rates further. Governing Council has debated whether to leave rates unchanged but decision for rate hike was made due to persistence in excess demand and inflationary pressures as well as cost of pausing being judged to be too high.

This week we will have inflation data.

Important news for CAD:

Tuesday:​

• CPI​

JPY

Core machinery orders, a good proxy for capex spending 6-9 months into the future, came down hard in May. They fell 7.6% m/m and 8.7% y/y while expectations were for an increase of 1% m/m and 0.1% y/y. The series can be volatile but the reading here is a rather concerning.

CHF

SNB total sight deposits for the week ending July 7 came in at CHF486.6bn vs CHF491.9bn the previous week. SNB continues to sell USD and EUR in order to successfully conduct its monetary policy.

[katetrades]

Forex Major Currencies Outlook (July 24 – July 28)

Fed, ECB and BOJ meetings, with first two delivering a 25bp rate hike, preliminary July PMI data from the Eurozone, the UK and Japan coupled with inflation data from Australia will drive the markets in this massive week ahead of us.

USD

Headline June retail sales came in at 0.2% m/m vs 0.5% m/m as expected. Markets have pushed USD down but then other data came out which strengthen USD. There was a positive revision to previous month’s reading which rose 0.5% m/m. Ex autos component beat expectations and came in at 0.2% m/m while previous month’s reading was revised up to 0.3% m/m. The highlight of the report was control group, used in GDP calculation and it rose 0.6% m/m with May reading being revised up to 0.3% m/m. The biggest drop was seen in gasoline stations -22.7% y/y while nonstore retailers and food services & drinking places rose by 9.4% y/y and 8.4% y/y respectively. The report shows that consumer is still holding strong and that economy is rising at a good pace.

The yield on a 10y Treasury started the week and year at around 3.85%, fell to 3.73% and finished the week at around the 4.02% level. The yield on 2y Treasury reached the high of around 4.78% and then tumbled post CPI. Spread between 2y and 10y Treasuries started the week at -94bp then widened to -99bp. The 2y10y is has now been inverted for over a year. FedWatchTool sees the probability of a 25bp hike next week at almost a 100%.

This week we will have Fed meeting, preliminary Q2 GDP reading as well as Fed’s preferred inflation metric, PCE. A 25bp rate hike is fully priced in so markets will be paying close attention to Powell’s remarks for any hints regarding path of future rates.

Important news for USD:

Wednesday:​

• Fed Interest Rate Decision​

Thursday:​

• GDP​

Friday:​

• PCE​

EUR

Final headline CPI for the month of June was unchanged at 5.5% y/y. However, core reading was revised up to 5.5% y/y from 5.4% y/y as preliminary reported and up from 5.3% y/y in May. With core CPI heading in the wrong direction hawkish camp in ECB gains more credibility. July 25bp rate hike was telegraphed at the June meeting, but this core reading nudges September meeting closer toward yet another 25bp rate hike.

ECB’s biggest hawks, Dutch Klaas Knot and German Joachim Nagel, stated that next week’s rate hike is a certainty, but were far less certain about September rate hike. They have suggested that September decision will be influenced by the incoming data. Markets are seeing rates at 4% by the year-end with a 80% probability.

This week we will have preliminary July PMI data and ECB meeting. Another 25bp rate hike was telegraphed at June meeting so markets will focus on any hints regarding rates at September meeting.

Important news for EUR:

Monday:​

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

Thursday:​

• ECB Interest Rate Decision​

GBP

The UK finally had some positive news on inflation. Headline inflation in June rose by 7.9% y/y vs 8.2% y/y as expected and down from 8.7% y/y in May. Core inflation also surprised to the downside and printed 6.9% y/y vs 7.1% y/y as expected and down from 7.1% y/y the previous month. Fuel prices showed biggest declines. (22.7%). There are signs that food inflation has past its peak as it rose 17.3% y/y vs 18.3% y/y in May. Markets will need to do some repricing as lower inflation readings may invalidate August 50bp rate hike and will surely lead to lower pricing for terminal rate.

Retail sales have printed 0.7% m/m in June vs 0.2% m/m as expected. Ex-autos printed 0.8% m/m vs 0.2% m/m as expected. Both huge beats little tainted by the fact that previous month’s readings were revised down. The report shows that both food and non-food stores contributed to growth with 0.7% m/m and 0.1% m/m respectively while non-store retailers increased by 0.2% m/m and fuel sales fell 0.3% m/m. Reports have started to emerge that UK Prime Minister Rishi Sunak plans to hold General Election in November of 2024. That would make US and UK elections being held at the same time.

This week we will have preliminary July PMI data,

Important news for GBP:

Monday:​

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

AUD

Minutes from the July RBA meeting showed that members presented strong cases for both a 25bp rate hike and a pause. In the end, the board opted to keep the rates unchanged but agreed that some further tightening may be required and agreed to keep August meeting as a live one. Current stance of monetary policy was described as “clearly restrictive” and will become more restrictive. Wage growth is seen rising 4% y/y in Q3 while economy slowed considerably with growth of around 0.2% q/q for Q2.

June employment report from Australia was another strong one. Employment change showed that the economy added 32.6k jobs vs 15k as expected. This number of jobs added comes after 75.9k jobs were added in May. The unemployment rate again ticked down to the very low level of 3.5% vs 3.6% as was expected. Admittedly, participation rate also ticked down to 66.8% but it is still much higher than pre-pandemic. All of the jobs added were full-time jobs (39.3k) adding the flare to a strong report. The labor market is as tight as it gets and is not showing any signs of slowing down.

China Q2 GDP was mixed. It printed 0.8% q/q vs 0.5% q/q as expected but 6.3% y/y vs 7.3% y/y as expected. High y/y figure is due to base effects. Housing and exports, which comprise roughly 40% of the entire economy, were notable drags. Weaker than expected yearly reading led analysts from big banks to cut its assessment of GDP for 2023 to range from 5%-5.5% from 5.5% to 6.3% as previously seen. Some stimulus measures are needed just to achieve a 5% GDP target for 2023. Activity indicators were also mixed with industrial production rising 4.4% y/y vs 2.7% y/y as expected while retail sales rose 3.1% y/y vs 3.2% y/y as expected. PBOC has decided to leave both 1-year and 5-year LPRs unchanged at 3.55% and 4.2% respectively.

This week we will have Q2 inflation data. They are expected to come down but details of the report will influence whether RBA opts for a hike or a pause.

Important news for AUD:

Wednesday:​

• CPI​

NZD

Q2 CPI came in at 1.1% q/q, down from 1.2% q/q in Q1 but it fell less than expected (1% q/q). Yearly figure was at 6%, down from 6.7% in the previous quarter, but it also fell less than expected (5.9%). RBNZ core inflation measure, sectoral factor model, was unchanged for the third straight quarter at 5.8% y/y. NZD was pushed higher by the inflation prints and markets are still weighing whether this reading will impact RBNZ. As a reminder, they are expected to be on hold with 5.5% Official Cash Rate seen through September of 2024. One of the factors that can push RBNZ to return to rate hikes is that domestic inflation came stronger than expected, although falling from Q1 levels.

CAD

June CPI data fell by more than expected and came in at 2.8% y/y vs 3.4% y/y in May. Base effects contributed to the declines as gasoline prices plunged 21.6% y/y. Grocery prices and mortgage costs saw biggest increases in price with latter rising astonishing 30.1% y/y. Core measures saw median slip to 3.9% y/y, trim slip to 3.7% y/y and common slip to 5.1% y/y. BOC may take a pause in rate hike process and enjoy the lower inflation.

JPY

BOJ Governor Ueda stated that there is some distance to sustainably achieving 2% inflation target. He emphasized that unless BOJ assumptions on the need to sustainably achieve 2% inflation target change there will be no changes to monetary policy. JPY has weakened after his remarks as they hint to no change for YCC at the July meeting. National inflation data for the month of June saw headline and ex fresh food categories both tick up to 3.3% y/y while ex fresh food, energy component ticked down to 4.2% y/y. This makes it the first decline since January of 2022.

This week we will have BOJ meeting. Incoming reports are suggesting that there will be no change to YCC. This could lead to prolonged JPY weakness.

Important news for JPY:

Friday:​

• BOJ Interest Rate Decision​

CHF

SNB total sight deposits for the week ending July 14 came in at CHF494.7bn vs CHF486.6bn the previous week. A rare move up in sight deposits and it remains yet to be seen if this is just a pull back or beginning of a new upward trend.

[katetrades]

Forex Major Currencies Outlook (July 31 – Aug 4)

BOE and RBA meetings coupled with NFP as well as inflation and growth data from the Eurozone, inflation data from Switzerland and PMI data from China will highlight another action packed week ahead of us.

USD

IMF has raised its projection for 2023 GDP to 3% from 2.8% and left 2024 projection unchanged at 3%. Projection for 2023 was revised up due to better than expected GDP readings for the US and the UK. US GDP is seen at 1.8% vs 1.6% in April while UK GDP is seen rising 0.4% vs falling 0.3% in April. German GDP was downgraded and IMF now sees it falling by 0.3% vs falling by 0.1% in previous projections. Consumer confidence measured by Confidence Board jumped in July to 117 from upwardly revised 110.1 in June. This represents the highest reading in two years and it is additional proof that economy is handling high rates pretty good.

Fed has delivered another 25bp rate hike, as was widely expected and brought Fed funds target rate into the 5.25-5.50% range. The statement did not reveal much saying that “economic activity has been expanding at a moderate pace” that “Job gains have been robust in recent months” and that “Inflation remains elevated.” The committee will take into account the cumulative effects of monetary policy and the lags along with economic and financial developments. We got more information from Powell’s opening statement during the press conference and Q&A session.

Chairman Powell declared that full extent of rate hikes is yet to be felt. He acknowledged a strong pace of job growth and added that process of bringing inflation back to 2% inflation “still has a long ways to go”. During Q&A session he stated that inflation will not return to 2% level before 2025. He also strongly emphasized that they are in a data-dependent mode stating that there are two more jobs (NFP) and inflation reports until September meeting. He admitted that June CPI was welcomed but it is just one reading and more is needed as they want to see core inflation down. He also stated that staff projections no longer see recession in 2023. Ultimately, he dismissed rate cuts for the rest of the year. Overall it can be said that his comments were neutral as he was looking to keep September meeting open for another rate hike, although he clarified that future rate hikes were not discussed.

Q2 GDP has come in strong at 2.4% annualised vs 1.8% annualised as expected and up from 2% in the first quarter. There was a big drop in personal consumption, which added just 1.12pp to the GDP reading, down from 2.79% in Q1. On the other hand, fixed investment showed a big jump and contributed 0.83pp to the GDP, up from -0.08pp in the previous quarter. Durable goods printed 4.7% m/m vs 1% m/m as expected. This is the highest monthly rise in three years.

PCE in June printed headline at 3% y/y as expected, down from 3.8% y/y in May. Core reading has dropped more than expected and is now at 4.1% y/y, down from 4.6% y/y the previous month. Headline PCE and CPI are both at 3% but core PCE is lower as core CPI is at 4.8% y/y. Personal income rose by 0.3% m/m while 0.5% m/m was expected. Personal spending jumped 0.5% m/m compared to increase of 0.1% m/m the previous month. Fed may be very satisfied with this reading as inflation is falling at desired pace and personal income seems to be slowing down while spending remains unchanged.

The yield on a 10y Treasury started the week and year at around 3.85%, rose to a little over 4% and finished the week at around the 3.95% level. The yield on 2y Treasury reached the high of around 5%. Spread between 2y and 10y Treasuries started the week at -101bp then tightened to -92bp. The 2y10y is has now been inverted for over a year. FedWatchTool sees the probability of a 25bp hike at September meeting at around 20% while probability of no change is at around 80%.

This week we will have ISM PMI data for July and NFP numbers on Friday. Headline NFP is seen at around 190k with the unemployment rate staying unchanged at 3.6%.

Important news for USD:

Tuesday:​

• ISM Manufacturing PMI​

Thursday:​

• ISM Services PMI​

*Friday:*​

• NFP​
• Unemployment Rate​

EUR

Preliminary PMI numbers for July for Eurozone as a whole came in slightly worse than expected. Manufacturing has slipped to 42.7 from 43.4 in June while services declined to 51.1 from 51.5 the previous month making composite drop to 48.9 from 49.7, a second consecutive month below 50. Digging into the details we find abysmal data. German manufacturing has fallen to 38.8. This low level has last been seen in May of 2020, at the peak of pandemic and lockdowns. French services reading has declined to 47.4 from 48 in June thus making it second consecutive month in contraction. German composite has also fallen into contraction with 48.8 reading. Q3 and H2 of 2023 will be very challenging for Eurozone as PMIs suggest even weaker readings in the coming months. The report also shows that new orders fell for services sector for the first time in seven months and that price pressures are still holding especially in the service sector.

Euro area bank lending survey for July of 2023 presented a dire situation. Credit standards have continued to tighten for all loan categories which led to sharp drop in demand for loans from businesses and households. The net demand for loans has fallen to the lowest level since the start of the survey 20 years ago. Banks are reporting that they are more concerned about non-performing loans and that they are set to further tighten lending conditions. The report states “For the third quarter of 2023, euro area banks expect a further, albeit more moderate, net tightening of credit standards on loans to firms, and unchanged credit standards on loans to households for house purchase.”

ECB has delivered their announced 25bp rate hike and brought deposit rate to 3.75%. Inflation continues to decline but it is still at too high level and will stay there for too long. ECB will remain data-dependent when deciding future rate hikes.

ECB President Lagarde acknowledged at the press conference that near-term economic outlook has deteriorated due to weaker domestic demand. Price pressures from wages and profit margins are becoming an increasing source of inflation. She reiterated during the Q&A session as well as during the opening statement that ECB is data-dependent. She particularly brought attention to the change in the statement from “The Governing Council’s future decisions will ensure that the key ECB interest rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target and will be kept at those levels for as long as necessary.” to “The Governing Council’s future decisions will ensure that the key ECB interest rates will be set to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target and will be kept at those levels for as long as necessary.”

Preliminary Q2 GDP readings showed French at 0.5% q/q vs 0.1% q/q as expected due to big contribution from net exports. German Q2 GDP was flat, showing weak economic rebound. As a reminder, preliminary Q1 GDP from Germany was also flat but it was revised lower in final reading to -0.3% q/q pushing the country into technical recession of two consecutive quarters of falling growth. So we cannot be sure yet that Germany managed to break the cycle and not post third consecutive quarterly decline in growth. Preliminary inflation data for July saw French reading at 4.3% y/y, down from 4.5% in June.

This week we will have preliminary Q2 GDP and July CPI data for the Eurozone.

Important news for EUR:

Monday:​

• CPI​
• GDP​

GBP

PMI data from the UK for the month of June saw continued declines in economic activity. Manufacturing fell to 45, services to 51.5 while composite managed to stay in expansion territory with a 50.7 print. New orders are almost unchanged while price pressures seem to be easing as the economy pushes to avoid a negative GDP print in Q3.

This week we will have BOE meeting. Markets are positioning themselves for a 25bp rate hike.

Important news for GBP:

Thursday:​

• BOE Interest Rate Decision​

AUD

Q2 inflation data came in at 0.8% q/q and 6% y/y vs 1% q/q and 6.2% y/y as expected and down from 1.4% q/q and 7% y/y in Q1. Inflation has come down and if we look at H1 of 2023 it has printed 2.6% annualised which is right within RBAs 2-3% target range. This report should lead to RBA not changing the cash rate next week. The report still holds some concerning data as it shows that services inflation is at 6.3% which is a 22-year high.

Pan Gongsheng has been appointed as the new Governor of PBOC. China’s Politburo has stated they will provide “counter-cyclical” measures in order to prop the economy.

This week we will have RBA meeting as well as official and Caixin PMI data from China. The economists are split almost 50/50 whether there will be a 25bp rate hike. We are leaning more toward no change in rate hike.

Important news for AUD:

Monday:​

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

Tuesday:​

• RBA Interest Rate Decision​
• Caixin Manufacturing PMI (China)​

Thursday:​

• Caixin Services PMI (China)​
• Caixin Composite PMI (China)​

NZD

June trade balance saw surplus of just NZD9m, down from May figure as both exports and imports declined. Kiwi had an up and down week, as did the majority of currencies, enjoying risk on in the first half of the week and then plunging on the risk off mood post ECB.

This week we will have Q2 employment data.

Important news for NZD:

Wednesday:​

• Employment Change​
• Unemployment Rate​

CAD

Manufacturing sales in June fell 2.1% m/m after they rose 1.2% m/m in May with biggest declines seen in petroleum and coal products followed by chemical and food producing industries. May GDP data came in at 0.3% m/m as expected with preliminary June reading seen dropping 0.2% m/m.

This week we will have employment data.

Important news for CAD:

Friday:​

• Employment Change​
• Unemployment Rate​

JPY

Preliminary July PMI numbers saw small declines across the board. Manufacturing dropped to 49.4 from 49.8 while services slipped to 53.9 from 54 which resulted in composite remaining unchanged from June at 52.1, The report shows weaker decline in output, new export orders as well as stronger decline for new orders in the manufacturing sector. Services sector saw weaker growth in all three of those categories. Stronger inflation is seen in both input and output prices while future output showed weaker positive outlook which is concerning sign going further into Q3 and H2 of 2023. Government spokesperson stated that they expect CPI to come down and print 1.5% in Fiscal Year of 2024. As a reminder, Fiscal Year in Japan starts in April. So the government sees inflation as transitory and expects it to come down below 2% target in about a year from now.

During the week speculations appeared that BOJ will tweak its Yield Curve Control (YCC) and that gave a huge boost to the JPY. Finally, after the meeting was concluded, it was announced that there will be no changes to the monetary policy or YCC, however BOJ will keep offering fixed-rate operations for 10y JGBs at yield of 1%. The vote on YCC was not unanimous, it was an 8-1. 10y This caused JGBs to trade at highest levels since 2014. Markets whipsawed on these comments with USDJPY going up and down 300 pips in a short time span. This is a tweak to YCC but not exactly as markets hoped for and they are still trying to grasp the meaning of the move.

Tokyo CPI data showed continued decline in ex fresh food category in July as it came in at 3% y/y vs 3.2% y/y in June. On the other hand, headline and the so-called “core core” measure which excludes food and energy reaccelerated to 3.2% y/y and 4% y/y from 3.1% y/y and 3.8% y/y the previous month. This is the highest reading for “core core” since April of 1982. BOJ quarterly report showed that risks for inflation are skewed to the upside for fiscal years of 2023 and 2024. There was an upward revision to core core inflation for 2023. It is now seen at 3.2% vs 2.5% in April.

CHF

SNB total sight deposits for the week ending July 21 came in at CHF489.3bn vs CHF494.7bn the previous week. It is a continuation of a trend down as SNB sells EUR and USD in order to strengthen Swissy and fight off inflation.

This week we will have inflation data.

Important news for CHF:

Thursday:​

• CPI

[katetrades]

Forex Major Currencies Outlook (Aug 7 – Aug 11)

After two action packed weeks we will take a breather in the coming week with the US inflation data taking centre stage followed by inflation from China and preliminary Q2 GDP from the UK.

USD

ISM manufacturing PMI for July printed 46.4 vs 46.8 as expected, but still up from 46 in June. New orders and production showed improvements but are still deep in the contraction territory. Prices paid turned higher, but it rose less than expected. Employment index was most concerning as it showed a huge drop further into contraction, much larger than expected. It printed 44.4 vs 48 as expected and down from 48.1 in June.

Fitch downgraded US government to AA+ from AAA which is the first time they downgraded in almost 30 years. USD weakened on the news but it has recovered its strength in the next few hours. Oil inventories saw a biggest drawdown in the 40 year history of the series. EIA reported that inventories fell 17409k barrels while a drop of 1367k was expected.

ISM Services PMI for July came in at 52.7 vs 53 as expected and down from 53.9 in June. The report shows small declines in new orders and new export orders, but they are still in very healthy territory with latter printing over 60. There was a big jump in backlog of orders, indicating unfinished orders and big drop in inventories. Worrying signs are appearing in the employment index which fell and barely managed to stay in expansion with 50.7 while there was a small increase in prices paid index.

Headline number NFP for the month of July printed 187k vs 200k as expected. June reading was revised down to 185k from 209k as previously reported. The unemployment rate slid to 3.5% with participation rate staying the same at 62.6%. Wages rose 0.4% m/m and 4.4% y/y, unchanged from previous month but higher than expected at 0.3% m/m and 4.2% y/y respectively. Underemployment rate fell to 6.7% from 6.9%. Although headline number missed expectations and there was a downward revision to June, exactly what Fed wants to see, other details of this report indicate still strong labour market, particularly stronger than expected wage growth.

The yield on a 10y Treasury started the week and year at around 3.95%, rose to 4.2% and finished the week at around the 4.05% level. The yield on 2y Treasury reached the high of around 4.93%. Spread between 2y and 10y Treasuries started the week at -91bp then tightened to -70bp due to bear steepening of the curve. The 2y10y is has now been inverted for over a year. FedWatchTool sees the probability of a 25bp hike at September meeting at around 17% while probability of no change is at around 83%.

This week we will have inflation data. Headline reading is expected to drop below 3% while core reading is expected to tick down to 4.6%.

Important news for USD:

*Thursday:*​

• CPI​

EUR

Preliminary June inflation data saw headline continue its downward trajectory as it printed 5.3% y/y as expected vs 5.5% y/y in May. Goods inflation is continuing to trend down, while services inflation is trending up. Core is proving to be much more stubborn as it printed 5.5% y/y, same as previous month while a slip to 5.4% y/y was expected. Headline data suggests that ECB can relax a bit and pause in September while core screams stickiness, dropping just slightly from the high of 5.7% in March. Looking solely at the core ECB should deliver another rate hike in September.

Preliminary Q2 GDP came in at 0.3% q/q vs 0.2% q/q as expected and helped Eurozone escape technical recession after GDPs of Q1 and Q4 came in negative. Irish GDP gave the boost to the overall reading while italian GDP came in negative 0.3% q/q vs 0% q/q as expected indicating that parts of the Eurozone are going though a ton of struggle. French and Spanish GDP readings were encouraging. Overall, this reading does not suggest that ECB will pause in September.

GBP

BOE has decided to raise interest rate by 25bp as majority of markets expected and thus bring bank rate to 5.25%. The voting was split 6-3 with Dhingra voting for no change. MPC members Haskel and Mann voted for a 50bp rate hike! Inflation is still too high and is seen falling toward 5% by the end of the year. Energy will be the main cause of bringing inflation down, followed by food and core goods while services is expected to stay close to current high levels. CPI inflation is seen returning to 2% by Q2 of 2025. Current monetary policy is seen as being restrictive. This is the first time since the start of tightening cycle that BOE described monetary policy as restrictive. BOE stands ready to tighten further if necessary and they conclude the statement with “The MPC will ensure that Bank Rate is sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term, in line with its remit.” They continue to be data dependent and statement has some clearly hawkish tones as more rate hikes are possible. Markets are pricing in two more rate hikes before the year ends. BOE Governor Bailey stated “I don’t think it is time to declare it’s all over,” indicating their readiness to tighten further and deliver on market expectations. Major banks are slashing their forecast for peak rates to 5.50% from 6%, not believing that BOE can deliver more than one rate hike.

This week we will have preliminary Q2 GDP reading.

Important news for GBP:

Friday:​

• GDP​

AUD

RBA has decided to keep rates unchanged at 4.10%. This is the second consecutive meeting where there was no change in the cash rate. This decision was made so that further impact of previous rate hikes can be assessed better. Inflation is seen as declining, with goods inflation easing, but it is still deemed to be too high at 6%. Central forecast sees CPI at around 3.75% by the end of 2024 and then falling further into the targeted range of 2-3% by the end of 2025. Economy is growing below trend with weak household consumption growth. Central forecast for GDP is around 1.75% for 2024 and little above 2% for 2025. Labour market remains very tight, although it has eased a bit. The unemployment rate is seen gradually rising to 4.5% by the late 2024. “The recent data are consistent with inflation returning to the 2–3 per cent target range over the forecast horizon and with output and employment continuing to grow.” The bank continues to be data dependent and some further tightening will also depend on “the evolving assessment of risks.” As long as RBA stays on the sidelines AUD will suffer. Potential stimulus from China could prop AUD up.

RBA released Statement on Monetary Policy (SoMP) on Friday in which it stated that the board has considered a rate hike in August, but instead decided that there was a stronger case to keep them unchanged. They acknowledged that policy has been significantly tightened but that the full effects of monetary tightening have not been fully felt yet. They have cut GDP and CPI projections slightly from the previous SoMP as they now see GDP at 0.9% by the end of 2023, 1.6% by the end of 2024 and 2.3% by the end of 2025. CPI is seen at 4.1% by the end of 2023, 3.3% by the end of 2024 and 2.8% (within 2-3% target) by the end of 2025.

Official PMI data for the month of June showed manufacturing improve to 49.3 from 49 in May while expectations were for it to decline to 48.9. Non-Manufacturing has declined to 51.5 from 53 the previous month, which was bigger decline than expected, and brought composite with it to 51.1, down from 52.5 in May. Since China is seen as world’s factory the jump in manufacturing was celebrated in the markets with AUD getting a push up. Caixin manufacturing PMI slipped back into contraction with 49.2 reading after spending previous two months above the 50 level. Expectations were for it to decline modestly to 50.3. The report shows a big drop in new export orders as international demand falters. Combine that with declines in supply and deterioration of jobs market and with June reading barely holding above 50, below 50 reading was inevitable. Caixin services came in at 54.1 vs 52.5 and up from 53.9 the previous month. Composite was dragged down to 51.9 due to weak manufacturing but it still shows that economy comprised of small and medium-sized companies is in expansion.

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

Important news for AUD:

Tuesday:​

• Trade Balance (China)​

Wednesday:​

• CPI (China)​

NZD

Business confidence in July improved to -13.1 from -18 in June. Both cost and wages expectations went up while pricing intentions and inflation expectations declined. The biggest improvement was seen in residential construction which showed highest jump since February of 2022. Employment report for the Q2 saw employment change rise by 1% q/q, doubling the expectations of a 0.5% q/q increase and coming higher from 0.8% q/q in the previous quarter. The unemployment rate has gone up to 3.6% but it was due to large jump in participation rate 72.4% (from 72% in Q1). Labor Cost Index has declined to 4.3% y/y from 4.5% y/y in the previous quarter. Labor market seems to be getting even tighter with great number of jobs added and participation rate jumping. On the other hand, loosening of wage price pressures may give some comfort to RBNZ in their fight against inflation.

CAD

July employment report missed expectation and showed 6.4k job losses. Projection was for a 21.1k increase. The unemployment rate ticked higher to 5.5% which is the third consecutive month of increases in the unemployment rate. Participation rate ticked down to 65.6% from 65.7% in June. One positive is that economy added 1.7k full-time jobs while part-time jobs declined by 8.1k. Wage increases jumped to 5% y/y from 4.2% y/y the previous month. BOC will be happy that its tightening is having effects as seen by employment change and the unemployment rate, however surge in wages will cause them to reevaluate their stance.

JPY

Retail sales in June declined 0.4% m/m but rose 5.9% y/y vs 5.8% y/y in May. Sales in the automotive sector led the way with biggest gains followed by pharmaceuticals & cosmetics and food & beverages. Preliminary industrial production for June showed 2% m/m increase due to positive contributions from motor vehicles and electronic parts and devices.

The yield on 10y JGB traded above 0.60% for the first time since 2014 and then BOJ announced unscheduled bond-buying program of JPY300bn in the 5-10y JGBs. This injection led to broad JPY weakness. BOJ Deputy Governor stated that BOJ needs to continue with easy policy. He added that they their move on making YCC flexible is not a step toward exit from the ultra loose policy. Additionally, he clarified that they may step in and buy more JGBs before the yield on 10y reaches 1%. It will all depend on the speed of the move, according to him, meaning that there is a heightened uncertainty about BOJ intervention through bond market. On Wednesday 10y JGB reached a new high in yields since 2014 of almost 0.65%.

CHF

SNB total sight deposits for the week ending July 28 came in at CHF490.1bn vs CHF489.3bn the previous week. July CPI report saw further declines as both headline and core numbers slipped lower to 1.6% y/y and 1.7% y/y respectively. Inflation coming down is a very welcoming sign for the SNB that may lean towards pausing in September.

[katetrades]

Forex Major Currencies Outlook (Aug 14 – Aug 18)

RBNZ meeting, inflation data from the UK and Canada, consumption data from the US and China as well as employment data from Australia will be the highlights of the week ahead of us.

USD

Fed Governor Michelle Bowman spoke over the weekend and came out with some hawkish remarks. She clearly stated that additional rate hikes will be needed and acknowledged that although inflation coming down is a positive input, inflation still remains too high. Bowman is a permanent Fed voting member and is considered to be neutral so some extra weight should be attributed to her statements. President of the New York Fed, also a permanent voter, stated in an interview with New York Times that he cannot rule out possibility of a rate cut in 2024. Markets are pricing five rate cuts in 2024. Williams reiterated Fed’s data dependence. He added some hawkish comments as well as he stated that rates will have “to be kept restrictive for some time” and added that he is open to future rate hikes. Philadelphia Fed president stated that if there are no new alarming data by September meeting he can see Fed pausing and hold rates steady at that level.

CPI July number came in at 3.2% y/y vs 3.3% y/y as expected and markets rallied on a smaller than expected increase in inflation (it was 3% y/y in June). This is is the first increase in headline number since June of 2022. Core CPI ticked down to 4.7% y/y from 4.8% y/y in June. Both headline and core rose 0.2% m/m as expected and as previous month. Energy component of inflation fell -12.5% y/y, a smaller than -16.7% y/y drop the previous month. Used car prices dropped 1.3% m/m. Shelter was the biggest contributor to the number as it accounted fore more than 90% of the total reading and increased 0.5% m/m and 7.7% y/y. After the details of the report were out and after San Francisco Fed President Daly reiterated Fed’s commitment to keep tight monetary policy conditions dollar regained its strength.

The yield on a 10y Treasury started the week and year at around 4.04%, fell to to 3.98% post inflation report and finished the week at around the 4.14% level post PPI report. The yield on 2y Treasury reached the high of around 4.9%. Spread between 2y and 10y Treasuries started the week at -73bp then widened to -80bp post CPI only to come back down and finish the week at around -72bp. The 2y10y is has now been inverted for over a year. FedWatchTool sees the probability of a 25bp hike at September meeting at around 10% while probability of no change is at around 90%.

This week we will get consumption data and July FOMC minutes.

Important news for USD:

Tuesday:​

• Retail Sales

Wednesday:​

• FOMC Minutes​

EUR

German final inflation reading for July was unchanged at 0.3% m/m and 6.2% y/y. Yearly figure has declined from 6.4% y/y in June. France reading was also unchanged at 4.3% y/y, down from 4.5% y/y in June. Italy printed a decline in inflation to 5.9% y/y from 6.4% y/y the previous month. Spain saw an increase in inflation to 2.3% y/y from 1.9% y/y in June. We will get final Eurozone reading next week. The picture is still not clear for the September ECB meeting, but August inflation readings will give us more clarity.

GBP

Preliminary Q2 GDP reading surprised to the upside as it printed an increase of 0.2% q/q while it was expected to come out flat. It was helped by a strong June reading which printed an increase of 0.5% m/m vs 0.2% m/m as expected. Production led the way for quarterly reading with 0.7% increase, with manufacturing surging 1.6%, followed by construction at 0.3% and services at 0.1%. Household consumption rebounded strongly from Q1, where it was flat, and rose 0.7% while business investment rose 3.4%. There was a big surge in government spending of 3.1%. Net exports were a drag on the GDP.

This week we will have employment and inflation data.

Important news for GBP:

Tuesday:​

• Claimant Count Change​
• Unemployment Rate​

Wednesday:​

• CPI​

AUD

July trade balance from China saw another jump in trade surplus as it printed $80.6bn, up from $70.62bn the previous month. However, as we dig deeper into the details we see that there is no reason for cheering the report. Exports have increased their declines and they fell 14.5% y/y while imports almost doubled their declines from June and fell 12.4% y/y. Weak international demand is responsible for decline in exports, but now that domestic demand is declining at a rapid pace imports are dwindling. Inflation data showed China experiencing deflation for the first time since February of 2021. CPI for July printed -0.3% y/y. PPI has experienced a small rebound by coming at -4.4% y/y vs -5.4% y/y in June, but it is still deep in deflation.

This week we will get 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 retail card sales, comprising about 70% of total retail sales, were flat in July. Inflation expectations were adjusted. Looking 1 year ahead inflation expectation was lowered to 4.17% from 4.28% the previous quarter while 2 year ahead inflation expectation was raised to 2.83% from 2.79% the previous quarter.

This week we will have RBNZ meeting where no change to monetary policy is expected.

Important news for NZD:

Wednesday:​

• RBNZ Interest Rate Decision​

CAD

Building permits in June rose 6.1% m/m. It printed a great jump of 12.6% m/m in May. Trade balance for the month of June fell deeper in deficit as exports fell more than imports. Although oil ripped throughout the week CAD has not benefited from it as it was dragged down by the strong risk off sentiment in the market.

This week we will have inflation data.

Important news for CAD:

Tuesday:​

• CPI​

JPY

Labor cash data for the month of June saw increase of 2.3% y/y vs 2.9% y/y in May. Household spending saw surprising increase of 0.9% m/m in the month of June but yearly figure continued to deteriorate and fell to -4.2% y/y. The yield on a 10y JGB fluctuated between 0.57% and 0.64% this week and BOJ did not intervene in the markets.

This week we will have preliminary Q2 GDP data.

Important news for JPY:

Tuesday:​

• GDP​

CHF

SNB total sight deposits for the week ending August 4 came in at CHF492.9bn vs CHF490.1bn the previous week. Deposits have been hovering around 490bn for the previous six weeks. This could be the sign of bottoming and no more Swissy buying from SNB. Seasonally adjusted unemployment rate for July ticked up to 2.1% but is still at exceptionally low levels, lower than pre-pandemic.

[katetrades]

Forex Major Currencies Outlook (Aug 21 – Aug 25)

Jackson Hole Symposium, preliminary PMI data from the Eurozone and the UK as well as potential for more rate cuts from China will highlight the week ahead of us.

USD

July retail sales report showed that US consumer is not backing down. Headline number came in at 0.7% m/m vs 0.4% m/m as expected. Control group, which excludes volatile components and is used for GDP calculation, rose 1% m/m vs 0.5% m/m as expected. Ex autos category also rose 1% m/m vs 0.4% m/m as expected as car sales were down. One thing that surely impacted the reading was Amazon’s Prime Day as sales at nonstore retailers rose 1.9% m/m. Sales were down at furniture stores and for electronics and appliances.

FOMC minutes were more hawkish as they showed that “most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy". Some participants do not see recession in 2023 and now see “real GDP growth in 2024 and 2025 would run below their estimate of potential output growth, leading to a small increase in the unemployment rate relative to its current level”. September looks to be a pause while Fed remains in data dependent mode but probability of a November or December hike is increasing.

The yield on a 10y Treasury started the week and year at around 4.14%, rose to 4.33% and finished the week at around the 4.22%. The yield on 2y Treasury reached the high of above 5%. Spread between 2y and 10y Treasuries started the week at -73bp then widened to -75bp only to come back down and finish the week at around -68bp. The 2y10y is has now been inverted for over a year. FedWatchTool sees the probability of a 25bp hike at September meeting at around 14% while probability of no change is at around 86%.

This week we will have Jackson Hole Symposium with Powell set to speak on Friday.

Important news for USD:

*Thursday – Saturday:*​

• Jackson Hole Symposium​

EUR

Second estimate of Q2 GDP was unchanged from preliminary reading at 0.3% q/q and 0.6% y/y. Industrial production for June came in at 0.5% m/m, up from being flat in May and thus finished the second quarter on a strong note and could give some boost to start of Q3. Final inflation print for the month of July was unchanged with headline at 5.3% y/y and core at 5.5% y/y. Core inflation peaked at 5.7% y/y in March and has not made any significant progress to the downside since then. ECB remains data dependent and this reading does not provide much information about their September move.

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

Important news for EUR:

Tuesday:​

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

GBP

The employment report was a a very mixed one. On the one hand, BOE got what it was looking for, the ILO unemployment rate for June rose to 4.2% from 4 in May and employment change saw a drop of 66k jobs. On the other hand, wages have continued their march up. Average weekly earnings for June came in at 8.2% 3m/y vs 7.3% 3m/y while May’s reading was revised up to 7.2% 3m/y. Average weekly earnings ex bonus rose 7.8% 3m/y vs 7.4% 3m/y as expected and up from upwardly revised May reading of 7.5% 3m/y. BOE has emphasized importance of wage data and this report may nudge markets towards pricing a higher terminal rate.

Headline inflation number in July fell to 6.8% y/y as expected, down from 7.9% y/y in June on the back of declines of almost 20% in household electricity bills. Food prices have also declined, but they still show double digit inflation (14.9% vs 17.4% in June). The biggest contributor were hotels and airfares. Core inflation ticked up to 6.9% y/y from 6.8% y/y the previous month as services inflation rose to 7.4% y/y from 7.2% y/y in June. Peak core reading was 7.1% y/y in May and July reading is moving towards it instead of away from it. Markets are fully pricing in a 25bp rate hike in September and are moving closer to pricing 6% terminal rate.

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

Important news for GBP:

Tuesday:​

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

AUD

July employment report was abysmal. The employment change showed a loss of 14.6k jobs vs 15k jobs added as expected. The unemployment rate rose to 3.7% from 3.5% in June while participation rate ticked down to 66.7%. Adding to the disappointment, all of the jobs lost were full-time jobs (-24.2k) while part-time jobs added 9.6k. This is a single report but it indicates that RBA has managed to loosen up previously tight labor market. Wages data for Q2 grew slower than expected and printed 0.8% q/q and 3.6% y/y vs 1% q/q and 3.7% y/y as expected. Subdued wage growth and weak employment data will lower fears around wage-price spiral in the economy and will keep RBA in the pause mode for September.

July industrial production came in at 3.7% y/y vs 4.5% y/y as expected and down from 4.4% y/y in June. Retail sales, also missed expectations by coming in at 2.5% y/y vs 4.8% y/y as expected and down from 3.1% y/y the previous month. In a response to weak data and in a surprising move PBOC has cut 1-year MLF rate to 2.5% from 2.65%. MLF is used as a benchmark rate for commercial banks in China to borrow funds from PBOC on a 6-month to 1-year horizon. PBOC has also lowered a 7-day reverse repo rate to 1.8% from 1.9% previously. Further cuts were made to overnight, 7-day and 1-month SLF rates which were all cut by 10bps to 2.65%, 2.8% and 3.15% respectively. All of the moves are aimed at increasing liquidity and thus providing stimulus to the economy. Some major banks are slashing GDP forecasts for 2023 to 4.5%. Next week we will have LPR setting from PBOC and talks about 15bp rate cuts are growing louder.

NZD

RBNZ has decided to leave the Official Cash Rate (OCR) unchanged at 5.50% as was widely expected. New projections see OCR higher than previously and shown that rate in December of 2023 is seen at 5.54% vs 5.5% as seen in May and in December of 2024 will be at 5.50%. Headline inflation and inflation expectations have declined from their peaks but they are still too high. The statement shows that “In the near term, there is a risk that activity and inflation measures do not slow as much as expected.” Additionally, Committee is confident that keeping rates at restrictive levels will bring inflation down to the targeted range of 1-3%. Governor Orr stated that they are happy where rates are and that economy is still on the path of soft landing. He added that there are too many uncertainties to provide forward guidance and that projected cash rate will not deviate far from 5.5% in the next 2 years. GDT auction saw prices falling 7.4%, a disastrous reading for New Zealand’s term of trade.

This week we will have Q2 consumption data.

Important news for NZD:

Tuesday:​

• Retail Sales​

CAD

CPI report for the month of July surprised the markets and showed that inflation reaccalerated faster than expected. Headline number came in at 3.3% y/y vs 3% y/y as expected and up from 2.8% y/y in June. Core measures have all continued to decline with median printing 3.7% y/y, trim 3.6% y/y and common 4.8% y/y. Digging into the details of report we can see that increase in inflation owes to base effects in gasoline prices which fell 12.9% y/y vs a drop of 21.6% y/y the previous month. Additional factor that added to rise in prices were mortgage costs. Index for mortgage costs rose 2.4% in July. Due to the weakness in recent incoming data BOC was seen as pausing, but after today’s report markets will increase their pricing of another hike which should give CAD a short-term boost. We also need to be mindful that core measures continued to decline which is in line with what BOC is hoping for.

JPY

Q2 GDP data showed stunning rebound in the economy as it grew by 1.5% q/q vs 0.8% q/q as expected. Annualized growth was at 6% vs 3.1% as expected and 3.7% in the previous quarter. Digging into the details we see that private consumption fell 0.5% after it has risen steadily for the past quarters. Business spending was flat while government spending rose 0.1%. The biggest contribution came in from net trade, with exports growing the most in two years (3.2%) while imports fell for the third consecutive quarter (-4.3%). Weak JPY was very supportive of growing exports.

Headline inflation in July for the whole country stayed unchanged at 3.3% y/y with ex fresh food component dropping to 3.1% y/y from 3.3% y/y in June while “core-core” ex fresh food, energy inflation ticked up to 4.3% y/y from 4.2% y/y the previous month. BOJ remains adamant that inflation will start coming down from September/October and that there is no need for changes in their monetary policy. JGB had a disastrous 2y auction where the tail was highest since 1997. Rising yields on JGBs will have impact on rising yields around the world. Yield on 10y JGB 0.66 and there was no intervention by the BOJ.

CHF

SNB total sight deposits for the week ending August 11 came in at CHF484.8bn vs CHF492.9bn the previous week. Sight deposits are continuing their decline as SNB sells EUR and USD in order to prop Swissy strength and subdue inflation pressures.

[katetrades]

Forex Major Currencies Outlook (Aug 28 – Sep 1)

Inflation data from the US, Eurozone and Switzerland combined with NFP data and GDP data from the US and Canada as well as official PMI data from China will highlight the week ahead of us.

USD

New home sales in July surpassed expectations and came in at 714k, up from 684k in June. This is the highest number of new homes sold since February of 2022. Gains were led by sales in Midwest followed by sales in the West part of the country. This is yet another data point indicating resilience of the housing sector. Revision to the NFP number for March removed 306k jobs. This is a huge revision and undoubtedly a bad sign, but considering that market was bracing for a 500k jobs revision this can be seen in a positive light.

We will keep at it and job is not done are the main messages from Powell’s speech at Jackson Hole and Fed will thread carefully. He reiterated that Fed is data dependent and added that there are signs that the economy is not slowing down as expected. Inflation remains too high and although weak inflation data is welcome Fed needs to see more. Fed will not change 2% inflation target. Powell acknowledged that monetary policy is restrictive.

The yield on a 10y Treasury started the week and year at around 4.25%, rose to new highs of 4.36% and finished the week at around 4.23%. The yield on 2y Treasury reached the high of 5.08%. Spread between 2y and 10y Treasuries started the week at -69bp then widened to -79bp only to come back down and finish the week at around -78bp. The 2y10y is has now been inverted for over a year. FedWatchTool sees the probability of a 25bp hike at September meeting at around 19% while probability of no change is at around 81%.

This week we will have second reading of Q2 GDP, PCE data and NFP on Friday. Headline NFP number is expected to come at around 180k with the unemployment rate remaining at 3.5%.

Important news for USD:

Wednesday:​

• GDP​

Thursday:​

• PCE​

Friday:​

• NFP​
• Unemployment Rate​

EUR

Preliminary August PMI data gave us an unpleasant surprise with services sector slumping down into contraction territory and printing 48.3 vs 50.3 as expected and down from 50.9 in July. This is the lowest services reading since February of 2021. Both new orders and new export orders have continued to decline deeper into contraction indicating weak domestic and foreign demand. Input prices have been on the rise due to wage increases, thus flaming inflation pressures. Manufacturing managed to improve a bit and printed 43.7 vs 42.6 as expected and up from 42.7 the previous month. Composite was dragged down by services sector and it printed a 31-month low of 47. ECB will be hard pressed to change their hawkish rhetoric and markets are lowering probabilities of September hike. Additionally, July and August PMI indicate another quarter of negative growth, but analysts expect a 0.1% q/q increase mostly due to income from tourism.

Second and final reading of Germany’s Q2 GDP was unchanged, coming in flat and confirmed that economy escaped technical recession by going into stagnation. Question can be raised if they really escaped recession especially after abysmal PMI data for Q3. Digging into details we can see that public consumption contributed positively with 0.1% q/q while public consumption was flat. Net exports were a drag while inventories were up indicating weak domestic and foreign demand. German Ifo survey showed further deterioration in all three categories: current situation, business climate and outlook.

This week we will have preliminary inflation data for the month of August.

Important news for EUR:

Thursday:​

• CPI​

GBP

The worst preliminary PMI for the month of August came from the UK. They saw all three components declining with all three of them now in recession territory. Manufacturing slumped to 42.5 from 45.3 in July, services came in at 48.7 vs 51.5 the previous month and they both collectively dragged composite down to 47.9 from 50.8 in July. The report shows easing of inflationary pressures as weak demand reduces price setting power of companies. Reduction of inflation is coming at the high cost as growth is severely dampened. That was BOE’s plan, to cause subdued growth in order to fight off inflation. September rate hike is still in play, but markets are positioning as it will be the last one in this cycle.

AUD

PBOC has delivered a 10bp rate cut to their 1-year Loan Prime Rate (LPR) which now stands at 3.45% vs 3.55% previously. Markets were expecting a 15bp rate cut. Additionally, they have left 5-year LPR rate unchanged at 4.20%. LPR rate is used as a basis for commercial banks when they determine interest rates for new loans for their customers. Lower than expected rate cut and no cut to longer tenor rate caused further weakening in AUD and NZD.

This week we will have official PMI data from China.

Important news for AUD:

Thursday:​

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

NZD

Q2 retail sales came in at -1% q/q vs -2.6% q/q as expected and improved from -1.4% q/q in Q1. When we look y/y we also see improvement from -4.1% in Q1 to -3.5% in Q2. Core retail sales have continued to decline and came in at -1.8% q/q vs -1.1% q/q in the previous quarter. High inflation is taking its toll on consumers who are in turn dialing back on their consumption.

CAD

Retail sales form the month of June managed to increase by 0.1% m/m vs being flat as expected. Ex autos category plunged deeper with -0.8% m/m reading. Motor vehicles and parts were the biggest contributor to retail sales while furniture, electronics and appliances were biggest drag on the reading. Advanced reading for July sees retail sales rising 0.4% m/m suggesting strong start to the Q3.

This week we will have Q2 GDP reading.

Important news for CAD:

*Friday:*​

• GDP​

JPY

Preliminary August PMIs saw improvements across all three readings. Manufacturing ticked up to 49.7 from 49.6 in July while services printed a very strong 54.3, up from 53.8 the previous month. Composite was thus lifted to 52.6 from 52.2 in July. New orders and new export orders saw stronger growth for services sector while they showed weaker decline for manufacturing sector. Employment was unchanged for manufacturing while it started to grow for services sector. Output prices showed weaker inflation coming from manufacturing sector with stronger inflation coming from services sector. Input prices showed both sectors facing stronger inflation,

August CPI data for the Tokyo are showed signs of slowing down with headline number coming in at 2.9% y/y vs 3% y/y as expected and down from 3.2% y/y in July. Ex fresh food category came in at 2.8% y/y vs 2.9% y/y as expected and down from 3% y/y the previous month. Ex fresh food, energy component, the so-called core-core, remained unchanged at 4% y/y. BOJ maintains the stance that inflation is transitory and it will start to drop below targeted 2% from September/October. Yield on 10y rose to 0.684% during the week and there was no intervention.

CHF

SNB total sight deposits for the week ending August 18 came in at CHF476.2bn vs CHF484.8bn the previous week. SNB keeps selling USD and EUR in order to prop Swissy strength and fight off inflation.

This week we will have inflation data.

Important news for CHF:

Friday:​

• CPI

[katetrades]

Forex Major Currencies Outlook (Sep 4 – Sep 8)

RBA and BoC meetings, ISM services PMI from the US, GDP data from Australia and Switzerland and employment data from Canada will dominate the week ahead of us. Please note that Monday is a holiday in the US so liquidity will be lower.

USD

Combination of two data points, consumer confidence plunging in August to 106.1 from 117 in July and JOLTS printing 8.827m in July vs downwardly revised 9.165m in June stirred talks about weakening of the US economy and sent USD down. Second reading of Q2 GDP was revised down to 2.1% from 2.4% which exacerbated USD selling.

PCE data for the month of July saw numbers come in line with expectations. Headline number was at 3.3% y/y vs 3% y/y in June while core number was 4.2% y/y, a tick up from 4.1% y/y the previous month. Core services ex housing component, this is closely watched by the Fed because it is more influenced by wages, rose 0.46% m/m, up from 0.3% m/m in June. Inflation pressures are creeping back. Personal income rose at a slower pace of 0.2% m/m vs 0.3% m/m the previous month while personal spending sped up increase to 0.8% m/m vs 0.5% m/m the previous month. Strong growth in personal spending boosts projections for higher Q3 GDP. Most banks now see Q3 GDP between 3 and 3.5% while Atlanta Fed GDP Now tracker sees it at 5.6%.

Headline NFP number for August came in at 187k vs 170k as expected and up from 157k in July. Private education and health services were the biggest job creating sectors while information and trade and transport saw biggest declines in jobs. There was a large jump in the unemployment rate which printed 3.8%, up from 3.5% the previous month. Part of it was due to jump in participation rate to 62.8% from 62.6% but part of it is for sure due to Fed’s fast rate increases. Additionally, average wages came in at 0.2% m/m and 4.3% y/y vs 0.4% m/m and 4.4% y/y the previous month. Average hours worked ticked higher to 34.4.

The yield on a 10y Treasury started the week and year at around 4.25%, fell to 4.04% and finished the week at around 4.18%. The yield on 2y Treasury reached the high of 5.11%. Spread between 2y and 10y Treasuries started the week at -85bp then tightened to -68bp. The 2y10y is has now been inverted for over a year. FedWatchTool sees the probability of a 25bp hike at September meeting at around 7% while probability of no change is at around 93%.

This week we will have ISM Services PMI.

Important news for USD:

Wednesday:​

• ISM Services PMI​

EUR

Spain CPI in July rose and printed 2.6% y/y as expected. It is a second consecutive month of increases in inflation. German CPI in August slipped to 6.1% y/y from 6.2% y/y in July while expectations were for a further decline to 6% y/y. German state inflation readings were mixed with majority states printing declines but some printing price increases. French CPI rose to 4.8% y/y vs 4.6% y/y as expected and up from 4.3% y/y the previous month. Preliminary Eurozone CPI was unchanged at 5.3% y/y while expectations were for a decline to 5.1% y/y. Much more optimistic data came in from the core CPI which fell to 5.3% y/y as expected from 5.5% y/y the previous month. Probabilities of a rate hike in September are declining. Additionally, member of ECB Governing Council Isabel Schnabel gave a more balanced view in her interview stating that although there are uncertainties around inflation outlook growth has decelerated. When a known hawk strikes a more balanced, less hawkish tone, markets pay much more attention and her words were interpreted as dovish for future rate hikes.

GBP

BoE Deputy Governor Broadbent came out with hawkish comments stating that inflation is likely to slow down slower and that monetary policy will need to remain in restrictive territory for some time. BoE Chief Economist Pill stated that monetary policy needs to be sufficiently restrictive for long enough period of time. He commented that job on inflation is not through, however that there is a possibility of doing too much in the fight against inflation. Dovishness starts to creep in as economy is in danger of slowing down while inflation remains high. Raising rates too high in this type of environment could be very dangerous. Final manufacturing PMI for August was revised up to 43 from 42.5, but still down from 45.3 in July indicating that bottom is not yet in for UK’s manufacturing sector.

AUD

CPI data for the month of July came in at 4.9% y/y vs 5.2% y/y as expected and down from 5.4% y/y in June. Although monthly reading does not measure prices of all goods that go into official quarterly measurement of CPI, this is still a very welcoming data point. This also cements no change to the cash rate at the RBA meeting next week. Private CAPEX rose 2.8% q/q vs 1.2% q/q as expected with great boost coming from new equipment and machinery. Investment in buildings and structures also improved greatly.

At the start of the week China’s Ministry of Finance announced that stamp duty on stock trades would be halved from 0.1% to 0.05%. This had immediate positive effect on Chinese stock markets and helped push AUD higher. Chinese banks have cut rates they pay on yuan deposits in order to stimulate investments into economy. Ultimately, PBOC will cut Forex Reserve Rate Ratio (RRR) to 4% from 6%. This decision will come into effect on September 15. The move is intended to free some USD liquidity, as banks now need to hold less USD than before, and use it to prevent yuan from falling further.

Official PMI data for the month of August saw improvement in manufacturing to 49.7 from 49.3. Slowly moving in the right direction and getting closer to the expansion level of above 50. New orders index has already edged into expansion with 50.2 with production index growing further into expansion. Non-manufacturing PMI missed expectations but it is still holding in expansion with 51. Expectations index is the main reason why Non-manufacturing is still in expansion with total orders and employment components printing below 50. Composite was propped up to 51.3 from 51.1 in July. Caixin manufacturing PMI returned into expansion with a 51 print vs 49.3 as expected.

This week we will have RBA meeting and trade balance data from China. No change to cash rate is expected. This will be Governor Lowe’s last meeting and from October he will be succeeded by current deputy Michele Bullock and she set bringing inflation down to the target as her top priority.

Important news for AUD:

Tuesday:​

• RBA Interest Rate Decision​

Wednesday:​

• GDP​

Thursday:​

• Trade Balance (China)​

NZD

Business confidence in August improved to -3.7 from -13.1 in July. The report jumps in export intentions and employment outlook. Both Inflation and pricing expectations continued to decline while residential construction saw the biggest improvement within surveyed sectors.

CAD

Q2 GDP data were abysmal. The reading printed a decline of 0.2% annualised vs increase of 1.2% as was expected. Previous quarter’s increase was revised down to 2.6% from 3.1. There was no growth in q/q while Q1 growth was revised down to 0.6% from 0.8%. A drop of 0.2% m/m in June pushed the Q2 reading in negative territory. Preliminary July GDP reading is now seen coming in flat indicating a slow start for Q3. BoC should stand pat next week after this reading.

This week we will have BoC meeting and employment data. Markets are mixed but are leaning more toward no change in the interest rate.

Important news for CAD:

Wednesday:​

• BoC Interest Rate Decision​

Friday:​

• Employment Change​
• Unemployment Rate​

JPY

During the weekend BoJ Governor Ueda stated in Jackson Hole: “We think that underlying inflation is still a bit below our target, this is why we are sticking with our current monetary easing framework.” His dovish remarks kept JPY under pressure. Japanese government maintained its view on the economy in August stating that private consumption and business investments are picking up with industrial production showing signs of picking up. Employment shows movements of improvement while consumer prices are rising.

The unemployment rate in July jumped to 2.7% from 2.5% with job-to-applicant ratio slipping to 1.29. This is the highest level for the unemployment rate since February of 2022. Retail sales jumped 2.1% m/m, which is almost three times more than expected, after a decline of 0.4% m/m in June and rose 6.9% y/y after a 5.6% y/y increase the previous month.

CAPEX for the second quarter came in at 4.5% q/q vs 5.4% q/q and down from 11% q/q in the previous quarter. Company profits in Q2 soared to 11.6% q/q from 4.6% q/q in Q1. Reports are circling that government plans to extend subsidies on fuel. This will keep inflation lower. Yield on a 10y JGB reached a high of 0.66 and BoJ has not intervened in the markets.

CHF

SNB total sight deposits for the week ending August 25 came in at CHF471.4bn vs CHF476.2bn the previous week. SNB remains adamant in drawing down sight deposits and using them to purchase Swissy. Headline CPI in August remained steady at 1.6% y/y while it was expected for it to tick down to 1.5% y/y. More encouraging sign can be seen in core reading which dropped to 1.5% y/y from 1.7% y/y in July. SNB may opt for one more hike just to be sure at their September meeting but with inflation below 2% and moving down they can be satisfied with the job they have done so far.

This week we will have Q2 GDP data.

Important news for CHF:

Monday:​

• GDP

[katetrades]

Forex Major Currencies Outlook (Oct 2 – Oct 6)

RBA and RBNZ meetings followed by potential NFP data, Canadian employment, ISM PMI and Swiss inflation will highlight the week ahead of us.

USD

Minneapolis Fed president Neel Kashkari published an essay in which he stated that there is a 60% chance of a soft landing with a 40% chance the Fed will have to continue hiking, possibly “significantly higher”. He expects that Fed will hold rates steady during 2024. USD has strengthened throughout the week and his words have provided a nice support for the dollar.

Durable goods for the month of August came in at 0.2% m/m vs -0.5% m/m as expected helped by downward revision to July reading. Core durable goods came in at 0.9% m/m vs 0.1% m/m as expected but there was also a revision down to July reading. Atlanta Fed GDP now remained unchanged at 4.9%. Final reading of Q3 GDP saw it come in unchanged at 2.1% annualised. However, the details are more concerning. Personal consumption was revised down to 0.8% from 1.8% thus making its contribution to 0.55pp from 1.14pp in second reading. With student loan repayments and government shutdown incoming this GDP component can fall further in Q4. Fixed investment was revised up and contributed 0.9pp while net exports were also revised up and contributed 0.04pp to the GDP reading.

PCE data for the month of August showed headline number ticking up to 3.5% y/y from 3.4% y/y in July. Core PCE has continued to decline coming in at 3.9% y/y, down from 4.3% y/y the previous month. Fed will be happy with the incoming data. Personal consumption and spending both came in at 0.4% m/m.

The yield on a 10y Treasury started the week and year at around 4.44%, rose to 4.65% and finished the week at around 4.52%. The yield on 2y Treasury reached the high of 5.15%. Spread between 2y and 10y Treasuries started the week at -68bp then tightened to -50bp as bear steepening of the curve continues. The 2y10y is has now been inverted for over a year. FedWatchTool sees the probability of a 25bp hike at November meeting at around 17% while probability of no change is at around 83%.

This week we will get ISM PMI data and should get NFP data on Friday. Headline number is expected to come at around 150k with the unemployment rate staying at 3.8%.

Important news for USD:

Monday:​

• ISM Manufacturing PMI​

Wednesday:​

• ISM Services PMI​

Friday:​

• NFP​
• Unemployment Rate​
• Average Hourly Earnings​

EUR

German Ifo survey for the month of September showed decline in current assessment, basically no change in business climate and improvement in expectations category. Business climate is at five year lows hinting at standstill for the economy.

Member of the ECB’s Governing Council Villeroy stated that risks of doing too much and too little on rates are now balanced. He added that oil prices need to be monitored as they can influence rising inflation expectations. He reiterated the message that rates should stay at this level (4% currently) for sufficiently long period of time. Positive growth is expected in 2024-25 and inflation should go down to 2% target by 2025.

Preliminary Eurozone inflation reading for the month of September saw a bigger than expected decline for the headline number as it printed 4.3% y/y, down from 5.2% y/y in August. A very encouraging sign for the ECB can be seen in core inflation reading which dropped to 4.5% y/y from 5.3% y/y the previous month. Preliminary inflation data from Spain came in at 3.5% y/y as expected, jumping almost a full percentage point from 2.6% y/y the previous month. Core inflation has declined to 5.8% y/y from 6.1% y/y making it the lowest print in last fifteen months. German CPI dropped to 4.5% y/y from 6.1% y/y in July. Base effects were the biggest reason for a drop. French CPI was unchanged at 4.9% y/y while expectations were for it to rise to 5.1% y/y.

GBP

Final reading of Q2 GDP saw economy growing by 0.2% q/q and 0.6% y/y. Q1 GDP was revised up to 0.3% q/q and 0.5% y/y from 0.1% q/q and 0.2% y/y. Services sector showed no growth while production sector increased by 1.2%. Household consumption in Q2 was revised down to show 0.5% growth from 0.7% as preliminary reported. Business investment jumped 4.1% while government consumption rose by 2.5%. Business confidence for September has slid to 36 from 41 in August.

AUD

Australian monthly inflation data for the month of August came in at 5.2% y/y as expected and up from 4.9% y/y in July. Headline monthly figure rose almost 0.7% while core rose 0.3% indicating that fight against inflation is not over which may prompt RBA to deliver more rate hikes. Rising oil prices (9.1% m/m) were the biggest contributor to the inflation. Rent increases continue to be strong rising 0.7% m/m.

This week we will have RBA meeting. Rising price pressures are turning RBA toward more tightening but we think that they will wait for official Q3 inflation data before deciding to make a move. Q3 CPI comes out late in October so we do not expect any change to monetary policy at this meeting.

Important news for AUD:

Tuesday:​

• RBA Interest Rate Decision​

NZD

September activity data published by ANZ showed continued improvement in business confidence to 1.5 from -3.7 in August. This is the first time that business confidence is in positive territory since May of 2021. Wage expectations continue to increase and are followed with increases in pricing intentions. Profit expectations are rising while inflation expectations are declining which is a great boon for the economy. On the negative side, export intentions and commercial construction are declining faster. Consumer confidence has also improved according to the ANZ survey.

This week we will have RBNZ meeting. No change in rate is expected but since we had some positive data we can expect a more hawkish message.

Important news for NZD:

Wednesday:​

• RBNZ Interest Rate Decision​

CAD

July GDP reading came in flat after increase of 0.2% m/m in June. Advanced reading for August is seen at 0.1%. Lackluster growth prospects caused CAD to be a laggard this week and make smaller gains compared to its peers. CAD rebounded a bit on Friday but still growth prospects are weighing it down.

This week we will have employment data.

Important news for CAD:

Friday:​

• Employment Change​
• Unemployment Rate​

JPY

BoJ Governor Ueda stated in his speech in Osaka that they will continue to patiently maintain easing policy. He stated that current stance has big stimulative effect on the economy but it can cause some unwanted side-effects. He emphasized uncertainty surrounding their base outlook and added that stable achievement of 2% inflation target is not yet in sight. Additionally, he clarified that they will not directly target forex in guiding monetary policy.

Tokyo CPI for September showed declines across the measures, but they remain elevated. Headline number came in at 2.8% y/y down from 2.9% y/y in August while ex fresh food category dropped to 2.5% y/y from 2.8% y/y the previous month. Ex fresh food, energy category, so-called core-core, slid to 3.8% y/y from 4% y/y in August. BoJ remains adamant that inflation will start falling from September/October period. The yield on a 10y JGB reached 0.77% which is the highest level in last ten years and BoJ will conduct unscheduled bond purchases starting next week.

CHF

SNB total sight deposits for the week ending September 22 came in at CHF475.1bn vs CHF473bn the previous week. Total sight deposits have been slowly rising for the entire month of September and with SNB leaving rates unchanged at 1.75% it seems that Swissy weakening is back on the table.

This week we will have inflation data.

Important news for CHF:

Tuesday:​

• CPI

[katetrades]

Forex Major Currencies Outlook (Oct 9 – Oct 13)

Inflation data from the US and China combined with FOMC meeting minutes will dominate otherwise quiet week ahead of us. Over the weekend Hamas has launched surprise attack on Israel killing many innocent civilians, oil and gold should spike on market open. Please be mindful that increased volatility can be seen during the week.

USD

ISM manufacturing PMI in the month of September printed 49, up from 47.8 in August. The number is still below expansion level of 50, it has been there for eleven months, but positives are abound in this reading. Production rose to 52.5 and employment jumped back into expansion with 51.2 which is the highest reading since May. New orders and new export orders both improved with former coming at 49.2, close to the 50 level. Finally, prices paid component continued to decline and printed 43.8 vs 48.4 in August.

ISM services PMI for the month of September came in at 53.6 as expected, down from 54.5 in August. There was a big drop in new orders index, but it is still holding nicely in expansion. Employment index also fell, but by smaller amount. New export orders index continued to improve and is now sitting at 63.7 while backlog of orders posted a huge jump and almost returned into expansion. Prices paid component remained unchanged at 58.9 which is a concern considering inflation pressures coming in from the services sector.

Headline NFP number in September blew the roof off expectations. It came in at 336k while 170k was expected. There was no changes in the unemployment rate and participation rate (3.8% and 62.8% respectively). Average hourly earnings came in at 0.2% m/m, unchanged from August reading, but a tad weaker than 0.3% m/m as was expected while yearly figure slid to 4.2% from 4.3% the previous month. Chances of a November rate hike jumped after the report.

The yield on a 10y Treasury started the week and year at around 4.58%, rose to 4.89% and finished the week at around 4.78%. The yield on 2y Treasury reached the high of 5.21%. Spread between 2y and 10y Treasuries started the week at -48bp then tightened to -26bp as bear steepening of the curve continues. The 2y10y is has now been inverted for over a year. FedWatchTool sees the probability of a 25bp hike at November meeting at around 30% while probability of no change is at around 70%.

This week we will have September meeting minutes and inflation data. Headline inflation is expected to tick up on the back of rising oil prices while core inflation is expected to continue declining toward the 4% level.

Important news for USD:

Wednesday:​

• FOMC Minutes​

Thursday:​

• CPI​

EUR

Final Eurozone manufacturing PMI for September was unchanged at 43.4 with German reading being revised down and French reading being revised up. Output and employment components are declining. Demand for manufactured goods is on the decline. August unemployment rate came in at 6.4% y/y as expected and ticked down from 6.5% y/y in July. Final services for the Eurozone improved to 48.7 on the back of improvements across the board while German and Spain services readings returned into expansion. Composite reading improved to 47.2.

ECB Vice President de Guindos stated that it is premature to talk about rate cuts. ECB Chief Economist Philip Lane stated that service inflation is a big contributor to the overall number and that getting inflation down to 2% will not be as quick as getting it down to 4%. He added the key is to keep rates at current level for as long as needed and that they are data dependent. As yields on 10y bonds are rising rapidly around the world, yield on 10y German Bunds reached 3% level for the first time since 2011.

GBP

Final manufacturing PMI for the month of September showed a slightly bigger bounce from August low (44.3 vs 43). New orders, output and employment components recorded declines as weak demand for manufactured goods prevail. Due to declines in demand input prices are falling which will have positive impact on high inflation. The report shows that combination of lower costs and higher selling prices led to higher corporate margins. Services printed 49.3, much better than preliminary reported, but still down from 49.5 in August. There was a drop in new orders and employment categories but input costs rose at a slowest pace in almost two-and-a-half years. Composite printed 48.5, a tick down from 48.6 the previous month. BOE policymaker Broadbent stated that it is still up to debate whether there will be more rate hikes.

AUD

RBA has decided to leave the cash rate unchanged at 4.1% as was widely expected. This was the first meeting led by new Governor Michele Bullock. Inflation has passed its peak but remain elevated due to services and rents, central projection is for it to return to 2-3% targeted range by late 2025. Growth in first quarter was stronger than expected, but still below trend as is expected to continue. Uncertainties around growth remain significant. The statement concludes with “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will continue to depend upon the data and the evolving assessment of risks. In making its decisions, the Board will continue to pay close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labor market.” A hawkish sounding message at the end, but markets continued to sell AUD.

Over the weekend Chinese PMI data were published and in the official data we can see manufacturing returning to expansion territory with 50.2 print while services PMI moved further into expansion with a 51.7 reading thus pushing composite to 52. Caixin PMI data missed expectations and dropped further with manufacturing printing 50.6 vs 51 in August while services recorded a bigger drop to 50.2 from 51.8 the previous month. Composite was dragged down to 50.9 from 51.7. China will be on holiday for the entire week. JP Morgan and Nomura analysts have revised China GDP growth up stating potential incoming targeted stimulative action.

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

Important news for AUD:

Friday:​

• CPI (China)​
• Trade Balance (China)​

NZD

RBNZ has left its Official Cash Rate (OCR) unchanged at 5.5% as was widely expected. Committee agreed that OCR needs to stay at restrictive level to constrain economic activity and keep inflation pressures in check. They acknowledged that Q2 growth was stronger than expected, the growth outlook remains subdued. The statement showed “There is a near-term risk that activity and inflation do not slow as much as needed.“ Inflation remains too high and Committee is determined to bring it down to 1-3% target range while maintaining maximum employment and that means that rates may need to remain at restrictive level for a more sustained period of time. Inflation is still expected to return to targeted range by the H2 of next year. The meeting and statement can be assessed as hawkish pause since there are no mention of cuts and doors are left open for additional rate hikes. The first GDT auction in October posted a great result as prices rose 4.4%. This makes it a third consecutive auction of rising dairy prices which should give Kiwi some support.

CAD

September employment report showed a strong addition of jobs to the tune of 63.8k vs 20k as expected. The unemployment rate remained at 5.5% while expectations were for it to tick up to 5.6%. Participation rate did tick up to 65.6% from 65.5% in August. Average hourly wages also ticked up to 5.3% y/y from 5.2% y/y the previous month. Full-time employment was at 15.8k while part-time employment was at 47.9k. Rising wages, more jobs added and higher participation all lead to higher chances of additional rate hike by BoC.

JPY

BoJ Tankan report for the Q3 showed that companies expect inflation to be higher than 2% target in five years. Consumer prices are seen rising 2.5% a year from now, 2.3% annual increase three years from now and 2.1% annual increase five years from now. The report shows improvements for both big manufacturers and non-manufacturers in September and December. Firms see USDJPY averaging 135.75 for Fiscal Year (FY) 2023/24 and EURJPY averaging 144.76 for FY 2023/24.

BoJ Summary of Opinions from September meeting sent a dovish tone. The minutes show that “even if the Bank were to terminate its negative interest rate policy, this can be considered as continuation of monetary easing if real interest rates remain negative”. It was said that timing of monetary policy changes cannot be stated now as it will depend on the incoming data. This puts BoJ in data dependent mode with other central banks. The summary also shows “Consumer prices are projected to continue rising in the next fiscal year”.

US JOLTS job openings for the month of August smashed expectations and came in at 9.61m vs 8.8m as expected. This data point pushed USDJPY over the 150 level and there was a fast intervention pushing the pair all the way down to 147. There was no confirmation of intervention from Japanese authorities. The yield on a 10y JBG reached the 0.8% level on Wednesday making it the highest since 2013.

Labour cash earnings rose by 1.1% y/y in the month of August vs 1.5% y/y expected increase. When we take inflation into account we see that real wages continued to decline and fell by 2.5% y/y. Household spending declined by 2.5% y/y vs expected decline of 4.3% y/y. High inflation is impacting real wages and consequently spending and with BoJ giving much attention to the wage growth we cannot expect any significant movements toward monetary tightening until situation with wages improves. MUFG has came out with opinion that negative rates policy can be abandoned as early as January of next year, but YCC will remain in place.

CHF

SNB total sight deposits for the week of September 29 came in at CHF476.3bn vs CHF475.1bn the previous week. Continuation of increases suggests that SNB is done with buying Swissy and is now leaning toward weakening it. Headline inflation for September ticked up to 1.7% y/y from 1.6% y/y in August, but expectations were for an increase to 1.8% y/y. On the other hand, core CPI declined further to 1.3% y/y from 1.5% y/y the previous month.

[katetrades]

Forex Major Currencies Outlook (Oct 16 – Oct 20)

This week we will have a packed week with Q3 GDP data from China as well as consumption data from the US, the UK, Canada and China, on top of inflation data from the UK, Canada and New Zealand and employment data from the UK and Australia.

USD

FOMC minutes from the September meeting saw members express their opinion thusly: “Participants generally judged that, with the stance of monetary policy in restrictive territory, risks to the achievement of the Committee’s goals had become more two-sided.” Additionally, minutes show that all members agreed that policy should remain restrictive until they are confident that inflation is sustainably moving to their target. GDP for the Q4 should be restricted somewhat by strikes.

Fed Vice Chair Jefferson and President of Dallas Fed Logan stated the increases in long-end Treasury yields could potentially be doing tightening of monetary conditions that the Fed had been trying to achieve. These comments can be seen as dovish as they indicate that Fed will not need to hike as much as anticipated now that markets are actively assisting them in conducting monetary policy. San Francisco Fed President Mary Daly also stated that high yields have impact on future monetary policy decisions. She added that neutral rate may be higher than 2.5% as previously expected. Philly Fed President Harker stated that they are likely to be done with rate hikes.

Headline CPI for the month of September came in at 3.7% y/y, unchanged from August but a tick higher than expected at 3.6% y/y. Monthly increase was 0.4% vs 0.3% as expected. The report showed that energy component was the biggest contributor to the increase as oil prices rose significantly in September. Food continued to increase at 0.2% m/m pace. Used vehicles were the biggest drag on inflation falling 2.5% m/m followed by apparel which fell 0.1% m/m. Core rate came in at 0.3% m/m and 4.1% y/y as was expected. Shelter component came in hot at 0.6% m/m. Super core (services, ex-shelter and ex-energy) also continued to run hot and also rose by 0.6% m/m. USD was bid and Treasuries were sold as markets started pricing in a greater chance of a final rate hike in 2023.

The yield on a 10y Treasury started the week and year at around 4.64%, rose to 4.68% and finished the week at around 4.32%. The yield on 2y Treasury reached the high of 5.08%. Spread between 2y and 10y Treasuries started the week at -29bp then widened to -37bp as curve starts to flatten again. The 2y10y is has now been inverted for over a year. FedWatchTool sees the probability of a 25bp hike at November meeting at around 9% while probability of no change is at around 91%.

This week we will have consumption data.

Important news for USD:

Tuesday:​

• Retail Sales​

EUR

ECB policymaker Kazaks, Governor of Central Bank of Latvia, stated that ECB is done with rapid rate hikes and added that any possible future rate hikes will be relatively small. ECB Vice President de Guindos stated that inflation is expected to continue falling in the coming months, but there is a risk of higher oil prices tempering with orderly decline and added that current level of rates should contribute to price stabilisation. French Central Bank President Villeroy stated that rates are on a good level and added that at this stage, further rate hikes are not the right thing to do. New projection for 12-month CPI by ECB has been raised to 3.5% from 3.4% as seen in July. Projection from 3-year was raised to 2.5% from 2.4% as was projected three months ago.

GBP

August GDP number came in at 0.2% m/m as expected and presented a nice rebound from -0.6% m/m seen in July. The services sector grew by 0.4% while both production and construction sectors contracted. BoE Chief Economist Pill stated that it is now a matter of fine balancing whether they need to raise rates higher adding that there is a lot of tightening from rate hikes yet to be felt in the markets. BoE Governor Bailey commented on how tight the previous voting was and that future votes on rate hikes will be tight as well. He added that rates are restrictive as it is needed for the current inflationary environment.

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

RBA Assistant Governor Kent reiterated that further tightening may be required adding that already done monetary policy tightening is bringing growth, demand and inflation down. Lags in the transmission of monetary policy are problematic. He added that pause gives them chance to assess effects of current tightening on the economy and that if they do decide to sell bonds they will do it in such a way as to not disturb the market.

September inflation data from China saw it increase 0.2% m/m vs 0.3% m/m as expected and thus stay flat for the year vs expected increase of 0.2% y/y. Food prices declined 3.2% and were the biggest drag on inflation. PPI continued to improve for the third straight month and printed -2.5% y/y vs -3% y/y the previous month. Trade balance data saw surplus widen to $77.7bn from $68.3bn in August with both exports and imports coming in at -6.2% y/y which represents improvement from falling by -8.8% y/y and -7.3% y/y the previous month respectively.

This week we will have employment data from Australia as well as Q3 GDP data, production and consumption data from China.

Important news for AUD:

Wednesday:​

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

Thursday:​

• Employment Change​
• Unemployment Rate​

NZD

RBNZ Governor Orr reiterated bank’s stance that rates will need to stay at restrictive levels for foreseeable future. He stated that it is necessary to keep them there in order for bank to reach its inflation target of 1-3%. Electronic card retail sales, a good proxy to the official quarterly retail sales, fell in September 0.8% m/m. Yearly number is still positive with a 1.6% y/y print, but much weaker than 4.2% y/y print in August.

This week we will have Q3 inflation data.

Important news for NZD:

Monday:​

• CPI​

CAD

Building permits rebounded in August and came in at 3.4% m/m vs 0.5% m/m as expected after a drop of 3.8% m/m in July. CAD has suffered from risk off mode in markets and gave up most of its gains against USD. BoC Governor Macklem stated that they do not expect recession and added that “Higher long-term bond yields are not a substitute for down what needs to be done to get inflation back down to target”. His message has differed from Fed’s and it was clearly hawkish giving CAD some new strength as markets start to price in bigger chance of further 25bp rate hike.

This week we will have inflation and consumption data.

Important news for CAD:

Tuesday:​

• CPI​
• Retail Sales​

JPY

Japanese media reports that BoJ is considering moving its inflation outlook for the current fiscal year to 3% from 2.5% that was projected in July. The report states that main reason for such a move would be rising oil prices and weak JPY. There are also reports that government is considering fuel subsidies to help its citizens with escalating energy prices. Core machinery orders, a good proxy for Capex spending, continued to decline in August and missed expectations. The numbers came in at -0.5% m/m vs 0.4% m/m as expected and -7.7% y/y vs -7.3% y/y as expected.

CHF

SNB total sight deposits for the week ending October 6 came in at CHF479.9bn vs CHF476.3bn the previous week. Another week of rising sight deposits indicates that SNB is buying EUR and USD.

[katetrades]

Forex Major Currencies Outlook (Oct 23 – Oct 27)

RBA and BoC meetings, coupled with preliminary Q3 GDP from the US and preliminary October PMI data from the Eurozone and the UK as well as inflation data from the US and Australia will highlight the busy week ahead of us. Additionally, we will get Q3 earnings from Microsoft, Alphabet, Meta and Amazon.

USD

September retail sales report was a strong one and reminder that we should never underestimate the strength of American consumer. All four key readings beat expectations and previous month’s readings were revised up. Headline number came in at 0.7% m/m. Ex autos category as well as ex autos and gas and control group, which excludes all volatile categories and is used for GDP calculation all increased by 0.6% m/m. Retail sales have been increasing for the past 6 months and they will give boost to Q3 GDP reading next week. Additionally, they will cause Fed to consider whether monetary policy conditions are tight enough.

Fed Chair Powell stated that economy is resilient and has consistently surprised to the upside. He added that rise in yields might lower the need for future rate hikes. Basically bond market is doing Fed’s job and tightens financial conditions by raising yields. On the rising yields he commented that the rise does not appear to be due to expectations for higher inflation or further Fed rate hikes. “It’s really happening in term premiums, which is the compensation for holding long-term securities, and not principally a function of the market looking at near term fund rates,” Fed is completely data dependent and in wait and see mode. Markets interpreted his speech as dovish leaning.

The yield on a 10y Treasury started the week and year at around 4.62%, reached the 5% level and finished the week at around 4.91%. The yield on 2y Treasury reached the high of 5.26%, the level not seen since 2006. Spread between 2y and 10y Treasuries started the week at -44bp then tightened to -14bp as curve resumed its bear steepening trend. The 2y10y is has now been inverted for over a year. FedWatchTool now sees the probability of a 25bp CUT at November meeting at around 2% while probability of no change is at around 98%.

This week we will have preliminary Q3 GDP reading which is expected to come north of 4% and Fed’s preferred inflation data, PCE.

Important news for USD:

Thursday:​

• GDP​

Friday:​

• PCE​

EUR

German ZEW survey for October saw current conditions deteriorate less than expected and print -79.9 vs -79.4 in September. Positives can be seen in the economic sentiment which improved to -1.1 from -11.4 the previous month indicating that investors think that worst is behind us and that future will be brighter. Economic sentiment for the Euro area returned into positive territory as it printed 2.3 vs -8.9 in September. Final inflation reading for September was unchanged with headline at 4.3% y/y and core 4.5% y/y.

This week we will have preliminary October PMI data and ECB meeting. This meeting should act as a bridge meeting for December one where we will get new staff projections. Therefore, markets and we see no change to interest rates. Further tightening could be conducted by advancing the end of PEPP reinvestments.

Important news for EUR:

Tuesday:

• S&P Global Manufacturing (Eurozone, Germany, France)​
• S&P Global Services (Eurozone, Germany, France)​
• S&P Global Composite (Eurozone, Germany, France)​

Thursday:​

• ECB Interest Rate Decision​

GBP

We got only partial employment data this week. Payrolls change for September dropped 11k vs flat as expected and August reading was revised down to show a drop of 8k. Wages data showed decline as average weekly earnings for August came in at 8.1% 3m/y vs 8.3% 3m/y and 8.5% 3m/y in July. Average weekly earnings excluding bonus came in at 7.8% 3m/y as expected and a tad weaker than 7.9% 3m/y the previous month. BoE can feel a bit of relief that wages were softer but increases are still very high. September inflation data saw headline CPI remain unchanged at 6.7% y/y while a small drop to 6.6% y/y was expected. Motor fuel prices were the biggest contributor to the reading. There was a decline in food prices making it the first such m/m decline in two years Core CPI did tick down to 6.1% y/y from 6.2% y/y in August, but expectations were for it to drop to 6% y/y. Chancellor of Exchequer Hunt commented on inflation and stated that it rarely comes down in straight line but it is still expected that it should continue declining toward the year end. BoE is primarily interested in services inflation and it ticked up to 6.9% y/y from 6.8% y/y in August. These readings will not sway BoE towards one way or another so we may see one more tight meeting with markets leaning more towards no change.

This week we will have preliminary October PMI readings and remaining jobs data.

Important news for GBP:

Tuesday:​

• S&P Global Manufacturing​
• S&P Global Services​
• S&P Global Composite​
• Unemployment rate​

AUD

RBA minutes from October meeting surprised markets as they showed that board debated between a 25bp rate hike and no change. In the end no change to rate hike prevailed as a stronger case. Minutes also show that upside risks to inflation present a “significant concern” as well as that boar has “low tolerance” for slow return of inflation towards the target. Minutes also showed concern about rising house prices and their potential to spur up consumption which may signal that policy is not restrictive enough. Minutes showed decent amount of concerns that board members had and they overall struck a more hawkish tone.

September jobs report was a weak one. Employment change came in at 6.7k vs 20k as expected. The unemployment rate slid to 3.6% from 3.7% in August but the main culprit was big drop in participation rate to 66.7% from 67% the previous month. Looking further into employment numbers we can see that full-time employment dropped by 39.9k so all of the gains in jobs report were from added part-time jobs.

Q3 GDP number saw economy grow 1.3% q/q vs 1% q/q as expected. On a yearly basis growth was 4.9% vs 4.4% as expected. Economy outperformed expectations but the yearly figure is weaker than it was in Q2. GDP has caused many analysts to revise China’s 2023 GDP higher than previously thought. Industrial production grew by 4.5% y/y in September, unchanged from August reading while retail sales rose 5.5% y/y, up from 4.6% y/y the previous month. Both readings came in stronger than expected. PBOC has left 1-year MLF rate unchanged at 2.5% as was widely expected. Loan Prime Rates (LPR) were also left unchanged with 1-year at 3.45% and 5-year at 4.20%.

This week we will have Q3 inflation data.

Important news for AUD:

Wednesday:​

• CPI​

NZD

In the elections held over the weekend Christian Luxon the leader of the National Party became the new Prime Minister. The party managed to secure enough votes so it can create a conservative leaning government with right-wing ACT party. Q3 CPI data saw quarterly number increase less than expected (1.8% vs 2%) while yearly figure fell more than expected (5.6% vs 5.9%). Q2 has printed 1.1% q/q and 6% y/y. RBNZ sectoral model, their preferred measure of inflation, declined to 5.2% y/y from 5.7% y/y in the previous quarter. Improvement in yearly figure and drop in sectoral model will release some of the pressure on RBNZ to continue raising rates. Although inflation remains very high, ANZ now predicts that next rate hike will come in February of next year instead of November of 2023. GDT auction saw prices increase by 4.3%. This is the fourth consecutive auction of rising prices which could add some tail wind to Kiwi.

CAD

Headline CPI for the month of September declined to 3.8% y/y from 4% y/y in October as it declined 0.1% m/m compared to increase of 0.4% m/m as seen the previous month. Declines were located in some travel-related services as well as in durable goods and groceries. A big decline in prices was seen in airfares. Increases in prices were seen for gasoline. Core measures all recorded declines in inflation with median falling below 4% with 3.8% y/y print, common at 4.4% y/y and trim at 3.7% y/y. Inflation coming down will make BoC reconsider their hawkish stance and may lead them to pause at next week’s meeting.

This week we will have BoC meeting. With inflation cooling down and growth prospects looking weak BoC may opt to leave rates unchanged despite the strong October employment report.

Important news for CAD:

Wednesday:​

• BoC Interest Rate Decision​

JPY

Report in the media showed that Japanese trade union plans to ask for more than a 5% increase at wage negotiations in spring of 2024. This is meant to help workers cope with rising living costs due to high inflation. The yield on 10y JGB reached 0.86% during the week. That level has not been seen in ten years. Trade balance returned into surplus in the month of September as exports rose to highest level in history according to the Ministry of Finance. Exports to the US also printed their highest value ever. Continually declining JPY is a great boost for the exporters, making Japanese goods cheaper and results are clearly seen.

CHF

SNB total sight deposits for the week ending October 13 came in at CHF483.8bn vs CHF479.9bn the previous week. SNB is selling EUR and USD and sight deposits have been rising every week since the start of September.