Tue, Dec 06, 2022 @ 23:19 GMT
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EUR/USD Downside Breakout; Focus on RBA, BoC and ECB This Week

The downside breakout in EUR/USD is finally here as markets focus turns to meetings of RBA, BoC and ECB. Dollar is rising broadly, and risk-off sentiment takes Yen and Swiss Franc higher too. Euro is starting to reverse some of last week’s gain while Sterling is staying weak. Commodity currencies are currently mixed for now.

Technically, as Euro turns weak broadly, some attention will be on 0.9696 minor support in EUR/CHF. Break there will argue that corrective rebound from 0.9550 has completed at 0.9864. Larger down trend might be ready to resume through 0.9550 low in this case. If that happens, Euro could be dragged down further in other crosses.

In Asia, at the time of writing, Nikkei is up 0.03%. Hong Kong HSI is down -1.28%. China Shanghai SSE is up 0.10%. Singapore Strait Times is up 0.25%. Japan 10-year JGB yield is down -0.007 at 0.236.

Australia AiG construction rose to 47.9, pull back continued

Australia AiG Performance of Construction Index rose 2.6 pts to 47.9 in August. Activity rose 3.5 to 46.2. Employment dropped -5.3 to 47.7. New orders rose 7.9 to 51.0. Supplier deliveries rose 3.4 to 45.6. Input prices dropped -1.2 to 92.6. Selling prices dropped sharply by -18.6 to 68.5. Average wages rose 1.2 to 77.6.

Peter Burn, Chief Policy Advisor at Ai Group said: “The pull back of the Australian construction sector continued in August with three of the four industry segments recording falls in activity and employment across the industry dropping in the month…. Builders and constructors link much of the fall in activity to rises in interest rates in recent months….. Softer demand was also reflected in the steep fall in the selling price index even though input prices and wage increases remain elevated.”

China Caixin PMI services dropped to 55 in Aug, PMI composite down to 53

China Caixin PMI Services dropped slightly from 55.5 to 55.0 in August, above expectation of 54.2. Caixin added that business activity growth held close to July’s 15-month high. total new orders rose despite stronger fall in new export business. Optimism around outlook was highest since November.

Wang Zhe, Senior Economist at Caixin Insight Group said: “In August, the Caixin China General Composite PMI dropped to 53 from 54 the previous month. The reading, while marking the second straight monthly drop, remained in expansionary territory. Both supply and demand continued to expand, albeit at a slower pace, with services outperforming manufacturing. Employment remained weak and input costs experienced the slowest increase in 27 months. Market confidence remained stable.”

RBA, BoC, and ECB to raise interest rates again

Three central banks are expected to raise interest rate this week. RBA should hike the cash rate by 50bps to 2.35%. While Governor Philip Lowe has recently indicated that the neutral rate for Australia is at least 2.50%, interest should be close enough to neutral after this week’s move. So, the markets would be eager to get more hints on what next. It’s unlikely for RBA to reveal much about the terminal rate. But there could be some twists in the statement to set the stage for a slower pace of tightening beyond neutral.

BoC is expected to raise interest by another massive 75bps to 3.25%. Rates should then be in restrictive region, with neutral considered by BoC as between 2-3%. There are some wild cards for the meeting. BoC could deliver the expected hike, and signal data-dependency for the path ahead, and slower tightening pace. Or BoC could deliver an even larger hike and signal a pause. The final result would be interest.

ECB is expected to raise the main refinancing rate by 50bps to 1.25%, as talked up by policymakers. The central will most likely maintain that further normalization of interest rates would be appropriate at upcoming meetings. It will maintain a meeting-by-meeting approach, and continue to be data-dependent. Meanwhile, the hints on what next will be delivered by the rhetorics of policymakers just before the next meeting, just it has been happening.

More on RBA, BoC, and ECB:

Here are some highlights for the week:

  • Monday: Australia AiG construction, retail sales; China Caixin PMI services; Swiss GDP; Eurozone PMI services final, Sentix investor confidence, retail sales; UK PMI services final.
  • Tuesday: Japan average cash earnings, household spending; RBA rate decision; Germany factory orders; UK PMI construction; US ISM services.
  • Wednesday: Australia GDP, AiG services; China trade balance; Japan leading indicators; Germany industrial production; Swiss foreign currency reserves; Eurozone GDP revision; Canada trade balance, Ivey PMI, BoC rate decision, ; US trade balance, Fed’s Beige Book.
  • Thursday: New Zealand manufacturing sales; Australia trade balance; Japan bank lending, current account, GDP final; Swiss unemployment rate; ECB rate decision;
  • Friday: China CPI, PPI; France industrial production; Canada employment.

EUR/USD Daily Outlook

Daily Pivots: (S1) 0.9925; (P) 0.9979; (R1) 1.0016; More

EUR/USD’s down trend resumed by breaking 0.9899 low. Intraday bias is back on the downside for 61.8% projection of 1.0773 to 0.9951 from 1.0368 at 0.9860. Firm break there should prompt downside acceleration to 100% projection at 0.9546. On the upside, break of 1.0078 resistance is needed to indicate short term bottoming. Otherwise, outlook will remain bearish in case of recovery.

In the bigger picture, down trend from 1.6039 (2008 high) is still in progress. Next target is 100% projection of 1.3993 to 1.0339 from 1.2348 at 0.8694. In any case, outlook will stay bearish as long as 1.0368 resistance holds, even in case of strong rebound.

Economic Indicators Update

GMT Ccy Events Actual Forecast Previous Revised
22:30 AUD AiG Performance of Construction Index Aug 47.9 45.3
01:00 AUD TD Securities Inflation M/M Aug -0.50% 1.20%
01:30 AUD Company Gross Operating Profits Q/Q Q2 7.60% 4.00% 10.20% 9.80%
01:45 CNY Caixin Services PMI Aug 55.0 54.2 55.5
07:00 CHF GDP Q/Q Q2 0.40% 0.50%
07:45 EUR Italy Services PMI Aug 48.3 48.4
07:50 EUR France Services PMI Aug F 51 51
07:55 EUR Germany Services PMI Aug F 48.2 48.2
08:00 EUR Eurozone Services PMI Aug F 50.2 50.2
08:30 EUR Eurozone Sentix Investor Confidence Sep -27.5 -25.2
08:30 GBP Services PMI Aug F 52.5 52.5
09:00 EUR Eurozone Retail Sales M/M Jul 0.60% -1.20%

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