Canadian Dollar Rises on Unexpected Inflation Uptick; Australian Dollar Continues to Struggle

Canadian Dollar is enjoying a broad rally in early US trading session, fueled by data that revealed unexpected reacceleration in Canadian consumer inflation for April. The evidence for BoC to resume tightening measures is steadily accumulating. Amid slight risk-off sentiment in US markets, due to persistent uncertainties over debt ceiling negotiations, Swiss Franc and Japanese Yen are also seeing gains.

On the other hand, Australian Dollar remains the day’s weakest performer, hamstrung by a sharp drop in consumer sentiment and a string of disappointing data from China. Hot on its heels is British Pound, which is feeling the pinch from poor employment data that underlines the economy’s rapidly slowing momentum. Both Euro and Dollar are exhibiting mixed performances, although the greenback seems to have a minor advantage in extending its near-term rebound.

From a technical perspective, AUD/CAD appears finally ready to resume its downtrend from 0.9545. Immediate attention is now on 0.8941 low, and decisive break of this level would see fall from 0.9545 resume to 61.8% projection of 0.9545 to 0.8941 from 0.9104 at 0.8731. Regardless, outlook will remain bearish as long as the 0.9104 resistance holds, even in the event of a recovery.

In Europe, at the time of writing, FTSE is up 0.05%. DAX is up 0.15%. CAC is up 0.02%. Germany 10-year yield is up 0.0002 at 2.313. Earlier in Asia, Nikkei rose 0.73%. Hong Kong HSI rose 0.04%. China Shanghai SSE dropped -0.60%. Singapore Strait Times dropped -0.02%. Japan 10-year JGB yield dropped -0.0123 to 0.396.

Canada CPI rose to 4.4% yoy in Apr, first acceleration since June 2022

Canada CPI rose 0.7% mom in April, above expectation of 0.5% mom. Prices for gasoline (+6.3%) contributed the most to the headline month-over-month movement. Excluding gasoline, the monthly CPI rose 0.5%.

Over the 12-month period, CPI accelerated from 4.3% yoy to 4.4% yoy, above expectation of 4.1% yoy. That’s the first acceleration in headline CPI since June 2022. Statistics Canada said that higher rent prices and mortgage interest costs contributed the most to the all-items CPI increase.

CPI median slowed from 4.5% yoy to 4.2% yoy, below expectation of 4.3% yoy. CPI trimmed dropped from 4.4% yoy to 4.2% yoy, above expectation of 4.1% yoy. CPI common slowed from 6.0% yoy to 5.7% yoy, above expectation of 5.5% yoy.

US retail sales up 0.4% mom in Apr, ex-auto sales up 0.4% mom

US retail sales rose 0.4% mom in USD 686.1B in April, below expectation of 0.8% mom. Ex-auto sales rose 0.4% mom to USD 556.1B, below expectation of 0.5% mom. Ex-gasoline sales rose 0.5% mom to USD 631.4B. Ex-auto, gasoline sales rose 0.6% mom to USD 501.4B. Total sales for the February through April period were up 3.1% yoy.

Germany ZEW dived to -10.7, economy could slip into recession

Germany ZEW Economic Sentiment recorded in significantly decline from 4.1 to -10.7 in May, even worse than expectation of -5.0%. Current Situation Index dropped from -32.5 to -34.8.

Eurozone ZEW Economic Sentiment fell form 6.4 to -9.4. Current Situation Index rose 2.7 pts to -27.5.

ZEW President Professor Achim Wambach said:

“The ZEW Indicator of Economic Sentiment has once again fallen sharply. The financial market experts anticipate a worsening of the already unfavourable economic situation in the next six months. As a result, the German economy could slip into a recession, albeit a mild one.

“The sentiment indicator decline is partly due to expectations of further interest rate hikes by the ECB. Additionally, the potential default by the United States in the coming weeks adds uncertainty to global economic prospects”.

Eurozone imports fell -10% yoy in Mar, exports rose 7.5% yoy

Eurozone goods exports to the rest of the world rose 7.5% yoy to EUR 269.2B in March. Imports fell -10.0% yoy to EUR 243.5B. Trade surplus came in at EUR 25.6B. Intra-Eurozone trade rose 0.6% yoy to EUR 246.4B.

In seasonally adjusted term, goods exports dropped -0.1% mom to EUR 243.3B. Imports dropped -7.1% mom to EUR 226.2B. Trade balanced turned into EUR 17.0B surplus, above expectation of EUR 5.6B. Intra-Eurozone trade dropped from EUR 230.9B to EUR 223.2B.

UK payrolled employees dropped -136k in Apr, unemployment rate rose to 3.9% in Mar

UK payrolled employees dropped -0.5% mom, or -136k in April, comparing with March. That is the first decline in total payrolled employees since the COVID pandemic. Comparing with April 2022, payrolled employees rose 1.0% yoy or 297k. Claimant counts rose 46.7k, above expectation of 31.2k. Median monthly pay rose 7.4% yoy.

In the three months to March, unemployment rate rose 0.1% to 3.9%, comparing to the previous quarter. Employment rate rose 0.2% to 75.9%. Average earnings including bonus rose 5.8% 3moy. Average earnings excluding bonus rose 6.7% 3moy.

RBA Minutes: Further hikes may still be required

Minutes of RBA’s May meeting revealed a detailed discussion where Board members weighed the pros and cons of keeping cash rate unchanged or increasing it by 25 basis points. Despite the fine balance of arguments, the Board saw it fit to raise the interest rates by 25bps to 3.85%, due to upside risks in inflation and tight labour market.

Data available in the month leading up to the meeting confirmed significant inflationary pressures and highlighted upside risks to the inflation outlook. The Board was concerned that if these risks materialised, it would “further delay the return of inflation to target levels” and potentially trigger a “damaging shift in inflation expectations”.

While acknowledging considerable uncertainties surrounding the economic outlook, particularly with respect to household consumption, the Board’s strong commitment to price stability and the necessity of anchoring inflation expectations tipped the scales in favour of a rate hike.

Looking forward, the Board indicated that “further increases in interest rates may still be required”, depending on the evolution of the economy and inflation.

Australian consumer sentiment plunges in May following unexpected RBA rate hike

Australia Westpac Consumer Sentiment Index dropping sharpy by -7.9% from 85.8 to 79.0 in May. This decline brings the index close to the grim levels observed in March, which were the lowest since COVID-19 outbreak in 2020 and, prior to that, since the severe recession of early 1990s.

The unexpected decision by RBA to raise the cash rate by an additional 0.25% in May, as well as the Federal Budget, were cited by Westpac as the two main factors impacting consumer sentiment over the last month.

Westpac stated, “Interest rates were again a key driver of the May survey. The RBA raised the official cash rate by a further 0.25% at its May meeting in the week before the survey. The move came as a major surprise to markets and most commentators, clearly stoking consumer fears of more increases to come.”

Looking ahead, Westpac predicts that RBA will likely pause in June, awaiting further data on inflation and the state of the economy. While the bank’s central view anticipates the current cash rate will remain at its peak due to economic weakness and clear progress toward the Board’s inflation target, it acknowledges that the risks are still “evenly balanced”.

China’s industrial production, retail sales miss expectations; youth unemployment hits record high

China’s industrial production growth fell short of expectations in April, with a year-on-year increase of 5.6% yoy, significantly under expectation of 10.1% growth. Despite missing the mark, the growth rate outpaced March’s 3.9% yoy rise and marked the fastest expansion since September 2022.

Retail sales also grew less than expected, posting 18.4% yoy rise, which fell short of anticipated 20.1% yoy growth. The figure was largely inflated due to a low comparison base, as retail sales plummeted by -11.1% yoy in April of the previous year due to severe lockdowns. On a monthly basis, retail sales contracted by -7.8% mom from March.

Fixed asset investment growth also came in below expectations 4.7% ytd yoy growth, underperforming expectation of 5.2%.

Urban jobless rate ticked down from 5.3% to 5.2%. However, unemployment among 16-24 age group spiked to a record high of 20.4%, up from 19.6% in the previous month. This exceeded the previous record of 19.9% set in July 2022.

The National Bureau of Statistics (NBS) stated, “In general, in April, the national economy continued to recover, and positive factors accumulated and increased. But we must also see that the international environment is still complex and severe, domestic demand is still insufficient, and the endogenous driving force for economic recovery is not yet strong.”

USD/CAD Mid-Day Outlook

Daily Pivots: (S1) 1.3504; (P) 1.3534; (R1) 1.3589; More….

USD/CAD’s fall from 1.3566 extends lower today but stays well above 1.3313 support. Intraday bias remains neutral first. Overall, it’s seen as extending the triangle consolidation pattern from 1.3976. Above 1.3566 will resume the rebound towards 1.3666 resistance and then 1.3860. However, firm break of 1.3313 support will invalidate this view and indicate that deeper correction is underway.

In the bigger picture, as long as 55 W EMA (now at 1.3321) holds, up trend from 1.2005 (2021 low) is still in favor to resume through 1.3976 at a later stage. However, sustained trading below the EMA and 38.2% retracement of 1.2005 to 1.3976 at 1.3233 will raise the chance of bearish reversal. Deeper should then be seen to 61.8% retracement at 1.2758 next.

Economic Indicators Update