Today’s top mover: GBP/AUD breaks 1.7282 support, solidifying medium term bearish reversal

    At the time of writing, GBP/AUD is the biggest mover today, down -151 pips or -0.87%. Aussie is clearly boosted by return of risk appetite on US-China trade truce. Meanwhile, focus has now turned back to Brexit worries. It’s still generally pessimistic on the chance of getting Brexit bill through the parliamentary vote on December 11.

    The development in GBP/AUD is so far pretty much in line with the bearish outlook as described in a prior quick note. Break of 1.7282 support today add to the case that whole “corrective” up trend from 1.5626 (2016 low) has completed at 1.8726 on after missing 50% retracement of 2.2382 to 1.5626 at 1.9004, on bearish divergence condition in weekly MACD.

    Near term outlook will now stay bearish as long as 1.7814 resistance holds, even in case of strong recovery. Next downside target is 61.8% retracement of 1.5626 to 1.8726 at 1.6810. Sustained break there will pave the way to retest 1.5626 low in medium term.

    Australia CPI surged to 3.5% yoy in Q4, trimmed mean CPI at 7-yr high

      Australia CPI rose 1.3% qoq, 3.5% yoy in Q4, well above expectation of 1.0% qoq, 3.2% yoy. RBA trimmed mean CPI rose 1.0% qoq, 2.6% yoy, also above expectation of 0.7% qoq, 2.4% yoy. The 2.6% yoy rise was the highest since June 2014.

      Head of Prices Statistics at the ABS, Michelle Marquardt, said the most significant price rises in the December quarter were new dwellings (+4.2%) and automotive fuel (+6.6%).

      Marquardt said: “Annual trimmed mean inflation is the highest since 2014, reflecting the broad-based nature of price increases, particularly for goods.”

      Full release here.

      ECB Schnabel: Extended period of high energy price inflation may lead to higher inflation expectations

        In a Twitter Q&A, ECB Executive Board member Isabel Schnabel said, “in the 1970s rising oil prices triggered a harmful price-wage spiral, as inflation expectations drifted away.” But, “today longer-term inflation expectations are well-anchored. We will ensure that high inflation does not become entrenched.”

        “Inflation will remain high for longer than anticipated. There is a risk that inflation continues to rise in the near term but it is likely to gradually decline towards the end of this year. There remains high uncertainty around the inflation outlook.”

        “Raising rates would not lower energy prices. But if high current inflation threatens to lead to a de-anchoring of inflation expectations, we may still need to respond, as our mandate is to preserve price stability.”

        “Monetary policy has to keep a watchful eye on all factors, including energy, that affect the medium-term inflation outlook. An extended period of high energy price inflation may lead to expectations of higher inflation in the future.”

        Some previews on ECB, a look at EUR/CHF

          A tremendous amount of uncertainty was added to ECB outlook from Russia’s invasion of Ukraine. There were expectations that ECB could announce an earlier end to its asset purchase program at today’s meeting, paving the way for a rate hike later this year. But now, it’s more likely for the central bank to keep options open for the moment.

          Nevertheless, facing increasing risk of prolonged high inflation, hawks in the councils could push for at least a move to a “neutral” guidance. That could come in form of dropping the reference to a rate cut in the guidance. ECB might also remove the stipulation that rate hike would come “shortly” after end of net asset purchases.

          The new economic projections would also be scrutinized while President Christine Lagarde would be asked for her views on risk of stagflation in Eurozone.

          Here are some previews for today’s ECB meeting:

          Euro is staging a strong rebound since yesterday, while gold and oil prices are in deep retreat. The situation came as markets are exiting the phase of initial shock of Russia invasion. But clearly, the clouds are still there. Today’s ECB announce might give Euro some temporary volatility, but the next move will still very much depend on the development in Ukraine.

          Technically, for EUR/CHF, 0.9970 is theoretically a good place to bottom. It’s not unreasonable to say that the down trend from 1.1149 has ended as a five-wave move, just hitting, 100% projection of 1.0936 to 1.0298 from 1.0610 at 0.9972. Parity can also provide additional psychological support. Yet, firm break of 1.0298 support turned resistance is still needed to be the first sign of major bottoming. Otherwise, risk will remain heavily on the downside.

          ISM manufacturing rises to 49.1, nears expansion threshold, with rising prices and stronger orders

            US manufacturing sector, as indicated by ISM Manufacturing PMI, showed signs of resilience in January 2024, slightly missing the mark of expansion. The index climbed from 47.1 to 49.1, surpassing market expectations of 47.7, yet marking the 15th consecutive month of contraction.

            A significant highlight was the jump in new orders, which soared to 52.5, reaching its highest level since May 2022. Production also showed modest improvement, ticking up from 49.9 to 50.5. However, employment index continued its downward trajectory, recording a fourth consecutive month of contraction at 47.1, down from 47.5.

            A notable surge was observed in the prices index, which escalated sharply from 45.2 to 52.9. This marks the highest point since April 2023, signaling increasing cost pressures within the sector.

            Overall, the current ISM Manufacturing PMI level is historically aligned with a 1.9% annualized growth in real GDP.

            Full US ISM manufacturing release here.

            Dollar gains momentum with help from Euro selloff

              Dollar is gaining momentum as the US session goes on . That’s partly helped by ECB disappoint as we see EUR is now the weakest one for the day. DOW pared initial gains and it’s trading nearly flat. Markets are now awaiting Trump’s signing of the order for tariffs. USD/CHF has taken out 0.9490 resistance mentioned earlier. Quickly, focus now turns to 1.2268 in EUR/USD.  

              Australia retail sales dropped -4.4% mom in Dec, but turnover remains strong

                Australia retail sales dropped -4.4% mom in December, much worse than expectation of -1.9% mom. That’s also the largest monthly decline since April 2020.

                “Despite this month’s fall, retail turnover remains strong, up 4.8 per cent on December 2020, with strong consumer spending continuing post the Delta Outbreak,” Ben James, Director of Quarterly Economy Wide Statistics, said.

                Full release here.

                Bundesbank Weidmann: Economic outlook is good and no need to change monetary policy

                  Bundesbank President Jens Weidmann reiterated over the weekend that there was no need for change in ECB policy. He noted despite recent uncertainties, “the economic outlook is good”. And, “we are assuming a rise in price pressures and that’s the condition for monetary policy to normalize.” Also, “this isn’t a situation where prices are falling and we have to react now.”

                  ECB is set to meet again on monetary policy on June 5/6. Eurosystem staff macroeconomic projections will be released Also, details are expected on the third round of cheap loans to banks, the TLTRO III.

                  BoJ Kuroda: Inflation trend likely to gradually accelerate, but takes some more time

                    BoJ Governor Haruhiko Kuroda told the parliament today, “Japan’s trend inflation is likely to gradually accelerate … but that will take some more time.”

                    “Uncertainty regarding Japan’s economy is extremely high. It’s therefore important now to support the economy, and create an environment where companies can raise wages,” he said.

                    Separately, a panel of academics and business executives urged BoJ to make the 2% inflation target a long-term goal, to make monetary policy more flexible.

                    “The way the BOJ conducts monetary policy must be revamped,” Yuri Okina, a candidate for the next BOJ deputy governor.”By making 2% inflation a long-term goal, the BOJ can make its monetary policy more flexible.”

                    German recession expected to accelerate in Q2, but recovery began in May

                      Germany’s GDP shrank -2.2% qoq in Q1, slightly worse than expectation of -2.0% qoq, worst in more than a decade. Also, as Q4’s figure was revised down to -0.1% qoq, the country was already in a technical recession with two straight quarters of contraction.

                      The contraction is expected to accelerate in Q2, with economists forecasts a -10% decline in GDP. But Germany’s Economy Ministry sounded relatively optimistic. It said in an email statement: “The recovery began with the cautious lifting of the lockdown at the beginning of May. But this process will take a longer time due to the continuation of the corona pandemic.”

                      RBA minutes; Developments have brought forward liking timing of rate hike

                        In the minutes of April 5 meeting, RBA said, inflation in Australia had “picked up” and a “further increase was expected” with measures of underlying inflation in the March quarter expected to be above 3%. Wages growth had “picked up” too but “had been below rates likely to be consistent with inflation being sustainably at the target.” These developments have “brought forward the likely timing of the first increase in interest rates. ”

                        “Over coming months, important additional evidence will be available on both inflation and the evolution of labour costs. Consistent with its announced framework, the Board agreed that it would be appropriate to assess this evidence and other incoming information as it sets policy to support full employment in Australia and inflation outcomes consistent with the target.”

                        Full RBA minutes here.

                        US oil inventories dropped -2.1m barrels, WTI accelerating as rally resumes

                          US commercial crude oil inventories dropped -2.1m barrels in the week ending December 31. At 417.9m barrels, oil inventories are about -8% below the give year average for this time of year. Gasoline inventories rose 10.1m barrels. Distillate rose 4.4m barrels. Propane/propylene dropped -0.7, barrels. Total commercial petroleum inventories rose 10.2m barrels.

                          WTI crude oil rises further after the release, as rally from 62.90 resumed. 100% projection of 62.90 to 73.66 from 66.46 at 77.22 is considered firmly taken out. Further rise is expected as long as 74.48 support holds. WTI is likely in another round of upside acceleration to 161.8% projection at 83.86, which is close to 85.92 high.

                          For now, we’re not expecting a break of 85.92 yet. We’d expect at least one more down leg before the corrective pattern from there completes. Hence, we’d look for topping between 83.86/85.92. But we’ll see.

                          Australia employment grew 64.6k in Feb, unemployment rate dropped to 3.5%

                            Australia employment grew 64.6k in February, well above expectation of 48.5k. Full-time employment rose 74.9k. Part-time employment decreased -10.3k.

                            Unemployment rate dropped from 3.7% to 3.5%, below expectation of 3.6%. Participation rate rose 0.1% to 66.6%. Monthly hours worked rose 3.9% mom.

                            Bjorn Jarvis, ABS head of labour statistics said: “with employment increasing by around 65,000 people, and the number of unemployed decreasing by 17,000 people, the unemployment rate fell to 3.5 per cent. This was back to the level we saw in December.

                            “The February increase in employment follows consecutive falls in December and January. In January, this reflected a larger than usual number of people waiting to start a new job, the majority of whom returned to or commenced their jobs in February.

                            Full release here.

                            ECB’s Wunsch awaits core inflation and wage growth to come down

                              In an interview with Financial Times, ECB Governing Council member Pierre Wunsch mentioned that the central bank is waiting for both wage growth and core inflation to decrease in conjunction with headline inflation before considering a pause.

                              Wunsch stated, “I would not be surprised if we had to go to 4 percent at some point.” He emphasized that ECB aims for a soft landing, and “nobody is going to err on the side of destroying the economy for the sake of destroying the economy.”

                              “But I have absolutely no indication that what we are doing (on interest rates) is too much,” he added.

                              Regarding rate hikes, Wunsch clarified, “I’m not a fetishist. I’m not going to hike rates even in a recession just because we have 2.3 percent or 2.1 percent inflation in the two-year forecast. But I’m not seeing inflation numbers going in the right direction yet.”

                              He also pointed out that if wage agreements persist around a 5 percent growth for an extended period, inflation may not return to 2 percent on a structural basis.

                              Fed Evans: Another support package is really incredibly important

                                Chicago Fed President Charles Evans said in a CBS interview that “we’ve not control over the virus spread,” and “another support package is really incredibly important”. He emphasized the importance of public confidence “so that people feel good about going back to work, they feel safe they can go out to retail establishments and enjoy leisure and hospitality that put people back to work.”

                                Evans said the actual unemployment rate is “somewhat higher” that the official number at 10%. “If we got the kind of support that we needed as quickly as possible, got control of the virus, perhaps all the people who were sent home to stay safe could be brought back by their- by their previous employers. ”

                                Full transcript here.

                                More turmoil for USD, Rex Tillerson fired by Trump

                                  More selling is seen in Dollar on news that US Secretary of State Rex Tillerson is fired by Trump.

                                  Trump also tweeted:-

                                  “Mike Pompeo, Director of the CIA, will become our new Secretary of State. He will do a fantastic job! Thank you to Rex Tillerson for his service! Gina Haspel will become the new Director of the CIA, and the first woman so chosen. Congratulations to all!”

                                  ADP employment grew 241k, USD lifted slightly

                                    USD is lifted by better than expected job data in early US session. ADP report showed 241k growth in private sector jobs in March, well above expectation of 205k. Prior month’s figure was also revised up from 235k to 246k.

                                    Meanwhile, GBP is suffering some steeping selling after today’s much weaker than expected construction PMI, which dived into contractionary region at 47 in March. While EUR was supported by CPI and employment data, it only performs better than GBP in the current 4-hour bar.

                                    For the day, with US-China trade war as the main theme, NZD and JPY are trading as the strongest one. GBP is the weakest one, followed by CAD.

                                    BoJ minutes: members discussed impact of Yen’s depreciation

                                      In the minutes of October 27-28 meeting, BoJ said “yen had depreciated somewhat significantly against both the U.S. dollar and the euro, mainly due to rises in U.S. and European interest rates”. Members have discussed the impact of the yen’s depreciation.

                                      Some members said, “the depreciation had positively affected Japan’s economy as a whole through an increase in profits from business conducted overseas and a rise in stock prices, although its effect of pushing up exports had declined.”

                                      One member said, “the effect of the depreciation on each economic entity was uneven, depending on industry and size”. Another member noted, “while prices had increased recently, triggered mainly by the yen’s depreciation, it was unlikely at present that heightened inflationary pressure would reduce the economic welfare of Japan as a whole.”

                                      Full minutes here.

                                       

                                      US ISM manufacturing rose to 58.6, corresponds to 3.5% annualized GDP growth

                                        US ISM Manufacturing index rose from 57.6 to 58.6 in February, above expectation of 57.9. Looking at some details, production rose from 57.8 to 58.5. New orders rose from 57.9 to 61.7. Employment dropped from 54.5 to 52.9. Prices dropped from 76.1 to 75.6.

                                        ISM said: “The past relationship between the Manufacturing PMI and the overall economy indicates that the Manufacturing PMI for February (58.6 percent) corresponds to a 3.5-percent increase in real gross domestic product (GDP) on an annualized basis.”

                                        Full release here.

                                        US 10-yr yield hits 1.3, to target 1.43-1.48 next

                                          US 10-year yield accelerated higher overnight and breached 1.3% for the first time in a year, before closing at 1.299, up 0.099. Reflation trade over the massive US stimulus package, together with loose Fed policy was a factor in driving funds out of treasuries. Also, there is increasing optimism of returning to normal with the pace of vaccine rollout, domestically and globally.

                                          TNX’s solid break of 1.266 resistance is an important bullish development. Upside momentum is also accelerating with the medium term channel resistance taken out, with a gap up. The strong support from 55 week EMA is also a medium term bullish sign.

                                          Now, further rally is expected as long as 1.131 support holds. We’re tentatively looking at key resistance zone between 1.429 and 38.2% retracement of 3.248 to 0.398 at 1.4867 at next target.