Sample Category Title

• Reserve Bank of Australia could raise rates on Tuesday
• Chinese trade and inflation stats also in the spotlight
• UK economy likely contracted in Q3 - can sterling hold on?

RBA decision will be a close call

With most of the major central bank decisions in the rear-view mirror and volatility in bond markets coming down, a quieter week lies ahead for FX traders. Most of the focus will fall on the Reserve Bank of Australia's rate decision on Tuesday, where markets assign a 60% probability for a rate increase.

Recent developments in Australia certainly favor another rate increase. Last week, the RBA Governor stressed that her central bank will not hesitate to raise rates further “if there is a material upward revision to the outlook for inflation”. Directly after those comments, inflation data for the third quarter surprised on the upside.

Similarly, house prices continue to rise and almost touched a record high in October according to CoreLogic. That can also boost inflation, both by lifting rent prices and through the wealth effect, as higher home prices often translate into stronger household spending.

Even the IMF recently warned that the RBA needs to raise rates further to cool an economy that is running beyond full capacity, with a historically labor market and booming population growth reinforcing the risk that inflation might remain hot for some time.

Of course, not everything is rosy. For instance, the latest round of business surveys signaled that economic growth will probably slow heading into year-end, amid a decline in new orders. Likewise, the conflict in the Middle East raises uncertainty.

Most importantly, the global wave of rising bond yields has spilled into Australia. With Australian yields trading near their highest levels in a decade, the bond market has essentially done a lot of tightening for the RBA, reducing the need for further rate hikes.

Therefore, there are solid arguments both for raising rates and keeping them unchanged. That said, the case for a rate increase seems stronger based on the data pulse and RBA commentary. Considering that market pricing only implies a 60% chance for a hike, a decision to raise rates could help boost the Australian dollar.

Beyond the RBA decision, the longer-term trajectory for the Australian dollar will also be decided by global risk sentiment and any developments in China.

China awaits trade and inflation data

The Australian currency is sensitive to China news because of the close trading relationship between the two nations. Australia and New Zealand rely on Chinese demand to absorb their commodity exports, so the outlook for China directly influences the growth prospects of these economies.

This correlation helps explain why both currencies have been pummeled this year, amid an unfolding property crisis and a severe manufacturing slowdown in China. Investors have been waiting in agony for Beijing to roll out bigger stimulus measures, but so far, the policy response has been underwhelming.

China’s central government announced last week it would boost its budget deficit, approving 1 trillion yuan ($137 billion) in debt issuance. This was a signal that fiscal spending is coming. However, this support package only amounts to 0.8% of GDP, so it might lack the ‘firepower’ to truly kickstart the stalled economy. 

In this sense, the upcoming releases will be closely monitored by investors. Trade data for October will hit the markets on Tuesday, ahead of inflation stats for the same month on Thursday. All these numbers are important, but markets often focus on exports and producer prices, which are seen as proxies of global factory demand.

Aside from the commodity-linked currencies, these releases could also impact global risk sentiment, driving stock markets in Asia and other regions accordingly.

UK GDP could be ugly

Turning to the United Kingdom, the highlight will come on Friday in the form of quarterly GDP numbers. The British economy most likely fell into contraction in the third quarter, something reflected in the monthly GDP readings that have already been released and gloomy business surveys.

Even more worrisome, the UK economy is suffering job losses. The labor market started losing jobs back in June, and this pattern continued through September. Faced with weaker demand conditions and shrinking margins, UK businesses are scrambling to slash costs. One option is to fire workers.

Employment losses are how every recession begins, so this is a massive red flag. In turn, the prospects for sterling appear dim. Economic growth is rolling over while inflation continues to burn hot, painting a stagflationary picture of the UK economy.

On top of that, Cable continues to exhibit strong correlation with stock markets, which leaves it vulnerable in case equities turn lower again as the global economy loses power.

Finally in the euro area, the latest data on producer prices are out on Tuesday, ahead of retail sales on Wednesday.

• RBA could announce a 25bps rate hike at its November meeting
• Hawkish bias could be maintained if quarterly forecasts revised higher
• Aussie/dollar’s current upleg could pick up speed after RBA meeting
• The meeting statement will be released on Tuesday at 03:30 GMT

RBA ready for action

The Reserve Bank of Australia is preparing for its 10th rate-setting meeting for 2023. It is shaping up to be the most interesting one in the current round of central bank meetings, as the RBA is widely expected to deliver a 25bps rate hike on Tuesday, raising its main cash rate to 4.35%.

The RBA was among the first central banks to pause in the current tightening cycle but, after three unchanged meetings, Governor Bullock et al look ready to hike again. To be fair, the RBA has been quite clear about its readiness to raise interest rates again and the minutes from the previous October 3 meeting supported this case. There was apparently a good discussion around another 25bps rate move at the last meeting but in the end most members agreed to wait for the early November gathering when new information on inflation and jobs would be available.

Quarterly inflation surprised on the upside

In this context, the incoming information since then has been on the stronger side. The inflation rate for the third quarter of 2023 came in at 5.4% YoY, slightly higher than anticipated, and the producer price index continues to show decent annual increases. Additionally, the comment that the “Board had low tolerance for a slower return of inflation to target”, which appeared in the last minutes, has also caught analysts' attention, fueling the current rate hike expectations.

Interestingly, most investment houses are expecting a rate hike on Tuesday. However, the same cannot be said for the market as it is assigning a meagre 56% probability for a November rate hike with the full 25bps rate move currently priced in by February 2024. It is quite rare for the market not to be fully onboard when analysts show a united front.

Quarterly RBA forecasts on Friday

Additionally, there is a strong possibility that the RBA could maintain its hawkish stance, even after announcing a rate hike. However, the degree of hawkishness will most likely depend on its quarterly forecasts. The last Statement on Monetary Policy published in August had 2025 inflation dropping to 2.8%.

While this is in line with the 2-3% inflation corridor targeted by the RBA, recent geopolitical developments and the decent consumer appetite could lead to an upwards revision in projected inflation. Should this be the case at Friday’s publication, the RBA could select to keep the door open for further rate hikes if needed going forward.

Aussie to benefit from a rate hike and a hawkish statement

The aussie has been under considerable pressure against the US dollar since the start of 2023. It recently traded at its lowest level for more than a year before the aussie bulls decided to stage a small upleg. The current move has stopped at the 0.6458 level but the combination of a 25bps rate and a hawkish statement could propel aussie/dollar towards the 0.6512-0.6561 area.

On the flip side, an RBA decision to postpone the rate hike for December could result in a stronger market reaction, with the aussie/dollar pair potentially dropping aggressively towards the November 3, 2022 low at 0.6271.

Markets were not spooked by Halloween as equities climbed significantly higher while rates and the index of fear (the VIX) declined during the week. The market moves were driven by weaker US data, dovish market perceptions of the Fed, and a better outlook for the US treasury as it now expects to slow the pace of longer-term bonds issuance.

The Bank of Japan (BoJ) used Halloween to "trick or tweak" and tweaked its yield curve yield curve control policy (YCC) by redefining the 1% cap on 10-year JGB yields as a reference rather than a rigid bound. This was likely the last, step ahead of dismantling the YCC altogether. However, the BoJ still needs confirmation that inflation has sustainably moved above the 2% target before they are ready to take bigger steps to normalisation. They are slowly recognising higher inflation is not temporary and moved their inflation forecast significantly higher for the fiscal year 2024 to 2.8% from 1.9%.

Economic data from the US showed weaker than expected ISM manufacturing driven by lower new orders, production and employment, reversing some of the more positive signals seen over the past months. ADP employment change was also lower than expected, while JOLTs job openings continue to signal quite resilient labour markets. The latter was also visible in the Conference Board wage index that rose 1.2% in Q3 vs 1% in Q2.

The Federal Reserve decided, as expected, to keep the Fed Funds target range unchanged at 5.25-5.50%. Powell delivered a balanced message with dovish undertones. The recent strong labour market data that has lifted inflation expectations provided Powell an option to deliver a more hawkish message, but he did not consider it necessary and said that inflation expectations remain "in a good place".

In the euro area, inflation and GDP data corroborated the 'soft-landing' narrative. Headline inflation fell significantly again to 2.9% y/y from 4.3% and core inflation ticked down to 4.2% y/y from 4.5%. Base effects drove the yearly growth rate down but the underlying inflationary momentum again showed positive signs with core inflation increasing just 0.11% m/m s.a. from 0.17%. GDP growth in the third quarter was -0.1% q/q which is not a bad as one could fear given the significant monetary policy tightening.

In China, October PMIs from both NBS and Caixin disappointed. Manufacturing PMI fell to 49.5 (consensus 50.2) from 50.2 and service PMI dropped to 50.6 (consensus 52.0) from 51.7. The lower service PMIs raise concerns over the consumer engine in China.

Bank of England (BoE) left the bank rate unchanged at 5.25% in line with expectations. The BoE lowered growth and near-term inflation projections amid pushing back against market pricing of rate cuts. We continue to expect the peak in the Bank Rate to have been reached and see another rate hike as unlikely at this point.

Next week, focus is on comments from the Fed and the flash University of Michigan survey. In Japan, we look out for September wage figures while China releases trade data and CPI. The reserve bank of Australia meeting on Tuesday is interesting as market pricing is split 50/50 on the probability of a hike/ no hike. On Friday, we receive UK GDP.

Full report in PDF.

• AUDUSD breaks familiar resistance zone after dissapointing NFP data
• Technical signals improve, but some caution necessary

AUDUSD rose rapidly in the wake of a weaker-than-expected US jobs report, crossing above the long-term constraining line from the 2020 low at 0.6450 after a couple of failed attempts.

The RSI has finally advanced above its 50 neutral mark for the first time after three months, boosting optimism that the bulls could stay in play in the coming sessions. The rising MACD, which entered the positive area, is adding to the positive signals, but some caution is still necessary as the stochastic oscillator has already entered the overbought zone above 80, suggesting that the recent gains could be short-lived.

The 0.6520 zone, which overlaps with the 38.2% Fibonacci retracement of the latest downleg, is currently in target. Beyond that, the price could stabilize somewhere between its 200-day exponential moving average (EMA) and the 50% Fibonacci of 0.6590. Then, a more challenging battle could take place near the long-term resistance trendline from April 2022 at 0.6677.

In the event the bears squeeze the price back below the 0.6430-0.6450 area, the 20- and 50-day EMAs could immediately come to thre rescue ahead of the broken resistance trendline at 0.6310. Should selling forces persist, the price might next seek shelter around the protective falling line from March 2023 at 0.6250. A step lower could stabilize near the 0.6200 psychological mark or head for the 0.6120-0.6100 constraining zone.

Summing up, the latest upturn in AUDUSD is looking promising. An extension above the 0.6520 wall could add more fuel to the bull run.

US ISM Services fell from 53.6 to 51.8 in October, below expectation of 53.2. Business activity/production fell from 58.8 to 54.1. New orders rose from 51.8 to 55.5. Employment dropped from 53.4 to 50.2. Prices ticked down from 58.9 to 58.6.

ISM said: "The past relationship between the Services PMI and the overall economy indicates that the Services PMI for October (51.8 percent) corresponds to a 0.7-percent increase in real gross domestic product (GDP) on an annualized basis."

Full US ISM Services release here.

Market picture

Crypto market investors rush to lock in profits from the recent growth, selling off coins. Capitalisation has rolled back to 1.27 trillion (-2.8% in 24 hours). Such dynamics fit pretty well into the definition of Bitcoin as a safe asset. The demand impulse for shares, in this case, plays against the largest crypto. But we advise not to rely too much on the crypto’s defensive nature. On the contrary, we see Bitcoin as the most sensitive to changes in risk demand and often leads to these changes. And its latest turnaround could foreshadow an intensifying sell-off in equities.

The Crypto Fear and Greed Index posted tops at 72 (Greed zone) several times since late October, a two-year high. The last time we saw such highs in the Index was in November 2021, when Bitcoin hit an all-time high near $69K.

Nowadays, Bitcoin has likely entered a correction phase from the upward momentum since mid-October. This scenario remains workable with a price above $32300. A failure below would make the latest rise be considered false.

Ethereum fell back and struggled for support at its 200-day moving average just above $1770. Bulls have room for a decline down to $1740, while a move below would go beyond the regular correction.

News Background

Michael van de Poppe expressed confidence that the US Federal Reserve has completed its policy tightening cycle, which could have a positive impact on risk assets, including the first cryptocurrency.

Fidelity Investments called bitcoin “exponential gold” and a “commodity currency” seeking to become a savings vehicle and a defence against the depreciation of money.

MicroStrategy last month increased its bitcoin reserves by 155 BTC to 158,400. Third-quarter purchases totalled 6,067 BTC at an average price of $27,531.

CoinShares noted digital asset managers’ interest in Ethereum. The second most capitalised cryptocurrency was mentioned in the survey by 44% of respondents. In comparison, 39% of respondents voted for Bitcoin and 7% for Solana.

The US SEC has started investigating PayPal’s PYUSD stablecoin, which launched in August. The launch of PYUSD raised concerns in the US Congress due to the lack of a regulatory framework for such assets.

Non-farm payroll employment rose by 150k in October, slightly below expectations calling for a gain of 180k. Employment readings for the two prior months were revised lower, subtracting 101k from the previously reported figures.

• Hiring over the last three-months averaged 204k jobs per-month, a stepdown from the 233k averaged between July-September and well off the 334k averaged over the three-months ending in January.

Private payrolls rose just 99k, with gains entirely concentrated in the service sector (+110k) while goods-producing industries shed 11k jobs. However, the pullback in the latter was entirely concentrated in manufacturing (-35k), which was largely attributed to the UAW strike – estimated to have temporarily removed 33k workers from payrolls. Across the service sector, gains were largely concentrated in healthcare (+77k), but professional & business services (+15k) and leisure & hospitality (+19k) also chipped in. Hiring across the public sector remained robust, rising by 51k last month.

In the household survey, employment (-348k) fell by more than the labor force (-201k), which pushed the unemployment rate to a near two-year high of 3.9%. The participation rate edged down by 0.1 percentage points to 62.7%.

Average hourly earnings were up 0.2% month-on-month – a modest deceleration from the upwardly revised 0.3% m/m gains recorded in each of the two months' prior. The 12-month change slipped to 4.1% – the slowest pace of wage growth since June 2021.

Key Implications

Job growth slowed considerably in October, with the U.S. economy adding the fewest jobs in four months and recording the second weakest monthly gain since December 2020. That said, some of the 'softness' can be chalked up to labor strikes spanning the auto, entertainment, and healthcare industries, as striking workers aren't counted on payrolls. The Bureau of Labor Statistics estimates that just over 48,000 workers were on strike during the survey period last month – the highest monthly total since February 2004. However, with tentative labor agreements between the UAW and the Big 3 automakers now reached, a significant number of these workers will be recounted in next month's payrolls.

In the press briefing following Wednesday's interest rate announcement, Chair Powell acknowledged that the recent tightening in financial conditions (if sustained) could act as a substitute for future rate hikes. However, Powell also underscored that policymakers have a low conviction on whether today's policy stance is 'sufficiently restrictive' – hence the need to proceed carefully and take a meeting-by-meeting approach. We suspect the Fed will need to see a few more softer employment reports met by a further easing in inflationary pressures before they have enough evidence to call it quits.

The Canadian labour market added 17.5k positions in October, with full-time employment down 3.3k and part-time employment up 20.8k.

The unemployment rate rose 0.2 percentage points to 5.7% and the participation rate was unchanged at 65.6%.

Employment by sector showed gains in construction (+23k) and information, culture and recreation (+21) being offset by declines in wholesale and retail trade (-22k) and manufacturing (-19k).

Lastly, total hours worked were flat at 0.02% month-on-month and wages were up 4.8% year-on-year (versus 5.0% in September).

Key Implications

The Canadian jobs market is moving back towards balance following two strong monthly prints. The 18k monthly job gain once again failed to keep up with the 58k gain in the population-driven boost to the labour force. The "is this a recession?" debate will continue to swirl, with the unemployment rate rising by 0.7 percentage points since April. While this certainly isn't a recession as there is no depth, duration, or breadth, weakness is present. The number of unemployed workers keeps rising, while cyclically sensitive private sector hiring has been retreating for months.

When the Bank of Canada decided to hold rates at 5% last week, it did so because of a notable slowing in economic momentum. While this has been apparent in reduced consumer spending and a weakening housing market, the labour market left the BoC wanting more. But, given the rise in the unemployment rate and continued weakening in the underlying details, today's report is likely to make the BoC feel more comfortable about its decision to hold. Looking forward, we are expecting this employment trend to continue, while high rates and persistent inflation make the case for the BoC to remain on hold in December.

Daily Pivots: (S1) 149.89; (P) 150.43; (R1) 151.02; More...

While USD/JPY's fall from 151.69 is extending, it's still holding above 148.79 support. Intraday bias remains neutral first. Price actions from 151.69 could still be seen as a consolidation pattern only. However, firm break of 148.79 will indicate rejection by 151.93 key resistance, and bring deeper fall through 147.28 support.

In the bigger picture, immediate focus is now on 151.93 resistance (2022 high). Rejection by 151.93, followed by sustained break of 145.06 resistance turned support will argue that rise from 127.20 has completed, and turn outlook bearish for 137.22 support and below. However, sustained break of 151.93 will confirm resumption of long term up trend. Next target will be 61.8% projection of 102.58 to 151.93 from 127.20 at 157.69.

Daily Pivots: (S1) 0.9023; (P) 0.9054; (R1) 0.9089; More....

Break of 0.9005 support support argues that USD/CHF's rebound from 0.8886 has completed at 0.9111 already. Intraday bias is back on the downside for retesting 0.8886. Firm break there will resume whole fall from 0.9243 to 0.8815 fibonacci level. For now, risk will be on the downside as long as 0.9111 resistance holds, in case of recovery.

In the bigger picture, outlook is mixed up by the deeper than expected pull back from 0.9243. Yet there was no follow through selling after hitting 0.8886. On the upside, break of 0.9243 resistance will revive the case of medium term bottoming at 0.8851, and turn outlook bullish. However, sustained break of 61.8% retracement of 0.8551 to 0.9243 at 0.8815 will argue that larger decline from 1.0146 is ready to resume through 0.8551 low.