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Markets

It’s a big week ahead, but we start rather quietly today with August inflation numbers in Czech Republic and Norway. Following last week’s upward surprise in South Korea, we start looking for more evidence of energy becoming an inflationary source again. Brent crude prices moved back above $90/b after Saudi Arabia & Russia’s joint decision to prolong unilateral production cuts by another 3 months (on top of OPEC+ cuts). Given the low comparison base, energy will at least from September on become an issue likely ending the disinflationary trend in headline CPI way before hitting central banks’ inflation targets. It could complicate the ECB & Fed’s catch 22 between stubborn inflation and weakening growth momentum even more and especially more than currently expected in the final quarter of this year. Before we arrive there, we have September updates by the ECB this week and the Bank of England next week. We expect them to both deliver a 25 bps rate hike. European money markets currently discount a 40% probability of a hike, slightly favoring a status quo. Lagarde and co switched to data dependence in July. Both data and speeches delivered by individual ECB members since then provided arguments both for the rate hike and for the rate pause camp. We expect updated inflation forecasts to still show above target inflation over the policy horizon, backing a 25 bps move. Contrary to the US, European real interest rates still hold just narrowly above 0% (0.15% for Germany 10y vs 1.9% for US) suggesting the ECB has more ground to cover. At the press conference, ECB Lagarde can afterwards put the onus on waning growth momentum and the lagged impact of previous tightening efforts to install a pause idea for the October policy meeting and allowing for a new comprehensive review in December. The Bank of England will get some final input from monthly labour market data tomorrow and the CPI next week before deciding on policy. A 25 bps hike is discounted with last week’s testimony before parliament by Bank of England Bailey suggesting caution going forward. Weak growth and the UK labour market becoming less tight are top of the BoE’s mind even as (wage) inflation isn’t under control yet. From a market-moving point of view, we think that Wednesday’s US CPI inflation figures are the real deal. Fed governors massaged another skip at next week’s FOMC meeting with money markets currently attaching a 40% probability to a final 25 bps rate hike in November.

News and views

Asian currencies lead the FX scoreboard this morning. The Japanese yen surges from a close last Friday at USD/JPY 147.83 to 146.05 currently following comments from Bank of Japan governor Ueda. He told the Yomiuri newspaper that there may be enough information to judge whether wages are rising sustainably. Wage growth is critical in the BoJ’s view of inflation hitting the 2% target in the medium term. The central bank considers the current price rally (4.3% in the core gauge) as mostly externally driven and only temporary. Having ultra-easy policy is therefore still necessary, it concludes. Should, however, domestic factor take over as the driving force, ending the era of negative interest rates is one of the options available, Ueda said. Speculation for policy normalization is lifting government bond yields as well. In an attempt to keep surging yields in check, the BoJ this morning also deployed its (bank) loans-for-bonds program by conducting a 5-year operation. The 10-y reference nevertheless adds 5 bps to top 0.7% for the first time since 2014. Ueda gave the interview just as the Japanese yen was nearing the symbolic 150 barrier, a level that sparked massive FX intervention in October of last year.

China’s yuan appreciates from USD/CNY 7.34 to 7.278, marking a blistering start of the new week even as it is still trading near the weakest levels since 2007. The strengthening move came amid three developments. Firstly, it followed in the Japanese yen’s slipstream. Second, after signaling more tolerance vs yuan deprecation last Friday, the PBOC again set a sharply stronger fixing this morning. Finally, the central bank held a foreign exchange mechanism meeting today. The statement after concluding the meeting said that the country’s financial regulators will take action against what it calls one-sided speculative moves in the market. The three strikes were combined with state-owned banks actively selling dollars today, putting a floor below the yuan, at least in the short run.

Daily Pivots: (S1) 183.39; (P) 183.93; (R1) 184.80; More...

Intraday bias in GBP/JPY is back on the downside with break of 183.04 temporary low. Fall from 186.75 should target 55 D EMA (now at 182.23). Sustained break there will argue that it's already in a larger scale correction and target 176.29 support next. On the upside, break of 185.67 resistance will indicate that the pull back from 186.75 has completed. Further rise should then be seen through 186.75 to resume larger up trend.

In the bigger picture, up trend from 123.94 (2020 low) is in progress. Next target is 195.86 (2015 high). This will remain the favored case as long as 176.29 support holds, even in case of deeper pull back.

Daily Pivots: (S1) 157.30; (P) 157.84; (R1) 158.69; More....

Intraday bias in EUR/JPY is back on the downside with break of 156.85 support. Sustained trading below 55 D EMA (now at 156.54) will argue that fall from 159.75 is a larger scale correction. Deeper fall would be seen back towards 151.39 support. On the upside, break of 159.75 will resume larger up trend to 163.06 projection target.

In the bigger picture, rise from 114.42 (2020 low) is in progress. Next target is 100% projection of 124.37 to 148.38 from 139.05 at 163.06. Sustained break there will pave the way to retest long term resistance at 169.96. This will remain the favored case as long as 151.39 support holds, even in case of deep pull back.

Daily Pivots: (S1) 0.8570; (P) 0.8582; (R1) 0.8594; More...

Intraday bias in EUR/GBP remains neutral for the moment. Current rise from 0.8941 could be the third leg of the corrective pattern from 0.8502. On the upside, above 0.8609 would resume the rebound and target 0.8667 resistance, possibly further to 0.8700. On the downside, however, break of 0.8522 will bring retest of 0.8491 low.

In the bigger picture, the down trend from 0.9267 (2022 high) is seen as part of the long term range pattern from 0.9499 (2020 high). Fall from 0.8977 is seen as the third leg. As long as 0.8700 resistance holds, further decline is still expected. Break of 0.8491 will resume the fall towards 0.8201 (2022 low). Nevertheless, firm break of 0.8700 will now be a sign of bullish reversal.

Daily Pivots: (S1) 1.6727; (P) 1.6770; (R1) 1.6823; More...

Intraday bias in EUR/AUD remains neutral for the moment. On the downside, break of 1.6647 will extend the corrective fall from 1.7062 to 1.6259/6601 support zone. On the upside, firm break of 1.6887 resistance should confirm that correction from 1.7062 has completed at 1.6647. Further rally should be seen through 1.7062 to 1.7377 projection level.

In the bigger picture, the rise from 1.4281 (2022 low) is in progress. Next target is 100% projection of 1.5254 to 1.6785 from 1.5846 at 1.7377. For now, outlook will stay bullish as long as 1.5846 support holds, even in case of deep pull back.

Daily Pivots: (S1) 0.9539; (P) 0.9552; (R1) 0.9569; More...

Range trading continues in EUR/CHF and intraday bias stays neutral. Outlook also remains bearish for now. On the downside, decisive break of 0.9513 will resume the decline from 1.0095, towards 0.9407 low. However, break of 0.9601 resistance will turn bias back to the upside for stronger rebound to 0.9646 resistance and above.

In the bigger picture, medium term outlook is staying bearish as the cross is capped well below falling 55 W EMA (now at 0.9818). Down trend from 1.2004 (2018 high) is in favor to continue. Sustained break of 0.9407 will target 61.8% projection of 1.1149 to 0.9407 from 1.0095 at 0.9018. For now, this will remain the favored case as long as 0.9670 support turned resistance holds, in case of strong rebound.

The Aussie hit 10-month lows last week but is finding a little support to start this week as the greenback falters. Australia’s jobs data will be closely watched but US CPI dominates the global calendar.

AUD/USD last week printed a low since November 2022 at 0.6357 but has showed glimmers of stability in recent sessions. It has been able to steady around 0.6400 despite the Chinese yuan falling to lows since 2007 against the US dollar, at 7.34 for the onshore yuan, 7.36 for the Hong Kong-traded yuan, (CNH).

The yuan fell every day last week but is starting this week on track to snap its losing streak. If China’s central bank – backed by US$3.2 trillion of FX reserves – is now looking to stabilise the yuan, it should be helpful for the Aussie’s tentative stabilisation. Still, China’s August activity data due Friday is not expected to inspire optimism over China’s economy.

The RBA has generally been less hawkish than over major central banks during the post-pandemic global tightening cycle. This remains the case following the RBA’s September meeting. The RBA repeated that “some further tightening of monetary policy may be required” but also introduced a new note of caution about China’s economy. Rates markets price around 40% chance of another rate rise.

Australia’s Q2 GDP data didn’t have a noticeable impact on the Aussie or interest rate expectations. The economy grew by a subdued 0.4%qtr, 2.1%yr. GDP per capita contracted -0.3% as population growth helped avoid a headline recession. Consumer spending was broadly flat but business investment was a positive surprise, increasing by 2.1%.

This week’s Australian data calendar remains worth watching, kicking off with September Westpac consumer sentiment and August NAB business confidence. Most market sensitive is the August labour force survey. After a surprising -15k dip in employment in July, a rebound is expected, Westpac on +40k, the median forecast +25k. We expect the unemployment rate to edge down to 3.6%. A surprise on the strong side might not have a big impact on the Aussie but a weak number would stoke talk of when the RBA might start cutting rates.

The global calendar focus this week is US August CPI. A rebound in gasoline prices is expected to push up annual inflation to 3.6% from 3.2%yr but CPI ex-food and energy will be key. Consensus is 4.3%yr versus 4.7%yr in July, the reading just a week ahead of the Fed policy meeting.

The Aussie cross rate with most at stake this week is probably AUD/EUR, with the ECB’s policy decision not at all clear. Markets price a 40% chance of another hike, to 4.00% deposit rate, while economists are split 26 to 23 in favour of no change in the Bloomberg survey. There is also the risk that ECB President Lagarde’s press conference sends the euro in a different direction from the initial response.

Event risk

Aust Sep Westpac consumer sentiment, Aug NAB business confidence, NZ Pre-election fiscal update, UK Jul unemployment and wages (Tue), UK Jul GDP, US Aug CPI (Wed), Aust Aug employment, ECB policy decision, US Aug retail sales (Thu), China Aug retail sales, industrial production, fixed asset investment, US Sep University of Michigan consumer sentiment, Sep NY Fed Empire State manufacturing survey (Fri)

Daily Pivots: (S1) 1.3601; (P) 1.3647; (R1) 1.3685; More....

Intraday bias in USD/CAD stays neutral at this point. More consolidations could be seen below 1.3693 temporary top. But further rally is expected as long as 1.3488 support holds. Above 1.3693 will resume the rally from 1.3091 to 1.3860 resistance, and then 1.3976 high.

In the bigger picture, price actions from 1.3976 are viewed as a corrective pattern only. Upon completion, rise from 1.2005 (2021 low) would resume through 1.3976. Next target is 61.8% projection of 1.2005 to 1.3976 from 1.3091 at 1.4309. For now, this will remain the favored case as long as 55 D EMA (now at 1.3445) holds.

Daily Pivots: (S1) 0.6358; (P) 0.6386; (R1) 0.6406; More...

AUD/USD's recovery from 0.6356 extends higher today but stays well below 0.6520 resistance. Intraday bias remains neutral and further decline is still expected. On the downside, break of 0.6356 will resume larger fall to 100% projection of 0.7156 to 0.6457 from 0.6894 at 0.6195.

In the bigger picture, current development argues that the down trend from 0.8006 (2021 high) is still in progress. Decisive break of 0.6169 will target 61.8% projection of 0.8006 to 0.6169 to 0.7156 at 0.6021. This will now remain the favored case as long as 0.6894, in case of strong rebound.

Daily Pivots: (S1) 1.0681; (P) 1.0713; (R1) 1.0731; More...

Intraday bias in EUR/USD remains neutral as consolidations continue above 1.0685 temporary low. Outlook will stay bearish as long as 1.0944 resistance holds. On the downside, below 1.0685 will resume the fall from 1.1274 to 1.0609/34 cluster support zone next.

In the bigger picture, fall from 1.1274 medium term top is seen as a correction to up trend from 0.9534 (2022 low). Strong support could be seen from 1.0634 cluster support (38.2% retracement of 0.9534 to 1.1274 at 1.0609) to bring rebound, at least on first attempt. Break of 1.0944 will indicate the start of the second leg, and target retest of 1.1274. However, sustained break of 1.0609/0634 will raise the chance of bearish trend reversal, and target 61.8% retracement at 1.0199.