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• 2-year Treasury yield rises 3.7bps to 4.979% (supports Fed’s higher for longer push)
• Dollar softens as risk appetite tentatively returns following last week’s stock market rout
• Fed Chair Powell to speak at Jackson Hole Symposium on Friday

The fate of the dollar will not solely depend on what Fed Chair Powell says at Jackson, but on several other factors. Will Nvidia’s earnings reignite the AI trade and provide much needed relief to tech stocks? How much additional support will we see from China? Is ECB President Lagarde ready to show which way she is leaning towards for the September meeting? Finally, will the global flash PMIs show that rate hiking cycles are starting to bring down the service sector?

Fed Chair Powell will be trying to avoid a policy mistake here. The annual Jackson Hole gathering will undoubtedly emphasize the need for policymakers to keep rates higher for longer.  Powell might stick to his hopes of a soft landing, while hinting that eventually rates will be able to come down.  It seems the majority of Wall Street is expecting Powell to deliver a hawkish hold, but any signs that the Fed is concerned about disorderly markets could end up supporting the case that the Fed will cut rates early next year.

EUR/USD Daily Chart

The EUR/USD (a daily chart of which is shown) as of Monday (8/21/2023) is seeing its bearish trend cool ahead of the Jackson Hole Symposium.  The euro’s slide had its eyes on the July low (1.0834), but that seems to be providing key support for now.  If the bond market selloff remains intact, we might not have to wait for any fireworks from Jackson Hole speeches by both ECB’s Lagarde and Fed Chair Powell.

If euro-dollar sees a sharp plunge, key support will come from the 1.0740 to 1.07400 region. It is around that area that price could see the formation of a potential bullish ABCD pattern, which might target a key harmonic level of 350 pips.

The key story on Wall Street remains the movement with real yields.  The yield on 10-year inflation-protected Treasuries rose above the 2% level, this is the first time it did that since 2009.  Soft landing or not, some investors won’t be able to pass up getting paid over 5% on short-term debt they can hold for a few months.

If at the end of the week, the dollar’s rally is exhausted, upside could target the 1.0925 region.  Only a daily close above the 1.1050 level would open the door for an extended euro rally.

Australian dollar edged higher on Monday and is on track for possible first bullish daily close in ten days, which may generate initial reversal signal.

Long tails of candles of past two days point to growing bids, with daily stochastic and RSI emerging from overbought territory and contributing to positive signals.

Larger downtrend of five weeks is looking for a breather, as Aussie dollar received fresh support from rising yuan and copper.

Triple failure to register daily close below cracked Fibo support at 0.6403 (76.4% of 0.6170/0.7157) signals formation of bear-trap pattern on daily chart which would also support recovery.

Today’s close above Friday’s high (0.6428) is seen as minimum requirement to keep alive hopes of recovery, with lift above daily Tenkan-sen / Fibo 23.6% of 0.6894/0.6364 (0.6489) to strengthen near-term structure for stronger recovery.

Caution on failure to clear Friday’s high which would signal extended narrow consolidation but will keep the downside vulnerable.

Res: 0.6428; 0.6453; 0.6489; 0.6521.
Sup: 0.6378; 0.6364; 0.6272; 0.6170.

Markets:

After a risk-off trend almost uninterruptedly set the tone for global trading since end July, little/no news this time proved good enough to trigger a cautious countermove in equities and in FX. US and European markets even ignored a fragile sentiment in Asia after Chinese banks reduced lending rates less than expected, proving less support to the economy than hoped for. The EuroStoxx 50 rebounds about 0.7% (was 1%+ earlier intraday), avoiding a new attack on the key 4200 support area. Similar story in the US with the S&P 500 staying away from the 4328 June correction low. Except for technical considerations, we saw few obvious drivers for the rebound. The (European) rebound - in part driven by energy stocks mirroring higher oil (Brent $85.7/b) and natural gas prices - calls for caution on the sustainability of the move. The bid for equities at least wasn’t driven by a congruent rebound in core bonds. They remained under modest pressure from the start of trading. US yields are rising between 3.5 bps (2-y) and 7 bps (30-y). The US 30-y yield is touching the highest levels since mid-2011. The US 10-y yield is only a whisker away from the 4.335% cycle top. The 10-y real yield (1.99%) nears the 2% psychological barrier. The real yield last surpassed this level in March 2009! At least another good reason to stay cautious on a sustained risk rebound. German/EMU yields lagged the rise in US yields earlier this month but today joined the US move with Bund yields adding between 4 bps (2-y) and 6.5 bps (10-y). Market focus this week evidently is on Fed Chair Powell’s speech at the Jackson Hole symposium on Friday. For European markets we also keep a close eye at Wednesday’s preliminary August PMI’s. The June and July EMU indices for sure were highly disappointing. Still, question remains whether the current slowdown in European growth is enough to bring (services/core) inflation back under control. A positive surprise for the August PMI’s (or the IFO) could in this context wrongfoot investors, reinforce the higher for longer narrative and might even revive more outspoken market anticipation of a September ECB rate hike.

The dollar rally slows on FX markets. DXY trades marginally lower at 103.3. The euro today outperforms after a long-drawn EUR/USD decline earlier this month. The pair tries to regain the 1.09 big figure, creating some breathing space to prevent an immediate attack on the 1.0834 key support. However, the battle isn’t over yet. The combination of a risk-on sentiment an higher US/EMU yields reveals ongoing yen vulnerability. Trading north of 159, EUR/JPY is again nearing last week’s top of 159.36, the weakest level of the yen against the single currency since 2008! USD/JPY (145.9) also keeps last week’s top (146.46) within reach with the psychological 150/the 2022 top at 151.95 seen as a likely level for more decisive BOJ action. No clear directional trend for sterling today even as Gilts both outperform Treasuries and Bunds (yields rising less than 2 bps). Cable (GBP/USD 1.275) gains marginally. EUR/GBP reversed early gains to trade in the 0.855 area.

News & Views:

The German Bundesbank expects Europe’s largest economy to probably stagnate again in Q3 as high interest rates and weak global demand weigh. The German economy continues to be in a weak phase as the country has it hard to overcome the manufacturing-induced slump with momentum in construction also sluggish. At the same time, stable employment, robust wage gains and retreating inflation will help private consumption recover. Increased inflation expectations and a possible recurrence of energy price shocks harbor upside risks for the price outlook together with strong wage growth which is set to remain beyond the turn of the year.

The Belgian debt agency raised a combined €2.8bn by tapping OLO 89 (€1.225bn 0.1% Jun2030) and OLO 97 (€1.575bn 3% Jun2033). The amount sold was the maximum on offer with an auction bid cover of 1.73. Thanks to today’s auction, the Belgian debt agency already raised €37.1bn of this year’s planned €45bn (82.5%). The bulk of this amount was raised via three syndicated deals earlier this year (totaling €16bn).

Daily Pivots: (S1) 157.66; (P) 158.12 (R1) 158.59; More....

Intraday bias in EUR/JPY is turned neutral first with today's recovery. On the upside, decisive break of 159.32 will resume larger up trend, and target 61.8% projection of 139.05 to 157.99 from 151.39 at 163.09 next. On the downside, however, break of 157.64 will turn bias back to the downside for deeper correction.

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 now remain the favored case as long as 151.39 support holds, even in case of deep pull back.

Daily Pivots: (S1) 184.50; (P) 185.22; (R1) 185.89; More...

Intraday bias in GBP/JPY is turned neutral first with today's recovery. On the upside, decisive break of 186.45 will resume larger up trend to 61.8% projection of 158.24 to 183.99 from 176.29 at 192.20. On the downside, below 184.53 will bring another corrective fall to 183.23 resistance turned support, and possibly below.

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

Daily Pivots: (S1) 1.0847; (P) 1.0871; (R1) 1.0896; More...

Intraday bias in EUR/USD stays neutral at this point. On the downside, decisive break of 1.0832 support will resume the fall from 1.1274 and target 1.0609/34 cluster support next. On the upside, above 1.0951 minor resistance will turn intraday bias to the upside for stronger recovery.

In the bigger picture, a medium term top should be formed at 1.1274, after failing to break through 61.8% retracement of 1.2348 (2021 high) to 0.9534 at 1.1273 decisively, on bearish divergence condition in D MACD. Fall from there is seen as a correction to the uptrend from 0.9534 (2022 low). Deeper decline would be seen to 1.0634 cluster support (38.2% retracement of 0.9534 to 1.1274 at 1.0609). Strong support could be seen there, at least on first attempt, to set the range for consolidation. Yet, medium term outlook will be neutral for now, as long as 1.1274 resistance holds.

Daily Pivots: (S1) 1.2696; (P) 1.2731; (R1) 1.2773; More...

GBP/USD continues to trade inside established range and intraday bias remains neutral. On the downside, firm break of 1.2615, and sustained trading below 1.2678 resistance turned support will argue that it's already in a larger correction. Deeper decline would then be seen to 1.2306 support next. Nevertheless, break of 1.2817 minor resistance will indicate that the pull back from 1.3141 has completed, and turn bias back to the upside for stronger rebound.

In the bigger picture, a medium term top could be in place at 1.3141 already, on bearish divergence condition in D MACD. Sustained trading below 55 D EMA (now at 1.2723) should confirm this case, and bring deeper fall to 38.2% retracement of 1.0351 to 1.3141 at 1.2075, as a correction to up trend from 1.0351 (2022 low). For now, rise will stay mildly on the downside as long as 1.3141 resistance holds, in case of strong rebound.

Daily Pivots: (S1) 0.8783; (P) 0.8806; (R1) 0.8846; More....

Range trading continues in USD/CHF and intraday bias stays neutral. On the upside, decisive break of 0.8818/26 resistance zone will carry larger bullish implication, and target 0.9146 cluster resistance next. However, break of 0.8688 support will indicate rejection by 0.8818, and turn bias back to the downside for retesting 0.8551 low.

In the bigger picture, a medium term bottom could be in place at 0.8551 already, on bullish convergence condition in D MACD. Sustained trading above 0.8818 support turned resistance will bring further rise to 0.9146 cluster resistance (38.2% retracement of 1.0146 to 0.8551 at 0.9160), even as a correction. Nevertheless, break of 0.8851 will resume the down trend from 1.0146 instead.

Daily Pivots: (S1) 144.92; (P) 145.40; (R1) 145.87; More...

USD/JPY recovered ahead of 55 4H EMA but stays below 146.55 temporary top. Intraday bias remains neutral first. On the upside, sustained break of 61.8% projection of 129.62 to 145.06 from 137.22 at 146.76 will pave the way to retest 151.93 high. However, considering bearish divergence condition in 4H MACD, firm break of 143.88 resistance turned support will be a sign of reversal, and turn bias back to the downside for 55 D EMA (now at 141.92).

In the bigger picture, overall price actions from 151.93 (2022 high) are views as a corrective pattern. Rise from 127.20 is seen as the second leg of the pattern and could still be in progress. But even in case of extended rise, strong resistance should be seen from 151.93 to limit upside. Meanwhile, break of 137.22 support should confirm the start of the third leg to 127.20 (2023 low) and below.

Japanese Yen is feeling the heat once again, buckling under the surge in major European and US benchmark yields. Notably, yield on Japan's 10-year JGB did jump, closing 0.655 today. However, this level has acted as a formidable ceiling for a while, even in the wake of BoJ's recent allowance hike to 1% last month. With this backdrop, Yen appears poised to challenge and possibly break recent support levels against its European counterparts and Dollar.

Elsewhere in the currency markets, Dollar finds itself in the dubious distinction of being one of the day's laggards just after Yen, with Australian and New Zealand dollars closely tailing. In stark contrast, Canadian Dollar emerges as the top performer for the day, likely buoyed by the uptick in oil prices. Swiss Franc clinches the second spot, with Euro closely on its heels, while the Sterling presents a more ambivalent picture.

Technically, EUR/JPY's strong rally today argues that pull back from 159.32 has completed. Firm break of 159.32 will resume larger up trend to 61.8% projection of 139.05 to 157.99 from 151.39 at 163.09. At the same time, break of 186.45 resistance in GBP/JPY and 146.55 in USD/JPY would further confirm Yen's downside momentum.

In Europe, at the time of writing, FTSE is up 0.23%. DAX is up 0.50%. CAC is up 0.87%. Germany 10-year yield is up 0.0558 at 2.681. Earlier in Asia, Nikkei rose 0.37%. Hong Kong HSI dropped -1.82%. China Shanghai SSE dropped -1.24%. Singapore Strait Times dropped -0.63%. Japan 10-year JGB yield closed up 0.0245 to 0.655.

Bundesbank: Germany economy to stagnate, inflation to stay above 2%

In its latest monthly report, Bundesbank paints a sobering picture of the German economy, which remains ensnared in a weak phase. Key factors hampering growth include tepid foreign demand combined with escalating financing costs. The bank foresees the economic output remaining largely stagnant for the summer quarter.

Yet, it's not all gloom. Bundesbank highlights several silver linings. Stable employment conditions paired with robust wage hikes amidst decreasing inflation rates are expected to stimulate private consumption, continuing its recovery trajectory. This, in turn, offers a promising uplift for the service sector.

Nevertheless, the manufacturing sector poses significant concerns. Weak industrial production, attributed to a continued slump in demand for industrial goods, threatens to stymie the nation's broader economic progress. Interestingly, the report underscores that the recent recovery in demand is predominantly driven by large orders, typically characterized by extended processing times. In the absence of these large-scale orders, demand, both domestically and internationally, would plummet more precipitously.

Peering into the future, Bundesbank's experts anticipate declining inflation rate in the autumn, largely influenced by dropping energy prices. On the flip side, the institution projects wage growth to persistently remain strong, extending beyond 2023. This dynamic of robust wage growth amid other economic pressures is pinpointed as a primary factor likely to keep the inflation rate hovering above the 2 percent mark for an extended duration.

China cuts 1-yr LPR moderately, keeps 5-yr LPR unchanged

In a somewhat anticipated move, China's PBoC made a cut to its one-year loan prime rate by 10bps, settling it at 3.45%. This is a slight deviation from the 15bps reduction that the majority of economists had forecasted. What stands out is that this marks the second reduction in this rate in just a span of three months.

However, eyebrows were raised when PBOC decided to keep its five-year LPR — the benchmark for most mortgages in the country — steady at 4.2%. This move defied expectations of a 15 bps cut by many market watchers. The unaltered five-year LPR is being read by many as a signal of Chinese banks' hesitancy to compromise their rate differential margin. Such reluctance throws into sharp relief potential concerns about the effective transmission of PBOC's policy decisions into the broader market landscape.

Furthermore, it stirs up conversations about the central bank's capability to invigorate the property sector and the broader economy through monetary easing strategies. This narrative is all the more potent given that this decision on the one-year LPR came on the heels of an unexpected reduction in PBOC's medium-term policy rate just a week earlier. To give specifics, PBOC had reduced the one-year medium-term lending facility rate by 15 basis points, bringing it down to 2.50% from its previous 2.65%.

Considering these rate adjustments, many financial experts are now projecting more proactive measures from the PBOC in the forthcoming months. This may encompass further rate trims as well as potential reductions in the reserve requirement ratio for banks.

NZ exports down -14% yoy in Jul, imports down -16% yoy, China leads the falls

July 2023 has been a challenging month for New Zealand's trade scenario, as the island nation witnessed a steep fall in both goods exports and imports. Data released depicted a substantial decline, with exports plunging by NZD -890m or -14% yoy, concluding at NZD 5.5B. Concurrently, imports saw a -16% yoy decline, falling NZD -1.2B to settle at NZD 6.6B for the month. This decrease in trade volumes culminated in a monthly trade deficit of NZD -1.1B. This significantly overshadows market expectations of NZD -0.05B.

Zooming in on the country-by-country trade details, China conspicuously led the downturn in both exports and imports. New Zealand's exports to the Asian giant dipped by -24% yoy, translating to a decline of NZD -407m while imports reduced by a staggering NZD -427m, down -25% yoy.

However, not all trade relations showed a contraction. Australia the US emerged as silver linings, with their exports experiencing an upward trajectory. Exports to Australia saw an 8.9% yoy growth, adding NZD 59m to the tally, and US followed suit with a 16% yoy rise, upping the figure by NZD 105m.

Yet, as New Zealand engaged with its other major trade partners, the news wasn't all positive. European Union and Japan both registered a decrease in exports, declining by -16% yoy (NZD -73m) and -21% yoy (NZD -84m) respectively. On the import front, while USA and South Korea posted a rise of 24% (NZD 166m) and 18% (NZD 71m), both European Union (up 1.9% yoy) and Australia (down -2.7% yoy) experienced mixed results.

NZD/USD pressing channel support, could it bounce from here?

In recent weeks, the antipodean currencies have encountered turbulent waters, contending for the title of the month's poorest performers. Reserve Banks of both Australia and New Zealand are widely perceived to have reached the peaks of their ongoing tightening cycles. In contrast, ECB and BoE (and less certainly Fed) seem poised for further rate hikes. Also, the broader sentiment, underpinned by belief that global interest rates may remain elevated longer than previously anticipated, has notably dampened risk appetites.

However, recent economic concerns stemming from China have played a pivotal role in the accelerated depreciation of these currencies in the last fortnight. China's less-than-stellar economic recovery post its stringent Covid lockdowns, coupled with looming deflation risks and challenges in its property and finance sectors, have further intensified the pressure on the antipodean currencies. Additionally, PBoC milder than anticipated rate cut today further dampened sentiments towards these currencies.

Technically speaking, however, there is prospect of a near term bounce in NZD/USD, given that it's now pressing a medium term channel support on oversold condition. Break above 0.5995 resistance will trigger a rebound to 55 D EMA (now at 0.6117). However, deeper decline and firm break of 100% projection of 0.6537 to 0.5984 from 0.6410 at 0.5857 could prompt downside acceleration to 161.8% projection at 0.5515, which is close to 0.5511 long term support (2022 low).

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 144.92; (P) 145.40; (R1) 145.87; More...

USD/JPY recovered ahead of 55 4H EMA but stays below 146.55 temporary top. Intraday bias remains neutral first. On the upside, sustained break of 61.8% projection of 129.62 to 145.06 from 137.22 at 146.76 will pave the way to retest 151.93 high. However, considering bearish divergence condition in 4H MACD, firm break of 143.88 resistance turned support will be a sign of reversal, and turn bias back to the downside for 55 D EMA (now at 141.92).

In the bigger picture, overall price actions from 151.93 (2022 high) are views as a corrective pattern. Rise from 127.20 is seen as the second leg of the pattern and could still be in progress. But even in case of extended rise, strong resistance should be seen from 151.93 to limit upside. Meanwhile, break of 137.22 support should confirm the start of the third leg to 127.20 (2023 low) and below.

Economic Indicators Update