Sample Category Title

AUD/USD rebounded strongly last week but was still bounded in range of 0.6563/6804. Initial bias remains neutral this week first. Near term outlook also stays bearish as long as 0.6804 resistance holds, and down trend resumption through 0.6563 low is in favor at a later stage. Nevertheless, sustained break of 0.6804 should indicate completion of whole fall from 0.7156, and turn near term outlook bullish for retesting this high instead.

In the bigger picture, as long as 61.8% retracement of 0.6169 to 0.7156 at 0.6546 holds, the decline from 0.7156 is seen as a correction to rally from 0.6169 (2022 low) only. Another rise should still be seen through 0.7156 at a later stage. However, sustained break of 0.6546 will raise the chance of long term down trend resumption through 0.6169 low.

In the long term picture, initial rejection by 55 M EMA (now at 0.7128) retains long term bearishness. That is, down trend from 1.1079 (2011 high) could still resume through 0.5506 (2020 low) on resumption.

USD/CAD's steep decline last week indicates short term topping at 1.3666. More importantly, the downside acceleration now argues that fall from 1.3860 is the third leg of the pattern from 1.3976. Initial bias is no won the downside this week first 1.3299 support first. Firm break there will target 100% projection of 1.3976 to 1.3224 from 1.3860 at 1.3395 next. On the upside, though, above 1.3477 minor resistance will turn intraday bias neutral first.

In the bigger picture, as long as 55 W EMA (now at 1.3312) 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.

In the longer term picture, price actions from 1.4689 (2016 high) are seen as a consolidation pattern only, which might have completed at 1.2005. That is, up trend from 0.9506 (2007 low) is expected to resume at a later stage. This will remain the favored case as 55 M EMA (now at 1.3025) holds.

GBP/JPY's fall from from 172.30 was contained slightly above 167.95 resistance turned support last week, then it recovered. Initial bias remains neutral this week and further rally is in favor. On the upside, break of 172.30 will resume larger up trend to 100% projection of 148.93 to 172.11 from 155.33 at 178.51. Nevertheless, firm break of 167.95 should confirm short term topping, and turn bias back to the downside for deeper pull back to 165.40 support instead.

In the bigger picture, based on current momentum, up trend from 123.94 (2020 low) is likely ready to resume. Next target is 161.8% projection of 122.75 (2016 low) to 156.59 (2018 high) from 123.94 at 178.69. This will now remain the favored case as long as 165.40 support holds, in case of retreat.

In the longer term picture, as long as 55 M EMA (now at 154.40) holds, rise from 122.75 (2016 low) could still extend higher at a later stage to 195.86 (2015 high).

EUR/JPY's pull back from 151.60 extended lower last week, but recovered ahead of 146.85 support. Initial bias stays neutral this week first, and outlook stays bullish. On the upside, break of 151.60 will resume larger up trend to 153.64 projection level. Nevertheless, firm break of 146.85 will confirm short term topping and turn bias to the downside for deeper pull back.

In the bigger picture, current development indicates that rise from 114.42 (2020 low) is in progress. Next target is 61.8% projection of 124.37 to 148.38 from 138.81 at 153.64. Sustained break there will pave the way to 100% projection at 162.82. For now, medium term outlook will remain bullish as long as 138.81 support holds, even in case of deep pull back.

In the long term picture, break of 149.76 (2014 high) argues that whole up trend form 94.11 (2012 low) is resuming. Sustained trading above 149.76 will pave the way to 100% projection of 94.11 to 149.76 from 109.03 at 164.68, which is close to 169.96 (2008 high).

EUR/GBP's break of 0.8717 support indicates that the choppy decline from from 0.8977 is resuming. Initial bias is now on the downside this week. Deeper fall would be seen to 100% projection of 0.8977 to 0.8717 from 0.8874 at 0.8614. On the upside, above 0.8766 minor resistance will turn intraday bias neutral first.

In the bigger picture, outlook remains rather mixed for now, except that price actions from 0.9267 (2022 high) are part of the long term range pattern from 0.9499 (2020 high). With 0.8720 support intact, rise from 0.8545 is in favor to continue through 0.8977. However, firm break of 0.8720 will argue that such rebound has completed, and open up deeper fall through this support level.

In the long term picture, long term range pattern is extending. But rise from 0.6935 (2015 low) is expected to extend at a later stage, to 0.9799 (2009 high).

EUR/AUD's pull back from 1.6785 extended lower last week but stayed above 1.6219 support. Initial bias remains neutral first and further rally is in favor. On the upside, break of 1.6785 will resume larger up trend to 100% projection of 1.4281 to 1.5976 from 1.5254 at 1.6949. However, considering bearish divergence condition in D MACD, decisive break of 1.6219 will argue that it's already in correction to whole up trend from 1.4281. Deeper decline would then be seen towards 1.5254/5976 support zone instead.

In the bigger picture, whole down trend from 1.9799 (2020 high) should have completed at 1.4281 (2022 low). Further rise should be seen to 61.8% retracement of 1.9799 to 1.4281 at 1.7691 next. For now, outlook will stay bullish as long as 1.5976 resistance turned support holds, even in case of deep pull back.

In the longer term picture, it's still early to decide if rise from 1.4281 is resuming whole up trend from 1.1602 (2012 low). Attention will be paid on the structure on the current rally to make an assessment later.

EUR/CHF extended the decline from 0.9995 last week but quickly rebounded. Initial bias remains neutral this week first and outlook is unchanged. That is fall from 0.9995 is a correction to rise from 0.9704 only. Break of 0.9878 resistance will indicate that such correction has completed and target 0.9995. Firm break there should confirm that larger corrective decline from 1.0095 has completed at 0.9704 too.

In the bigger picture, prior rejection by 55 W EMA (now at 0.9971) and 38.2% retracement of 1.1149 to 0.9407 at 1.0072 suggests that medium term outlook is staying bearish. That is, down trend from 1.2004 is not completed yet and is in favor to resume through 0.9407 at a later stage. However, decisive break of 1.0095 resistance will raise the chance of bullish trend reversal. Rise from 0.9407 should then target 1.0505 cluster resistance (2020 low at 1.0505, 61.8% retracement of 1.1149 to 0.9407 at 1.1484).

In the long term picture, it's still way too early too call for bullish trend reversal with upside capped well below 55 M EMA (now at 1.0515) and 1.0505 support turned resistance (2020 low). The multi-decade down trend could still continue.

Monday, May 8, 2023

Tuesday, May 9, 2023

Wednesday, May 10, 2023

Thursday, May 11, 2023

Friday, May 12, 2023

Summary

United States: Rock Solid Labor Market Keeps the Fed in a Hard Place

• In April, employers added 253K jobs and the unemployment rate fell to 3.4%. During the same month, the ISM services index edged up to 51.9, while the ISM manufacturing index improved to 47.1. In March, the count of job openings declined to 9.6 million, while construction spending rose 0.3%. Nonfarm productivity declined 2.7% in Q1 as unit labor costs jumped 6.3%.
• Next week: NFIB (Tue), CPI (Wed), Consumer Sentiment (Fri)

International: Global Central Banks Still Active

• In addition to the Fed's rate hike, several international central banks were active this week. The European Central Bank raised its policy rate 25 bps to 3.25%, and signaled further tightening to come. Norway's central bank also raised its policy rate 25 bps to 3.25% and indicated rates would be raised further, while the Reserve Bank of Australia surprised market participants with a 25 bps rate increase to 3.85%.
• Next week: Mexico CPI (Tue), Bank of England Policy Decision (Thu), U.K. GDP (Fri)

Interest Rate Watch: The Fed Hikes Again

• As widely expected, the FOMC elected to raise its target range for the federal funds rate by 25 bps on Wednesday to 5.00%–5.25%. This may very well be the last hike of the current tightening cycle. The FOMC did not pre-commit to another rate hike on June 14, and the next action will depend on how the economy evolves from here.

Topic of the Week: The Looming Debt Ceiling X Date Draws Closer

• On Monday, Treasury Secretary Janet Yellen gave guidance that the Treasury could be unable to meet all of the government's obligations as soon as early June due to the debt ceiling constraint. The Treasury bill market suggests investors have taken notice of the political standoff over the nation's debt ceiling.

Full report here.

U.S. Highlights

• The Federal Reserve hiked the policy rate 25 basis points this week, lifting it to a 16-year high of 5.00-5.25%. Changes in FOMC statement hinted at the potential for a pause, though Chair Powell stated that such a decision had not been made.
• The banking stress continues to fester, with this week marking the failure of another bank (First Republic).
• Though still slowing on a trend basis, hiring ticked up in April, with the economy adding 253k jobs. That was above market expectations for a gain of 180k, but downward revisions to the prior months tempered the optimism.

Canadian Highlights

• Oil prices slid this week on growth concerns, pressuring equities lower. However, we think that oil prices will ultimately rise as the year wears on.
• This week’s data flow skewed positive, highlighted by a jobs report where headline employment growth was healthy. However, job markets didn’t tighten further, as labour force growth was also robust.
• The jobs report reinforced our view that the Bank of Canada will likely keep interest rates unchanged this year, as it showed that healthy job gains can manifest without materially tighter conditions.

U.S. - Fed Lifts Policy Rate to a 16-year High

The Fed followed through with its highly anticipated decision to hike the policy rate by 25 basis points (bps) this week. This lifted the fed funds rate to 5.00-5.25% – the highest level in 16 years – in what has been a historically aggressive hiking cycle (Chart 1). Changes in the FOMC statement hinted at the potential for a pause, so this could very well be the last hike of this cycle. But, stating this explicitly would not serve the Fed well at this point. In the press conference, Chair Powell tried to keep his options open, stating bluntly that a decision on a pause had not been made.

The Fed’s communication is at odds with market expectations. Markets are dismissing the possibility of further rate hikes and are instead signaling that after a brief pause the Fed will begin cutting rates. Market odds as tracked by the CME Group point to 75 bps in cuts over the last few months of the year. Asked about this divergence, Powell pushed back against the notion of soon-to-come cuts. In his words, the reasoning is that the Fed sees inflation coming down “not so quickly”, and that if that outlook proves to be broadly correct then “it would not be appropriate to cut rates”.

Fed Chair Powell noted that upcoming policy rate decisions would ultimately be data-dependent, mentioning the usual suspects (i.e., inflation and labor market metrics), while also putting a focus on credit conditions. Tighter credit conditions ultimately serve a similar purpose to rate hikes when it comes to cooling economic growth and inflation. This is something that the Fed considers in setting monetary policy, especially in light of the recent banking stress, with this week marking the failure of another regional bank. Powell had access to the Senior Loan Officer Opinion Survey (SLOOS), due to be released publicly on Monday, and noted that it would show a tightening in credit conditions among small and medium sized banks.

Factoring in the banking stress and tighter credit conditions suggests that the Fed has done enough, but labor market resilience continues. On the one hand, the pace of job creation continues to trend down on a three-month moving average basis. On the other hand, it’s hard to discount the strength in the April jobs report. The economy added 253k jobs last month – well above expectations for 180k. Gains were concentrated in service sectors (+197k). The labor force participation rate held flat at post-pandemic high of 62.6%, while the unemployment rate ticked down to 3.4%, matching January’s multi-decade low. Amidst the ongoing tightness in the labor market, growth in average hourly earnings accelerated both on a year-on-year and month-on-month basis, while other wage measures also point to some resilience (Chart 2).

Should the strength seen in April extend in the months ahead, it could push the Fed to hike a bit more. However, other labor market indicators – such as job openings, which are trending down, and initial jobless claims, which continue to trend up – are not in tune with this view. All told, the upcoming data will continue to bear careful watching, with next week’s CPI report next under the magnifying glass.

Canada – Canada's Goldilocks Jobs Market

In a week that was chock full of U.S. developments, Canadian markets largely took their cues from south of the border. Pessimism reigned for much of the week, as investors fretted over the economic outlook, on-going turmoil in the U.S. banking sector, and unsettling news that the so-called "x-date" on the U.S. debt ceiling could be fast approaching. At one point, the Canadian 10-year bond yield had fallen about 30 bps from its Monday high. However, much of this gloom was undone at the end of the week by a pair of solid job reports in the U.S. and Canada. This shift in sentiment wasn't enough to pull WTI higher, as it slid about 7% this week (as of writing). However, we see it rising through the rest of the year, supported by Chinese economic growth.

As for the Canadian economic outlook, this week's data reinforced the narrative that near-term resilience is in the cards, despite some indications that activity could be easing. On the negative side, the Canadian manufacturing PMI indicated only modest growth in April, and forward-looking indicators were soft. In addition, import volumes fell again in March, suggesting flagging domestic demand.

On the other hand, housing data from local boards released during the week pointed to surging home sales in April (Chart 1). This result was supported by lower interest rates, solid job markets and the jolt to buyer psychology sent from a central bank that's currently on pause. Furthermore, the rapid run up in interest rates had pushed sales to levels far below any reasonable long-run trend – given fundamentals (like household income) – and so some recovery to trend is likely to continue.

However, what's most germane for the outlook is the fact that Canada's jobs market continues to be firm. This morning's employment report showed that 41k net new positions were added last month and that solid growth was recorded in highly cyclical industries. Hours worked even managed to climb 0.2% m/m, despite job gains being driven by part-time work. It also helped that the federal worker's strike fell outside of the survey week. Notably, the strike ended this week and while it should weigh on GDP growth in April, a bounce back in May will likely follow.

Strikingly, what would have been considered a very robust headline employment in the past didn't flow through to a materially tighter job market. Indeed, the unemployment rate was unchanged and wage growth (while remaining robust) decelerated slightly during the month. This speaks to yet another solid gain in Canada's labour force (Chart 2) which, in turn, is being driven by robust population growth.

In terms of the outlook for interest rates, the jobs report makes us more confident in our view that the Bank of Canada will keep its policy rate unchanged this year. On the one hand, the positive indications for growth flowing from the report argue against the notion of rate cuts. On the other, the fact that healthy job growth didn't result in a tighter labour market likely discourages any lean towards tighter policy.