Sample Category Title
Technical Outlook and Review
DXY:
The DXY chart currently shows a neutral momentum overall, which suggests that the price could potentially fluctuate between the 1st resistance and 1st support levels.
The 1st support level for DXY is at 101.51, which is an overlap support and also lines up with the 38.2% Fibonacci retracement level. This level has proven to be a strong support in the past. If the price were to drop from the current level, it could potentially reach this support level.
The 2nd support level is at 100.85, which is a swing low support level. This level has also provided strong support in the past and could potentially act as a target for a further drop in price.
On the resistance side, the 1st resistance level is at 102.20, which is an overlap resistance level and lines up with the 100% Fibonacci projection. This level is key to watch for potential bearish movements.
The 2nd resistance level is at 102.64, which is also an overlap resistance and coincides with the 38.2% Fibonacci retracement level. If the price were to break through this level, it could potentially trigger a stronger bullish acceleration towards the 1st resistance.
EUR/USD:
The EUR/USD chart is showing bullish momentum overall, as it is currently within a bullish ascending channel, suggesting that price may continue to rise due to its bullish momentum.
Looking at the support and resistance levels, the 1st support is at 1.0910, which is an overlap support that lines up with a 61.80% Fibonacci retracement. This level has proven to be strong in the past and could potentially act as support for price. If the price were to break below this level, it could drop towards the 2nd support at 1.0831, which is a swing low support.
On the resistance side, the 1st resistance level is at 1.0976, which is an overlap resistance and lines up with a 38.20% Fibonacci retracement. If the price were to break through this resistance level, it could trigger a bullish acceleration towards the 2nd resistance level at 1.1071, which is also an overlap resistance and lines up with a 61.80% Fibonacci projection.
GBP/USD:
The GBP/USD chart is showing strong bullish momentum overall, as price is above a major ascending trend line and on an ascending trend line which acts as support. This suggests further bullish momentum is likely to continue.
Price has the potential to make a bullish break through the 1st resistance and rise towards the 2nd resistance.
On the support side, the 1st support is at 1.2346 which is an overlap support and has a 23.6% Fibonacci retracement lining up with it. This level has the potential to act as strong support if price were to bounce from here. The 2nd support is at 1.2273 which is also an overlap support and has a 38.2% Fibonacci retracement lining up with it.
On the resistance side, the 1st resistance is at 1.2471 which is a multi-swing high resistance level. If price manages to break through this level, it could potentially rise towards the 2nd resistance at 1.2542. This level is a swing high resistance and also lines up with the 78.6% Fibonacci projection.
USD/CHF:
The current price of USD/CHF is below a major descending trend line, which suggests that bearish momentum is likely to continue. Additionally, the price is currently testing a descending trend line that is acting as resistance.
Based on this, it is possible that the price will continue to drop and reach the first support level at 0.8869. This support level is an important multi-swing low support that also lines up with the 23.6% Fibonacci retracement level.
If the price breaks through this support level, the next support level is at 0.8763, which is a significant swing low support and coincides with the 161.8% Fibonacci extension level.
On the other hand, if the price manages to break through the descending trend line resistance, it could potentially rise towards the first resistance level at 0.9006. This level is an overlap resistance and lines up with the 50% Fibonacci retracement level.
If the price manages to break through the first resistance level, the second resistance level is at 0.9069. This level is a pullback resistance and lines up with the 78.6% Fibonacci projection level.
USD/JPY:
The USD/JPY chart currently shows strong bullish momentum. Prices could potentially bounce off the 1st support level at 133.72 and move towards the 1st resistance level at 134.73.
The 1st support level is an overlap support that coincides with current price, indicating a strong level of buying interest. The 2nd support level is a multi-swing low support that is aligned with the 61.80% Fibonacci projection, further enhancing its importance as a support level.
On the resistance side, the 1st resistance level is a multi-swing high resistance that corresponds with the 61.80% Fibonacci retracement. This resistance level is expected to pose a significant challenge to prices moving upwards. The 2nd resistance level is a pullback resistance that may also act as a hindrance to the bullish momentum.
AUD/USD:
The AUD/USD chart is currently exhibiting strong bearish momentum. Price is below the major descending trend line, which suggests that we may see a continuation of the bearish trend.
There is potential for price to continue its bearish movement towards the 1st support level at 0.6680. This level is a strong overlap support and lines up with the 78.60% Fibonacci projection, making it a good candidate for a potential bounce. If price were to break below this level, the next support level is the 2nd support at 0.6624, which is a multi-swing low support.
On the other hand, if price were to reverse from the 1st support, it could potentially rise to the 1st resistance at 0.6785. This level is a pullback resistance and coincides with the 38.20% Fibonacci retracement. If price were to break above the 1st resistance, the next level to watch out for is the 2nd resistance at 0.6873, which is another pullback resistance and lines up with the 50% Fibonacci retracement.
NZD/USD:
The overall momentum of the NZD/USD chart is bearish, indicating a downward trend. Price could potentially continue to decline towards the 1st support at 0.6133, which is a significant overlap support level and coincides with the 78.60% Fibonacci retracement. A break below this level could push the price further down to the 2nd support at 0.6093, which is also a multi-swing low support.
On the other hand, the 1st resistance at 0.6224 is acting as a pullback resistance and coincides with the 50% Fibonacci retracement. A bullish reversal from this level could push the price up towards the 2nd resistance at 0.6280, which is a significant overlap resistance level.
It’s important to note that the bearish momentum is currently strong, suggesting that the probability of a bearish continuation is high.
USD/CAD:
The USD/CAD currency pair is exhibiting strong bearish momentum on its chart, indicating a potential bearish continuation in the near future. The price is expected to react bearishly to the 1st resistance and drop towards the 1st support level.
The 1st support level is situated at 1.3420, which is a crucial pullback support level and coincides with the 78.60% Fibonacci retracement level. The 2nd support level is located at 1.3304, which is a multi-swing low support level.
On the upside, the 1st resistance level is seen at 1.3520, which is an important overlap resistance level and coincides with the 78.60% Fibonacci retracement level. The 2nd resistance level is positioned at 1.3649, which is a pullback resistance level and coincides with the 61.80% Fibonacci retracement level.
DJ30:
The Dow Jones Industrial Average (DJ30) is showing bullish momentum on the chart, with potential for a bullish bounce off the first support level and a move towards the first resistance level.
The first support level is at 33587.40, which is an overlap support level and the 61.80% Fibonacci retracement level. This level has previously acted as a support, which increases its significance. The second support level at 33324.95 is also an overlap support level and the 38.20% Fibonacci retracement level. A bounce off either of these levels could potentially signal a bullish move.
On the upside, the first resistance level is at 34171.35, which is a multi-swing high resistance level. A break above this level could potentially indicate further bullish momentum. The second resistance level at 34370.08 is also a multi-swing high resistance level, which increases its significance.
GER30:
The German DAX (GER30) has been exhibiting bearish momentum on the chart, with a rising wedge pattern that suggests a possible imminent breakout to the downside. With this overall sentiment, the price is expected to continue its bearish trend towards the next support level.
The first support level that the price could potentially reach is at 15655.92, which is an overlap support and also coincides with the 23.60% Fibonacci retracement level. If the price breaks through this level, the next support level to watch out for is at 15487.81, which is another overlap support.
On the other hand, the first resistance level that could potentially hinder the price from going further down is at 15932.10, which is a swing high resistance and coincides with the 78.60% Fibonacci projection level. If the price manages to break through this level, the next resistance level to watch out for is at 16045.65, which is another swing high resistance and coincides with the 127.20% Fibonacci extension level.
BTC/USD:
The Bitcoin/USD pair is currently showing bearish momentum, with a potential continuation towards the 1st support level at 27537.
The first support level is a pullback support level, while the second support level at 26518 is an overlap support level, which also corresponds to the 38.20% Fibonacci retracement level. These levels are expected to act as support, as prices continue to move downwards.
On the other hand, the first resistance level at 28742 is a pullback resistance level, while the second resistance level at 30594 is an overlap resistance level. These resistance levels are expected to offer significant resistance to prices as they move upwards.
US500
US500 Bearish Momentum: Possible Breakdown of Key Support Levels
The US500 index has been displaying bearish momentum as it struggles to maintain its position above key support levels. With the price potentially breaking below the 1st support level at 4118.09, traders may anticipate a drop towards the 2nd support level at 4059.58.
Overall, the momentum of the US500 chart is bearish, with prices struggling to maintain support levels. The 1st support level is an overlap support, with a 50% Fibonacci retracement. On the other hand, the 2nd support level is also an overlap support, providing further evidence of a strong support zone.
In terms of resistance, the 1st resistance level is currently at 4173.65, indicating a multi-swing high resistance level. The 2nd resistance level at 4195.92 acts as a swing high resistance, further confirming the bearish momentum of the chart.
If the bearish momentum continues, traders may anticipate a breakdown of key support levels, leading to a potential drop towards the next level of support. Alternatively, if the index manages to maintain its position above support levels and breaks through the resistance levels, a bullish trend may emerge.
ETH/USD:
The overall momentum of the ETH/USD chart is bullish. The price could potentially continue to rise towards the first resistance level.
The first support level is at 1918.22, which is an overlap support and a 61.80% Fibonacci retracement level. The second support level is at 1834.05, which is also an overlap support and a 38.20% Fibonacci retracement level.
The first resistance level is at 2015.74, which is a pullback resistance and a 50% Fibonacci retracement level. The second resistance level is at 2138.66, which is a multi-swing high resistance.
Overall, if the bullish momentum continues, we could see the price of ETH/USD rise towards the first resistance level at 2015.74. However, if there is a bearish reversal, the price could potentially drop towards the first support level at 1918.22.
WTI/USD:
The overall momentum of WTI is bullish. The price is expected to potentially make a bullish bounce off the first support level and head towards the first resistance level.
The first support level is at 77.02, and it is a swing low support. It is also situated at the 38.20% Fibonacci retracement level, which makes it a significant level to watch. The second support level is at 73.15, and it is a pullback support level.
On the resistance side, the first resistance level is at 81.58, and it is an overlap resistance level. It is expected to be a significant level of resistance that could potentially stop the bullish momentum of the price. The second resistance level is at 84.51, and it is a swing high resistance level.
In addition to the above levels, there is also an intermediate resistance level at 78.96, which is a pullback resistance level. This level may act as a minor resistance level that the price may encounter before reaching the first resistance level.
XAU/USD (GOLD):
Gold prices are currently experiencing a bearish momentum on the chart. The price could potentially continue its downward movement towards the first support level at 1982.58, which is an overlap support level. If the price breaks below this support level, the next level of support will be the 2nd support at 1949.24, which is a multi-swing low support level and also aligns with the 161.80% Fibonacci Extension level.
On the other hand, the first resistance level is located at 2010.13, which is also an overlap resistance level. If the price manages to break above this resistance level, it could rise towards the second resistance level at 2032.86. This resistance level coincides with a pullback resistance level and the 61.80% Fibonacci projection.
BoE Tenreyro: We may already have tightened too much
BoE Monetary Policy Committee member Silvana Tenreyro, known for her dovish stance, has expressed her belief that interest rates have already been raised more than enough.
Tenreyro stated, "the shape of the inflationary shock stemming mostly from the large increase in energy prices, coupled with the long lags with which monetary policy affects the economy, means that the most likely scenario now is that we undershoot the inflation target in the medium term, meaning 2025."
She emphasized the need for forward-looking forecasts when setting policy, and warned that "we may already have tightened too much" based on UK forecasts.
She likened those advocating for further rate hikes to Milton Friedman's "fool in the shower," explaining, "When the fool starts the water and it runs cold, he keeps turning the faucet and, eventually, because he's impatient, he gets burned."
Fed’s Harker: Some additional tightening may be needed
Philadelphia Fed President Patrick Harker has indicated that "some additional tightening may be needed to ensure policy is restrictive enough to support both pillars of our dual mandate." Harker expects that once this point is reached, which he believes should happen this year, the Fed will "hold rates in place and let monetary policy do its work".
Harker also noted that the economy remains strong and inflation is coming down, albeit slowly. He projected that inflation, currently at a 5% annualized rise in the personal consumption expenditures price index, would fall to 3% to 3.5% this year and reach 2% in 2025. The unemployment rate, currently at 3.5%, is expected to move up to around 4.4% this year amid tepid growth.
The bank president acknowledged the impact of last month's financial sector woes on the economy, stating that "it will take some time to evaluate how recent events may impact overall economic activity and inflation."
Harker added that he expects to see tighter credit conditions for households and businesses, which may slow economic activity and hiring, but the full extent of this impact is still unclear.
Fed officials highlight the need for further action to tame inflation
Atlanta Fed President Raphael Bostic, Dallas Fed President Lorie Logan, and Fed Governor Michelle Bowman have all expressed concerns over the persistently high inflation rate.
Bostic, speaking on CNBC, said that "one more move should be enough for us to then take a step back and see how our policy is flowing through the economy, to understand the extent to which inflation is returning back to our target." He acknowledged that inflation has been much too high, with Fed having raised interest rates by 4.5 percentage points over the past year in an attempt to bring the economy into better balance.
Lorie Logan emphasized the need for sustained improvement in inflation statistics, an economy evolving as forecast, and a change in the factors underlying inflation, such as the hot labor market and imbalance in supply and demand. She reiterated the concern, stating, "As you surely know, inflation has been much too high."
Bowman also highlighted the importance of the Fed's focus on lowering inflation. She said, "Lately, as you know, the Fed has been focused on lowering inflation, which is essential if we want to support a growing economy and rising incomes." Bowman added, "We clearly need to continue to work to bring inflation down."
Fed’s Mester foresees further tightening to ensure downward trajectory of inflation
Cleveland Federal Reserve President Loretta Mester emphasized the need for further tightening in monetary policy to ensure a "sustained downward trajectory" of inflation. She pointed out that "demand is still outpacing supply in both product and labor markets and inflation remains too high."
To tackle the persistent inflation, Mester suggested that monetary policy will need to "move somewhat further into restrictive territory", with fed funds rate "moving above 5%" and "real fed funds rate staying positive for some time". However, she also acknowledged that the tightening journey is closer to its end than the beginning, with future rate decisions being dependent on the economy's performance.
Mester expects the unemployment rate to rise to between 4.5% and 4.75% and inflation to ease to 3.75% this year. She projects that inflation will reach the central bank's 2% target by 2025. In response to an audience question, Mester emphasized the Fed's aim for a "soft landing" and mentioned that she expects slow growth, well below 1%, in the current economic environment.
Canada’s Slowly Approaching Economic Slowdown
Summary
- Canada's economy has made a solid start to 2023, with sturdy employment gains over the last six months and monthly GDP figures pointing to respectable growth in the first quarter. However, the cumulative effects of past monetary tightening and lower energy prices should, together, weigh on consumer and business activity going forward. We forecast 1.0% GDP growth in 2023, down from 3.4% in 2022.
- A slowing in Canadian inflation is a silver lining, with a drop in energy prices driving headline inflation lower and core inflation trends also showing a perceptible slowing. That said, the underlying pace of inflation of around 3.25%-3.50% during the past three months is likely still uncomfortably high for central bank policymakers. That discomfort was reflected in the Bank of Canada's April monetary policy announcement. The BoC held its policy rate at 4.50%, but repeated that it was prepared to raise rates further if needed.
- Our base case is for no further rate hikes and, as growth and inflation slows, for rate cuts to begin in Q4-2023 with a cumulative 50 bps of easing. That easing in policy should also see the Canadian dollar underperform, remaining broadly steady against a soft U.S. dollar. The most significant risk to our outlook is that core inflation fails to slow below a 3% pace. In that scenario, rate cuts could get pushed back to 2024, and the Canadian dollar would likely be stronger than we currently forecast.
A Solid Start to 2023, But Slower Growth Still Ahead
We have, for some time, been anticipating a slowdown in Canada's economy in 2023, given an accumulation of headwinds through late last year. While we still believe that slowdown will be forthcoming, the economy has proved surprisingly resilient at the beginning of 2023. To be clear, we don't think the Canada's economy has been suprising or strong enough to prompt further Bank of Canada (BoC) rate hikes. However, depending on how quickly (or not) any growth slowdown transpires, it is possible that BoC easing begins later than our current forecast for initial rate cuts starting in Q4-2023.
Perhaps the most notable area of strength over the past several months has been the Canadian labor market. Employment rose by 34,700 in March, reflecting an 18,800 gain in full-time jobs and a 15,900 gain in part-time jobs. The March increase comes after a run of solid job gains, such that the monthly employment increase has averaged 61,800 over the past six months. The unemployment rate remained low in March at 5.0%, although hourly wage growth for permanent employees did ease a little to 5.2% year-over-year.
It is not just the labor market that has shown solid trends in early 2023. Canada's January GDP also rose 0.5% month-over-month, a bit more than the consensus forecast, as both services activity (+0.6%) and industrial output (+0.4%) rose. In that same release, Statistics Canada said its advance estimate is for GDP to rise another 0.3% in February. If realized, that would leave Canadian GDP for the January-February period up 0.7% over its Q4 average and, as a result, we have lifted our GDP growth forecast for the first quarter as a whole.
Finally, there was also some favorable news with respect to consumer fundamentals from the Q4 GDP report, as household disposable income rose 3.0% quarter-over-quarter and the household saving rate rose to 6.0% from 5.0% in Q3. To be sure, the gain in disposable income was due in part to one-off factors, including a Goods and Services Tax credit top-up and an increase in Old Age Security payments. That said, even allowing for inflation, real disposable income growth turned positive in Q4-2022 with a gain of 2.8% year-over-year, likely contributing to some resilience seen in the economy early this year.
However, while Canada's economic resilience in early 2023 has been—for us—a pleasant surprise, we still believe a slowdown is approaching. We see several factors as likely to weigh on activity as the year progresses, though chief among these are cumulative rate hikes and monetary tightening from the Bank of Canada. Since the start of 2022, when the Bank of Canada's policy rate was just 0.25%, the Bank of Canada has hiked rates by 425 bps, reaching 4.50% by the time of the January 2023 meeting, a level it has remained at since. The impact of these interest rate increases have yet to be fully felt, although they are still working their way through (and relatively quickly we think) the economy. Variable rate mortgages became very popular in Canada during the pandemic, a period when policy interest rates were at record lows. Thus, even given some waning in demand recently, variable rate mortgages remain a sizable portion of housing loans and were still some 33.5% of outstanding residential mortgages as of January 2023.
This sizable proportion of variable rate mortgages means interest costs for Canadian households have also risen relatively quickly. Interest costs rose to 7.8% of disposable income by Q4-2022 from just 5.9% at the beginning of last year, meaning that even with some offsetting decline in principal payments, the total debt service ratio for Canadian households has risen to 14.3% of disposable income.
It is not just Canadian households that face a more challenging outlook. In the BoC's Q1 Business Outlook Survey, firms indicated for the fifth quarter in a row that they expected a decline in future sales. On the energy front, oil and natural gas prices are both well below their 2022 peaks, also diminishing the business outlook to some extent. In terms of investment spending, business fixed investment fell 1.4% quarter-over-quarter in Q4, which was the third straight quarterly decline. Against the backdrop of Canada's mixed economic outlook, the BoC's Q1 Business Outlook Indicator fell to -1.1, the first time that indicator has dropped into negative territory since Q3-2020 during the height of the pandemic. Overall, although the relatively solid signals for Q1 economic activity recently prompted us to lift our 2023 full year GDP forecast for Canada to 1.0%, that would still be much slower than the 3.4% GDP growth seen in 2022.
Slowing Canadian Inflation is a Silver Lining
In addition to an approaching slowdown in economic growth, the other key trend within the Canadian economy that has already been evident for some months is receding inflation. The latest news on the price front came earlier this week as the March CPI slowed to 4.3% year-over-year, down from a peak of 8.1% in June last year. Lower energy prices have been an important driver of slower inflation trends. Perhaps even more significant than slower headline inflation is a perceptible slowing in underlying inflation trends, as reflected in the Bank of Canada's core inflation measures. The March trimmed mean CPI slowed to 4.4% and the weighted median CPI slowed to 4.6%, while on a three-month annualized basis those core inflation measures are running at around a 3.25%-3.50% pace. Overall, there is both good and bad news in the recent inflation figures, in that the slowing trend is clearly encouraging, but inflation is still high enough to be uncomfortable for central bank policymakers.
That discomfort was reflected in the Bank of Canada's April monetary policy announcement at which it held its policy rate steady at 4.50%. The BoC said it “continues to assess whether monetary policy is sufficiently restrictive to relieve price pressures and remains prepared to raise the policy rate further if needed to return inflation to the 2% target”. With respect to the CPI outlook, the BoC said its expects inflation to fall quickly to around 3% in the middle of this year, but “getting inflation the rest of the way back to 2% could prove to be more difficult because inflation expectations are coming down slowly, service price inflation and wage growth remain elevated, and corporate pricing behaviour has yet to normalize." In his post meeting press conference and subsequent comments, Boc Governor Macklem also said policy rate cuts this year do not look like the most likely scenario, and that it is too early for the central bank to consider rate cuts.
In terms of our outlook for Bank of Canada monetary policy, we do not forecast any further rate increases. Even though the Bank of Canada has signaled it is prepared to tighten further, we remain comfortable with our view, especially in the context of slower growth and inflation trends. Our outlook for Bank of Canada monetary policy also envisages monetary policy easing beginning in Q4-2023 with a cumulative 50 bps of rate cuts, with further easing anticipated in 2024. That easing is predicated upon, or in other words would require, the growth slowdown we forecast, as well as some further declaration in core inflation trends to below a 3% pace. Our BoC policy outlook is a more aggressive view than implied by market pricing, which currently sees only a moderate 14 bps of rate cuts by the end of this year, and also a reason we expect the Canadian dollar to be an underperfomer among to G10 currencies over the medium-term. Indeed, we forecast little change in the Canadian dollar versus a broadly soft greenback through the end of 2023 and through until mid-2024. We acknowledge that the more relevant risk to our Bank of Canada outlook would be later central bank rate cuts than we currently forecast, with BoC easing potentially not beginning until 2024. Whether such a delay occurs will largely hinge on whether underlying inflation trends remain stubbornly persistent and core inflation trends remain stubbornly above 3%. We will be monitoring Canada's CPI outcomes even more closely than usual in the months ahead. If core inflation fails to slow meaningfully, clearly rate cuts could be delayed until next year, in which case the risk is for a stronger Canadian dollar than we currently forecast.
RBA Review Represents Significant Progress Although Some Challenges Remain
The Reserve Bank Review recommends extensive constructive changes but issues around the dual mandate; communication; and the structure of the Monetary Policy Board contain challenges.
The much anticipated Review of the Reserve Bank has recommended sweeping changes to the operation and structure of the Bank.
There are some very significant improvements to the operating model for the Reserve Bank that are recommended in the Review.
These include establishing separate Boards to cover monetary policy and corporate governance; removing the ability of the Treasurer to override RBA decisions; removing the RBA’s ability to directly control bank lending decisions; ensuring the Treasury secretary sits on the Board in a non-political capacity; and calling for more clarity around the way the Council of Financial Regulators operates, particularly with respect to macroprudential policy.
Separating the Board responsibilities between governance and monetary policy highlights the importance to the nation of a well researched approach to setting interest rates.
The Review recommends a tightening of the wording around the Bank’s key policy objectives and gives equal weighting to inflation and full employment.
It has appropriately recommended that the wording around inflation – “on average over the cycle” should be tightened to set a specific objective path back to the middle of the 2–3% target range.
It must be noted that the Bank already sets out that path in its forecast tables in the quarterly Statement on Monetary Policy (SOMP).
For example, in the February SOMP the target timing is clearly set out as June 2025.
The new arrangements are likely to ensure that the Board is forced to defend that timing. Certainly the current timing seems to be a less ambitious objective than other central banks who are planning to reach their targets earlier. Defending a less ambitious target will be a welcome discipline under the new arrangements.
The Governor’s defence, and part of his justification that rates in Australia do not need to go as high as in comparable systems such as US; Canada; and New Zealand, is that he is more mindful of protecting the employment gains over the last year. That is an indirect way of noting the dual mandate around inflation and employment.
But that approach of “protecting the employment gains where possible” is likely to be tightened significantly under the recommended arrangements. Under the Review an explanation of the expected path back to full employment will be required.
That raises a number of issues – firstly, the point definition of the full employment rate and secondly the well understood challenge in policy of having only one instrument (the cash rate) and two quantitative objectives – inflation and full employment.
Inflation targeting evolved from the empirical observation that economies which attained stable inflation were able to operate closer to maximum capacity – indirectly achieving the full employment goal without having to adopt a quantitative employment target at the first stage. No doubt the Bank’s forecasts are likely to indicate that achieving the inflation target will eventually allow the achievement of full employment in the steady state but the path of the unemployment rate in the near term will be difficult to balance as the Bank pursues its specific inflation target.
It is proposed that Board meetings be cut back from eleven per year to eight and every Board meeting is followed by a press conference.
If the objective is to improve communication and the understanding of the monetary policy process this is not an unambiguous improvement. While the press conference will allow the direct questions along the lines of what we observe at the FOMC press conferences, which is an advantage, the trade off will be that we will only receive eight Board Minutes per year. The Board Minutes have become a rich source of information allowing an understanding of the evolution of policy. Receiving those Minutes on a less frequent basis will be a disappointment. But there is certainly merit in the observation in the Review that fewer meetings will allow more time to respond to developments.
The structure of the Monetary Policy Board is proposed as nine members, including the Governor; the Deputy Governor; and the Secretary of the Treasury. Other Board members will be selected on the basis of their understanding of various aspects of the decision process including macro economics; financial markets; the labour market; wages/inflation; industry policy and fiscal policy.
It is planned that these members will be much more closely linked in with the Reserve Bank, spending, on average, around one day per week, at the Bank, while still retaining their current employment. If that one day guideline is to be a condition of membership it will probably preclude the CEO’s who have held Board positions in the past given the demands on their time. It will also exclude anyone practising in the financial system, given obvious conflicts; and may lean heavily on those people such as academics and retirees who are not conflicted and can find the necessary time to spend at the Bank. That will have the obvious disadvantage of not being able to bring people with current relevant practical experience to the table.
The model has a huge advantage in that the impressive research resources of the Bank’s staff will have much more direct access to Board members. This is emphasised in the Review where specialist advisory committees including staff are proposed. With the Bank’s two representatives on the Board likely to find their influence being diluted relative to the current arrangements it is critical that the Australian people continue to get the best use of the Bank’s impressive research resources for the policy process.
It will be very important to get a balanced make up of the Monetary Policy Board. The record of the so called “Shadow Monetary Policy Committee” which seemed to consistently adopt a hawkish bias serves as an important warning around the risks of biasing a committee too far towards one particular group such as academics.
With the decision process in the Monetary Policy Board now being subject to a vote it is disappointing that dissenting voters do not have the responsibility to set out the reasons for their dissent. That is a time honoured practice at the FOMC and provides additional insights into the decision making process. Under the current proposal only the “unattributed” vote count will be reported. Independent Board members will have the flexibility to speak out and the responsibility to make at least one speech per year. This arrangement seems somewhat haphazard and would be better handled with dissenting reports being required.
The Review recommends a closer alignment between fiscal and monetary policy. We expect that will be welcomed at the Bank.
A recent study by respected modeller Chris Murphy at the ANU calculated that inflation, which printed 7.8% in 2022, would have been 3 ppt’s lower if fiscal and monetary policy had not been excessively expansionary over the COVID period. He attributed 2.4 ppt’s to fiscal policy and, only, 0.6 ppt’s to monetary policy. This example, while extreme, highlights the challenges faced by the Bank in achieving its targets when other policy instruments are operating in a different direction.
USD/JPY Turns Green Above 133.50, Dips Supported
Key Highlights
- USD/JPY climbed above 134.50 before sellers appeared.
- A key bullish trend line is forming with support near 133.50 on the 4-hour chart.
- Crude oil price slowly moved lower below the $78.80 support.
- The US Manufacturing PMI could decline from 49.2 to 49.0 in April 2023.
USD/JPY Technical Analysis
The US Dollar gained pace after it broke the 133.50 resistance against the Japanese Yen. USD/JPY climbed above the 134.20 and 134.50 levels.
Looking at the 4-hour chart, the pair traded as high as 135.13. Recently, it started a downside correction below the 134.50 level. There was a break below the 23.6% Fib retracement level of the upward move from the 132.02 swing low to the 135.13 high.
On the downside, there is a major support forming near 133.55. There is also a key bullish trend line forming with support near 133.50 on the same chart.
The trend line is near the 50% Fib retracement level of the upward move from the 132.02 swing low to the 135.13 high. A break below the trend line might call for a test of the 200 simple moving average (green, 4 hours) or the 100 simple moving average (red, 4 hours).
Any more losses might send USD/JPY toward the 132.00 support. On the upside, the pair is facing resistance near the 134.80 level.
The next key resistance is near the 135.20 zone. A clear move above the 135.20 resistance might send the pair toward the 135.80 zone. Any more gains might send the pair toward 136.20.
Looking at crude oil prices, there was a steady decline and the bears were able to push the price below the $78.80 support.
Economic Releases
- Germany’s Manufacturing PMI for April 2023 - Forecast 45.7, versus 44.7 previous.
- Germany’s Services PMI for April 2023 - Forecast 53.3, versus 53.7 previous.
- Euro Zone Manufacturing PMI for April 2023 – Forecast 48.0, versus 47.3 previous.
- Euro Zone Services PMI for April 2023 – Forecast 54.5, versus 55.0 previous.
- UK Manufacturing PMI for April 2023 – Forecast 48.5, versus 47.9 previous.
- UK Services PMI for April 2023 – Forecast 52.9, versus 52.9 previous.
- US Manufacturing PMI for April 2023 – Forecast 49.0, versus 49.2 previous.
- US Services PMI for April 2023 – Forecast 51.2, versus 52.6 previous.
Yen Awaits Japan’s Inflation as BoJ Meeting Approaches
Investors will be exploring Japan’s CPI inflation report during Friday’s Asian session in order to get clarity on whether inflation is persisting enough to provoke a tweak in the super accommodative monetary policy. Forecasts are for steady growth after February’s downturn from multi-decade highs, though investors will be on alert for any surprises, which could signal changes in monetary guidance, generating fresh volatility in the yen.
BoJ to stay on course but not for long
Headline inflation rose at its fastest pace since the end of 1990 in January, while the core measure, which excludes food and energy prices, hit the highest since the 1980s, fueling speculation that the Bank of Japan (BoJ) could soon end its ultra-easy monetary strategy. Despite investors debating over a potential hawkish policy tweak, the BoJ has been bravely dialling down expectations for a hawkish rotation even if its major counterparts are well ahead in the tightening cycle.
The departure of former BoJ governor Haruhiko Kuroda, who was the first to kick off the aggressive monetary easing strategy a decade ago, did not alter the central bank’s language. Instead, his successor Kazuo Ueda affirmed that current ultra-easy settings are appropriate in the meantime as a sustained achievement of the 2.0% inflation target has yet to be achieved. Neither has nominal wage growth climbed sustainably above 3.0% as the central bank desires, although spring wage talks with unions and businesses promised increases of around 5.0% from April onwards, with real wage growth remaining negative at -2.2% y/y at the moment.
As a result, market pricing for a rate hike at next week’s policy meeting and till September remains zero. On the other hand, commentary on the controversial yield curve control, which aims to keep the 10-year bond yield around 0.5%, has been more ambiguous, with polls showing that scrapping yield curve control is the second most popular choice among investors after a tweak in policy guidance.
That probably comes as evidence from previous months showed that even under massive policy easing domestically in Japan, yields can still go higher if foreign central banks are raising rates. Perhaps it’s a tool worth keeping for now as GDP growth figures are not that great in Japan and global recession risks loom. However, with major peers such as the Fed unwilling to reverse monetary policy in the face of inflation, the BoJ may have a tough time in sustaining the cap through massive bond buying, with the domestic currency also suffering from negative side effects.
CPI inflation
On Friday it would be interesting to see if Japan’s headline CPI inflation inched lower to 3.2% y/y from 3.3% previously and 4.3% y/y in February without the central bank’s aid as forecasts suggest. The core measure, which excludes volatile food and energy prices, is expected to stabilize at 3.1% y/y. If that proves to be the case or the figures head lower, pressure for a policy change may soften. Alternatively, a new inflation upturn before businesses raise wages as pledged could increase criticism on the current accommodative settings during the April 28 gathering.
USD/JPY
As regards the market reaction, a notable upside deviation from forecasts could help the yen regain some lost ground. Looking at USD/JPY, the 200-day simple moving average (SMA) could immediately come under the spotlight at 133.75. Breaking that base, the price may pause near 132.80 before heading for the key support trendline seen at 131.80.
Alternatively, weaker-than-expected readings may back “Abenomics” policies, which many members of the ruling LDP party are still endorsing. The spread between the 10-year US and Japan government bond yields could maintain its latest upturn, helping the dollar to breach the 135.30 resistance and rally towards the March high of 137.90.
