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Japan PMI Manufacturing was unchanged at 48.9 in January, below expectation of 49.4. PMI Services rose from 51.5 to 52.4. PMI Composite rose form 49.7 to 50.8.

Laura Denman, Economist at S&P Global Market Intelligence, said: "Japan's private sector kicked off 2023 on a more positive note, as signalled by activity returning to growth territory in January. However, similar to trends recorded over much of the past six months, a divergence between the manufacturing and services sectors has remained.

Full release here.

Australia NAB Business Conditions fell from 20 to 12 in December. Trading conditions fell from 27 to 18. Profitability conditions fell from 19 to 12. Employment conditions also declined from 13 to 8. Business Confidence improved from -4 to -1.

NAB Chief Economist Alan Oster said: "The main message from the December monthly survey is that the growth momentum has slowed significantly in late 2022 while price and purchase cost pressures have probably peaked".

"The gap between current business conditions and business confidence remains wider than usual though has narrowed. Ultimately while on average business reports still healthy activity at present, they don't necessarily expect that to last."

Full release here.

Australia PMI Manufacturing fell from 50.2 to 49.8 in January, a 32-month low. PMI Services rose from 47.3 to 48.3. PMI Composite rose from 47.5 to 48.2.

Warren Hogan, Chief Economic Advisor at Judo Bank said:

"Following eight consecutive rate hikes in 2022, the RBA Board will be meeting for the first time on 7 February. The latest PMI readings may raise the concern that the economy is not slowing sufficiently to bring inflation back to target in a timely manner...

"Inflation pressures may abate somewhat but the risk for the RBA is that inflation remains stubbornly high well into 2023. This could maintain upward pressure on inflation expectations and wages growth. On this basis it seems premature for the RBA to pause the current tightening cycle....

"We expect the RBA to hike the cash rate by 25bp in each of February and March before an extended pause. Further rate hikes may be required later in 2023 if the economy and inflation prove more resilient than current consensus forecasts suggest."

Full release here.

New Zealand BusinessNZ Performance of Services Index dropped from 53.8 to 52.1 in December. Looking at some details, activity/sales dropped notably from 58.2 to 52.1. Employment fell from 51.8 to 47.1. New orders/business rose from 57.4 to 58.4. Stocks/inventories declined from 54.6 to 51.7. Supplier deliveries increased from 46.8 to 53.4.

BNZ Senior Economist Craig Ebert said that "December marked a significant slowdown in a short space of time for the PSI, although the maintained loftiness in New Orders/Business suggested there was still a lot of demand-side pressure at play".

Full release here.

ECB President Christine Lagarde said in a speech that the "high inflation environment" is a big challenge facing Europe. And, that's "the challenge that concerns me the most".

"We must bring inflation down. And we will deliver on this goal," she emphasized. "We have made it clear that ECB interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive, and stay at those levels for as long as necessary."

"In other words, we will stay the course to ensure the timely return of inflation to our target."

Another challenge Lagarde named is to "best protect Europe's critical interests... as the next chapter in the globalisation story is being written". Europe must be "prepared for a future in which the global economy could fragment", and "develop more our own sources of growth."

Full speech here.

After signaling that it will be considering whether interest rates need to rise further on a meeting-by-meeting basis, the Bank of Canada was seen as the first major central bank to end its tightening crusade. However, the stellar employment numbers for December sparked speculation that another quarter-point hike may be delivered at this week’s gathering, on Wednesday, before the curtain falls on rate hikes. Will the BoC meet those expectations? And if so, how will the Canadian dollar react?

Inflation and employment allow another hike

At its December meeting, the Bank of Canada raised interest rates by 50bps, confounding expectations of a quarter-point hike. However, what attracted more attention was the change in the Bank’s guidance, with officials noting that they will be considering whether the policy interest rate needs to rise any further, hinting that this could have been their final move in this tightening crusade.

The market took that statement seriously and immediately priced in no more increments. However, data releases thereafter convinced investors that December may not have been the last time officials pressed the rate-hike button. Yes, headline inflation slowed further in December, to 6.3% y/y from 6.8%, but underlying metrics have not shown signs of a significant slowdown yet. This suggests that headline inflation may be easing due to the decline in prices of volatile items, like energy. With all underlying metrics at 5% or higher, another rate hike cannot be ruled out.

What adds more credence to the argument of another hike is the nation’s latest employment report, which revealed that the economy added 104k jobs during December, pushing the jobless rate down to 5.0%, just a tick above the record low seen over the summer. What’s more, the cooling of inflation since the summer months, combined with the upward trend in salaries, resulted in improvement in real wage growth. Although wages continued to contract, it was at a much slower pace than in May, when they fell at their steepest rate in more than 20 years.

Investors anticipate rate cuts later this year?

Having said all that though, the BoC business outlook survey for the last quarter of 2022 showed that most businesses expect a mild recession over the next year due to high interest rates curtailing investment plans and consumer spending. Such concerns corroborate investors’ view that this week’s hike may be the last one and that Canadian policymakers may need to start considering rate reductions at some point later this year.

Specifically, investors are currently assigning a nearly 73% probability for a 25bps hike with the remaining 27% pointing to no action. More interestingly, they are expecting 50bps worth of rate cuts by the end of the year.

Risks surrounding the Loonie likely tilted to the upside

Ergo, considering that a quarter-point increment is not fully priced in, the Canadian dollar could strengthen if indeed policymakers decide to press the hike button, and it could gain even more if they reiterate the guidance that they will be considering whether more hikes are needed. That was the wording that hurt the Loonie at the last meeting, but with the market now almost certain that there will be no other rate rise, the same phrase could be interpreted as leaving the door open to additional hikes. Also, any communication underscoring that interest rates will stay untouched for a prolonged period after they hit their peak could add extra fuel given the market’s pricing for cuts later this year. For the Loonie to come under selling pressure, BoC officials would need to refrain from hiking this week or deliver the 25bps and officially announce the end of this tightening cycle.

Putting everything together, the risks surrounding the Canadian dollar arising from Wednesday’s gathering may be tilted to the upside, while in the slightly bigger picture, China’s reopening may be an extra variable with a positive sign. China is the world’s top crude importer while Canada holds the fourth place in terms of production. Thus, any increase in crude demand due to China’s reopening may well benefit the Canadian economy and thereby the Loonie.

From a technical standpoint, the outlook of dollar/loonie could darken upon a break below the 1.3225 zone, which provided support back in November and acted as resistance in July. This may encourage the bears to dive all the way down to the low of September 13, at 1.2950.

For the picture to brighten again, the bulls may need to overcome the 1.3700 obstacle, which provided strong resistance in December. Such a rebound could initially pave the way towards the peak of November at 1.3810, the break of which set the stage for extensions towards the two-and-a-half-year high of 1.3980, hit on October 9.

• CADJPY reversed from support level 96.00
• Likely to rise to resistance level 98.00

CADJPY currency pair recently reversed up from the pivotal support level 96.00 (which has been reversing the price from the middle of December) intersecting with the daily Bollinger Band.

The upward reversal from the support level 96.00 created the daily Hammer – which stopped the earlier impulse waves 5 and (C).

CADJPY currency pair can be expected to rise further toward the next resistance level 98.00 (top of the earlier sharp reversal pivot from last week).

• AUDUSD reversed from support level 0.6885
• Likely to rise to resistance level 0.7060

AUDUSD currency pair recently reversed up with the daily Bullish Engulfing from the key support level 0.6885 (previous monthly high from the start of December).

The support level 0.6885 was further strengthened by the 38.2% Fibonacci correction of the previous upward impulse from the middle of December.

AUDUSD currency pair can be expected to rise further toward the next resistance level 0.7060 (top of the previous daily shooting star from last week).

At the conclusion of the latest WEF meeting in Davos, many of the leaders there were optimistic that the world would avoid a recession. Or, at least, if there was a recession, it would be short and shallow. A substantial portion of that optimism relied on an expectation that China would rebound, now that it was putting covid restrictions away.

The meeting happened right after the latest GDP figures from the world's second largest economy, which were well above expectations. That helped offset some of the negativity that would be expected when the US reported slower than expected industrial growth. So, it begs the question: Are major investors looking at this as the bottom? Or is there further downside?

What to look out for

One of the clues could be in PMI data, to see where advance trends in the economy are headed. Over the last several months, most major economies were reporting PMIs below the 50 level, that indicate contraction. But the latest consensus shows that indicator might be starting to rise again, particularly in Europe.

Europe's ability to keep up with energy demand has helped boost optimism in the shared economy, with stocks moving to 9-month highs. If PMIs were to move above 50, it could provide further impetus to the notion that the ECB will keep hiking, and support the Euro. Meanwhile, if PMIs in the US were to show a similar trend as industrial data, it could weaken the greenback.

Key data points:

Australia's Manufacturing PMI is expected to fall to 49.5 from 50.2, entering contraction for the first time since the pandemic. This despite reports of thawing relations between Canberra and Beijing which are expected to increase trade. Services, on the other hand, are expected to tick up though remain in contraction at 47.5 compared to 47.3 prior.

French Manufacturing PMI is forecast to improve to 49.7, up from 49.2 prior. That's only marginally in contraction. France is the first major EU company to report, and could then set the tone for optimism if the result were to come in above expectations. Services PMI is expected to do even better at 49.8, up from 49.5 prior.

German Manufacturing PMI is expected to also improve, but remain in worse condition than France, at 47.8 compared to 47.1 prior. Services, on the other hand, are expected to almost return to expansion at 49.6 compared to 49.2 prior. The latest news on German energy reserves has been positive, but the last few days have seen cold weather in Europe, with expectations it could continue. Coinciding with the PMI survey, that could dampen the optimism among executives in Europe's largest economy.

UK Manufacturing PMI is expected to stage a marginal improvement though remains firmly in contraction at 45.5 compared to 45.3 prior. The persistent strikes and reports that even more are expected in February have contributed to pessimism in the industrial sector. Services, on the other hand, are forecast to remain in contraction by the bare minimum at 49.9.

US Manufacturing PMI is forecast to stay firmly in contraction at 46.2, unchanged from December. Services PMI is expected to show a marginal improvement to 45.0 from 44.7 prior. A beat of expectations would come as a larger surprise to markets, given how much of the other data has been pessimistic.