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USD/CAD edged higher 1.3699 last week but turned sideway again. Initial bias remains neutral this week first. The favored case is still that correction from 1.3976 has completed at 1.3224. Above 1.3699 will resume the rebound from there to 1.3807 resistance, and then retesting 1.3976 high. However, break of 1.3383 support will dampen this case and bring retest of 1.3224 low instead.

In the bigger picture, as long as 1.3222 cluster support (38.2% retracement of 1.2005 to 1.3976 at 1.3223) holds, larger up trend from 1.2005 (2021 low) is still expected to resume through 1.3976 high at a later stage. However, firm break of 1.3222/3 will indicate that the trend might have reversed. Deeper fall would be seen to next cluster support at 1.2726 (61.8% retracement at 1.2758).

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 long as 1.2061 support holds, which is close to 50% retracement of 0.9406 to 1.4689 at 1.2048.

Range trading continued in GBP/JPY last week and outlook is unchanged. Initial bias stays neutral this week first. On the downside, break of 164.02 should resume the whole fall from 172.11 through 163.02 support. Nevertheless, on the upside, break of 168.99 resistance will bring stronger rebound to retest 172.11 high instead.

In the bigger picture, medium term upside momentum has been diminishing as seen in bearish divergence condition in weekly MACD. Sustained break of 55 week EMA (now at 160.90) will argue that it's already correcting whole up trend from 123.94 (2020 low). Nevertheless, before that, such up trend could still extend through 172.11 high.

In the longer term picture, as long as 55 month EMA (now at 151.94) holds, rise from 122.75 could still extend higher at a later stage. Next target is 195.86 (2015 high).

EUR/JPY recovered last week but stays well inside near term falling channel. Initial bias remains neutral this week and further decline is in favor. Break of 140.75 will resume the choppy fall from 148.38. However, sustained break of the channel resistance (now at 144.83) will suggest that the correction from 148.38 has completed. Stronger rise should be seen to 146.12 resistance for confirmation.

In the bigger picture, considering bearish divergence condition in weekly MACD, 148.38 could be a medium term top already. Fall from there is probably correcting whole up trend from 114.42 (2020 low). Deeper decline would be seen to 55 week EMA (now at 138.08), or further to 38.2% retracement of 114.42 to 148.38 at 135.40 before completion.

In the long term picture, outlook will stay bullish as long as 134.11 resistance turned support holds (2021 high). Sustained break of 149.76 (2014 high) will open up further rally, as resumption of the rise from 94.11 (2012 low), towards 169.96 (2008 high).

EUR/GBP turned into sideway consolidations last week. Initial bias stays neutral this week first and further decline is expected with 0.8674 resistance intact. Break of 0.8545 will resume the fall from 0.9267, and target 61.8% projection of 0.9267 to 0.8647 from 0.8827 at 0.8444 next. On the upside, above 0.8674 minor resistance will indicate short term bottoming, and bring stronger rebound back to 0.8827 instead.

In the bigger picture, current development suggests that fall from 0.9267 is a down leg inside long term range pattern. Deeper fall could be seen towards 0.8201/8338 support zone. But strong support should be seen there to bring reversal. Nevertheless, firm break of 0.8827 resistance will turn favor to the case that such decline is merely a correction in the up trend from 0.8201. That is, further rally would be seen at a later stage through 0.9267.

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 edged higher to 1.5747 last week but failed to sustain above 1.5704 resistance and retreated. Initial bias remains neutral this week first. But further rally is expected as long as 1.5271 support holds. On the upside, firm break of 1.5747 will resume larger rally from 1.4281. Next target is 61.8% projection of 1.4281 to 1.5704 from 1.5271 at 1.6150.

In the bigger picture, as long as 1.5271 support holds, rise from 1.4281 medium term bottom is expected to continue to 1.6434 key resistance next. However, firm break of 1.5271 will argue that such rebound has completed, and keep medium term outlook neutral at best. But in this case, more range trading should be seen above 1.4281 low first.

In the longer term picture, focus is on 55 month EMA (now at 1.5591). Sustained trading above there will raise the chance of bullish trend reversal, and at least bring further rally to 1.6434 cluster resistance, 38.2% retracement of 1.9799 (2020 high) to 1.4281 at 1.6389. However, rejection by the EMA will revive the chance of down trend resumption through 1.4281 at a later stage.

EUR/CHF extended the sideway consolidation from 0.9953 last week and outlook is unchanged. Initial bias stays neutral this week first. On the upside, firm break of 0.9953 resistance will resume larger rally from 0.9407 to 1.0072 fibonacci level. However, break of 0.9720 will extend the decline from 0.9953 to 61.8% retracement of 0.8407 to 0.9953 at 0.9616.

In the bigger picture, price actions from 0.9407 medium term bottom are currently seen as a corrective pattern, rather than trend reversal. Down trend resumption through 0.9407 is mildly favored at a later stage. This will remain the favored case now, as long 38.2% retracement of 1.1149 to 0.9407 at 1.0072 holds.

In the long term picture, capped well below 55 month EMA, EUR/CHF is seen as extending the multi-decade down trend. There is no prospect of a bullish reversal until firm break of 1.0505 support turned resistance (2020 low). In case of resumption, next target is 138.2% projection of 1.2004 to 1.0505 to 1.1149 at 0.9033.

Trading in the markets was rather subdued last week. Canadian Dollar was an exception, as it was pressured by falling oil price and a dovish BoC hike. The Loonie just closed marginally higher against Yen, which was also soft. On the other hand, Swiss Franc was the best performer, followed by the resilient Aussie and Kiwi. Dollar didn't perform too badly but it's overall lackluster. Euro and Sterling ended mixed.

Looking ahead, four major central banks will meet this week, and then market will turn into year-end holiday mode. Fed's meeting will carry slightly larger significance than ECB, BoE and SNB, as new economic projections will also be published. Judging from the actions in stocks and yields, traders might be guarding against a hawkish set of forecasts.

CAD down on BoC and oil prices, AUD Lifted by China

Canadian ended the week broadly lower, except versus Yen. BoC clearly said that it's "considering whether the policy interest rate needs to rise further". That is, last week's 50bps rate hike could be the last in the current tightening cycle. Meanwhile, oil prices extended recent down trend and slumped back to pre-Ukraine war levels.

WT hit as low as 70.34 and 70 handle now looks rather vulnerable. In any case, near term outlook will stay bearish as long as 83.82 resistance holds. Current down trend should target 61.8% projection of 124.12 to 76.61 from 94.25 at 64.88. Such development would continue to weigh on Canadian Dollar.

Australian Dollar ended slightly on the stronger side. RBA's 25bps might look small comparing to other major central banks. But the board meets on monetary policy 11 times a year, comparing to 8 FOMC meeting. RBA is also not finished with tightening yet. Additionally, Aussie was supported by easing of restrictions in China, which boosted industrial metal prices too.

The Chinese Yuan strengthened notably together with stocks in China and Hong Kong last week, on optimism over reopening. USD/CHN should have completed a head and shoulder top reversal pattern (ls: 7.2670, h: 7.3745, rs: 7.2567). Deeper decline is now in favor. The real test for Yuan is probably at 6.8372 resistance turned support in USD/CNH, which is close to 50% retracement of 6.3057 to 7.3745 at 6.8401. It will need significant progress to break through this level. Otherwise, the support to Aussie could be short-lived.

AUD/CAD's rise from 0.8596 continued last week and accelerated to as high as 0.9275. The strong break of the medium term channel resistance argues that whole down trend from 0.9991 (2021 high) has completed with three waves down to 0.8596. Further rally is expected as long as 0.9093 support holds. Next target is 0.9514 resistance, and reaction from there would reveal the underlying medium term momentum in the cross.

US stocks and yields turning around?

Traders and investors have turned more cautious ahead of the upcoming FOMC announcement on December 14. A 50bps rate hike by Fed is pretty much a done deal, and the focus is actually on the new economic projections, which should guide the market in estimating the level of terminal rate of the current cycle, and the time to stay there. Judging from the price actions in stocks and bonds, the markets might be leaning towards some hawkish forecasts.

A short term top is likely in place at 34595.51 in DOW, after failing to sustain above 34281.36 resistance Break of last week's low at 33418.59 will extend the correction to 55 day EMA (now at 32729.03), or even further to 38.2% retracement of 28660.94 to 34595.51 at 32328.50.

10-year yield spiked lower to 3.402 but quickly recovered to close at 3.567. The near term focus remains on whether TNX could defend 3.483 resistance turned support. Break of 3.798 resistance will suggest short term bottoming and bring stronger rebound back above 4% handle, "towards 4.333 high. However, sustained trading below 3.483 will open up deeper decline to 3% handle or even further to 55 week EMA (now at 2.921).

Dollar index has been losing some downside momentum as seen in daily MACD. It's trying to draw support from 104.63, as well as 55 week EMA (now at 104.03). Yet, there is no clear sign of rebound yet. On the upside, break of 107.19 resistance will indicate short term bottoming and bring stronger rise to 55 day EMA (now at 108.03) and above. However, sustained break of 104 will open up deeper decline to 100 handle, and possibly below to 61.8% retracement of 89.20 to 114.77 at 98.96. The next move will depend more on development in stocks than yield.

USD/JPY Weekly Outlook

USD/JPY retreated after recovering to 137.84 but there was no clear downside momentum. Initial bias is neutral this week first. On the upside, break of 137.84 resistance will revive the case of short term bottoming at 133.61, and turn bias back to the upside for 55 day EMA (now at 141.02). However, break of 133.61 will resume the decline form 151.93 through 133.07 fibonacci level.

In the bigger picture, price actions from 151.93 medium term could be just a corrective pattern to up trend from 102.58 (2021 low). Strong support from 38.2% retracement of 102.58 to 151.93 at 133.07 and 55 week EMA (now at 131.52) will set the range for such corrective pattern. However, sustained break of 55 week EMA will pave the way to 61.8% retracement at 121.43.

In the long term picture, rise from 102.58, as part of the up trend from 75.56 (2011 low) was put to a halt at 151.93, just ahead of 100% projection of 75.56 to 125.85 from 102.58 at 152.87. There is no clear sign of long term reversal yet. Such up trend is expected to resume at a later stage, as long as 125.85 resistance turned support holds.

Monday, Dec 12, 2022

Tuesday, Dec 13, 2022

Wednesday, Dec 14, 2022

Thursday, Dec 15, 2022

Friday, Dec 16, 2022

U.S. Highlights

• Somewhat unexpectedly, the ISM services index accelerated in November, with the business activity sub-index expanding to a level last seen in 2021.
• The services sector continues to struggle with elevated inflation as the prices paid component of the ISM services index and the services side of the producer price index showed no signs of price relief.
• Despite higher rates, consumers continued to borrow to support their spending. This underscores the degree of resilience of the U.S. consumer but increases prospects for a weaker economy next year as the Fed will have to move into more restrictive territory.

Canadian Highlights

• The Bank of Canada delivered another 50-basis point hike, raising the overnight rate to 4.25%. There was also a notable shift in the Bank’s forward-looking language, which removed any reference to further hikes being needed.
• Next week’s release of the national balance sheet accounts is expected to show that consumers spent more of their income on debt servicing costs in the third quarter as higher interest rates began to reach some households.
• Activity in the housing market continues to be depressed by high borrowing costs, but the correction may be nearing the end. Next week’s release of November’s housing data is expected to echo this, showing relatively modest drag on activity and prices.

U.S. - Waiting for the Fed

A slow week on the economic data front gave markets time to reflect and prepare for the FOMC meeting next week, which will include an update to the Fed’s economic projections. The consensus has solidified for a 50-basis points (bps) hike, but the Wall Street jury is out on how far the Fed will have to raise policy rates this cycle. Price volatility this week underscores increasing concerns that higher policy rates could tip the U.S. economy into recession.

On Monday, the ISM Services index reported an acceleration in the services sector. Somewhat unexpectedly, the business activity sub-index expanded by whooping nine percentage points lifting it to a level last seen in 2021. This is in stark contrast with the manufacturing sector’s production index, which moved into contractionary territory. The pick-up in services activity was backed by remaining pent up demand, further boosted by the start to the holiday season as industries like Accommodation & Food Services and Retail Trade entered their busiest month of the year.

The prices sub-indexes reinforce the contrast between the two sectors. While the manufacturing sector has seen a significant deterioration in the prices paid component, which contracted in November with a reading of 43, it’s taking much longer for the services sector to see signs of price relief, with the sub-index remaining mired around 70 (Chart 1). Higher prices also appear to be broad-based with 16 out of 18 industries reporting higher prices. The Producer Price Index (PPI) for November provided another example of the sectoral divergence in price pressures. The PPI advanced by 0.3% month-on-month in November, driven by a 0.4% increase rise in services prices.

Tuesday’s trade data showed that goods exports declined in October, with a notable weakness in industrial supplies and materials (includes petroleum products), providing more evidence of dwindling demand from overseas. This contributed to a widening in the trade deficit to $78.2 billion. Imports also improved marginally supported by an increase in domestic demand for foreign goods, partially offset by weaker services imports from abroad.

Consumer demand has proven a bit more resilient recently, and it looks to have been supported by consumer credit, which continued to expand in October despite higher interest rates. Consumer credit outstanding increased by $27.0 billion on the month (7.1% annualized), driven by nonrevolving credit, which gained $17.0 billion (Chart 2). Revolving credit added $10.1 billion, reflecting consumers stronger reliance on credit card debt as pandemic savings continue to dwindle. We think that consumers will add more leverage to support real spending growth of roughly 1.5% in 2023 – a step down from 2.8% expected in 2022.

That forecast underscores the degree of resilience coming from the U.S. consumer, but the cumulative effect of higher interest rates may create stronger headwinds than currently anticipated. Stronger domestic demand and higher inflation increases prospects that the Fed will have to move rates into more restrictive territory. Wednesday’s FOMC decision will feature the dot plot, so we won’t have to wait much longer to see the Fed’s latest thinking.

Canada – The End of the Hiking Cycle Is In Sight

This week's economic highlight was the Bank of Canada interest rate announcement. As expected, the central bank delivered another 50-basis point hike, raising the overnight rate to 4.25%. As a justification of its decision, the Bank stated that while there were signs that the economy was slowing, particularly in the interest-rate sensitive areas such as housing and consumption, it was still in excess demand territory and that further cooling was required. Ditto for inflation. While acknowledging that supply chain bottlenecks have improved and the three-month rate of change in core inflation has come down, overall inflation remained high and inflation expectations elevated.

However, perhaps more interesting than the interest rate decision itself, was the notable shift in the Bank's forward-looking language, which removed any reference to further hikes being needed. This suggested that the Bank is nearing the end of its rapid-fire hiking cycle. This was re-affirmed by Deputy Governor Sharon Kozicki in her speech on Thursday, where she said that the central bank thinking was "moving from how much to raise interest rates to whether to raise interest rates" and that future decisions will be "more data-dependent".

Indeed, given the lagged effects of the past interest rate increases, much of the impact of higher policy rates, particularly on consumer spending, is yet to come. Next Monday's release of the national balance sheet accounts is expected to show that consumers spent more of their income on debt servicing costs in the third quarter as higher interest rates began to reach some households. This is likely just a start of a lengthy process. Our estimates suggests that the drag from higher debt servicing costs on household finances and spending will continue to intensify next year, long after the Bank of Canada ends rate hikes in Q1 of 2023 (Chart 1). Given these headwinds, we expect consumer spending and the economy to come to a near standstill next year.

While financial headwinds are still looming large, at least consumers have been getting some reprieve at the gas pump. Gasoline prices dropped by about 35 cents per liter since the start of November, and continued to edge lower this week as oil prices remained under pressure amid worries about the next year's global economic outlook.

Activity in the housing market continues to be depressed by high borrowing costs, but the correction may be nearing the end, with the market expected to bottom at the start of next year. The impact of higher rates on the housing market so far has been dramatic. Sales crated by 35% since February and are now at level last consistently seen in 2012. The MLS home prices index, which adjust for the composition of home sales, is down 11% from its peak. However, declines have been moderating recently. Next week's release of November's housing data is expected to echo this, showing relatively modest drag on activity and prices (Chart 2).

Summary

United States: Price Pressures Improving Gradually Amid Resilient Economy

• The November release of the ISM services index kicked off the week with a surprisingly strong reading on the U.S. economy. Various price metrics released this week showed some continued signs of inflation cooling, but gradually rather than rapidly.
• Next week: CPI (Tue), Retail Sales (Thu), Industrial Production (Thu)

International: Global Central Banks Continue Along Their Rate Hike Paths

• The Bank of Canada raised its policy interest rate 50 bps at this week's meeting, but signaled that further rate hikes would be increasingly data-dependent. Meanwhile, the Reserve Bank of Australia raised its policy rate 25 bps without offering any clear indication of an end to rate hikes. We expect Australia's central bank to tighten policy further next year. The Reserve Bank of India also hiked interest rates and should raise rates further in 2023.
• Next week: China Retail Sales & Industrial Output (Thu), Bank of England (Thu), European Central Bank (Thu)

Interest Rate Watch: The Fed Set to Hike 50 bps This Festive Season

• We expect to see the fed funds rate rise 50 bps to a range of 4.25%-4.50% at the conclusion of the Federal Reserve's Open Market Committee (FOMC) meeting on December 14. This represents a significant hike over the current range of 3.75%-4.00% but is still a downshift from the four consecutive 75 bps hikes at the prior four FOMC meetings.

Credit Market Insights: Consumers Continue to Draw on Credit

• Consumer credit grew $27.1 billion in October, registering a 6.9% year-over-year gain. This continued rise in new debt is the newest installment in a troubling trend for consumers, as they appear increasingly willing to both borrow and draw down savings in order to fund consumption habits.

Topic of the Week: No Money, More Problems

• This week, we focus on the personal saving rate. There has only been one month over the past 60 years in which consumers set aside less of their income than they did in October. That's both remarkable and worrying for the outlook.

Full report here.