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ECB Executive Board member Isabel Schnabel said yesterday in Luxembourg, "What we are seeing is that the inflationary pressures have become much more broad-based. They have somehow crept into all parts of the economy."

"At the moment, we are not in a situation where the normalization of monetary policy harms the economy," she said. "It's more like we have to remove the accommodation that we still have in the system."

Key Highlights

• USD/JPY started a downside correction from the 145.90 high.
• It broke a major bullish trend line at 143.75 on the 4-hours chart.
• Gold price is still consolidating below the $1,700 resistance zone.
• The US Manufacturing PMI could decline from 51.5 to 51.1 in Sep 2022 (Preliminary).

USD/JPY Technical Analysis

The US Dollar remained in a positive zone above the 142.00 level against the Japanese Yen. USD/JPY traded to a new multi-year high at 145.90 before the bears appeared.

Looking at the 4-hours chart, the pair started a downside correction from the 145.90 high. There was a sharp decline below the 145.00 and 144.00 levels. Besides, the pair traded below a major bullish trend line with support at 143.75.

There was a drop below the 142.50 level and the 100 simple moving average (red, 4-hours). However, the pair remained well above the 139.00 support and the 200 simple moving average (green, 4-hours).

On the upside, an initial resistance sits near the 142.50 zone. The first major resistance is near the 143.15. A clear move above the 143.15 level could open the doors for a fresh increase to 144.00. Any more gains might send the pair towards the 145.00 level.

On the downside, an initial support is near the 141.25 level. The main support sits at the 140.00 level. A downside break below the 140.00 zone might send the pair towards the 139.00 level. The next major support is near the 138.40 level, below which the pair could even test the 136.50 level.

Looking at gold price, the price is still facing a strong resistance below the $1,700 level and remains at a risk of a fresh decline.

Economic Releases

• Germany’s Manufacturing PMI for Sep 2022 (Preliminary) - Forecast 48.3, versus 49.1 previous.
• Germany’s Services PMI for Sep 2022 (Preliminary) - Forecast 47.2, versus 47.7 previous.
• Euro Zone Manufacturing PMI for Sep 2022 (Preliminary) – Forecast 48.7, versus 49.6 previous.
• Euro Zone Services PMI for Sep 2022 (Preliminary) – Forecast 49.0, versus 49.8 previous.
• UK Manufacturing PMI for Sep 2022 (Preliminary) – Forecast 47.5, versus 47.3 previous.
• UK Services PMI for Sep 2022 (Preliminary) – Forecast 50.0, versus 50.9 previous.
• US Manufacturing PMI for Sep 2022 (Preliminary) – Forecast 51.1, versus 51.5 previous.
• US Services PMI for Sep 2022 (Preliminary) – Forecast 45.0, versus 43.7 previous.

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After a week in which a dozen central banks around the world either tightened policy or resorted to currency intervention, the focus is now on the economy. Just how much of the move was priced in, and how much will economic growth be impacted going forward. So far, tightening has contributed to a stronger dollar, on top of increased risk avoidance supporting safe havens.

Purchasing managers are likely to see the first signs of the effects of monetary policy. Whether that's in lower prices implying potentially less inflation in the future, or lower orders implying less growth in the future. Weaker PMIs could start raising bets that monetary policy will start to level off in the near future. The surveys are still being conducted, so we won't see the full effect on manager's thinking until next month. But central bank action was pretty well telegraphed ahead of the start of the survey.

What to look out for:

 Australia

Australia is expected to keep bucking the global trend, with manufacturing PMIs expected to be firmly in expansion, although stumbling a bit. The services sector is expected to remain under pressure through the winter, and slower tourism activity. Australian Manufacturing PMI expected at 53.2 compared to 53.8 prior. Services PMI expected to expand modestly to 50.8 from 50.2 prior.

France

As usual, France is the first major EU country to report PMIs, and is likely to set the tone for the shared currency unless there is a major deviation with later data. The high cost of energy in France has been weighing on the economic outlook coupled with the ECB recently starting to raise rates. Both are likely to be on the minds of managers when they answer the survey.

French September Preliminary Manufacturing PMI is forecast to fall just barely into contraction at 49.8 compared to 50.4 prior. Services PMI is expected to remain just barely in expansion at 50.5 compared to 51.2 prior.

Germany

Recent positive news in Germany on the energy front isn't expected to lift businesses' spirits all that much. With energy prices still high despite the country well ahead of target on filling up its reserves, executives are worried about which plants will be idled next due to high operating costs.

German September Preliminary Manufacturing PMI is expected to fall further into contraction to 48.3 from 49.1 prior. Services PMI is expected to perform even worse, dropping to 46.0 from 46.9 prior.

UK

The British survey was conducted after PM Truss announced the price cap, so we could see if that has any effect on business optimism. However, the details have yet to be announced, so the impact might be minimal. UK Preliminary Manufacturing PMI is expected to improve modestly to 47.5 from 47.3 prior. Services PMI is expected to fall to 50.0 compared to 50.9 prior.

• In line with our expectations, the BoE today hiked policy rates by 50bp, bringing the Bank Rate to 2.25.
• The extent to which fiscal policy is set to boost demand and hence impact policy setting is still highly uncertain.
• We maintain our call for a 50bp hike in November and December and 25bp in February with risks to our call skewed towards additional hikes in 2023.

In line with our expectation, the Bank of England (BoE) hiked the Bank Rate by 50bp to 2.25% with 5 members voting for a 50bp hike, 3 members voting for 75bp and one member voting for 25bp. As expected, BoE announced that outright government bond selling will start with a total reduction in bond holdings of 80 billion pounds over 12 months. The BoE repeated its meeting-by-meeting approach stating that "Policy is not on a pre-set path.", giving close to no forward guidance to markets.

One of the key takeaways from the Monetary Policy Summary is that the BoE no longer seem to pencil in a recession by Q4 2022. Note no inflation or growth forecast were published at this interim meeting, but not mentioning a recession gives a hint that the recession won't hit as soon as BoE predicted in August. This feeds well into our narrative of the fiscal stimulus providing near-term support to the economy. With newly elected PM Lizz Truss having announced the energy relief plan, which will cap energy prices for households, BoE now sees the peak in CPI inflation to be just below 11% compared to the 13% projected in August. The BoE emphasised that the package is likely to add to inflationary pressures in the medium term, which strengthens our case for a February hike in 2023. The BoE also repeated the message that they will "respond forcefully as necessary" if inflationary pressures look more persistent, noting that the upward risk could come from stronger demand. More details on the fiscal package will be announced tomorrow (Friday).

Rates: 10Y gilts jumped 20bp upon announcement as investors' took note of BoE's perceived lower recession risk. The market is currently pricing in another 270bp until the third quarter next year and thus expects the rate path to peak at around 4.6%. Our base case remains that of a peak in the Bank Rate of 3.5%.

FX. EUR/GBP initially moved higher upon announcement to 0.8740 from 0.8700. However, the move was overall muted with the cross later settling around 0.8720. We see a case for EUR/GBP to remain elevated in the near-term, but in the longer-term we expect the cross to move lower as we expect the positive USD environment to eventual benefit GBP relative to EUR.

Our call. We still expect BoE to deliver more rates hikes. We pencil in another 50bp rate hike in November and December and finally a 25bp hike in February. We do not expect rate hikes beyond the February meeting, although another 25bp rate hike in March seems like a close call at this point. Our expectations fall below current market pricing as we expect BoE to eventually turn less hawkish amid a weakening growth backdrop.

Summary

• The Swiss National Bank (SNB) delivered a 75 bps rate hike at its September monetary policy meeting, bringing its policy rate to +0.50%.
• Overall, the announcement's forward guidance was not as hawkish compared to many other global central banks' comments. Rather than signaling forceful rate hikes ahead, the SNB instead repeated that it cannot be ruled out that further increases in the SNB policy rate will be necessary to ensure price stability over the medium term. In addition, the central bank indicated it remains willing to intervene in the foreign exchange market as necessary.
• Looking ahead, we believe the SNB will continue tightening monetary policy but will deliver rate hikes of smaller magnitude, consistent with our outlook for slower growth and somewhat more contained inflation next year. More specifically, we expect the SNB to hike rates by 50 bps in December and 25 bps in March, with a terminal policy rate of 1.25%.

Swiss National Bank Exits Negative Rates

The Swiss National Bank (SNB) delivered a 75 bps rate hike at its September monetary policy meeting, bringing its policy rate to +0.50%. Switzerland was the last of the European countries to move its policy rate into positive territory.

Overall, the announcement's forward guidance was not as hawkish compared to many other global central banks' comments. Rather than signaling forceful rate hikes ahead like other institutions, the SNB instead repeated that it cannot rule out further increases in the SNB policy rate to ensure price stability over the medium term. In addition, the central bank continues to closely monitor the franc exchange rate given currency strength has been a factor in helping dampen inflation pressures. After reaching a seven-year high this week against the euro, the franc fell around 2% versus the euro after the announcement, as the 75 bps rate move fell short of the increase priced into interest rate markets. The SNB reiterated it remains willing to intervene in the foreign exchange market as necessary.

Along with its monetary policy decision, the SNB also released updated economic projections. It upwardly revised its overall CPI forecast, and now expects inflation to average 3% in 2022, 2.4% in 2023, and 1.7% in 2024, conditional on its current policy rate of 0.50%. As for growth, the SNB cut its forecast to 2% GDP growth this year, half a percentage point lower than its June forecast, citing slower overall global growth and the energy shortage in Europe.

Where to From Here?

Looking ahead, we believe the SNB will continue tightening monetary policy but will deliver rate hikes of smaller magnitude, consistent with our outlook for slower growth and somewhat more contained inflation next year. More specifically, we expect the SNB to hike rates by an additional 50 bps in December, bringing its policy rate to 1.00% by the end of 2022. Then in 2023, we expect a 25 bps rate hike in March, with a terminal policy rate of 1.25%. Moreover, we do not expect any unscheduled inter-meeting rate hikes, as President Jordan indicated the SNB would only resort to unplanned tightening if the economic outlook changed significantly.

On the growth front, we see downside risks accumulating. While GDP growth in the second quarter was steady, warning signs are flashing for slower growth in the coming quarters as sentiment deteriorates and the Eurozone falls into recession. GDP grew 0.3% quarter-over-quarter in Q2, boosted by the services sector reopening and household consumption, which were resilient even amid higher prices (real private consumption was up 1.4% quarter-over-quarter). However, there was some noticeable softness in the manufacturing sector, which was also reflected in the manufacturing PMI falling for the fifth straight month in August.

Moreover, the KOF leading index, which historically has been a good indicator of GDP growth, declined for the fourth straight month in August, falling to 86.5. This downward trend suggests slower or negative growth ahead. Furthermore, our expectation for a Eurozone recession by the end of 2022 poses additional downside risks for Switzerland's growth prospects, as the two regions have significant trade relations—36% of Swiss exports go to the Eurozone, while 45% of Swiss imports come from the Eurozone. The economic outlook is further complicated by the Russia-Ukraine war and resulting energy crisis, as Switzerland ultimately sources almost half of its natural gas from Russia. While Switzerland has relatively low demand for gas at only around 15% of total energy consumption, the country currently does not have large capacity to store natural gas or its own gas reserve, adding to uncertainty surrounding the growth outlook. Against this backdrop, we do not forecast an outright recession in Switzerland, but we expect economic growth to slow in 2023, which is consistent with a slower pace of rate hikes from the SNB.

Also consistent with our expectation for a slower pace of rate hikes is our outlook for more contained inflation in 2023. Inflation in Switzerland is at a 30-year high and is above the SNB's 2% target, but remains much lower compared to other major European economies. In August, the CPI quickened to 3.5% year-over-year. Taking a closer look at the details, prices for housing, water, electricity, gas and other fuels were only up 4.7% from the previous year, significantly lower than in the Eurozone, where they are up 19.7%. With the updated SNB forecasts showing annual average inflation of 2.4% for 2023 and 1.7% for 2024, we believe the central bank will continue tightening monetary policy, although larger rate hikes are likely not needed given inflation is expected to be closer to target by the end of 2023. The central bank noted that without September's 75 bps rate hike, its inflation forecast would be significantly higher.

While our base case is for smaller magnitude rate hikes in the coming quarters, we would not fully rule out a 75 bps rate hike in December. Since the SNB only has one monetary policy meeting per quarter, half as many as the ECB, the central bank could opt to deliver a larger rate hike to account for this. The central bank has also repeatedly emphasized its commitment to support the franc in order to soften the blow from higher import prices and inflationary pressures. While its willingness to intervene in foreign exchange markets is an important policy lever, large rate hikes that support the currency could also complement these actions.

WTI oil futures traded higher on Thursday, after hitting support near 82.35. The black liquid continues to hold above the key barrier of 81.00, but the bigger picture still points to a downtrend. WTI continues to trade below the downside line drawn from the high of June 14, as well as below the prior longer-term upside line taken from the low of April 19, 2020.

That said, the daily oscillators suggest that some further recovery may be on the cards before the next leg south, perhaps towards the crossroads of the aforementioned diagonal lines and the round figure of 90.00, marked by the high of July 5. The RSI, although below 50, has turned up again, while the MACD, despite negative, has rebounded as well and crossed above its trigger line.

If indeed the bears recharge from near the 90.00 zone, a tumble below 81.00 may follow, which will confirm a lower low and perhaps extend the downtrend towards the 73.00 territory, marked by the inside swing highs of December 9 and 13. If no buyers are found around there either, the bears may dive towards the 66.00 or 62.20 zones, marked by the lows of December 20 and 2 respectively.

The short-term outlook could start turning bullish upon a break above 97.50. If so, the price will be above both the trendlines, as well as above all three of the moving averages. The next resistance may be at 101.25, the break of which could carry advances towards the peak of July 5 at 108.15.

In brief, oil has been in a recovery mode today, but the broader trend remains to the downside. That said, a break below 81.00 may be needed to confirm a lower low and its continuation.

The New Zealand dollar is in negative territory for a fourth straight day. NZD/USD fell as low as 0.5803 in the Asian session, its lowest level since March 2020.

Putin threats, Fed hikes weighs on kiwi

The New Zealand dollar is in serious trouble. NZD/USD has slipped 2.2% this week, and September has been dreadful, with the kiwi declining by 4.3%. The New Zealand dollar is staggering from the double blow of an aggressive Federal Reserve and risk sentiment sliding due to ominous developments in Russia.

Ukraine’s counter-offensive has sent Russian forces in retreat, and a furious Vladimir Putin has upped the ante. He has given the go-ahead for a lightning-fast referendum in occupied Ukraine, in order to annex these territories. As well, Putin has said that all options are on the table to defend “Russian territory” and has hinted at the use of nuclear weapons. Second, Putin has ordered a partial mobilization which could involve up to 300,000 Russian soldiers. These moves are a clear escalation in the conflict and predictably, risk appetite has decreased, sending the risk-sensitive New Zealand dollar lower.

With the Federal Reserve and a host of other central banks tightening policy this week, the spectre of a global recession looms ever closer. This has unnerved investors, who are flocking to the safety of the US dollar and other safe haven assets. The Fed raised rates by 0.75% on Wednesday in a move that was widely expected. Still, the Fed’s hike can be considered hawish, as it sent a clear message that it will be uncompromising in the fight against inflation, even if that results in the US economy tipping into a recession. The markets are expecting another 0.75% rate hike in October, and with relations between Moscow and the West worsening, the outlook for risk currencies such as the New Zealand dollar look grim.

NZD/USD Technical

• NZD/USD tested support at 0.5810 earlier. Below, there is support at 0.5679
• There is resistance at 0.5900 and 0.5992

Markets

No big hawkish surprises post-Fed as the Bank of Japan, Swiss National bank, the Norges Bank and the Bank of England announced their answers to arrest above-target inflation (for Norges Bank and SNB see infra). After a split vote, the BoE raised its policy rate by ‘only’ 50 bps to 2.25%. (5 votes for 50 bps, 3 votes for 75 bps, 1 vote for 25 bps). The BoE also gave the go-ahead to reduce the stock of government bond holdings by £80 bln over the next 12 months, both via maturing gits and gits sales. The MPC acknowledged that uncertainty on retail energy prices has fallen due to the Government Energy Price Guarantee. Inflation is now expected to peak at 11% in October, but will stay above 10% over the following few months before decreasing. At the same time, the government’s growth plan will support demand and will, all else equal, add to medium term inflationary pressures. The BoE will make a full assessment on the impact in November. Even as part of the market hoped for a 75 bps hike, the UK gilt yields are gaining 16/19 bps compared to yesterday’s close. Admittedly, part of this move was driven by the broader market trend. Markets apparently assume that the BOE will catch up with a 75 bps step in November when it has a more detailed view on fiscal support. After some nervous swings immediately after the policy announcement, EUR/GBP currently trades slightly higher near 0.8750. Cable this morning touched a new multi-year low at 1.1212, but rebounded on a broader USD correction. (currently 1.126).

The established uptrend in yields continues post-Fed. Both the US 2-y (4.125%) and the 2-y EMU swap yield (2.87% intraday top) hit new cycle peak levels. The move initially showed some hesitation maybe as the likes of the SNB, BOE and Norges Bank didn’t bring an hawkish surprise, but the uptrend resumed during US dealings. Currently US yields are rising between 11 bps (10-y) and 6.0 bps (2-y). Persistent low weekly US jobless claims reinforced the Fed case for further tightening. German yields are rising +10 bps (5-y) and 0.5 bps (30-y). On FX markets, several USD cross rates at the start this morning jumped to new cycle peak levels (intraday top for DXY at 111,81; for EUR/USD 0.9809, cable 1.1212; USD/JPY 145.9) supported by the Fed’s hawkish stance and a poor risk sentiment. However; a new sustained USD upleg was blocked (at least temporary) as the Japanese Ministry of Finance step into the market to prevent a further weaking of the yen. Intervention sales in the first place hit USD/JPY (currently 141.75), but also dented the momentum in other USD cross rates. EUR/USD currently trades near 0.985. DXY is changing hands near 111.1. We doubt that BOJ interventions will be a game changer, not for the yen nor for the USD trend overall.

News Headlines

The Norwegian central bank raised its policy rate as expected by 50 bps, from 1.75% to 2.25%. Governor Wolden Bache stressed the importance of frontloading to entrench inflation expectations around the 2% inflation target and in order not to tighten more further down the cycle. Based on the Committee’s current assessment of the outlook and the balance of risks, the policy rate will most likely be raised further in November. Projections in the updated Monetary policy report suggest a policy rate around 3% in the course of winter. Risks to the outlook are balanced, stretching from upward inflation risks to downside growth risks, stemming from the squeeze on finances. The Norwegian krone trades a tad weaker at 10.25, but remains within technical ranges.

The Swiss National Bank raised its policy rate as forecast by 75 bps, from -0.25% to 0.75%. The SNB doesn’t rule out further increases to ensure price stability over the medium term. Inflation rose to 3.5% in August and is likely to remain at an elevated level for the time being. The new forecast puts average annual inflation at 3% for 2022, 2.4% for 2023 and 1.7% for 2024. The stronger Swiss franc helps to tighten monetary conditions and dampen inflationary pressures, but the SNB keeps its potential FX intervention threat alive to provide appropriate monetary conditions. Markets clearly hoped for either a bigger hike or a removal of the intervention talk, pushing EUR/CHF from 0.9466 towards 0.97.

• BoJ kept its yield curve control (YCC) policy and dovish forward guidance unchanged at the policy meeting ending this morning.
• Afterwards the Ministry of Finance instructed the BoJ to intervene to support JPY. USD/JPY traded five figures lower to 140.8 levels and then bounced up and down during the following hours.
• Japan has the world's second largest FX reserve. Thus, it has the ammunition to continue to defend JPY, but in the current economic environment, markets are likely to intensify its pressure on the YCC.

The Bank of Japan (BoJ) intervened in the FX market this morning on behalf of the Ministry of Finance (MoF). This came a few hours after the announcement that BoJ kept its QQE with yield curve control in place and thus remains the only major central bank sticking with negative rates, after SNB hiked today. In the meantime, USD/JPY continued to drift higher amid the confirmation that BoJ will continue to supply JPY to the market to defend its yield curve control. Despite highlighting that BoJ might perform stealth intervention, and not tell the market, earlier in the morning, Japan's top currency diplomat, Masato Kanda, called a second press conference at 10.15 CET on which he confirmed the decision to step in to the market.

The intervention comes after a 2022 with significant headwinds for the yen. An increasing divergence between the BoJ and other major global central banks has resulted in a widening interest rate gap between Japan and the rest of the world. At the same time, the pressure on global commodities has made significant dents in Japan's current account surplus, which in July turned into a deficit for the first time in eight years and until today the yen was at its weakest level against the dollar since the last time BoJ intervened to support the yen in 1998.

The decision to stem the massive weakening of the yen triggered a USD/JPY decline by five figures to 140.8 levels and then bounced up and down during the following hours. Japan has the world's second largest foreign exchange reserve, so there is some weight behind an intervention like this. But the fact remains that the BoJ pursues a monetary policy that sends more yen into the market. It is hardly a sustainable situation for the BoJ to pursue its inflation target while simultaneously propping up the yen. Today's decision has increased the likelihood that the BoJ will end up giving in to the global pressure for higher yields and abandon the YCC, or allow for a steeper yield curve. It is not least this higher probability that is being priced in the market and which has driven the yen stronger. If the BoJ does not adjust its monetary policy, then it may be difficult to prevent the yen from weakening again, and then we could quickly be back in a situation with a record weak yen again.

For more about the inconsistency between the BoJ's policy stance and JPY support, see FX Research - Bank of Japan's Gordian knot, 20 September.