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New Zealand BusinessNZ Performance of Manufacturing Index rose slightly from 53.5 to 54.9 in August. Production rose from 50.8 to 54.6. Employment rose from 52.9 to 53.6. New orders rose from 50.8 to 59.2. Finished stocks rose from 48.7 to 50.8. Deliveries rose from 50.1 to 53.7.

BNZ Senior Economist, Craig Ebert stated " that manufacturing production, in general, was holding its own in Q2, rather than drooping, was portrayed in the PMI readings for April May and June. And in July and August the PMI has moved on to suggest an improving tone around underlying growth."

Full release here.

RBA Governor Philip Lowe told the House of Representatives Standing Committee on Economics, interest rate at 2.35% is "still too low". He added that over the longer term, the cash rate "should at least average the mid point of the inflation target", which is 2.5%, if not a bit higher. Also, an average interest rate of about 3% was "possible", and we'll cycle around some number between 2.5 and 3.5."

Lowe also warned that the longer inflation stays above 3%, "the more difficult it's going to become" for Australians. If that. happens "then we have higher interest rates and a recession, which is damaging. "So we've got two difficult kind of positions at the moment: some pain now and hopefully real wages start rising again next year against the risk of not doing anything, just sitting on our hands and having inflation stay higher."

Key insights from the week that was.

This week, Australian data provided a constructive view on the economic outlook. Global financial markets meanwhile were jolted by the US’ strong August CPI report.

Beginning first with consumer sentiment, the Westpac-MI survey reported a bounce in confidence, the headline index gaining 3.9%. Coming at a time of high uncertainty around the cost of living, the domestic rate outlook and global growth, this is a pleasing result. Though, at 84.4, the index remains near historic lows typically only seen during recessions and major economic disturbances. Arguably, the key difference between now and these other periods is that the Australian labour market is extremely tight, with the unemployment rate at 50-year lows. Nominal wage growth is also strengthening, which is perhaps, in part, why ‘family finance expectations for the year ahead’ rose 5% in September even as ‘family finances versus a year ago’ declined 5% to a 10-year low. Notably, ‘time to buy a major household item’ is still 34% below average and our quarterly ‘wisest place for savings’ questions point to intense risk aversion.

Chief Economist Bill Evans provided a full discussion of the implications of the latest sentiment readings for the economy in a video update mid-week. The outlook for the housing market heading into spring was also a key theme of our latest Market Outlook in Conversation podcast.

According to NAB’s latest business survey, Australian firms are drawing strength and optimism from current circumstances, with conditions up 1pt to +20 and confidence up 2pts to +10 in August – both well above average reads. Importantly, the momentum in business conditions looks to be broad based by state and industry. Views on utilisation also continue to point towards labour and capital being at full capacity. Thankfully for inflation, upstream cost pressures moderated somewhat in August, although they remain at very elevated levels, having reached a record high in July.

Despite still being impacted by COVID-19 absences, August’s employment print indicates the labour market remains in robust health. At 33.5k, job growth in the month was able to offset much of the decline observed in July (-40.9k). And a solid increase in participation led to the up-tick in the unemployment rate to 3.5%. A stronger result would have arguably been possible had illness not affected hours and the number of workers available. These impediments should subside in coming months, giving room for further gains before 2022’s rate hikes slow the economy and consequently labour demand into 2023.

The August overseas arrivals and departures release meanwhile marked two key developments: a ‘normalisation’ of overseas travel towards typical seasonal trends; and hints that momentum in visa arrivals is beginning to build. On the latter, the lack of net positive visa arrivals has been a key contributor to labour market tightness. It is therefore promising to see the ‘temporary work’ group of visa arrivals post a solid net gain of 10.3k in August. With more resources dedicated to reducing visa processing backlogs, the return of foreign labour should, in time, go some way towards alleviating Australia’s labour supply constraints.

Over in New Zealand, as anticipated by Westpac, Q2 GDP was strong, gaining 1.7% as the service sector benefitted from the return of international tourists. The result also confirms that the 0.2% decline of Q1 was due to temporary factors, particularly disruptions related to the omicron wave of COVID-19 which have now largely passed. The Q2 result supports our expectation that the RBNZ will continue to hike into year end to a peak cash rate of 4.0%. This is necessary to bring demand and supply into line and mitigate inflation risks.

Turning then to the US. August’s strong core CPI print got all the headlines this week, but the dataflow was decidedly mixed overall.

Against an expectation of a 0.3% gain for the month, August’s 0.6% rise for the core CPI was a shock to markets, particularly as they had prepared for a downside surprise. With the recent hawkish rhetoric of FOMC members still fresh in their minds, market participants bid the US dollar aggressively straight after the release, while bonds and equities sold off in an equally volatile fashion. Westpac and the market now expect at least 175bps of hikes into year-end by the FOMC, taking the fed funds rate to a peak of 4.125% (Westpac) or above (market).

Westpac sees the flow of decisions as most likely being a 75bp hike in September followed by a 50bp increase at both the November and December meetings. The market however is pricing a greater risk of an accelerated delivery during September and November, with 150bps priced for those two meetings, as well as the need for additional tightening in late-2022 or early 2023, with around 215bps priced by March 2023.

Arguably, the FOMC sees a need to act with such vigour to keep real yields along the yield curve materially above zero – currently 5-10 year real yields are around 1.0%. To do so, nominal yields need to be kept around current levels into year end, and the anticipated 2023 decline managed to a pace proportional to the fall in medium-term inflation expectations. Maintaining real yields around 1.0% well into 2023 should give the FOMC comfort that the remaining risks related to inflation will pass.

Our concern however is that the hit to output from the fight against inflation will endure. Currently we see an output gap circa 3.0% of GDP by end-2023, likely increasing to 3.5% come end-2024 given rate cuts are only expected to commence in 2024 once inflation has abated. If this forecast eventuates, it will prove a material negative for US productivity, profitability and income into the medium-term as well as a material hindrance to the US’ emission reduction ambition to 2030 and beyond – as discussed in our September Market Outlook.

Notably, the activity data released this week has highlighted that the risks to US growth lay to the downside. Control group retail sales were much weaker than expected in August (0.0% against 0.5% consensus) and the July growth rate was halved to 0.4%. Industrial production also contracted 0.2% in August (0.0% consensus), while recent readings from the regional federal reserve surveys point to increasingly fragile conditions and growing uncertainty over the outlook.

As a result, the latest estimate of Q3 GDP from the Atlanta Fed’s GDPnow nowcast is just 0.5% annualised, less than a quarter of the decline in activity experienced over H1 2022. At the turn of the year and through 2023, financial markets are likely to increasingly factor in these risks for the US, particularly FX markets given the US dollar’s historically-elevated starting level.

USD/JPY:

On the H4 chart, price is still respecting the ascending momentum. We are still bullish bias- Price is testing above the previous low and if bullish momentum continues, it should bring price to first resistance at 144.918 where the 161.8% extension sits. If it breaks this level, it should bring price to 147.332 where the previous swing high sits. Alternatively it could pull back to the first support at 141.652 where the 23.6% retracement and 100% projection sits then to the second support at 139.518 where the 38.2% retracement and overlapping support sits.

Areas of consideration:

• H4 time frame, 1st resistance at 144.918
• H4 time frame, 1st support at 141.652

DXY:

On the H4, price is still respecting the bullish channel and has failed to break the first support- we are bullish bias. Price has rebounded off the support level and is moving toward the first resistance at 110.698 levels where the previous swing high sits. Alternatively, price could pull back to test the first support at 109.323 where the 23.6% retracement sits then the second support at 108.007 where the 61.8% projection, 61.8% retracement and previous swing low sits.

Areas of consideration:

• H4 time frame, 1st resistance at 110.698
• H4 time frame, 1st support at 109.323

EUR/USD:

On the H4, price is moving within the channel, we are currently bullish bias as price fails to break the first support. Price seems like its moving to first resistance at 1.0112 level where the previous swing low sits. If bullish momentum continues, it should bring price to second resistance at 1.0274 where the 78.6% retracement and previous swing high sits. Alternatively, price could pull back to test the first support at 0.9913 where the 78.6% projection and previous swing low sits, subsequently the second support at 0.9878 where the previous swing low sits.

Areas of consideration :

• H4 1st resistance at 1.0112
• H4 1st support at 0.99134

GBP/USD:

On the H4, prices are still moving in a bearish momentum hence we are bearish biassed. Prices seem to be moving toward the first support at 1.1442 where the 161.8% extension and previous swing low sits. Alternatively, price could pull back to test the first resistance at 1.1605 where the 23.6% retracement and overlapping support sits then the second resistance at 1.1760 where the 38.2% retracement and previous swing high sits

Areas of consideration:

• H4 1st resistance at 1.1605
• H4 1st support at 1.1442

USD/CHF:

On the H4, prices have broken the ascending channel and we are currently bearish bias. Price is testing the first resistance at 0.9623 where the overlapping resistance and 50% retracement sit. If it breaks this level, it might test the second resistance at 0.9694 where the 38.2% retracement sits. Alternatively, price could pull back to test the first support at 0.9468 where the 78.6% retracement sit and then second support at 0.9369 where the previous swing low sits

Areas of consideration

• H4 1st support at 0.9468
• H4 1st resistance at 0.9623

XAU/USD (GOLD):

On the H4, with the price moving within the descending trendline and below ichimoku cloud, we have a bearish bias that the price may drop from the 1st support at 1662.740, which is in line with the 100% fibonacci projection to the 2nd support at 1639.347, where the 127.2% fibonacci projection is. Alternatively, the price may rise to the 1st resistance at 1679.649, which is in line with the 23.6% fibonacci retracement and pullback resistance. If the 1st resistance is broken, the 2nd resistance could be at 1695.654, which is in line with the 50% fibonacci retracement and overlap resistance.

Areas of consideration:

• H4 time frame, 1st support at 1662.740
• H4 time frame, 2nd support at 1639.347

AUD/USD:

On the H4, with the price moving within the descending channel and below ichimoku cloud, we have a bearish bias that the price may drop to the 1st support at 0.66725, which is in line with the 78.6% fibonacci projection. If the 1st support level is broken, the 2nd support could be at 0.66122, where the 100% fibonacci projection is. Alternatively, the price may rise to the 1st resistance at 0.67717, which is in line with the 38.2% fibonacci retracement and overlap resistance. If the 1st resistance is broken, the next resistance level could be at 0.68274, where the overlap resistance and 61.8% fibonacci retracement are.

Areas of consideration

• H4 1st support at 0.66725
• H4 2nd support at 0.66122

NZD/USD:

On the H4, with the price moving within the descending channel and below ichimoku cloud, we have a bearish bias that the price may drop to the 1st support at 0.59099, where the 100% fibonacci projection and 161.8% fibonacci extension are. Alternatively, the price may rise to the 1st resistance at 0.60373, which is in line with the pullback resistance and 38.2% fibonacci retracement. If the 1st resistance is broken, the 2nd resistance could be at 0.60788, which is in line with the overlap support and 61.8% fibonacci retracement.

Areas of consideration:

• H4 time frame, current price
• H4 time frame, 1st support at 0.59099

USD/CAD:

On the H4, with the price moving within the ascending channel and above ichimoku cloud, we have ab bullish bias that the price may rise from to the 1st resistance at 1.32727, which is in line with the 127.2% fibonacci extension to the 2nd resistance at 1.33618, where the 161.8% fibonacci extension is. Alternatively, the price may drop to the 1st support at 1.30745, which is in line with the 61.8% fibonacci retracement and overlap support.

Areas of consideration:

• H4 time frame, 1st resistance at 1.32727
• H4 time frame, 2nd resistance at 1.33618

OIL:

On the H4, with price below ichimoku and moving within the long term descending trendline, we have a bearish bias that the price may drop to the 1st support at 90.155, which is in line with the 78.6% fibonacci retracement. If the price broke the 1st support, the 2nd support could be at 88.332, which is in line with the swing low. Alternatively, the price may rise to the 1st resistance at 93.434, where the 50% fibonacci retracement and overlap resistance are.

Areas of consideration:

• H4 time frame, 1st resistance at 96.160
• H4 time frame, 1st support at 92.239

Dow Jones Industrial Average:

On the H4, price is reflected off nicely at the first resistance at 32500.85 where the 50% Fibonacci retracement is and broke right through the first support at 31029.34 where the 78.6% Fibonacci retracement is. Price might continue heading downwards towards the second support at 30343.73 where the previous swing low is.

Areas of consideration:

• H4 time frame, 1st support at 31029.34
• H4 time frame, 2nd support at 30343.73

DAX:

On the H4, price has reflected of the first resistance at 13505 where the 61.8% retracement is and got a big reaction breaking through the first support at 13084. Price might continue going down towards the second support at 12606 where the swing low is.

Areas of consideration:

• H4 time frame, 1st support at 13084
• H4 time frame, 2nd support at 12606

ETHUSD:

On the H4, price has reflected off the second resistance at 1789.8 where the 61.8% Fibonacci level is and pulled back hence we are currently bearish bias. Price has pushed through the first support at 1508.57 where the previous swing low is at. If bearish momentum continues it should bring price to the second support at 1420.74 where the previous swing low sits.

Areas of consideration:

• H4 time frame, 1st resistance of 1676.58
• H4 time frame, 1st support at 1508.57

BTCUSD:

On the H4, price reflected off the first resistance at 22600.00, broke past the second resistance at 20756.87 and is moving in a bearish momentum hence we are bearish. Price has moved and tapped the first support at 19557.00 where the 78.6% retracement sits. If bearish momentum continues, it should bring price to the second support 18540.00 where the previous swing low sits. Alternatively, price could pull back to test the second resistance at 20756.87 where the 50% retracement is.

Areas of consideration:

• H4 time frame, 1st resistance of 22600.00
• H4 time frame, 1st support at 19557.00

S&P 500:

On the H4, the price reversed from the 4100 price area forming a bearish channel, with the price falling towards the 1st support are of 3900. With our bearish bias still valid, as price trades back towards the 61.8% Fibonacci retracement, look for price to test the 1st support area. If the price breaks below the 1st support level, the price could fall towards the 78.6% Fibonacci retracement level of 3784.19. There could be some pullback up towards the 1st Support level area else it could head towards the 2nd support of 3636.87. As the price falls towards the 2nd support, it could find some pullback towards the 78.6% Fibonacci retracement pullback support area.

Areas of consideration:

• H4 time frame, 1st support at 3900
• H4 time frame, 2nd support at 3636.87

Key Highlights

• USD/JPY seems to be forming a double top near 145.00.
• It is testing a major bullish trend line at 142.85 on the 4-hours chart.
• Gold price declined heavily below the $1,680 support zone.
• GBP/USD is at a risk of more losses below the 1.1420 level.

USD/JPY Technical Analysis

The US Dollar made another attempt to clear the 145.00 resistance zone against the Japanese Yen. However, USD/JPY struggled to continue higher and corrected lower.

Looking at the 4-hours chart, the pair seems to be forming a double top near 145.00. The pair is slowly moving lower and there was a break below the 50% Fib retracement level of the upward move from the 141.59 swing low to 144.96 high.

It is now testing a major bullish trend line at 142.85 on the same chart. The trend line is near the 61.8% Fib retracement level of the upward move from the 141.59 swing low to 144.96 high.

A downside break below the trend line support might spark a sharp decline towards the 141.50 support. The next major support is near the 140.50 level, below which the pair could even test the 140.00 level and the 100 simple moving average (red, 4-hours).

On the upside, the pair might face resistance near the 143.80 level. The next major resistance is near the 144.20 level. The main resistance is still near the 145.00 level.

A clear move above the 145.00 resistance might start a strong increase. The next major resistance is near 146.50, above which the pair may perhaps rise towards the 148.00 level.

Looking at gold price, the bulls failed to protect the $1,680 support and there was a sharp decline towards the $1,660 support zone.

Economic Releases

• UK Retail Sales for August 2022 (YoY) - Forecast +1.7%, versus +4% previous.
• UK Retail Sales for August 2022 (MoM) - Forecast -0.8%, versus +2.3% previous.
• Michigan Consumer Sentiment Index for Sep 2022 (Prelim) – Forecast 63.0, versus 65.5 previous.

• Gold under bearish pressure
• Likely to fall to support level 1650.00

Gold under the bearish pressure after the price broke the pivotal support level 1690.00 (which has been reversing Gold from the middle of July).

The breakout of the support level 1690.00 continues the clear multi-month downtrend that can be seen on the daily Gold charts.

Gold can be expected to fall further in the active impulse waves (iii), 3 and (3) toward the next support level 1650.00.

• NZDJPY reversed from resistance level 87.30
• Likely to fall to support level 85.00

NZDJPY currency pair recently reversed down from the key resistance level 87.30 (which has been reversing the price from the end of March), standing above the upper daily Bollinger Band.

The downward reversal from the resistance level 87.30 started the active short-term correction (ii).

NZDJPY can be expected to fall further toward the next support level 85.00 (target for the completion of the active wave (ii).

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The yen has been, of course, on a wild ride lately. But there were some surprise moves yesterday which need some explaining, since they could shed some light on whether or not the USDJPY has hit a ceiling. There are some important implications for the future of the yen, and something traders need to be very careful about (hint: make sure stops are in place).

The lead-up

The yen has been weakening generally because the BOJ isn't raising rates while other central banks are. The BOJ isn't likely to raise rates in the foreseeable future, which makes the currency ripe for carry trading. On Tuesday, the USDJPY spiked higher after US CPI figures came out, because of speculation of an even stronger move by the Fed at the upcoming meeting.

After the data, through the rest of the session, the pair drifted higher until it hit the 144.90 level, and then pulled back. That's when currency watchers noted that the BOJ had conducted a "rate check", and further announced a "doorstop" statement later in the day. The pair then pulled back rather dramatically, dropping over 180 pips in the course of a few hours.

What is a "rate check"?

The important thing isn't the check itself, but that it's something the BOJ does before it intervenes in the currency. Basically, the BOJ calls around to different banks asking what the exchange rate is. Presumably this is in preparation to take action, or to warn Japanese banks that action is likely.

That's why there was a reaction, but not a major move in the currency just yet. That it happened just as the pair was about to hit the 145.00 somewhat implies that's the level Japanese authorities will hold the line. That doesn't mean the market won't go above it marginally, or for brief periods. In fact, it would be expected that the market would "test" Japanese authorities to see if they actually will go through with intervention.

What does intervention mean?

It's been a couple of decades since the last time the currency pair moved up to similar levels, prompting a response from authorities. In that case, the pair got up to 147.00 and there was joint action from the US and Japan.

The BOJ does conduct the operation, but it's at the direction of the Ministry of Finance, who "pay" for the move. Basically, the BOJ will buy yen on the market in a very large volume, enough to push the exchange rate down by several thousand pips all at once. The move is not pre-announced, and can happen more than once. The idea is precisely to keep the market from trying to push the pair up by "burning" out many of the long positions, and threatening to repeat at any moment.

That's why if you are trading with yen pairs over the next several weeks, as the USDJPY remains close to the 145.00, it's a very good idea to make sure your stops are in place and your portfolio is ready for a sudden, large move in the currency. But, remember, if the market behaves as the BOJ and MOF expect, then it's also quite possible that no intervention happens.

Markets

ECB members over the past 24 hours did little or nothing to counter the post US CPI inflation bond sell-off. On the contrary, they seem to embrace it and added fuel to the fire. ECB Kazaks (Latvia) thinks that the ECB will continue raising rates beyond February 2023. That’s at least another 4 rate hikes coming. Kazaks makes Lagarde’s maximum (more than 2, less than 5) a minimum. ECB Holzmann (Austria) talked a lot about could have been’s and should have been’s when it comes the start of the tightening cycle. After reminiscing, he concluded that inflation is set to accelerate even more with stagflation the potential outcome for Europe. Strong inflation is the reason why the ECB reacted, and reacted strongly and will continue to react in the future. ECB Makhlouf (Ireland) stressed that raising rates is absolutely necessary as EMU inflation is undesirably high. Vice ECB-president de Guindos mentioned the weak single currency as additional source of inflation. Determined action in needed to anchor price expectations even as growth will slow substantially. ECB Centeno (Portugal) was today’s exception to the rule, advocating predictable, small, steps, in the tightening cycle. Markets clearly turned a deaf ear to Centeno’s (minority) view. The core bond sell-off continued. German yields added up to 7.3 bps (2-yr) in a bear flattening move. EMU money markets for the first time discount a 2.75% ECB policy rate peak mid next year. We stick with our view that this is too conservative. The EU 2y-5y swap part of the curve inverts today for the first time since 2008. The front end of the US yield curve underperforms as well with yields rising by 2.7 bps (30-yr) to 6.6 bps (2-yr). The bond sell-off spills over to stock markets again with European indices losing up to 1% and main US gauges opening around 0.5% weaker. The dollar holds strong on FX markets, trading near this week’s highs. EUR/USD is changing hands around 0.9985. Sterling weakened in the wake of the publication of the Bank of England’s quarterly inflation survey (see below). EUR/GBP touched the 0.87 big figure. Key resistance stands at 0.8721. We stick with the view that it’s only a matter of time when this ceiling gets pierced.

News Headlines

The Bank of England published the results of its quarterly survey of public attitudes to inflation. The survey was conducted between 5 and 8 August. The median answer from respondents asked on current inflation rose from 6.1% at the May survey to 7.6% in August. Actual UK August headline inflation as published yesterday printed at 9.9% (from 10.1% in July). Respondents see inflation for the coming year at 4.9% (from 4.6%). However, expectations for the twelve months thereafter eased back to 3.2% from 3.4% in the May survey. 75% of respondents (was 70% in May) expect rates to rise over the next 12 months. Asked to make an assessment on the way the BOE is ‘doing its job to set to interest rates to control inflation’ the net satisfaction balance dropped to -7.0% from -3.0% in May. The -7% reading was the lowest on record.

Swedish outgoing Prime Minister Andersson resigned the centre-left coalition which was defeated in elections by a group of right wing parties this weekend. The head of the Moderate’s party, Ulf Kristersson, is now expected to start negotiations to form a new government involving its Moderate party, Christian Democrats, the Liberals and the Swedish Democrats even as the latter far right party overcame the Moderates as the second biggest party. It is possible that Kristersson will try to form a minority government that will have to rely on the support of one or two of the other right-wing parties in Parliament. Sweden will take the rotating leadership from the EU form January next year.