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USD/CAD edged lower to 1.2766 last week but rebounded strongly since then. The development argues that pull back from 1.3222 has completed, and revived near term bullishness. Initial bias is mildly on the upside for retesting 1.3222 next. On the downside, however, break of 1.2817 minor support will suggest that the fall from 1.3222 is resuming through 1.2766.

In the bigger picture, down trend from 1.4667 (2020 high) should have completed at 1.2005, after defending 1.2061 long term cluster support. Rise from there should target 61.8% retracement of 1.4667 to 1.2005 (2021 low) at 1.3650. This will remain the favored case now as long as 1.2516 support holds.

In the longer term picture, price actions from 1.4689 (2016 high) are seen as a consolidation pattern only. That is, up trend from 0.9506 (2007 low) is still 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.

GBP/JPY dipped to 159.42 last week but quickly recovered. Initial bias stays neutral this week first and consolidation pattern from 168.67 might extend. On the upside, above 163.97 will turn bias to the upside, and resume the rebound to 166.31 resistance. Break there will be the first sign of up trend resumption. On the downside, break of 159.42 will extend the correction towards 155.57 support.

In the bigger picture, up trend from 123.94 (2020 low) is still in progress. Sustained break of 61.8% retracement of 195.86 (2015 high) to 122.75 (2016 low) at 167.93 will be a long term bullish signal, and could pave the way back to 195.86 high. This will remain the favored case as long as 155.57 support holds, even in case of deep pull back.

In the longer term picture, rise from 122.75 could be the third leg the the pattern from 116.83 (2011 low). Further rise will remain in favor as long as 55 month EMA (now at 149.84) holds. Sustained break of 61.8% retracement of 195.86 to 122.75 at 167.93. will pave the way to 195.86 (2015 high).

EUR/JPY dropped to as low as 133.38 last week, but recovered strongly after drawing support from 134.11 resistance turned support. Initial bias is now on the upside this week. Sustained trading above 55 day EMA (now at 138.52) will suggest that whole correction from 144.26 has completed. Further rally would then be seen back to retest 144.26 high. However, break of 135.63 will turn bias back to the downside for 133.38 low instead.

In the bigger picture, up trend from 114.42 (2020 low) is seen as the third leg of the pattern from 109.30 (2016 low). Further rally is in favor as long as 134.11 resistance turned support holds, even in case of deep pull back. Next target is 149.76 (2015 high). However, sustained break of 134.11 will be a sign of medium term bearish reversal and turn focus to 124.37 support for confirmation.

In the long term picture, up trend from 94.11 (2012 low) is seen as in the third leg. Further rally would be seen to 149.76 resistance (2014 high) and above. This will remain the favored case as long as 55 month EMA (now at 128.86) holds.

EUR/GBP edged lower to 0.8338 last week, but recovered since then. Initial bias remains neutral this week first. While stronger recovery might be seen, outlook will stay bearish as long as 0.8585 resistance holds. Break of 0.8338 will resume the decline from 0.8720 to retest 0.8201 low.

In the bigger picture, current development suggests rejection by 38.2% retracement of 0.9499 to 0.8201 at 0.8697. Medium term bearishness is maintained. Break of 0.8201 will resume larger down trend from 0.9499 (2020 high). Nevertheless, sustained break of 0.8697 will affirm the case that rise from 0.8201 is a medium term up trend itself.

In the long term picture, the lack of medium term downside momentum suggests that fall from 0.9499 (2020 high) is merely a correction to rise from 0.6935 (2015 high). In case of another fall, downside should be contained by 61.8% retracement of 0.6935 to 0.9499 at 0.7917 to bring rebound. Sustained trading above 55 month EMA (now at 0.8591) will indicate that the correction has completed and bring retest of 0.9499.

EUR/AUD stayed in consolidation from 1.4508 last week and outlook is unchanged. Initial bias stays neutral this week first. While stronger recovery cannot be ruled out, upside should be limited below 1.4910 resistance to bring fall resumption. On the downside, break the 1.4508 will resume the decline from 1.5396 to retest 1.4318 low. However, firm break of 1.4910 will dampen this bearish view and bring stronger rally.

In the bigger picture, down trend from 1.9799 is still in progress. Break of 1.4318 low will target 61.8% projection of 1.9799 to 1.5250 from 1.6434 at 1.3623, which is close to 1.3624 long term support (2017 low). This will remain the favored case now as long as 1.5396 resistance holds.

In the longer term picture, fall from 1.9799 (2020 high) is seen as the third leg of the pattern from 2.1127 (2008 high). Deeper fall should be seen to 1.3624 support. Decisive break there would pave the way back to 1.1602 (2012 low). This will remain the favored case as long as 55 month EMA (now at 1.5656) holds.

EUR/CHF turned into consolidation last week. Initial bias stays neutral this week first. While further fall cannot be ruled out, some support might be seen from 0.9650 long term projection level to bring rebound. Break of 0.9948 resistance will indicate short term bottoming. Nevertheless, firm break of 0.9650 will target 100% projection of 1.1149 to 0.9970 from 1.0513 at 0.9334.

In the bigger picture, long term down trend from 1.2004 (2018 high) is expected to target 100% projection of 1.2004 to 1.0505 to 1.1149 at 0.9650. Firm break there will target 138.2% projection at 0.9033. On the upside, break of 1.0513 resistance is needed to indicate medium term bottoming. Otherwise, outlook will stay bearish in case of strong rebound.

In the long term picture, capped below 55 month EMA, EUR/CHF is seen as extending the multi-decade down trend. There is no prospect of a bullish reversal until some sustained trading above the 55 month EMA (now at 1.0764).

The strong set of job market data seemed to have cleared much concern over recession in the US, and set the tone for the financial markets. Benchmark treasury yields jumped as traders added bets on Fed continuing with the current pace of tightening beyond neutral. Stocks markets were resiliently firm despite that and look set to extend near term rebound.

In the currency markets, Dollar ended as the strongest, even though rising yield was countered by risk-on sentiment. But it couldn't break out of range against the steady Euro. Yen was the worst performing, pressured by the development in both stocks and bonds markets. Sterling and Aussie were mixed after respect central banks' rate hikes. The Pound didn't end up too badly considering the grim outlook of UK economy as painted by BoE.

Overall, risk-on sentiment could continue in the coming week. Dollar should remain firm but need fresh inspiration from consumer inflation data. Yen's extended selloff could be the most apparent theme.

Market repricing 75bps hike by Fed in Sep after NFP

There have been talks of Fed slowing the tightening pace starting from the September meeting. But such speculations receded after an all-round strong non-farm payroll on Friday. The 528k job growth was much higher than the average gain of 388k over the prior four months, with total employment level reaching its pre-pandemic level. Unemployment rate dropped further to 3.5% while average hourly earnings printed a strong 0.5% mom growth. That put an end to whether a recession has started in the US.

Traders were quick in repricing the chance of another 75bps rate hike by Fed in September. There's now 68% chance of seeing federal funds rate at 3.00-3.25% out of the meeting, comparing to just 28% chance a week ago.

US 10-year yield already in second leg of medium term consolidation?

US 10-year yield rebounded notably after NFP to close at 2.840. Immediate focus is on 55 day EMA (now at 2.868) in the coming days. Sustained break there would argue that fall from 3.483 has already completed at 2.525, ahead of 50% retracement of 1.343 to 3.483 at 2.413.

In this case, TNX should be already in the second leg of the medium term consolidation pattern from 3.483, and further rebound should be seen to to 3.000 handle and above. Rejection by 55 day EMA, however, will bring another down leg towards 2.413 before bottoming.

DOW facing key resistance in the next few days

Major US stock indexes edged higher last week, and were not bothered by expectation of another big Fed hike in September. The coming days will be crucial in determining the near term outlook for stocks. DOW's rebound from 29653.39 is set to extend to take on 33272.34 resistance, which is close to 55 week EMA (now at 33164.20).

Sustained trading above these levels will argue that whole correction from 36952.65 has completed at 29653.29, after hitting 38.2% retracement of 18213.65 to 36952.65 at 29794.35. In this case, further rally should be seen to 35492.22/36952.65 resistance zone next.

However, rejection by 33272.45, followed by break of 31705.36 support, should set up another test on 26953.29 low at least.

Dollar index supported by 55 day EMA, staying well inside rising channel

Dollar index recovered last week as it responded to the rise in benchmark yield on the one hand. But momentum was capped by risk-on sentiment on the other hand. Nonetheless, the support from 55 day EMA (now at 105.19) was a bullish sign. DXY is also kept well within the medium term rising channel.

107.42 minor resistance will be the main focus in the coming week. Make or break could depend on the CPI release. Firm break of 107.42 should confirm that pull back from 109.29 has completed, and retest of this high should be seen then. Though, even in this case, up trend resumption through 109.29 would probably more depend on the next set of job and inflation data.

But anyway, near term risk for DXY will now be on the upside as long as 55 day EMA holds.

CHF/JPY finished corrective pattern at 137.13

The next development in Yen is also worth a note. The rebound in Yen might have ended as major global benchmark yields stabilized and recovered. On the other hand, Japan 10-year JGB yield has indeed closed lower at 0.163, farther away from BoJ's 0.25% cap.

Even CHF/JPY managed to extend the rebound from 137.13 last week, with a close above 4 hour 55 EMA, as well as 55 day EMA. The development argues that corrective pattern from 143.73 might have completed with three waves down to 137.13 already, above 136.16 resistance turned support, and after breaching 38.2% retracement of 127.48 to 143.73 at 137.52.

Further rally is expected as long as 138.81 support holds. Break of 143.09 resistance will suggest that larger up trend is ready to resume. If that happens, there should be upside breakouts in some other Yen crosses in tandem.

USD/JPY Weekly Outlook

USD/JPY's correction from 139.37 extended to as low as 130.38 last week but rebounded strongly since then. Initial bias is mildly on the upside this week for retesting 139.37 high. Upside should be limited there to bring another fall, as the third leg of the consolidation pattern from 139.37. On the downside, below 132.50 minor support will resume the fall from 139.37 towards 126.35 structural support.

In the bigger picture, fall from 139.37 medium term top is seen as correcting whole up trend from 101.18 (2020 low). While deeper decline cannot be ruled out, outlook will stays bullish as long as 55 week EMA (now at 121.84) holds. Long term up trend is expected to resume through 139.37 at a later stage, after the correction finishes.

In the long term picture, rise from 101.18 is seen as part of the up trend from 75.56 (2011 low). Further rally is expected to 100% projection of 75.56 (2011 low) to 125.85 (2015 high) from 98.97 at 149.26, which is close to 147.68 (1998 high). This will remain the favored case as long as 55 week EMA (now at 122.31) holds.

Summary

• The Reserve Bank of Australia (RBA) raised its Cash Rate by 50 bps to 1.85% at its August meeting and signaled that further rate hikes will be needed to bring inflation back toward target over time.
• Several elements of the monetary policy announcement were essentially unchanged from previous meetings. However, there were also some important changes in language that lead us to believe the RBA will revert to smaller hikes going forward. Notably, the central bank indicated that while further normalization of policy is expected in the months ahead, it also noted that policy is "not on a pre-set path". The RBA also dropped references to "extraordinary monetary support" that had appeared in previous announcements, suggesting it now sees itself a bit further along the monetary tightening path, and perhaps does not need to move at an accelerated 50 bps pace anymore. Given these changes, we believe the RBA will be more flexible moving forward with regard to the size and timing of future rate hikes.
• With signals of further tightening but more flexibility, we now expect 25 bps rate hikes at the RBA's next several meetings in September, October, November, December and February, which would see the Cash Rate peak at 3.10% by early next year.

RBA Signals More Rate Hikes, but by How Much and at What Pace?

In a widely expected move, the Reserve Bank of Australia (RBA) continued down the path of monetary tightening at its August meeting, raising its Cash Rate by 50 bps to 1.85%. The central bank signaled that further rate hikes are needed to bring inflation down to target and rebalance supply and demand dynamics.

Taking a closer look at the details of the monetary policy announcement, with a few exceptions, the RBA's language was very similar to prior meetings. As in previous announcements, the central bank brought attention to tightness in the labor market and evidence of wage growth, as well as resilient consumer spending, while reiterating that the outlook for household spending remains a key uncertainty amid high inflation. Speaking of inflation, the central bank emphasized that price pressures are still elevated within Australia, driven by both global and local factors, and released updated inflation forecasts in its Statement on Monetary Policy. The RBA's lifted its central CPI forecast for CPI inflation and now expects it to reach around 7.75% over 2022, 4.25% in 2023, and 3% in 2024. In addition, looking at underlying price pressures, trimmed mean inflation is expected to peak at 6% this year and decline to 3%, the top end of the RBA's target, by 2024. The central bank expects wage growth to accelerate further, and to eventually be the primary driver of inflation in a tight labor market. On the growth front, GDP forecasts show the economy experiencing respectable growth, averaging 4% this year before slowing to 2.25% in 2023 and 1.75% in 2024. The growth outlook suggests the economy should be able to absorb further tightening. With much of the language unchanged from previous announcements, we believe the RBA is still on track to continue hiking rates. The question is: by how much and at what pace?

To answer this question, we look to the few notable changes in language that lead us to think the RBA will move forward with a smaller magnitude of rate hikes than its recent 50 bps increments. While the RBA again said that it expects to take further steps in normalizing monetary conditions over the months ahead, and that the size and timing of future interest rate increases will be guided by incoming data, the latest announcement added that policy is not on a "pre-set path". This phrasing suggests the RBA will be more flexible moving forward with regard to the size and timing of future rate hikes, pointing to a meeting-by-meeting approach to monetary policy decisions based on incoming data. Other central banks around the world have also adopted this more flexible meeting-by-meeting approach, notably the Federal Reserve and European Central Bank. Overall, we expect the RBA to pay close attention to Q2 wage data and July employment data released between now and its September policy meeting.

In addition, the August announcement dropped previous references to "withdrawal of extraordinary monetary support". Instead, this phrase was replaced with more standard language that "the increase in interest rates is a further step in the normalization of monetary conditions in Australia." This new language hints that the RBA believes it is now a bit further along the monetary tightening path, and perhaps does not need to move at an accelerated 50 bps pace anymore—also a mildly dovish tilt. Furthermore, in its Statement on Monetary Policy, the RBA indicated it is seeking to bring inflation down in a way that keeps the economy on an "even keel". We believe this language is also consistent with a more measured pace of rate hikes. Against this backdrop, we now expect the RBA to revert to a steady pace of consecutive 25 bps rate hikes at its next several meetings in September, October, November, December and February, which would bring the Cash Rate to 3.10% by early 2023.

Summary

United States: July Jobs Report Squashes Current Recession Fears

• Employers added over half a million jobs in July, which squashes arguments that the U.S. economy is currently in recession. While other measures of labor market strength have shown more pronounced signs of slowing, the July jobs report puts further pressure on the Fed to act aggressively in its fight against inflation.
• Next week: Productivity (Tues.), CPI (Wed.)

International: Global Central Banks Deliver Another Round of Rate Hikes

• The Bank of England stepped up the pace of its monetary tightening, raising its policy rate 50 bps to 1.75% this week, and also notified it would likely begin active sales of its government bond holdings shortly after its September announcement. The Reserve Bank of Australia (RBA) also hiked rates 50 bps but hinted at a more flexible approach moving forward. We expect the RBA to revert to 25 bps increments from September. Brazil's Central Bank raised its Selic Rate 50 bps this week, and we now expect one final 25 bps hike to 14.00% at its September monetary policy announcement.
• Next week: Brazil CPI (Tue.), Mexico Overnight Rate (Thu.), U.K. GDP (Fri.)

Credit Market Insights: Household Debt Surges in the Second Quarter

• Total household debt balances rose by $312B in the second quarter of this year, a 2% increase from last quarter. Debt has now surpassed $16T and has increased by over $2T since the start of 2020.

Topic of the Week: Tension in Taiwan

• Speaker of the House Nancy Pelosi's visit to Taiwan made one thing clear: U.S.-China tensions are not going anywhere anytime soon and international trade between the two countries continues to hang in the balance.

Full report here.

U.S. Highlights

• The U.S. economy added a whopping 528k jobs in July, pushing employment above its pre-pandemic level. The unemployment rate also ticked lower, falling back to its pre-pandemic historical low of 3.5%.
• Sentiment indicators also surprised to the upside, with the manufacturing sector faring better than expected and the services sector pointing to plenty of pent-up demand.
• Data out this week support the narrative that the U.S. economy is not currently in a recession, and more monetary tightening will be required from the FOMC to slow inflation and restore balance in the labor market.

Canadian Highlights

• Preliminary data from the regional real estate boards this week showed that home sales and prices in Canada’s major cities continued to ease in July.
• The labour market disappointed expectations for a modest gain, and instead shed 30.6k jobs in July.
• The slowdown in the labour market and broader economic activity suggests that rate hikes are already starting to bite. Sill, with wage growth remaining strong, more tightening will be required to cool current inflationary pressures.

U.S. - More Fuel to the Recession Debate

This week, the debate on whether the Fed will be able to achieve a soft landing intensified. Equities were trading up most of the week as investors bought into the positive economic news with an expectation that a slowdown in economic growth will avoid a severe downturn. In contrast, the bond market took a grimmer view of the future, by pushing the 10Y2Y yield inversion deeper into negative territory, suggesting a recession may be looming on the horizon.

Investors weren’t the only ones arguing about the economic prospects. In academic circles, the debate on whether a soft landing can be achieved was out in the open. At its core is the argument that job vacancies can’t decline by a large amount without the economy falling into recession. This week’s release of June’s Job Openings and Labor Turnover Survey (JOLTS) showed that job openings dipped to 10.7 million while job vacancy rate continued to decline, indicating we have likely already surpassed peak tightness in the labor market. Still, demand for workers continued to outpace supply - a sign of a still strong labor market.

Indeed, anyone in search of more signs that the economy is in fact not in a recession need to look no further than today’s jobs report. July data shows that the economy added a whopping 528k jobs (well above the consensus forecast of 250k), while revisions resulted in additional 28k jobs – enough for the payroll figures to surpass their pre-pandemic level (Chart 1). The unemployment rate declined by a tenth of a percentage point to 3.5%, while the labor force participation rate fell slightly to 62.1%. Furthermore, average hourly earnings accelerated – not quite what the Fed was looking for as this increases the possibility of inflation becoming entrenched.

Meanwhile, sentiment indicators also surprised to the upside. The Institute for Supply Managements’ (ISM) readings for the manufacturing sector slipped modestly but came in above expectation. Demand is clearly slowing with new orders contracting for the second month in a row. Still, this comes with less pressure on suppliers, as supplier delivery times rose at their slowest pace since before the pandemic. Moreover, the inventories subindex continues to show improvement. This corresponds with rising auto inventories, where increased production helped improve market supply to roughly 28 days from February’s low of just 24 days.

The ISM services index pointed to a broad pickup in services activity, proving again that there is still plenty of pent-up demand. The gap between the supplier deliveries time and the rest of the index’s drivers narrowed in July – a month after a similar improvement in the manufacturing sector. This seems to have contributed to a decline in the prices paid component in both sectors of the economy (Chart 2). The sizeable deceleration in the ISM price subindexes may very well be a harbinger of a slowing pace in broader price growth, which we’ll hopefully see in next week’s CPI report.

Still, at the 40-year high price growth is too overwhelming for the Fed to scale back on rate hikes. For now, robust employment growth adds further conviction that the economy remains on a solid footing and suggests the FOMC needs to remain aggressive in tightening rates to help cool inflation and re-anchor inflation expectations.

Canada - Cooling Like It Should

Coming on the heels of the soft GDP print for May and the modest flash reading for June, this week brought further signs that the Canadian economy is slowing. Nowhere has this been more evident than the housing market. Under the weight of soaring borrowing costs and still elevated home prices, the Canadian housing market continued to cool in July. Preliminary sales data from the regional real estate boards out this week showed that resale activity and prices across Canada's major cities were all lower.

The most glaring declines came from the GTA, where home sales were down 47% from July 2021, which was more than the 41% year-over-year drop reported in June. Meanwhile, supply continued to increase, with active listings up 58% from year-ago levels. Prices were also down on the month. Across the more expensive detached segment, home prices swung from a modest year-over-year gain to an outright decline in July (Chart 1).

In Vancouver, the slowdown also accelerated, with sales down 43.3% from last year. Unlike in Toronto, detached home prices were still higher - up 11% from year-ago levels - though gains have also ebbed relative to June. The more affordable Calgary market is holding up better than its pricier peers, with sales down just 2.5% from last year. Falling sales across the detached and semi-detached segments were largely offset by gains in the more affordable multifamily segment. Detached prices were still up 14.8% y/y in July.

The theme of a slowdown extended to the labour market. Friday's job report surprised to the downside, with the labour market shedding 30.6k jobs in July. This marked the second consecutive monthly decline, and the loss of hiring momentum is becoming increasingly evident (Chart 2). The underlying details of the report were also on the softer side, with full-time employment falling by 13.1k, while hours worked declined by 0.5% m/m. Perhaps one silver lining is the fact that the labour market is still tight, with the unemployment rate holding at 4.9% - matching its historic low in June. Wage growth also remained strong, with average monthly earnings up 5.2% y/y.

The slowdown in the labour market and broader economic activity suggests that previous rate hikes are already starting to bite. Indeed, this is something that the Bank of Canada is trying to accomplish as it works to rein in inflation. While the Bank will likely find some solace in the nascent signs of weakening demand, the fact that wage growth remains elevated suggests more will be required in terms of monetary tightening to cool current inflationary pressures. To that end, the focus now shifts to the July CPI report which will be released on August 16th, as markets try and gauge just how big of move the BoC has in store in September. Stay tuned!