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Markets

Dollar strength was the one constant in a week where inflation angst traded for recession worries and vice versa. That subsided somewhat as markets headed into the weekend. The greenback consolidated after surging to multidecade highs in a range of crosses over the previous days. On a trade-weighted basis, DXY retreated slightly from 108.54 to 108.25. USD/JPY punched through recent cycle highs around 137/138 yesterday to close just shy of 139. The pair is changing hands at levels that are barely lower (138.69). “Third time’s a charm” only applied partially for EUR/USD. The currency cross yesterday indeed finally dipped below parity in a convincing manner (0.995) after three attempts but the psychological forces opposing gravity are strong. EUR/USD today even ekes out a small gain to 1.005. Perhaps things would have been a bit different if US retail sales surprised materially to the upside. Fed’s Waller referred to them as being key input whether to back a 100 bps hike at the July meeting or not. Instead, the amount of money spent by Joe Sixpack in June came in close to expectations. Headline sales showed a 1% m/m increase (0.9% expected) with 9 out of the 13 categories gaining. The control group – a proxy for private consumption in GDP calculations – rose by 0.8% m/m. Consumer confidence from the Michigan University due later today still has the potential to rock markets though. Other data today included the NY Manufacturing index, which unexpectedly rebounded from -1.2 to 11.1. Yet the outlook tumbled to a 21-year low. Prices paid continued to ease, reaching the lowest level since March 2021 and even October 2020 for the 6m ahead gauge, suggesting easing price pressures. New orders recovered slightly but the flow is expected to dry up in the near future.

US Treasuries strengthened today though left intraday highs behind during a speech by Fed’s Bullard and the slightly better-than-expected data. Bullard stepped up his end-of-year target from 3.5% to 3.75%/4.0%. He sticks to a 75 bps hike in July nonetheless, fearing hiking by 100 bps would create a false perception of panic. Yields pared declines still and are now up 1.9 bps at the front and less than 1 bp lower at the long end of the curve. German Bunds outperform slightly. Yield changes vary between -1 bps to -3.9 bps. Losses were bigger during early European dealings though. The 10y yield briefly lost 1.12% support (2012/2013 interim lows) before recovering as the session evolved. EMU swap yields decline 0.8 to 1.4 bps, the wings (+1.3/1.9 bps) underperforming. Peripheral spreads vs. Germany’s 10y are mixed. Italy again underperforms, adding 5 bps as political uncertainty lingers. Risky assets including equities bounce between 1.2-1.7% in Europe and the US. Brent oil (+2.4%) inches further north of $100 again.

News Headlines

The Polish statistical office slightly downgraded its final inflation number for June from 15.6% Y/Y to 15.5% Y/Y. That’s still a significant rise from 13.9% Y/Y in May. Details showed that the biggest monthly contributions came from transport prices, dwelling, food and recreation and culture. While the headline Polish inflation number could stabilize somewhat over the next months thanks to the correction in energy prices and seasonal effects on food prices, the peak might still not be in sight with regulated prices set to rise again by the end of this year and early next. This suggests that the Polish national bank’s efforts to slow the tightening cycle (“only” 50 bps in July) might prove premature. The Polish zloty profits from the risk rebound today with EUR/PLN sliding from 4.82 to 4.77.

The European Automobile Manufacturers’ Association reported that EU passenger car registrations continued their downward trend in June (-15.4%) as supply chain issues continue to limit vehicle output. Simultaneously, record high inflation rates impact the demand side of the equation. In terms of volumes (886 510), June was the lowest month on record since 1996. During H1 2022, new car registrations in the EU fell by 14% compared to one year earlier, totaling around 4.6 million units.

• USDCAD reversed from resistance level 1.3200
• Likely to fall to support level 1.3000

USDCAD currency pair recently reversed down from the key resistance level 1.3200, standing far above the upper Bollinger Band.

The downward reversal from the resistance level 1.3200 started the active minor correction (iv) – which belongs to wave 3 from the start of June.

Given the strongly bullish CAD sentiment seen today, USDCAD can be expected to fall further toward the next round support level 1.3000.

• EURJPY reversed from support level 138.00
• Likely to rise to resistance level 140.00

EURJPY currency pair recently reversed up with the Bullish Engulfing from the key support level 138.00, standing near the lower daily Bollinger Band and the 61.8% Fibonacci correction of the upward impulse from May.

The upward reversal from the support level 138.00 started the active minor impulse wave (iii) – which belongs to wave C from May.

Given the clear daily uptrend, EURJPY can be expected to rise further toward the next resistance level 140.00.

EUR/USD softens as ECB hikes lag behind

The euro hovers over parity as the ECB is expected to kick off its tightening cycle this week. The ECB will likely deliver a 25 bp increase next week but may have limited impact on the single currency. The modest hike is more of a concession that policymakers’ hands are tied given the energy price shock and the fragmentation risk. Traders might focus on how the central bank would support peripheral bonds to avert another debt crisis as borrowing costs rise. The euro may struggle to maintain the parity milestone as the ECB cannot afford to normalise in a decisive manner. 0.9800 could be next with 1.0400 as a fresh resistance.

USD/JPY soars as BoJ sits on sidelines

The Japanese yen fell to a 24-year low against the US dollar as the Bank of Japan vowed to stay dovish. Governor Kuroda has repeatedly shrugged off the idea of tightening and gone contrarian instead. The BoJ may even consider further easing to support the recovery. Inflation shot above 2% mainly due to soaring fuel costs, and unless wage growth gains a foothold, the central bank has leeway to leave its policy loose. After the SNB raised its interest rate for the first time in 15 years, the BOJ is the last major central bank still kicking the stimulus can down the road. The pair is climbing towards 140.00. 135.00 is a fresh support.

GBP/USD weighed by growth concerns

The pound weakens as Britain faces multiple economic and political headwinds. Hawkish signals from the Bank of England have had little effect as the market frets that inflation compounded by Brexit trade frictions could be persistent in the UK. Higher consumer price data this week would underpin the inflationary spiral and a strong economic slowdown in the country. To rub salt into the wounds, an uncertain political outlook may continue to cast a cloud on the currency. Volatility could be expected as the leadership race for a new prime minister goes on. The pair is heading to March 2020’s low at 1.1450. 1.2050 is the closest resistance.

XAU/USD falls as dollar surges amid record inflation

The gold market remains under pressure as record high US inflation sends the dollar index to a 20-year high. Consumer prices surged 9.1% in June to a four-decade high, cementing expectations of more aggressive moves from the central bank. A 75bp hike has become the base scenario, but speculations grow that the Fed may follow in the footsteps of the Bank of Canada and deliver a supersized 100 bps rate hike later this month. As traders pile into the greenback, roaring volatility may continue to take a toll on the precious metal. The price is ab August 2021’s low near 1682. 1750 has turned into a supply area.

Retail sales gained 1.0% month-on-month (m/m) in June – slightly above the consensus forecast (+0.8% m/m) –  and accelerating from May's reading, which was revised up to -0.1% m/m from -0.3% m/m reported earlier.

Sales at autos & parts dealers rose by 0.8% m/m even after May's upward revision to -3.0% from a decline of 3.5% previously reported.  Excluding autos, retail sales were up 1.0% m/m in June, above the consensus forecast of 0.6% m/m.

Sales at gasoline stations continued to rise in June, gaining 3.6% m/m. However, gas prices were up 11% m/m last month, implying price adjusted sales were down sharply. Building materials reported a modest pullback of -0.9% m/m.

Excluding the above categories, sales in the "control group" that are used in calculating personal consumption expenditure (and GDP), were up 0.8% m/m. Within the group, the biggest contributors to growth were sales at non-store retailers (+2.2% m/m), miscellaneous stores retailers (+1.4% m/m),  furniture & electronics/appliance stores (+1.0% m/m),  and food services & drinking places (+ 1.0% m/m).

Within categories that reported losses, the largest drag came from clothing & accessory stores (-0.4% m/m), while department stores and health & personal care also reported losses.

Key Implications

Retail sales reversed some of May's losses, finishing the quarter 2.3% higher. Yet, most of this gain comes from higher prices which continue to have an outsized impact on the headline reading. As their purchasing power continues to dwindle, consumers are clearly cutting back on their shopping . Our estimates of real activity point to depressed sales at gas stations, food stores, auto dealerships and apparel stores. Even sales at restaurants –  the only services category in today's report –  pulled back in real terms in June.

Still, we think that spending on experiences at the expense of discretionary goods will continue to support consumption expenditures. We now expect PCE to grow somewhere close to 1% (annualized) in the second quarter, roughly 2 percentage below our earlier estimates.

Taken alongside June's CPI reading, today's release suggests that the Fed will continue to move more forcefully on raising rates at their next meeting on July 27th. The question is whether 75 basis points will be considered enough. Today's stronger-than-expected report may give the Fed more reason to hike by a full percentage point. At present, market pricing is split down the middle on whether the Fed will move by 75bps or 100bps.

Daily Pivots: (S1) 137.70; (P) 138.54; (R1) 139.81; More...

USD/JPY's rally is still in progress and intraday bias stays on the upside. Current up trend should target 100% projection of 114.40 to 131.34 from 126.35 at 143.29. On the downside, below 137.74 minor support will turn intraday bias neutral and bring consolidations first, before staging another rally.

In the bigger picture, current rally is seen as part of the long term up trend from 75.56 (2011 low). Next target is 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 126.35 support holds.

Daily Pivots: (S1) 0.9783; (P) 0.9834; (R1) 0.9891; More...

Intraday bias in USD/CHF is turned neutral with current retreat. Some consolidations could be seen first. On the upside, above 0.9884 will extend the rise from 0.9493 to t 1.0063 high. Decisive break there will resume larger up trend. On the downside, break of 0.9754 will turn bias back to the downside for 0.9493 support.

In the bigger picture, medium term up trend from 0.8756 (2021 low) is still in progress. Next target is 1.0342 (2016 high). Sustained break there will resume long term up trend from 0.7065 (2011 low). This will remain the favored case as long as 0.9471 resistance turned support holds.

Daily Pivots: (S1) 1.1759; (P) 1.1828; (R1) 1.1828; More...

Further fall is expected in GBP/USD with 1.1966 minor resistance holds. Current down trend is in progress for 100% projection of 1.2666 to 1.1932 from 1.2405 at 1.1671. Decisive break there will target a test on 1.1409 long term support. On the upside, above 1.1966 minor resistance will turn intraday bias to the upside for stronger rebound.

In the bigger picture, fall from 1.4248 (2018 high) could be a leg inside the pattern from 1.1409 (2020 low), or resuming the longer term down trend. Deeper decline is expected as long as 1.2666 resistance holds. Next target is 1.1409 low. However, firm break of 1.2666 will bring stronger rise back to 55 week EMA (now at 1.3065).

Daily Pivots: (S1) 0.9960; (P) 1.0013; (R1) 1.0074; More...

Intraday bias in EUR/USD is turned neutral with current recovery. On the upside, firm break of 1.0121 minor resistance will indicate short term bottoming at 0.9951. Intraday bias will be back on the upside for strong rebound back to 1.0348 support turned resistance. On the downside, sustained break of 100% projection of 1.1184 to 1.0348 from 1.0773 at 0.9937 will extend larger down trend to 161.8% projection at 0.9420.

In the bigger picture, down trend from 1.6039 (2008 high) is still in progress. Next target is 100% projection of 1.3993 to 1.0339 from 1.2348 at 0.8694. In any case, outlook will stay bearish as long as 1.0773 resistance holds, in case of rebound.

Dollar is starting to pare back this week's gains in early US session, after retail sales data were not materially stronger than expectations. It looks like EUR/USD could close the week above parity, and may start to stabilize for the near term. US futures are trading higher after the data and could point to a rebound in stocks. There is prospect of stronger rebound for Aussie and Loonie for the rest of the session.

Technically, before the close of the week, some attention could be on EUR/JPY, which is pressing 139.78 minor resistance. Firm break there will argue that that pull back from 144.26 has completed, and would bring retest of this high next week, probably with up trend resumption later in the month. Rebound is stocks would help EUR/JPY achieve it.

In Europe, at the time of writing, FTSE is up 0.86%. DAX is up 1.31%. CAC is up 0.32%. Germany 10-year yield is down -0.029 at 1.150. Earlier in Asia, Nikkei rose 0.54%. Hong Kong HSI dropped -2.19%. China Shanghai SSE dropped -1.64%. Singapore Strait Times rose 0.28%. Japan 10-year JGB yield dropped -0.0002 to 0.235.

US retail sales rose 1% mom in Jun, ex-auto sales up 1%

US retail sales rose 1.0% mom to USD 680.6B in June, above expectation of 0.8% mom. Ex-auto sales rose 1.0% mom, above expectation of 0.6% mom. Ex-gasoline sales rose 0.7% mom. Ex-auto, ex-gasoline sales rose 0.7% mom. Retail trade rose 1.0% mom. Gasoline sales rose 3.6% mom. Total sales for the three months through June were up 8.1% yoy.

Eurozone exports rose 28.9% yoy in May, imports rose 52% yoy

Eurozone exports of goods to the rest of the world rose 28.9% yoy to EUR 248.5B in May. Imports of goods rose 52.0% yoy to EUR 274.8B. Trade deficit came in at EUR -26.3B. Intra-eurozone trade rose 33.0% yoy to EUR 231.6B.

In seasonally adjusted term, exports rose 4.8% mom to EUR 241.8B. Imports rose 2.0% mom to EUR 267.8B. Trade deficit narrowed from April's EUR -31.8B to EUR -26.0B, slightly smaller than expectation of EUR -26.3B. Intra-eurozone trade rose from EUR 217.2B to EUR 221.4B.

NZ BusinessNZ manufacturing dropped to 49.7, sector remains in struggle street

New Zealand BusinessNZ Performance of Manufacturing Index dropped from 52.9 to 49.7 in June. Production dropped from 52.6 to 47.8. Employment dropped from 52.8 to 51.2. New orders dropped fro 52.3 to 47.8. Finished stocks dropped from 52.8 to 50.0. Deliveries dropped from 55.1 to 51.7.

BusinessNZ's Director, Advocacy Catherine Beard said that the drop in activity levels for June highlights the fact that the sector remains in struggle street to get back to long-term activity levels.

"The key sub index values of Production (47.8) and New Orders (47.8) both recorded the same level of contraction, which had a combined negative effect on the overall Index.  As mentioned in previous months, a strong and consistent activity level for both these key sub index values will be the only way to push the PMI towards better results."

China GDP grew only 0.4% yoy in Q2, but Jun data improved

China GDP grew only 0.4% yoy in Q2, missing even the expectation of 1.0% yoy. For June, industrial production rose 3.9% yoy, below expectation of 4.3% yoy/. Nevertheless, retail sales rose 3.1% yoy, above expectation of 0.4% yoy. Fixed asset investment rose 6.1% ytd yoy, versus expectation of 6.0%.

"Domestically, the impact of the epidemic is lingering," NBS spokesman Fu Linghui said. "Economic growth is still much lower than its potential, as the fear of Covid outbreaks continues to hurt consumer and corporate sentiment... Even accounting for June's strength, the data are consistent with negative year-on-year growth last quarter," he added.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 0.9960; (P) 1.0013; (R1) 1.0074; More...

Intraday bias in EUR/USD is turned neutral with current recovery. On the upside, firm break of 1.0121 minor resistance will indicate short term bottoming at 0.9951. Intraday bias will be back on the upside for strong rebound back to 1.0348 support turned resistance. On the downside, sustained break of 100% projection of 1.1184 to 1.0348 from 1.0773 at 0.9937 will extend larger down trend to 161.8% projection at 0.9420.

In the bigger picture, down trend from 1.6039 (2008 high) is still in progress. Next target is 100% projection of 1.3993 to 1.0339 from 1.2348 at 0.8694. In any case, outlook will stay bearish as long as 1.0773 resistance holds, in case of rebound.

Economic Indicators Update