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WTI crude oil dropped sharply overnight, losing more than -4% and falling to its lowest level since last December. A combination of bearish factors contributed to this steep decline. The 70 psychological level is now critical for support, and if broken decisively, it could lead to an accelerated drop toward the 2023 low of around 63.

The decline was triggered by news that Libya's rival governments may reach a deal to restore disrupted oil production. Oil prices were already facing downward pressure as OPEC+ prepares to increase output in the coming weeks. Further fueling concerns, weak US ISM manufacturing data, along with China's disappointing Caixin PMI release earlier this week, raised demand worries for oil.

From a technical perspective, WTI remains bearish as long as the 72.57 resistance level holds. The falling trendline support at 69.47, near the 70 psychological level, is the key area to watch. A decisive break below this level could trigger further downside momentum.

Technically, near term outlook in WTI would stay bearish as long as 72.57 supported turn resistance holds. Falling trend line support (now at 69.47), which is close to 70 psychological level, is the key level the defend. Decisive break there could trigger downside acceleration.

Price actions from 95.50 (2023 high) are seen as the second leg of the pattern from 63.67 (2023 low). Fall from 87.84 is the third leg of the decline from 95.50. Any downside acceleration below the mentioned channel support could easily push WTI to 63.67/67.79 support before bottoming.

Key Highlights

• Bitcoin price is struggling to recover above the $60,000 resistance.
• BTC is trading below a key bearish trend line with resistance at $59,400 on the 4-hour chart.
• Oil prices extended losses and traded below $72.50.
• Gold might correct gains and retest the $2,450 support.

Bitcoin Price Technical Analysis

Bitcoin price started a recovery wave from the $57,000 zone. BTC/USD climbed above the $58,500 resistance but the upsides were limited.

Looking at the 4-hour chart, the price failed to settle above the 23.6% Fib retracement level of the downward move from the $64,996 swing high to the $57,077 low. BTC is also trading below a key bearish trend line with resistance at $59,400.

The main resistance seems to be forming near the $60,000 zone and the 200 simple moving average (green, 4 hours). It is close to the 50% Fib retracement level of the downward move from the $64,996 swing high to the $57,077 low.

A clear move above the trend line and then $60,000 might send the price toward the 100 simple moving average (red, 4 hours) at $60,500.

A successful close above $60,500 might start another steady increase. In the stated case, the price may perhaps rise toward the $62,000 level.

Immediate support is near the $57,250 level. The next key support sits at $56,500. A downside break below $56,500 might send Bitcoin toward the $55,000 support. Any more losses might send the price toward the $52,500 support zone.

Looking at gold, the price is showing a few bearish signs and it might correct gains to test the $2,450 support zone.

Today’s Economic Releases

• US Factory Orders for July 2024 (MoM) - Forecast +4.6%, versus -3.3% previous.
• Fed's Beige Book.

BoC is widely expected to cut interest rates for the third consecutive meeting today, lowering the policy rate by 25bps to 4.25%. With inflation at a 40-month low of 2.5% and trending toward the 2% target, coupled with ongoing weakness in the labor market, further easing is anticipated. As a result, BoC is likely to maintain a dovish stance in its statement.

A recent Reuters poll shows that 70% of economists expect additional rate cuts in October and December, with the rate reaching 3.75% by year-end. Seven economists predict the rate will be 4.00%, while only one expects a drop to 3.50%.

CAD/JPY saw a notable decline after briefly rising to 109.03 earlier this week. A couple of factors could be in force today. BoC's decision and statement, overall risk sentiment, and the risks for further declines in oil prices could all impact the pair's next move.

Technically, rebound from 101.63 is still in favor to continue as long as 106.21 support holds. Above 109.03 will target 61.8% retracement of 118.85 to 101.63 at 112.27. However, firm break of 106.21 will argue that the rebound has completed and bring deeper fall back to retest 101.63 low.

China's Caixin PMI Services fell to 51.6 in August, down from 52.1 in July and below expectations of 52.2. While this marked the continuation of an expansion that began in January 2023, the rate of growth is among the slowest seen this year. PMI Composite remained steady at 51.2, indicating ten consecutive months of expansion.

According to Wang Zhe, Senior Economist at Caixin Insight Group, the services sector experienced a slight slowdown in supply and demand growth, in contrast to a recovery in manufacturing. One key concern was the services sector’s shrinking labor market, which pulled the composite employment indicator below the 50.0 mark, signaling a marginal contraction in employment.

On the pricing front, while input costs increased in both sectors, prices charged by manufacturers and service providers fell, adding pressure to business profitability. This combination of slower services growth and declining prices suggests increasing challenges for Chinese businesses as they contend with rising costs and shrinking profit margins.

Full Caixin PMI Services release here.

Australia's GDP grew by 0.2% qoq in Q2, aligning with market expectations. However, GDP per capita declined for the sixth consecutive quarter, falling by -0.4% qoq. For the 2023-24 financial year, the economy expanded by 1.5%.

Katherine Keenan, head of national accounts at the Australian Bureau of Statistics, noted, "The Australian economy grew for the eleventh consecutive quarter, although growth slowed over the 2023-24 financial year."

Keenan also pointed out that excluding the pandemic period, annual financial year growth was the lowest since 1991-92, a year marked by the recovery from the 1991 recession.

Full Australia Q2 GDP release here.

Japan's services sector continued its expansion in August, with PMI Services index finalized at 53.7, unchanged from July's figure. This marks the 23rd month of growth out of the past 24. PMI Composite, which includes both services and manufacturing, rose to 52.9 from 52.5 in July, reflecting the strongest overall growth since May 2023.

The services sector showed solid performance, while manufacturing output posted its most significant increase since May 2022. According to Usamah Bhatti, economist at S&P Global Market Intelligence, August saw ongoing growth in activity, new business, and employment in the service sector. However, the pace of employment growth and business optimism slowed to seven- and 19-month lows, respectively.

Full Japan PMI services final release here.

• BoC could easily cut interest rates for the third time on Wednesday
• Macro data favors additional easing but will it be a continuous process?
• USDCAD needs a close above 1.3585 to gain fresh bullish momentum

The easing cycle has more room to go

The Bank of Canada (BoC) is in the front of the global easing cycle. Having cut interest rates twice in a row, the central bank is widely expected to announce its third reduction on Wednesday at 13:45 GMT, but it won’t stop there. It is anticipated that interest rates will decline to 3.75% by the end of the year, based on the futures markets. The bank's board is expected to approve two additional 25 bps cuts in October and December, and potentially more in early 2025.

The question that comes instantly to mind is whether the current market pricing is realistic. Driven by base effects, inflation continued to trend down and towards the central bank’s 2.0% midpoint target, with headline CPI inflation falling to 2.5% y/y and the core measure easing to 2.6% in July. Of course, shelter costs remained elevated, but there was a slowdown from the previous month.

With the battle against inflation looking almost settled, the focus has started to shift to the labor market and to economic growth as interest rates are still hovering at multi-year highs despite easing lately. The unemployment rate has been steadily rising over the past year before stabilizing at a more-than-a-year high of 6.4% and is expected to tick up to 6.5% on Friday when the next employment report is published.

As regards economic growth, GDP rose at a faster-than-expected annualized rate of 2.1% in the second quarter. While the data was encouraging, the details showed that the expansion was driven by factors that could prove transient such as government spending and business investment on engineering structures in oil and gas facilities. Spending on services increased as well but the rise was trimmed by declines in goods consumption, net trade, and residential structure, while growing population squeezed per capita household expenditure to the negative region. Moreover, the monthly GDP readings for July displayed stagnation at the start of the third quarter.

Will the BoC send any strong signals?

Hence, the latest economic developments could justify further monetary easing as Canada is more sensitive to global trade and housing risks than the US. Still, whether there is a need for more aggressive rate cuts, or a continuous easing process remains to be seen. There will be no policy statement or updated economic projections following the rate decision, which reduces the odds for a serious shift in communication.

The certain thing is that messaging such an aggressive dovish strategy or delivering an unexpected 50bps rate cut could sow panic, signaling that things are going out of the central bank’s control. Note that futures markets are currently pricing a small probability of 23% for a double rate cut. Therefore, if that scenario unfolds, the loonie could drift significantly lower, lifting USDCAD above 1.3585 and beyond the 200-day simple moving average (SMA). The 1.3700 number could be the next target on the upside.

If the BoC slashes interest rates as expected but plays down the case of consecutive or double rate cuts, investors might take it as a hawkish signal, helping the loonie to resume its positive momentum. USDCAD might drift back towards the 1.3440 support zone in the aftermath of such a scenario. Failure to pivot there could bolster downside forces towards 1.3300-1.3350.

Perhaps volatility could stay relatively balanced if the policy meeting is uneventful and investors wait for fresh direction from Friday’s jobs report. A worse-than-expected employment report could keep the case of a double rate cut alive in the coming months, putting some pressure on the loonie. Strong numbers on the other hand could help the currency to strengthen. Analysts estimate a positive employment growth of 25.6k versus -2.8k in July and a slight pickup in the unemployment rate from 6.4% to 6.5%.

Swiss inflation slowed to 1.1% y/y in August from 1.3% the previous month, below the 1.2% expected. In April and May, the rate of price increases rose to 1.4% y/y but later started to fall again, losing 0.2% in the last three months.

The Swiss National Bank cut its key interest rate twice, in March and June. However, the combination of a further slowdown in price growth and an appreciating CHF opens the door for further monetary easing.

USD/CHF is back below 0.8500, its lows at the beginning of the year. The pair plunged into this area then, as it has now, on the back of rising expectations of a Fed rate cut. At the same time, earlier policy easing in Switzerland did not significantly weaken the franc.

The strength of the franc, which only fell below its current level in 2011, could encourage the monetary authorities to take more aggressive steps to curb the growth of the national currency, including warnings or actual currency intervention.

Too strong a franc hurts the economy by making exports less competitive, which could be a problem for Switzerland’s open economy.

Summary

A headline increase to 47.2 for the ISM manufacturing index says more about a back-up in inventories than it does about a meaningful improvement for the factory sector. Excluding the inventory contribution, the index would have been down 0.8 points.

Rise & Whine: More of the Same from August ISM

This is not the sort of improvement you want to see if you are rooting for a turnaround in the factory sector. Only two of the five components that feed into the headline rose in August. Employment (up 2.6 to 46.0) and inventories, which rose twice as much (+5.8 points to 50.3). Production, supplier deliveries and new orders were all lower. The most disconcerting development is the 2.8 point drop in new orders, which took this leading indicator to its lowest since May of last year.

While a sub-50 print may indicate a discouraging backdrop for the factory sector, it takes an even lower reading to signal outright recession for the broader economy; 42.5 in fact, according to the ISM. So today's report for August activity is broadly consistent with a theme that has been in place for the better part of the past two years: the economy is still expanding even if the factory sector is not.

Our way of describing this dichotomy has been that the combination of pulled-forward demand for durable goods during the pandemic and higher financing costs has meant that Fed rate hikes have bitten harder in this sector than most others. Both of these dynamics are transitioning in a way that we expect to eventually be favorable for the sector. Even long-lived durable goods need replacing and items purchased during the early days of the pandemic are now four-and-a-half years old and rates are apt to start coming down, perhaps as soon as later this month. But for August, it was more of the same for manufacturing.

In general manufacturing activity remains constrained. The new orders component slid nearly three points to the lowest reading since May of last year, and the only of the six largest industries to report an increase in new orders was the computer & electronic products—which has been a notable bright spot in an otherwise flagging sector. The measure of current production also slid deeper into contraction last month.

As mentioned, most of the strength came from inventories. While inventories can be volatile, it's the first time this component crested above 50 since early 2024 and the release notes manufacturers adjusting to lower output levels and timing issues. In other words, this inventory was unintended and a consequence of slowing demand. Without the inventory build, the overall ISM composite index would have seen a decline twice as large in August.

Slower activity continues to hold back hiring. We often look to the ISM surveys for a hint of what to expect from the coming employment report, and although the ISM's have been more volatile than broader hiring figures, the signal has been clearly one of lost momentum. While employment was less negative in August, it was still consistent with a broad contraction in hiring in August. Only three of 18 industries reported employment growth in August according to the release, and one of them (food & beverage) was said to do so due to seasonal reasons. The employment component has only been above 50, or consistent with an expansion in hiring, for just one month of the year.

The main event this week comes with Friday's employment report. We forecast a partial rebound in hiring and reversal of the unemployment rate from July's increase. With the labor market now largely having normalized from its pandemic-related distortions the only question that remains is by how much will the Fed cut rates in two weeks at its September meeting. Recent public comments of Fed officials indicate few currently see the need for a 50 bps reduction, and we expect Friday's jobs report will likely need to come in weaker than July for such a large rate reduction to kick off the Fed easing cycle.