Sample Category Title

• Bank of Canada to slash rates by 25bps for the second time in a row
• More easing expected, but policymakers might signal a data-dependent approach
• USDCAD tests key resistance of 1.3740; key support at 1.3620

Investors are confident that the Bank of Canada (BoC) will cut interest rates by a quarter percentage point for the second time in a row to 4.5% when it announces its policy decision on Wednesday. If that scenario plays out, the BoC will be ahead of major central banks in the easing cycle. But will the central bank feel comfortable moving forward with further back-to-back reductions given that its major peers are still uncertain?

What led to June’s rate cut?

Back on June 5th, headline inflation displayed the lowest annual change since March 2021, clocking in at 2.7% y/y and within the central bank’s control range of 1-3%. Although that was still higher than the BoC’s 2.0% midpoint target, the core measure, which excluded food, energy, tobacco and mortgage rates, was below that threshold at 1.6%; once mortgage costs are excluded, it’s evident that monetary policy does not need to be so restrictive.

With the unemployment rate climbing to a two-year high and household debt remaining problematic, the BoC did not hesitate to slash its borrowing costs and join its Swedish and Swiss counterparts.

Will there be a second reduction?

The question now is whether a second cut in a row is necessary. In June, inflation slipped back to 2.7% y/y after a pickup to 2.9%, staying below the BoC’s Q2 projection of 3.0%. On the other hand, the core measure climbed to 1.9% but held near the 2.0% midpoint target.

Furthermore, the unemployment rate increased to 6.4% and the central bank’s most recent business survey indicated a decline in sales outlook and weaker expectations for wage growth, alleviating concerns of labor shortages and potential widespread inflation from rising wages. Recall that retail sales have been in the negative region every single month since the start of the year excluding the month of April.

Even though the central bank has not declared victory over inflation yet, the above stats could be enough reasoning for a second rate cut this month. According to futures markets, this is a done deal. Besides, back-to-back rate reductions are common during monetary easing cycles in Canada. Taking this into consideration, investors might shrug off the rate decision and pay more attention to whether there will be additional rate cuts by the end of the year.

How many rate cuts are priced in?

There are three more meetings in September, October and December, and investors foresee at least one rate reduction.

Policy divergence between the US and Canada tends to face limits and it has not exceeded 100bps since the 2007-2009 financial crisis. But with the FOMC expected to step into its easing cycle in September, the BoC may not feel there are any barriers in further lowering its borrowing costs. That said, policymakers might avoid straightforward communication and could instead endorse a data-dependent approach, citing elevated services inflation, and a potential increase in global trade barriers if Trump becomes the next president.

USDCAD outlook

As regards the loonie, it has been on the backfoot against the US dollar lately, completely losing its July wins. A relatively hawkish BoC communication linked to a data-dependent attitude could provide some relief to the currency. In this case, USDCAD could slide towards its 20- and 50-day simple moving averages (SMAs) at 1.3670. A bigger test could come slightly lower at 1.3650, where the 2024 protective trendline is placed. If the 1.3625 zone proves easy to pierce too, the bears could target the flattening 200-day SMA at 1.3595, a break of which would damage the short-term outlook.

In the event the central bank surprises investors with no rate cuts, the pair could experience a steep downfall.

Alternatively, if policymakers feel more confident about their price stability mission, flagging more rate decreases ahead, USDCAD could surpass the wall at 1.3747 to meet the next barrier at 1.3800. Even higher, the pair could stop somewhere between 1.3840 and 1.3860.

• Wednesday's PMI surveys key for both the Fed and the BoE
• Eurozone PMI manufacturing survey could disappoint again
• US PMIs unlikely to unsettle September Fed expectations
• UK figures could surprise on the upside after the general election

Important PMI survey prints this week as both the Fed and the BoE meet soon

Despite last week’s stock market correction and the latest developments in the US Presidential race dominating the headlines, economic data releases this week should attract the market's interest. Both Thursday’s advance US GDP print for the second quarter of 2024 and Friday’s PCE report are expected to have an impact on the market.

On Wednesday, though, the preliminary PMI surveys for July will be published. The importance of these figures cannot be underestimated as the market is trying to predict the likely timing of their next rate moves.

Could the euro area services sector save the day again?

As widely expected, last week’s ECB meeting did not produce any surprises. Rates were kept stable, and President Lagarde appeared moderately balanced with a willingness to advertise the new “no pre-commitment” dogma. The door to a September rate cut remains open, especially if the Fed signals its readiness to start easing its monetary policy stance soon.

President Lagarde mentioned the PMI surveys during last Thursday’s press conference in order to highlight the divergent dynamics seen in the services and manufacturing sectors and their impact on inflation. The services sector pulled the eurozone out of the recession, and its respective PMI survey continues to hover at levels consistent with soft growth.

The same cannot be said for the smaller manufacturing sector, which has remained stuck below the 50-level for the past two years. The main culprit of this abysmal performance is Germany where the once-mighty manufacturing segment has lost part of its competitiveness edge against other powerhouses due to the lack of cheap Russian energy. Similarly, the French manufacturing sector continues to underperform, which is somewhat expected considering the recent political unrest.

Focusing on Wednesday’s prints, the market expects a small improvement across the board. The eurozone aggregate services indicator should edge higher to 53, while the manufacturing survey is expected to climb to 46.1.

US PMI surveys to give useful information to the Fed

While the Fed’s preferred set of indicators remains the Institute for Supply Management (ISM) indices, going into the July 31 gathering, Fed members will probably have access only to the already-published PMI surveys. And these PMIs accurately depict the economic advantage of the US against the eurozone as the composite PMI survey indicator jumped in June to the highest level since May 2022.

Like the euro area, the services sector is the key growth area of the US economy with the respective PMI services survey climbing to a 2-year high. However, contrary to the eurozone, the PMI survey for the manufacturing sector has recently climbed above the 50-threshold, and it appears to be on a gentle upward trend.

The market is currently forecasting a small pickup in the PMI manufacturing survey but a decent correction in the services one. Confirmation of these figures is unlikely to change the Fed outlook, with the market fully pricing in a 25bps rate cut in September. Actually, weaker data prints could allow the Fed to start cutting rates with a clear conscience, despite the currently elevated inflation rates. The July 31 meeting might prove uneventful, but the Jackson Hole symposium at the end of August could prove pivotal in the current cycle.

The UK could benefit from political stability

A different picture emerges in the UK where the PMI services survey remains above the 50-threshold, but it has failed to achieve the progress seen in other regions. The recent general election has probably improved sentiment in this sector and hence it will be interesting to see if the recent weakness reversed on Wednesday.

Interestingly, the manufacturing sector has been recovering aggressively from the 2023 trough and has actually returned above the 50 mark in the past two months. This is quite noteworthy considering the very weak prints seen in the eurozone, but the strong UK domestic demand could possibly explain the manufacturing sector’s solid performance.

The market expects a positive set of figures with the services survey climbing to 52.5 and the manufacturing one edging to 51.1. The BoE meets on August 1, the day after the Fed gathering, with the market recently scaling back its expectations for an August rate cut. A strong downside surprise from Wednesday's PMIs could tempt the BoE doves to put a rate cut on the table at the next gathering.

AUDUSD hit three-week low on Monday after recovery attempts overnight were short-lived and bears regained full control.

The pair remains in a steep downtrend for the sixth straight day and retraced so far 61.8% of 0.6575/0.6798 rally.

Last week’s 1.3% fall left large bearish candle (the first week in red after five consecutive weeks of rally) and generated reversal signal on weekly chart.

Weakening daily studies (south-heading 14-d momentum is about to break into negative territory / 10/20/30 MA’s in bearish configuration) favor further downside, as Aussie dollar was hurt by falling copper price and rise in USCNY, following PBOC loan prime rate cut by 10 basis points.

Bears eye next significant supports at 0.6642/31 (top of thick daily cloud / Fibo 38.2% retracement of larger 0.6362/0.6798 uptrend) which are likely to produce strong headwinds, along with oversold daily studies.

Limited upticks should be ideally capped by 20DMA / last Friday’s top (0.6708) to keep bears intact.

Res: 0.6663; 0.6683; 0.6708; 0.6729.
Sup: 0.6642; 0.6631; 0.6605; 0.6580.

Markets

Biden’s dropout from the presidential race grabbed most of the headlines today, if only because there was basically no other news to report. He and many other Democrats have endorsed the current runner-up Kamala Harris as the new nominee. What that means for the eventual election outcome and policy is unclear at this stage. Markets behaved accordingly. We’ve seen no such thing as an aggressive repositioning whatsoever. Equity markets showed some of the sharpest moves today following the biggest weekly loss in several month’s time. Technical support areas around 4820-4840 for the EuroStoxx50 (38.2% retracement on the 2024 rally, lower bound of a downward trading range) and 5500 for the S&P 500 (23.6% on the mid-April rally, June interim high) helped as well by living up to the name. Core bond yields looked for and eventually found a bottom end of last week. The front end of the curve both in Europe and the US today extends losses slightly, with Bunds underperforming Treasuries (+3 bps in the 2-yr vs +0.8 bps). Two of the big three on currency markets barely budge, resulting in extremely stoic EUR/USD trading in the high 1.08 zone. The Japanese yen performs best though it did forfeit some of the early gains this (European) morning. USD/JPY trades around 156.8, at least temporarily giving Japanese FX officials some relief. EUR/JPY tested the 170 barrier but no break occurred. Sterling snapped last week’s losing streak, inching marginally higher both against the dollar and the euro. After last week’s British economic update, Wednesday’s July PMI’s are the only release worth mentioning ahead of the Bank of England policy meeting August 1. Policymakers, not least governor Bailey, have been extremely quiet of late, even as the UK elections no longer force them to be. Without clear hints from officials and with the mixed eco update (the inflation/labour market/retail sales numbers respectively topped/matched/missed expectations), markets are almost perfectly 50-50 split on the inaugural rate cut in August. After Wednesday, which has PMI’s in store not only for the UK but also Europe and the US, attention turns to the first Q2 GDP growth estimate for the US on Thursday as well as the June PCE-deflators for the country on Friday.

News & Views

Poland’s June retail sales reported today printed on the softer side of expectations. Real sales (constant prices) rose 0.3 % M/M and 4.4% Y/Y, coming on the back of two months of negative growth in May and April. Positive growth in motor vehicles and parts (3.4%) and fuels (+1.5%) was partially counterbalanced by a monthly decline in most other subcategories. Real sales over the January-June period increased by 4.9% compared to the same period last year. The data suggest a modest recovery in domestic demand. The National bank of Poland (NBP) in its communiqué after the July 2-3 policy meeting still mentioned the risk of demand pressure in the domestic economy due to a marked wage growth. This assessment was confirmed by comments from MPC member Iwona Duda in an interview this weekend. In addition to demand and inflation risks of high wages, Duda indicated that the impact of higher energy prices (removing price caps) on households’ inflation expectations is another reason for the NBP to refrain from policy easing. She expects Polish inflation to be at heightened levels (about 6.0%) at the beginning of next year which only allows the NBP to start discussing interest rate cuts in the second half of next year.

The National Bank of Belgium’s (NBB) monthly consumer confidence indicator fell back in July after markedly improving last month. The NBB saw a worsening of all components of the indicator. Consumer expectations for the general economic situation in Belgium have dropped slightly (-16 from -15). In addition, fears of a rise in unemployment over the next twelve months have sharply intensified (19 from 12), following the clear abatement last month. On a personal level, households are less confident about their own future financial situation (-2 from 1), and less optimistic about their savings intentions over the coming twelve months (16 from 20).

Graphs

DXY: trade-weighted dollar draws no conclusions from Biden’s dropout

US 2-yr yield tries to build on end last week’s recovery, strenghtening the bottom at 4.4% as a solid one

Brent oil ($/b) slips below 200dMA, extending a drop since early July that wiped out almost half of the June gain

EuroStoxx50 kicks off this week with a nice gain after testing support at 4800+ last week

Daily Pivots: (S1) 1.0870; (P) 1.0889; (R1) 1.0903; More....

EUR/USD is staying in range below 1.0947 and intraday bias remains neutral. Further rise is in favor as long as 1.0871 minor support holds. Break of 1.0947 will target 100% projection of 1.0601 to 1.0915 from 1.0665 at 1.0979. However, firm break of 1.0871 will turn bias to the downside for deeper fall to 55 D EMA (now at 1.0809) and possibly below.

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern, possibly a triangle, that's still be in progress. Break of 1.1138 resistance will be the first signal that rise from 0.9534 (2022 low) is ready to resume through 1.1274 (2023 high). This will now remain the favored case as long as 1.0601 support holds.

Daily Pivots: (S1) 1.2886; (P) 1.2930; (R1) 1.2958; More...

Intraday bias in GBP/USD remains neutral for consolidation below 1.3043. Downside of consolidations should be contained by 1.2859 resistance turned support to bring another rally. Break of 1.3043 will resume the rise from 1.2298 and target 100% projection of 1.2298 to 1.2859 from 1.2612 at 1.3173, which is slightly above 1.3141 key medium term resistance. However, firm break of 1.2859 will turn bias to the downside for deeper decline.

In the bigger picture, corrective pattern from 1.3141 medium term top (2023 high) could have completed with three waves to 1.2298 already. This will now remain the favored case as long as 1.2612 support holds. Firm break of 1.3141 will target 61.8% projection of 1.0351 (2022 low) to 1.3141 from 1.2298 at 1.4022.

Daily Pivots: (S1) 0.8867; (P) 0.8884; (R1) 0.8908; More…

USD/CHF is staying in range above 0.8819 and intraday bias remains neutral. Further decline is in favor as long as 0.8914 support turned resistance holds. Break of 0.8819 will target 61.8% retracement of 0.8332 to 0.9223 at 0.8672 next. However, break of 0.8914 will turn bias back to the upside for stronger rebound instead.

In the bigger picture, with 0.9243 resistance intact, medium term outlook in USD/CHF is neutral at best. For now, more sideway trading is likely between 0.8332/9243. However, firm break of 0.9243 will indicate larger bullish trend reversal.

Daily Pivots: (S1) 157.02; (P) 157.38; (R1) 157.78; More...

USD/JPY is staying in range above 155.36 temporary low and intraday bias remains neutral. Further decline is expected with 158.85 resistance intact. Below 155.36 will target 38.2% retracement of 140.25 to 161.94 at 153.65. On the upside, above 158.85 resistance will turn bias back to the upside for stronger rebound instead.

In the bigger picture, as long as 151.89 resistance turned support holds, long term up trend could still continue through 161.94 at a later stage. Next target will depend on the depth of the current correction from 161.94. However, sustained break of 151.89 will argue that larger scale correction or trend reversal is underway.

Daily Pivots: (S1) 0.6672; (P) 0.6693; (R1) 0.6707; More...

AUD/USD's fall from 0.6798 accelerates lower today and intraday bias stays on the downside for 38.2% retracement of 0.6361 to 0.6798 at 0.6631. Strong support could be seen there to bring rebound, and break of 0.6714 resistance will turn bias back to the upside for retesting 0.6798. However, sustained break of 0.6631 will bring deeper fall to 61.8% retracement at 0.6528 instead.

In the bigger picture, overall, price actions from 0.6169 (2022 low) are seen as a medium term corrective patter, which is still extending. Break of 0.66870 resistance will extend the rising leg from 0.6269 towards 0.7156 (2023 high). However, break firm break of 0.6619 support will argue that another falling leg has started back towards lower side of the range between 0.6169/6361.

Australian Dollar continues to lead the decline among commodity currencies today, with the selloff appearing to accelerate. Despite stabilization in risk sentiment in Europe where major indexes are trading positively, and US futures, particularly NASDAQ, pointing to a stronger open, overall sentiment remains vulnerable. This fragility is largely due to political uncertainty in the US following Joe Biden's withdrawal from the presidential election race. Additionally, several high-profile earnings reports are set to be released this week, which could further influence market dynamics.

Contributing to Australian Dollar's woes is the continued decline in Copper prices. Copper just had its worst week since 2022, as the highly anticipated Plenum in China ended with significant disappointment among investors, offering no substantial plan to revive the beleaguered economy. Today's unexpected rate cut by the People's Bank of China serves as a stark reminder that economic troubles in the region persist.

Technically, Copper is now pressing 61.8% projection of 5.1650 to 4.3133 from 4.6839 at 4.1575. Decisive break there could trigger downside acceleration to 100% projection at 3.3058 next.

Overall in the currency markets, Yen is currently the strongest for the day, followed by Sterling and Swiss Franc. Dollar and Euro are positioned in the middle. However, Dollar, Euro, Sterling, and Swiss Franc are all trading within last week's ranges against each other, indicating that their relative positions could easily shift.

In Europe, at the time of writing, FTSE is up 0.91%. DAX is up 1.56%. CAC is up 1.45%. UK 10-year yield is down -0.0074 at 4.121. Germany 10-year yield is down -0.0013 at 2.457. Earlier in Asia, Nikkei fell -1.16%. Hong Kong HSI rose 1.25%. China Shanghai SSE fell -0.61%. Singapore Strait Times fell -0.30%. Japan 10-year JGB yield rose 0.0181 to 1.065.

Bundesbank urges prudence: further rate reductions must be judiciously evaluated

Bundesbank's latest monthly report indicates that while some factors are bolstering the economy, they are simultaneously complicating efforts to bring inflation down to target.

"The labor markets are still operating at high capacity, wage growth is brisk, and prices are rising strongly, particularly in the service sector," the report stated.

Bundesbank highlighted that "inflationary risks also predominate on the supply side." Services inflation is expected to decline only modestly in the coming months, with the overall price index likely to fluctuate around current levels.

Given these conditions, the Bundesbank advised that "possible further interest rate cuts should therefore be carefully considered in light of current data."

Bundesbank anticipates the economy to "strengthen somewhat" in the Q3. Private consumption is expected to "pick up a little more speed" driven by strongly rising wages, falling inflation, and a robust labor market, which should continue to support consumer spending.

However, the report also cautioned that industrial activity is likely to improve "only hesitantly" due to weak demand, which could result in GDP growth for Q3 falling slightly short of the expectations from June forecast.

ECB's Kazimir: Two more rate cuts this year not guaranteed

In an op-ed published today, ECB Governing Council member Peter Kazimir addressed market expectations for two additional rate cuts before the end of the year. He stated that while these market bets are "not entirely misplaced," they should not be considered a "given or a baseline scenario."

Kazimir highlighted that inflation is "on track" to return to the target but cautioned, "we are clearly not there yet." He emphasized the persistent risks of inflationary pressures due to various domestic and global factors. "There is still a non-negligible risk of inflationary pressures re-emerging," he noted.

"There is no need to rush our decisions," Kazimir added, advising a measured approach. "Enjoy the summer lull and wait for the much-anticipated September 'health check.' The upcoming data, combined with fresh forecasts, will set the stage for any necessary decisions."

China's surprise rate cut

In a surprised move, China's PBoC today announced its first reduction in a key short-term policy rate in nearly a year, following weaker-than-expected economic growth in Q2. The economy expanded at its slowest pace in over a year, prompting the central bank to lower the seven-day reverse repo rate from 1.8% to 1.7%. PBOC emphasized that these rate cuts are part of its strategy to "strengthen counter-cyclical adjustments to better support the real economy."

Following closely on PBOC's announcement, Chinese banks adjusted their main benchmark lending rates, marking the first such adjustment since August 2023. The one-year loan prime rate was reduced to 3.35% from 3.45%. The five-year rate, which is crucial for mortgages, dropped to 3.85% from 3.95%.

New Zealand's goods exports falls -0.1% yoy, imports down significantly by -13% yoy

In June, New Zealand's overall goods exports slightly declining by -0.1% yoy, a reduction of NZD 7.4m, totaling NZD 6.2B. Conversely, goods imports experienced a more significant decrease, falling -13% yoy or NZD 821m, resulting in total imports of NZD 5.5B. This led to a trade surplus of NZD 699m, surpassing expectations of NZD 294m.

Examining trade movements by country, exports to major partners showed mixed results. China saw a decrease of NZD 142m in exports, a -9.1% yoy drop, while exports to Australia also fell by NZD 74m or -9.2% yoy. In contrast, exports to the US and the EU increased by NZD 91m (12% yoy) and NZD 129m (34% yoy) respectively. Japan's exports marginally decreased by NZD 4.1m or -1.1% yoy.

On the import front, China and the EU recorded increases of NZD 11m (0.9% yoy) and NZD 33m (3.3% yoy) respectively. However, imports from Australia, the US, and South Korea saw significant declines, with reductions of NZD 69m (-10% yoy), NZD 49m (-8.4% yoy), and NZD 54m (-14% yoy) respectively.

AUD/USD Mid-Day Report

Daily Pivots: (S1) 0.6672; (P) 0.6693; (R1) 0.6707; More...

AUD/USD's fall from 0.6798 accelerates lower today and intraday bias stays on the downside for 38.2% retracement of 0.6361 to 0.6798 at 0.6631. Strong support could be seen there to bring rebound, and break of 0.6714 resistance will turn bias back to the upside for retesting 0.6798. However, sustained break of 0.6631 will bring deeper fall to 61.8% retracement at 0.6528 instead.

In the bigger picture, overall, price actions from 0.6169 (2022 low) are seen as a medium term corrective patter, which is still extending. Break of 0.66870 resistance will extend the rising leg from 0.6269 towards 0.7156 (2023 high). However, break firm break of 0.6619 support will argue that another falling leg has started back towards lower side of the range between 0.6169/6361.

Economic Indicators Update