Sample Category Title

Dollar is showing renewed strength in Asian session, particularly against commodity currencies. Market reactions to the televised debate between US President Joe Biden and former President Donald Trump have been muted, with traders shifting their focus to upcoming inflation data.

Both headline and core PCE inflation are expected to dip to 2.6% in May. For Fed to consider lowering interest rates, disinflation needs to show consistent progress for several more months. Currently, Fed fund futures indicate around a 65% chance of a 25bps rate cut in September.

Yen continues to weaken despite stronger-than-expected Tokyo CPI core readings. BoJ has explicitly indicated a possible rate hike in July. But even if it materializes, it is likely to be more symbolic than impactful. Recent global inflation surprises suggest that the interest rate gap between Japan and other major economies will remain wide for the foreseeable future.

Meanwhile, Japan has appointed a new top currency diplomat, Atsushi Mimura, to replace Masato Kanda starting July 31. It remains to be seen if Mimura will implement significant changes to Japan's strategy regarding Yen's prolonged depreciation.

In the broader currency markets, Dollar is currently the top performer for the week, followed by Euro and Sterling. New Zealand Dollar is the weakest, trailed by Yen and Swiss Franc. Australian and Canadian Dollars are positioned in the middle.

Technically, USD/CAD's break of 1.3717 resistance suggests that fall from 1.3790 has completed at 1.3626 already. The whole corrective pattern from 1.3845 might be finished with three waves to 1.3626 too. Further rise is now in favor to 1.3790 resistance first. Decisive break there will raise the chance of larger up trend resumption through 1.3845. The next significant moves will probably be influenced by today's US PCE inflation data and Canada's GDP release.

In Asia, at the time of writing, Nikkei is up 0.71%. Hong Kong HSI is up 0.56%. China Shanghai SSE is up 0.98%. Singapore Strait Times is down -0.24%. Japan 10-year JGB yield is down -0.0025 at 1.071. Overnight, DOW rose 0.09%. S&P 500 rose 0.09%. NASDAQ rose 0.30%. 10-year yield fell -0.028 to 4.288.

Tokyo CPI surpasses expectations, Japan's industrial output rebounds

Japan's Tokyo CPI core (excluding food) rose to 2.1% yoy in June, beating expectations of 2.0% yoy and up from May's 1.9% yoy. CPI core-core (excluding food and energy) increased from 1.7% yoy to 1.8% yoy. Headline CPI also ticked up from 2.2% to 2.3% year-on-year. Monthly figures showed Tokyo's CPI core rose by 0.4% mom, core-core by 0.3% mom, and headline CPI by 0.3% mom.

In addition, Japan's industrial production saw a significant boost in May, rising 2.8% mom, surpassing the forecasted 2.0%. Of the 15 industrial sectors covered, 13 reported higher output while only two experienced declines.

A Ministry of Economy, Trade and Industry official noted, "The private sector's sentiment toward output is improving as auto production started to pick up." Despite this, the ministry maintained its previous assessment that industrial production "showed weakness while fluctuating indecisively." According to a poll of manufacturers, output is expected to decrease by -4.8% in June but increase by 3.6% in July.

Fed's Bowman cites multiple risks to inflation, rules out rate cuts for now

In a speech overnight, Fed Governor Michelle Bowman reiterated that Fed is "still not yet at the point where it is appropriate to lower the policy rate." She emphasized that several upside risks to inflation persist, making it premature to consider rate cuts.

Bowman highlighted several concerns impacting inflation. She noted that further improvements on the supply side are unlikely, and geopolitical developments could disrupt global supply chains, adding to inflationary pressures. Additionally, loosening in financial conditions might increase demand, potentially stalling disinflation progress. Furthermore, increased immigration and continued labor market tightness could lead to persistently high core services inflation.

Bowman stressed that monetary policy is "not on a preset course." She remains willing to raise interest rates if incoming data suggest that progress on inflation has stalled or reversed.

Looking ahead

Germany import price index and unemployment, France consumer spending, UK Q1 GDP final, and Swiss KOF economic barometer will be released in European session.

Later in the day, Canada will publish GDP. US will release personal income and spending, PCE price index, Chicago PMI.

EUR/JPY Daily Outlook

Daily Pivots: (S1) 171.60; (P) 171.89; (R1) 172.38; More...

Intraday bias in EUR/JPY remains on the upside as up trend continues. Next target is 100% projection of 164.01 to 170.87 from 167.52 at 174.38. On the downside, below 171.37 minor support will turn intraday bias neutral and bring consolidations first, before staging another rally.

In the bigger picture, strong support from 55 D EMA indicates that the long term up trend is still in progress. Decisive break of 171.58 will confirm resumption and target 100% projection of 139.05 to 164.29 from 153.15 at 178.38. For now outlook will stay bullish as long as 164.01 support holds, even in case of deep pullback.

Economic Indicators Update

Japan's Tokyo CPI core (excluding food) rose to 2.1% yoy in June, beating expectations of 2.0% yoy and up from May's 1.9% yoy. CPI core-core (excluding food and energy) increased from 1.7% yoy to 1.8% yoy. Headline CPI also ticked up from 2.2% to 2.3% year-on-year. Monthly figures showed Tokyo's CPI core rose by 0.4% mom, core-core by 0.3% mom, and headline CPI by 0.3% mom.

In addition, Japan's industrial production saw a significant boost in May, rising 2.8% mom, surpassing the forecasted 2.0%. Of the 15 industrial sectors covered, 13 reported higher output while only two experienced declines.

A Ministry of Economy, Trade and Industry official noted, "The private sector's sentiment toward output is improving as auto production started to pick up." Despite this, the ministry maintained its previous assessment that industrial production "showed weakness while fluctuating indecisively." According to a poll of manufacturers, output is expected to decrease by -4.8% in June but increase by 3.6% in July.

In a speech overnight, Fed Governor Michelle Bowman reiterated that Fed is "still not yet at the point where it is appropriate to lower the policy rate." She emphasized that several upside risks to inflation persist, making it premature to consider rate cuts.

Bowman highlighted several concerns impacting inflation. She noted that further improvements on the supply side are unlikely, and geopolitical developments could disrupt global supply chains, adding to inflationary pressures. Additionally, loosening in financial conditions might increase demand, potentially stalling disinflation progress. Furthermore, increased immigration and continued labor market tightness could lead to persistently high core services inflation.

Bowman stressed that monetary policy is "not on a preset course." She remains willing to raise interest rates if incoming data suggest that progress on inflation has stalled or reversed.

Full speech of Fed's Bowman here.

This week’s inflation data was in line with Westpac’s expectations. But what matters is whether the RBA was surprised. We do not think it was, and note that despite personnel changes, the RBA’s analysis and strategy have not changed.

This week’s inflation data were not a surprise to the Westpac Economics team and so did not change our view of the outlook for interest rates. As our Westpac Economics colleague Justin Smirk previewed last week, we had expected that base effects would lead the monthly indicator to print at 4% over the year to May. Clearly, the disinflation journey is becoming more difficult, and the RBA is becoming more nervous that its strategy may not work as planned. And as our colleague Pat Bustamante also highlighted recently, some recent state government budgets are not helping.

The real question is not whether we were surprised by the May inflation data but whether the RBA was. We can assume that the staff know how to account for one-off factors like changes in electricity rebates, or noise factors such as fruit and vegetable prices. Given their above-market forecast for June quarter headline CPI in the May Statement on Monetary Policy, we suspect that this week’s data were no surprise to the RBA, either. An ugly June quarter CPI release together with strong labour market data could tip the balance and force a rate hike, but this is not our base case and is not supported by currently available information.

In this context, the Deputy Governor’s speech last night was an important steer on the Bank’s view. While the speech itself was not about current developments, Deputy Governor Hauser reminded the audience that services inflation was in fact declining, and that ‘it would be a bad mistake to set policy on the basis of one number’. As well as highlighting the quarterly CPI, Deputy Governor Hauser pointed to retail sales and the labour market as key pieces of information yet to come.

Last night’s speech is part of a sequence of public events introducing the new Deputy Governor to the Australian audience. A previous milestone in that sequence, an interview in the Australian Financial Review earlier this month, also ruled out a potential policy risk in a way that has perhaps not been fully appreciated.

Recall that both the Deputy Governor and chief economist are new to the Bank and (compared with their predecessors) relatively new to Australia and Australian economic data. In addition, both the Heads of Economic Analysis and Economic Research will be vacating their posts shortly, for different reasons. Less well known (but evident from LinkedIn) is that the deputy heads of department in that group have also or are about to move to other roles in the RBA or BIS secondments. Given this decline in collective experience in reading the Australian economy, and particularly the country-specific nuances of the data (which all economies have), there was always a risk that the new leadership would take a different direction and adopt a different strategy and/or approach to reading the economy, for better or worse.

In our view, the Deputy Governor’s interview shows that this risk has not eventuated. The RBA continues to hold onto the priorities forged from earlier experience. The loss of experience has not translated into a loss of insight. In that interview, Deputy Governor Hauser spoke of importance of full employment, that the unemployment rate consistent with full employment could change, and that you needed to ‘test’ where it was. In other words, the RBA is continuing with the strategy articulated by the previous Governor to ‘protect the employment gains’ (Deputy Governor Hauser’s words) that were achieved in the aftermath of the pandemic. The refreshed Statement on the Conduct of Monetary Policy has solidified that strategy.

These insights are longstanding views of the Bank, first articulated before the pandemic in a pair of speeches in 2019 by the then Governor and the then chief economist. In the latter speech, I emphasised that ‘the level of the NAIRU [the sustainable unemployment rate around which inflation is stable] is an emergent property of the system. It is not baked in.’

While the nod to complexity theory in that reference to emergent properties might not be front of mind for the current leadership, the underlying analysis still seems to be. Further evidence of this recognition can be seen in the Bulletin article articulating the RBA’s approach to assessing full employment.

Related to this, this week’s speech by the Assistant Governor for Financial Markets highlighted that the RBA does still think that policy is currently tight. This speech was used as a vehicle to present updated estimates of the neutral nominal cash rate, noting that it, too, can and has changed. Again, we see a recognition at the RBA that these ‘star’ variables can shift.

A similar view of the likely neutral level of the interest rate structure informs our own view of the medium-term outlook. As we noted back in March:

In this context, one can interpret the Westpac Economics forecast for the cash rate at the end of 2025 of 3.1% as either neutral, with a neutral real rate a bit below 1%, or slightly below neutral with a higher neutral real rate. Given the uncertainties around both the outlook and the level of the neutral rate in any one period, we are agnostic about which interpretation turns out to be the right one. It might be that one will never be able to tell the difference.

The difficulty, though, is that the full-employment rate of unemployment seems to have fallen over recent years, while the estimates of the neutral interest rate point to it being higher than before the pandemic. The RBA’s recent commentary suggests that the former is more salient in the near term – consistent with wages growth already rolling over but contrary to some market commentary. But the latter limits the scope for rate cuts, when they do eventually come. A particularly bad scenario would be if both invisible benchmarks end up being overestimated. In that case, the ‘stars’ would collide to produce a period of overly high rates and slow growth.

Key Highlights

• USD/JPY rallied and tested the 160.80 zone.
• A major bullish trend line is forming with support at 159.80 on the 4-hour chart.
• EUR/USD is consolidating above the 1.0670 support zone.
• GBP/USD spiked lower toward 1.2600 before it recovered some losses.

USD/JPY Technical Analysis

The US Dollar remained in a strong uptrend above the 157.50 level against the Japanese Yen. USD/JPY cleared the 160.00 resistance to move further into a positive zone.

Looking at the 4-hour chart, the pair settled above the 160.00 level, the 100 simple moving average (red, 4-hour), and the 200 simple moving average (green, 4-hour). The bulls remained in control and even pumped the pair toward the 160.80 zone.

On the upside, the pair is facing resistance near the 160.85 level. The next resistance sits at 161.20. The first major resistance is near the 162.00 level.

A clear move above the 162.00 resistance might send it toward the 162.50 level. Any more gains might open the doors for a test of the 165.00 zone and a new all-time high in the coming days.

Immediate support is near the 160.00 level or the 38.2% Fib retracement level of the upward move from the 158.73 swing low to the 160.86 high. The next major support is near the 159.80 level. There is also a crucial bullish trend line forming with support at 159.80 on the same chart.

The trend line coincides with the 50% Fib retracement level of the upward move from the 158.73 swing low to the 160.86 high. A downside break and close below the 159.80 support zone could open the doors for a larger decline. In the stated case, the pair could decline toward the 159.20 level.

Looking at EUR/USD, the pair remained stable above the 1.0670 support zone and is now attempting a short-term recovery wave.

Economic Releases

• US Personal Income for May 2024 (MoM) - Forecast +0.4%, versus +0.3% previous.
• US Core Personal Consumption Expenditure for May 2024 (MoM) - Forecast +0.1%, versus +0.2% previous.

• Natural gas reversed from resistance zone
• Likely to fall to support level 2.6000

Natural gas recently reversed down from the resistance zone located between the resistance levels 3.200 and 3.0000, which have been reversing the price from the start this year, as can be seen below.

The aforementioned resistance zone was further strengthened by the upper daily Bollinger Band.

Natural gas can be expected to fall further to the next pivotal support 2.6000, target price for the completion of the active impulse wave C of the higher order ABC correction (2) from the start of June.

• Gold reversed from support level 2300.00
• Likely to rise to resistance level 2365.00

Gold recently reversed up from the pivotal support level 2300.00, which has been steadily reversing the price from the end of April, as can be seen below.

The support level 2300.00 was strengthened by the lower daily Bollinger Band and by the 38.2% Fibonacci correction level of the previous sharp upward impulse from March.

Given the clear daily uptrend and the strength of the support level 2300.00, Gold can be expected to rise further toward the next resistance level 2365.00 (which has been reversing the price from the start of June).

The Japanese yen has fallen to its lowest since 1986 against the dollar and a historic low against the euro. Its YTD loss is 12.5%, the third-worst performance after the Nigerian naira and the Egyptian pound among the 36 most liquid global currencies.

This performance of the currency has the monetary and financial authorities in the Land of the Rising Sun publicly displeased. However, their anger is not as strong as it was in October 2022 and November 2023, when powerful currency interventions reversed the trend from decline to growth for months. It was not even as strong as in late April when the USDJPY pair was pushed back more than 4% in five trading days.

The persistent pressure on the yen is the result of fundamental forces. Japan’s monetary policy remains ultrasoft, with the key rate at 0.1% versus the Fed’s 5.25-5.50%, justifying a long-term carry trade. The negativity on this topic is complemented by the disappointment of the portion of medium-term speculators who expected a more aggressive rate hike and winding down of the QE programme instead of one hike and discussion of reduced purchases.

Meanwhile, inflation is again showing signs of acceleration, although it is already near the target of 2% y/y, eating away at the value of yen savings.

We believe that the Japanese authorities’ hands are virtually tied, and they will continue to say more than they do for several reasons. The low key rate is holding down the cost of servicing the largest government debt relative to GDP. The abundant QE programme makes the Bank of Japan the largest buyer of bonds and also indirectly funds the government.

A sharp change in these parameters would be a blow to public finances. Accelerating economic growth and rising tax revenues should offset this negative. However, macroeconomic indicators are weakly improving: the balance of payments is back in surplus by a large margin, but the industrial production index is roughly where it was in the late 1980s, failing to feed into the 55% rise in USDJPY since early 2021.

In addition, currency intervention in support of the yen is burning up foreign exchange reserves, undermining the economy’s long-term sustainability.

Without economic recovery, Japan is not interested in a yen reversal but only in easing volatility so as not to create currency shocks for businesses. At the end of May, the yen’s nominal effective exchange rate was 9.8% lower, which is within the norm, although not a reason for calm.

In our view, the Ministry of Finance and the Bank of Japan will continue to do the bare minimum necessary to contain the yen’s decline unless it suddenly experiences an economic boom that will force the economy to keep from overheating. In this regard, it should not be surprising that USDJPY will continue to move upwards, hitting 38-year highs, erasing the merits of the Plaza Accord.

The U.S. government in early May sanctioned 300 Chinese entities for supplying machine tools and parts to Russia for its war against Ukraine, while in mid-May Russian president Vladimir Putin made a two-day visit to China. In turn I found myself thinking about how tensions between China and the United States could lead to open conflict, specifically over Taiwan.

The likelihood of conflict depends in part on the region's social mood, as reflected in Asia's stock market indexes. When social mood is negative, countries are more likely to behave aggressively.

Tensions in the region have been high. On May 23, China conducted a military drill that sent 111 warplanes plus several navy destroyers and frigates close to Taiwan and its outer islands. China said the drill meant to punish Taiwan for an offense committed by its new head of state, Lai Ching-te, who used his May 20 inauguration speech to suggest that Taiwan is not part of China.

Yet China appeared to end the provocative move after just two days, much like Iran quickly ended its reprisal drone attack on Israel in April. Both examples reflect the desire to limit the scope of new conflicts, consistent with the improving social mood and burgeoning rally in emerging markets.

As our "Bull versus Bear" chart shows, the mood in Taiwan remains positive amid the global tech boom: The Taiwan Index rose right through the military drill. In contrast, the mood in China remains severely negative, as reflected in the Shanghai Composite's long-term pattern. That does raise the risk of Chinese aggression -- or at the least increases the risk of accidents and miscalculations. As Singapore's deputy prime minister Gan Kim Yong recently said at the Nikkei Forum in Tokyo, bad outcomes tend to follow during periods "when each side views the other as an adversary."

Some geopolitical observers frame the Russia-Ukraine conflict as a proxy battle in a new cold war between the United States and its democratic allies, versus the China-dominated axis of autocratic states that includes Russia, North Korea and Iran.

Long-term charts offer perspective.

In 2020, the MSCI Asia-Pacific Ex-Japan Index ended a 26-year sideways pattern, while the MSCI World Ex-U.S. Index ended its own, similar 20-year-long sideways trend. This two-decade period is comparable to the 1929-1949 corrective period in the U.S. stock market. The Covid pandemic erupted toward the end of the triangles much like the 1948-1955 polio epidemic spread across the globe and killed half a million people a year at its peak.

The first proxy battle in the current cold war -- Russia-Ukraine -- erupted two years post-Covid during the correction in the index, much like the first proxy battle -- the Korean War -- in the earlier Cold War erupted in 1950 and lasted until 1953. The Russia-Ukraine war could follow that precedent by ending in a stalemate sooner than most observers imagine, even as the developing bull market in world ex-U.S. stocks contributes to years of relative peace. Then, once China becomes much stronger militarily, the next proxy battle in the cold war rivalry -- perhaps over Taiwan -- would be analogous to the Vietnam War when the U.S. dramatically escalated the fighting in 1965 and pulled out eight years later, as the communist government of North Vietnam in turn took over South Vietnam to reunite the country.

We're watching the region's stock market indexes closely.

If you'd like to learn more about Elliott wave price patterns, including the triangles mentioned above, EWI has made available the entire online version of the book Elliott Wave Principle: Key to Market Behavior.

By Mark Galasiewski | Elliott Wave International