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USD/CAD rebounded strong last week but reversed after hitting 1.3742. Initial bias is turned neutral this week first. Break 1.3742 will affirm the case that correction from 1.3845 has completed at 1.3589. Further rally would then be seen to retest 1.3845 high. However, sustained trading below 55 D EMA (now at 1.3635) will argue that whole rise from 1.3176 has completed already.

In the bigger picture, price actions from 1.3976 (2022 high) are viewed as a corrective pattern. In case of another fall, strong support should emerge above 1.2947 resistance turned support to bring rebound. Firm break of 1.3976 will confirm up resumption of whole up trend from 1.2005 (2021 low). Next target is 61.8% projection of 1.2401 to 1.3976 from 1.3176 at 1.4149.

In the longer term picture, price actions from 1.4689 (2016 high) are seen as a consolidation pattern, which might have completed at 1.2005. That is, up trend from 0.9506 (2007 low) is expected to resume at a later stage. This will remain the favored case as long as 1.2947 resistance turned support holds.

GBP/JPY's rally from 191.34 continued last week and outlook is unchanged. This rise is still seen as the second leg of the corrective pattern from 200.53. Initial bias stays on the upside for 100% projection of 191.34 to 180.07 from 195.02 at 200.75. But upside should be limited there. On the downside, below 198.25 minor support will turn intraday bias neutral first. Further break of 197.07 will argue that the third leg has started, and target 191.34 support and possibly below.

In the bigger picture, a medium term top could be in place at 200.53 after breaching 199.80 long term fibonacci level. As long as 55 W EMA (now at 183.92) holds, price actions from there is seen as correcting the rise from 178.32 only. However, sustained break of 55 W EMA will argue that larger scale correction is underway and target 178.32 support.

In the longer term picture, rise from 122.75 (2016 low) is seen as the third leg of the pattern from 116.83 (2011 low). Focus is now on 61.8% retracement of 251.09 (2007 high) to 116.83 at 199.80. Decisive break there would pave the way back to 251.09 in the long term.

EUR/JPY's rise from 164.01 extended by breaking through 169.38 resistance last week. This rally is seen as the second leg of the corrective pattern from 171.58. Initial bias remains on the upside for 61.8% projection of 164.01 to 169.38 from 167.31 at 170.62, and then 171.58 high. On the downside, break of 169.05 minor support will intraday bias neutral first. Further break of 167.31 should turn bias back to the downside to start the third leg towards 164.01.

In the bigger picture, a medium top could be formed at 171.58 after brief breach of 169.96 (2008 high). As long as 55 W EMA (now at 158.72) holds, price actions from there is seen as correcting the rise from 153.15 only. However, sustained break of 55 W EMA will argue that larger scale correction is underway and target 153.15 support.

In the long term picture, rise from 114.42 (2020 low) is seen as the third leg of the whole up trend from 94.11 (2012 low). 100% projection of 94.11 to 149.76 from 114.42 at 170.07 was already met but there is no signal of reversal yet. Firm break of 170.07 will target 138.2% projection at 191.32. This will remain the favored case as long as 153.15 support holds.

EUR/GBP fell to as low as 0.8498 last week but recovered just ahead of 0.8491/7 support zone. Initial bias is turned neutral this week for some consolidations first. Further decline is expected as long as 55 D EMA (now at 0.8564) holds. Decisive break of 0.8491/7 will resume larger down trend to 0.8376 projection level next.

In the bigger picture, outlook remains bearish as EUR/GBP is capped below medium term falling trendline. That is, down trend from 0.9267 (2022 high) is still in progress. Firm break of 0.8491/7 will target 100% projection of 0.8764 to 0.8497 from 0.8643 at 0.8376.

In the long term picture, price action from 0.9499 (2020 high) is seen as part of the long term range pattern from 0.9799 (2008 high). Range trading should continue between 0.8201 and 0.9499, until there is clear signal of imminent breakout.

EUR/AUD's extended rebound last week suggests short term bottoming at 1.6211, on bullish convergence condition in 4H MACD. Intraday bias stays mildly on the upside this week. Sustained trading above 55 D EMA (now at 1.6412) will argue that fall from 1.6742 has completed, and turn near term outlook bullish. On the downside, though, below 1.6322 minor support will bring retest of 1.6211 support instead.

In the bigger picture, fall from 1.7062 medium term top is seen as a correction to the up trend from 1.4281 (2022 low). In case of deeper fall, strong support is expected around 1.5846 and 38.2% retracement of 1.4281 to 1.7062 at 1.6000 to bring rebound. Break of 1.7062 is in favor as a later stage.

In the longer term picture, price actions from 1.9799 (2020 high) are seen as a long term decline at the same scale as the rise from 1.1602 (2012 low). Rebound from 1.4281 is seen as the second leg. As long as 55 M EMA (now at 1.5962) holds, this second leg could still extend higher. However, sustained trading below 55 M EMA will open up the bearish case for extending the decline through 1.4281 low.

EUR/CHF's rally continued last week despite some brief interim retreat. Initial bias is now on the upside this week. Current rise from 0.9252 should target 100% projection of 0.9304 to 0.9847 from 0.9563 at 1.0106, which is slightly above 1.0095 key structural resistance. On the downside,e below 0.9880 minor support will turn intraday bias neutral and bring consolidations first.

In the bigger picture, as long as 0.9728 support holds, rise from 0.9252 medium term bottom is still in favor to continue. Next target is 38.2% retracement of 1.2004 (2018 high) to 0.9252 (2023 low) at 1.0303, even just as a correction to the down trend from 1.2004.

In the long term picture, fall from 1.2004 (2018 high) is part of the multi-decade down trend. Firm break of 1.0095 resistance is needed to be the first sign of long term bottoming. Otherwise, outlook will remain bearish.

Monday, May 27, 2024

Tuesday, May 28, 2024

Wednesday, May 29, 2024

Thursday, May 30, 2024

Friday, May 31, 2024

U.S. Highlights

• U.S. equity markets briefly touched a new all-time high mid-week, while measures of market volatility dipped to multi-year lows.
• Minutes from the April 30th-May 1st FOMC meeting struck a more hawkish tone, resulting in markets now pricing in just 34 basis-points of cuts by year-end.
• Both new and existing home sales dipped in April, alongside an uptick in mortgage rates.

Canadian Highlights

• Canadian inflation made waves this week as lower-than-expected price growth brought much needed relief to consumers.
• Both headline and the Bank of Canada’s (BoC’s) core inflation metrics are now firmly within the Bank’s 1% to 3% target, with other inflation measures continuing to show improvement.
• March retail sales showed that consumers pulled back for the second straight month, weighed down by high interest rates.

U.S. – FOMC Continues to Preach Patience

With nothing in the way of top tier U.S. economic data releases, global financial markets started the week eerily calm. Equity markets continued to inch higher, briefly touching a new all-time high by mid-week – bolstered by another strong earnings release from the AI-chip behemoth Nvidia. Wall Street’s fear gauge, the ‘VIX’ index, dipped to the lowest level since before the pandemic, while the comparable bond market measure also slipped to a level not seen since before the tightening cycle began over two years ago. However, the mood soured a bit as the week progressed, as the minutes of the April 30th-May 1st FOMC meeting struck a more hawkish tone. However, equities firmed on Friday and look to end the week relatively unchanged. Meanwhile, the yield curve inversion widened to its largest margin of the year, as investors pushed out the timing of the first Fed rate cut, with just 34 basis points of cuts now priced by year-end.

Perhaps no metric better captures investors sentiment than the Chicago Federal Reserve’s measure of financial conditions, which is currently at the lowest level since January 2022 (Chart 1). With the domestic economy still strong and perceived financial conditions no tighter today than before the tightening cycle began, it’s no wonder the latest Fed minutes showed ‘many’ participants voicing uncertainty about the degree of restrictiveness of today’s policy stance. The minutes also highlighted that ‘various participants noted a willingness to tighten policy further should risks to inflation materialized in a way that such action became appropriate’.

On the surface, the above sentence reads very hawkish. However, it’s worth noting that the April 30th-May 1st meeting occurred before the release of the April CPI data, which ultimately showed some cooling in inflationary pressures relative to the three months prior. While certainly a step in the right direction, most voting FOMC members who have spoken since the CPI release have emphasized the importance of patience and allowing more time for restrictive monetary policy to do its work.

Federal Reserve Governor Christopher Waller went as far as saying he would need to see ‘several’ more months of ‘good’ inflation readings before lowering rates – implying the Fed is very likely on hold until at least September. But at this point, even a September cut seems optimistic. Between now and that meeting, Fed officials will see four more inflation reports. Even assuming all four readings come in slightly softer than April, the 3-and-6-month annualized trends on core PCE inflation are still likely to be above their respective troughs reached in December of last year. If the Fed didn’t cut then, it’s unlikely they’d would be cutting in September, unless there’s a significant deterioration in the labor market and/or broader economy.

The only noteworthy data releases this week were refreshed readings of new and existing home sales. Both pulled back in April – likely in response to the uptick in mortgage rates last month (Chart 2). While the 30-year fixed mortgage rate has since retraced a bit, affordability remains very pour by historical standards. With longer-term yields expected to remain elevated through year-end, it’s unlikely we see any meaningful pick-up in sales activity in 2024.

Canada – April Showers Rain on Housing

Canadian inflation made waves this week as lower-than-expected price growth showed consumers are getting some much-needed relief. Inflation’s march towards 2% and another weak retail sales print raised odds that the Bank of Canada (BoC) would cut its policy rate on June 5th. This pushed government of Canada yields lower, sending the loonie down as well.

Headline CPI inflation continued to ease, coming in at 2.7% year-on-year (y/y) in April (from 2.9% y/y last month). More importantly, the average of the BoC’s core inflation rates came in at 2.8% y/y, down from 3% y/y in March. This means that both headline and core inflation are firmly within the BoC’s comfort band of 1% to 3%. The deceleration appears to be following the BoC’s former preferred inflation gauge (CPIX), which dropped below 3% last September and now sits at just 1.6% y/y (Chart 1). As we have written in the past (link), the BoC’s current preferred inflation metrics peg inflation at a more elevated pace than what other traditional inflation measures would suggest.

The BoC has broadened the inflation measures it uses when setting monetary policy beyond CPI median and trimmed mean. One of the new measures the Bank has been referencing of late is the distribution of inflation, with specific focus on the percent of CPI items growing at 3% or higher. At the beginning of 2024, approximately half of the distribution met this condition – well above the historical average. This was one of the reasons the BoC gave for keeping the policy rate higher for longer. But over the last few months, the share of items in the CPI basket with high inflation has fallen significantly. And following the April CPI release, this share is now back to its historical average (Chart 2).

Further underscoring this view was weakness emanating from the Canadian consumer. Real retail sales posted a negative print for March, the second straight month of contraction. There was a notable drop in spending at furniture/appliance and clothing retailers. Despite StatCan’s flash estimate for a rebound in April, our own tracking shows that momentum heading into the second quarter is fading. Lackluster consumer spending supports the view that domestic demand isn’t expected to reignite Canadian inflation – this is counter to what we have seen in the U.S. over 2024.

We have been arguing for some time that the foundation for rate cuts in Canada has been established. Canadian economic growth has underperformed its potential for the better part of the last 18 months. Weak domestic demand has paved the way for inflation to continue along the path towards 2%. And while we could understand it if the BoC decided to cut in June, the Bank has not telegraphed anything so far. With no speeches lined up between now and the next interest rate decision, we believe the BoC would be best served using the June meeting to tee up a cut in July. This would be the most logical move. One that balances the need to cut to support the economy, while reducing financial market volatility given that markets are fully priced for July.

Summary

United States: High Mortgage Rates Burden Homebuyers

• Homebuying retreated in April following a leg up in mortgage rates. Meanwhile, durable goods orders surprised to the upside, suggesting the manufacturing industry is on better footing.
• Next week: Consumer Confidence (Tue.), Personal Income & Spending (Fri.)

International: Foreign Economies Show Mixed Inflation Trends amid Ongoing Economic Expansion

• In this week's price news, Canada's underlying inflation slowed more than forecast, which we think keeps the Bank of Canada on course for June easing. U.K. inflation slowed less than expected, which should see the Bank of England lean toward August or later for an initial rate cut. Separately, May composite PMI figures for the Eurozone and United Kingdom remained comfortably in expansion territory, suggesting gradually strengthening recoveries as the year progresses.
• Next week: China PMIs (Fri.), Eurozone CPI (Fri.), Canada GDP (Fri.)

Interest Rate Watch: Higher for Longer Mantra on Repeat in Week Replete with Fed Speak

• The latest FOMC meeting minutes and a flock of Fed officials on the speaking circuit this week provided additional evidence that rate cuts this summer are not likely. On balance, the Fed communication channel conveyed a sense that monetary policy was transmitting through the economy at a slower pace than previous cycles and a desire for more patience in order to gain certainty that inflation is on its way to 2%.

Credit Market Insights: Credit Card Delinquencies Continue to Rise in Q1

• All eyes have been on households' balance sheets as the consumer has continued to spend at an unexpected pace in the face of elevated interest rates. Recent data have suggested that cracks in households' financial situations are beginning to emerge, especially for lower income households.

Topic of the Week: Drivers... Start Your Engines

• Monday is a federal holiday in the United States. In addition to being a time of remembrance, Memorial Day also marks the un-official start to summer. In our Topic of the Week, we describe what a trip to the lake or the beach has in common with the big races in Indianapolis and Charlotte this weekend and what it all has to do with earnings.

Full report here.

• Iran is still quiet about reasons behind the helicopter accident
• Saudi Arabia’s King health scare turns focus on Crown Prince
• Oil still under pressure; a new catalyst could reverse the recent trend

Iranian Presidential elections to be held on June 28

News of the helicopter accident, which resulted in the loss of several senior Iranian officials including President Raisi, caused a sudden chill in market participants. However, the newsflow since Sunday has been subdued, allowing the oil price to resume its recent bearish trend.

An interim president has already been appointed and elections have been set for June 28. The direction of the country is unlikely to change regardless of the next president as Iran's supreme leader, Ali Khamenei, is still calling the shots. However, the new president could become a very strong candidate for the top spot when Khamenei decides to step down.

Putting the domestic developments aside, it is interesting that the Iranian authorities have been quiet about the reasons behind the helicopter accident and Israel. The feud between Iran and Israel exists for decades but since the October Hamas attack, it took a turn for the worse. Israel’s alleged attack on Iran's consulate in Syria in early April resulted in a surprising, but ineffective, drone and missile attack by Iran.

It will not be surprising if, once the dust settles, Iranian officials raise their rhetoric against Israel, implying its possible involvement in the accident. Such commentary will not shock the market unless the Iranian officials start talking about a possible retaliation, or even the blockade of the Hormuz strait. Such a move would exceed the mostly symbolic Iranian reaction after the Consulate attack, increasing concerns about a direct confrontation between Iran and Israel and threaten the stability of the entire Middle East.

Saudi Arabia’s King health scare

The health scare of the King of Saudi Arabia has attracted some attention. King Salman has been in charge since 2015 when his half-brother passed away due to pneumonia, but he has been effectively running the country since 2012. King Salman is currently being treated for a lung infection, potentially opening the door to an early transfer of power to his son and current Crown Prince, Mohammed bin Salman (MBS).

The Crown Prince, who also holds the position of the Prime Minister since 2017, controls Saudi Arabia's vast oil sector and has been gradually implementing his Vision 2030 plan for reducing the Saudi economy’s reliance on oil. Following the 2017-19 anticorruption campaign, the Crown Prince is presumed to have been centralizing political power as he prepares to officially take over in the near future.

While this leadership style is not fully endorsed by the West, he has managed to maintain a good relationship with both the US and Russia. In addition, there is an ongoing process mediated by the US to normalize the relationship with Israel. Whenever he officially takes over, it will be the first time that the King of Saudi Arabia will not be one of the sons of the nation's founder, King Abdulaziz.

Oil losing momentum since early April

The unexpected strength of the US economy, the continued oil production cuts by most OPEC countries and concerns about Iran properly joining in the Israel-Hamas conflict helped oil climb from the mid-December 2023 lows to the 2024 high of $87.85. Since early April though, oil prices have been on a downward trend as the market is trying to guess the extent of the recent soft patch in the US and the Fed’s likely response.

Developments in both Iran and Saudi Arabia could turn the tide around for oil. Should Iran decide to blame Israel for the helicopter accident and retaliate, possibly with another drone attack and even a blockade of the strait of Hormuz, and if Saudi Arabia experiences an actual change in command, then the oil market could face a new reality. Coupled with some degree of optimism about China's recovery, oil prices could start to head north, creating another headache for the central banks on the brink of announcing rate cuts.