Sample Category Title

EUR/JPY retreated after rising further to 169.38 last week but then recovered. Initial bias remains neutral this week first, and further rise is expected. Break of 169.38 will resume the rally from 164.01, as the second leg of the corrective pattern from 171.58, towards this 171.58. On the downside, 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 158.30) holds, fall 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's fall last week argues that rebound from 0.8529 has completed at 0.8619 already. Initial bias remain the downside this week for 0.8529 support first. Decisive break there will that larger down trend is ready to resume through 0.8491/7 support one. On the upside, above 0.8579 minor resistance will delay the bearish case and turn intraday bias neutral first.

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 stayed in sideway trading above 1.6216 last week and outlook is unchanged. Initial bias remains neutral this week first and further decline is expected. Break of 1.6216 will resume the fall from 1.6742, as the third leg of the corrective pattern from 1.7062. Next target will be 1.6127 support, or further to 100% projection of 1.7062 to 1.6127 from 1.6742 at 1.5807. On the upside, however, break of 1.6381 resistance will bring stronger rebound.

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 from 0.9252 resumed by breaking through 0.9847 resistance last week. Initial bias stays on the upside this week for 61.8% projection of 0.9304 to 0.9847 from 0.9563 at 0.9899. Decisive break there could prompt upside acceleration to 100% projection at 1.0106, which is slightly above 1.0095 key structural resistance. On the downside, below 0.9835 resistance turned support will turn intraday bias neutral and bring consolidations first. But near term outlook will remain bullish as long as 0.9728 support holds, in case of retreat.

In the bigger picture, as long as 0.9563 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 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 20, 2024

Tuesday, May 21, 2024

Wednesday, May 22, 2024

Thursday, May 23, 2024

Friday, May 24, 2024

U.S. Highlights

• After three consecutive months of hotter-than-expected inflation, consumer prices in the U.S. finally broke the heat streak in April, with headline and core inflation decelerating.
• Retail sales also lost momentum in April, with spending coming in flat for the month.
• With the data showing some slowing in economic activity, markets are hopeful that the Federal Reserve will deliver on rate cuts this year. However, Fed Governors are touting that holding rates higher for longer is still on the table, while they wait for more convincing data.

Canadian Highlights

• Housing starts were firm in April, although nowhere near levels required to hit federal targets under their new plan or restore affordability to solid levels, per CMHC’s analysis.
• The weak spring selling season for existing homes continued in April, with sales down month-on-month and benchmark prices flat. However, softness now could set the stage for a rebound later.
• Next week brings the release of the April inflation report, and expectations are that cooler trends will prevail in the Bank of Canada’s preferred metrics.

U.S. – Inflation Breaks Its Heat Streak

A combination of data releases this week pointed to a cooling U.S. economy. Retail sales were weak, and inflation slowed, which revived hopes of a Fed rate cut sooner rather than later. Markets responded to the news with the S&P 500 edging higher (up 1.4% relative to last Friday’s close) and 10-year Treasury yield easing (down 9 basis points), at the time of writing.

The April Consumer Price Index was much anticipated after a string of disappointing readings. Markets hoped the report would snap the string of three consecutive months of hotter-than-expected inflation. Good news – it did (Chart 1). Relative to March, headline inflation in April decelerated on both an annual and monthly basis. The same was true for core inflation. While the reprieve from the string of upside surprises was welcomed, the out turn on its own is not enough to undo the elevated numbers in Q1. Further adding to the price picture, were higher-than-expected readings for producer prices in April, even as March’s figures were revised lower. Given the mixed bag, the central bank is likely to remain on the sidelines awaiting more information before taking any policy action.

This was the position articulated by both Fed Chair Powell and Fed Governor Mester this week. Chair Powell reiterated that the central bank is likely to hold rates at their current level until more compelling data shows that inflation has resumed its downward trek. Governor Mester highlighted that she believes rates are high enough to slow economic activity and bring inflation down. As such, holding rates steady is appropriate.

Data showing that consumers pumped the brakes on retail spending, seemed to support Mester’s position. Retail sales were flat in April, with data for March revised lower. Of note, the “control group” which feeds into the calculation of personal consumption expenditure in GDP, outright declined in April, marking its third decline in four months (Chart 2). The out turn is pointing to slowing consumer momentum, which is a key ingredient to achieving the Fed’s 2% inflation target.

A combination of data releases this week pointed to a cooling U.S. economy. Retail sales were weak, and inflation slowed, which revived hopes of a Fed rate cut sooner rather than later. Markets responded to the news with the S&P 500 edging higher (up 1.4% relative to last Friday’s close) and 10-year Treasury yield easing (down 9 basis points), at the time of writing.

The outlook among small businesses was a bit better in April with the NFIB small business optimism index increasing. Despite the marginal increase, the index remains well below its historical average. Business owners continued to be concerned about inflation and quality of labor issues. Additionally, concerns about sales are rising among small business owners, with fewer of them having raised or planning to raise prices.

Turning to the housing market, signals were mixed. Housing starts rose, while building permits fell in April. The overall tally was boosted by multi-family starts, as single-family starts declined slightly. April’s uptick did not completely undo the decline in March and suggests that builders remain wary as higher home prices and interest rates weigh on buyer demand.

The Fed had much to digest this week as they ponder their next policy move. While the break in inflation’s heat streak is a welcome development, it’s still too early to breathe a sigh of relief. As is stands, markets (and us) expect any rate cut to materialize closer to the end of the year.

Canada – April Showers Rain on Housing

Probably the most significant development for Canadian financial markets this week flowed from south of the border. Weaker-than-expected data sent U.S. bond yields lower, with Canadian yields following suit. Indeed, the benchmark Canadian 10-year yield was down around 10 bps on the week (at time of writing). Otherwise, housing was the name of the economic game this week, with April pulse-checks on new home construction and the state of Canada’s resale market.

Housing starts dipped a tad last month, but the underlying trend remained healthy. There are a few things to note here. First, the trend in starts was about 15% above the pre-pandemic run-rate. Second, this trend has been supported by condo units and purpose-built rental housing. Current condo starts reflect gains in pre-sales several years ago when borrowing costs were lower, while purpose-built rental construction is being supported by steep increases in rents and government programs. Meanwhile, construction of other units, like detached housing, remains at low levels.

Third, even though the trend in starts is healthy, it’s clearly on the decline. This is consistent with our view that starts will fall in 2024, as borrowing and construction costs remain high, and demand for new homes has been notably weak in markets like Toronto recently. Fourth, even this robust pace of homebuilding comes nowhere near levels required to hit the federal government’s target under its new housing plan, or to restore affordability to solid levels, per CMHC’s analysis (Chart 1).

As for the resale market, April was a subdued month. Home sales declined month-on-month while benchmark prices were flat. We were expecting a soft spring market to unfold given stretched affordability conditions and our view that buyers and sellers would wait for more clarity on rates from the Bank of Canada. However, home sales are on track to disappoint even our modest expectations in the second quarter. The upshot of this weaker performance is that pent-up demand continues to build, waiting to be unleashed in the second half of this year and 2025, when rates should be moving lower.

This anticipated rise in home sales will push home prices higher, although strained affordability in key markets will limit the gain. Rising home prices would imply upward pressure on consumer inflation via the shelter component, although this will likely be more of a second half story. In the here and now, we eagerly await next week’s CPI report for April. The consensus expects that the average of the Bank’s preferred core inflation measures (CPI-trim and CPI-median) decelerated from March, continuing the improvements we’ve seen since the beginning of the year (Chart 2). Both we and the markets anticipate that July will be the start of the Bank of Canada’s rate cutting campaign. After all, waiting until July will give the Bank an opportunity to see two more inflation and jobs reports, along with a Business Outlook Survey. However, a significant downside surprise in next week’s report could revive expectations for a June move.

Summary

United States: Let's Wait and See

• There was no shortage of economic data this week, but little did much to change the macro landscape. The April inflation data were a step in the right direction, and if sustained, we see the first rate cut coming in September.
• Next week: Existing Home Sales (Wed.), New Home Sales (Thu.), Durable Goods (Fri.)

International: Mixed Data from Foreign Economies

• In this week's data, U.K. wage growth surprised to the upside, but the underlying details were a bit more encouraging; we maintain our outlook for an initial Bank of England rate cut in August. Japan's GDP contracted more than expected, by 2.0% quarter-over-quarter annualized. Swedish CPI inflation continued its journey back to target, affirming the central bank's decision to ease monetary policy last week. In China, industrial output firmed while retail sales softened, and in India, CPI inflation slowed by less than expected.
• Next week: Canada CPI (Tue.), U.K. CPI and PMIs (Wed. & Thu.), Chilean Central Bank Policy Rate (Thu.)

Interest Rate Watch: Fed Rate Cuts Back on the Table?

• Market participants have significantly dialed back their expectations of the total amount of Fed easing this year, but recent data keep a 25 bps rate cut at the September meeting in play.

Credit Market Insights: Are Businesses Still Managing Their Debt?

• Like the mighty consumer, who has steadfastly supported the U.S. economy over this cycle but appears poised to slow spending as the year progresses, businesses remain on firm footing but show signs of weakness ahead—notably a steep increase in business bankruptcies over the past year.

Topic of the Week: Biden Expands Higher Tariffs on Chinese Imports

• President Biden announced a modification of tariff rates on a selection of U.S. imports from China, including batteries, electric vehicles, semiconductors and solar panels. How much of these goods does the United States import from China?

Full report here.

Next week’s Canadian April inflation report will be the last major data release before the Bank of Canada’s next interest rate decision on June 5th. Absent an upside surprise, we think the soft conditions in the economy and labour markets should warrant a 25-bps interest rate cut from the BoC in June.

In April, we expect year-over-year CPI growth will tick down to 2.7%, from 2.9% in March, edging further towards the BoC’s 2% inflation target despite higher energy prices. Gasoline prices were up 7.6% in April from March, and with roughly a third of the increase coming from the annual increase in the federal carbon tax. But food price growth has been slowing and we look for year-over-year price growth for “core” CPI excluding food and energy products to edge down to 2.6% in April from 2.9% in March. Surging mortgage interest costs (+25% year-over-year in March) are a lagged result of earlier interest rate increases and have been accounting for more than a quarter of total price growth, but the pace of increase is gradually slowing.

BoC policymakers will be more focused on the central bank’s own preferred core measures of inflation (designed to be a better gauge of broader inflation pressures) for further signs of easing. The CPI ‘median’ and ‘trim’ measures averaged 3.0% on a year-over-year basis in March – dropping back to the top end of the BoC’s 1% to 3% inflation target range for the first time since 2021. Very recent trends have been softer with the closely watched 3-month rolling average of month-over-month increases in those measures below the 2% inflation target rate as of March. This cooling has been broad-based, as more items in the CPI basket are seeing lower inflation this year.

Week ahead data watch

StatCan’s advanced indicator suggests retail sales were flat in March, in-line with our own RBC cardholder tracking . Sales at gas stations likely increased by 1.2% as gas prices were up during the month. But unit auto sales were down 3% on a seasonally adjusted basis. Excluding autos and gas stations, core retail sales should have edged higher, but sales volumes (adjusted for inflation) are expected to be lower in March. Our own RBC Consumer Tracker points to stronger spending on essentials in March and weaker discretionary goods sector spending.

• After cool US CPI, attention shifts to UK and Japanese inflation
• Flash PMIs will be watched too amid signs of a rebound in Europe
• Fed to stay in the spotlight as plethora of speakers, minutes on tap
• No fireworks expected from RBNZ policy decision

Will CPI report bring BoC nearer to a rate cut?

Inflation data will dominate the economic agenda once again in the coming week as CPI numbers are due in Canada, Japan and the United Kingdom. The Canadian figures are up first on Tuesday. Prior to that, it will be an unusually quiet start to the week as several markets will be closed on Monday.

Price pressures appear to be on the wane again in Canada after the downward trend in the various CPI metrics flatlined in the second half of 2023. The underlying gauges – CPI trim, median and common – eased for the third straight month in March. The headline rate did tick up slightly to 2.8%, but this isn’t seen as anything worrying and wage growth has also been moderating since the beginning of the year.

The Bank of Canada meets on June 5 and there is around a 40% probability of a 25-basis-point cut. A softer-than-expected CPI report for April could push those odds closer to 50%. Nevertheless, even if there continues to be good progress in reining in inflation, a rate cut is more likely in July.

For the Canadian dollar, weaker inflation data could come as a setback for its one-month long uptrend against the greenback. But in the bigger picture, Fed rate cut expectations will be a bigger force in deciding the loonie’s fate. Investors will also be watching retail sales numbers for March out on Friday.

UK inflation to plummet as BoE hints at cut

The UK will publish its inflation stats a day later on Wednesday. Headline CPI fell to 3.2% in March to the lowest since September 2021. There’s been an encouraging drop in core CPI too in the first few months of 2023 and April is expected to be another good month for UK inflation. The headline rate is projected to fall to around the Bank of England’s target of 2.0%, mainly on the back of the base effect from the changes to the energy price cap in the UK.

Policymakers are wary that inflation may creep back up again once this effect begins to wear off, but there have been some hints from the BoE that interest rates could still be cut during the summer. Investors have lately started to ramp up their bets of a cut as early as June, with the odds rising to just over 50%.

There will be one more CPI report before the June policy meeting so should the two releases conform to expectations, the BoE may decide not to wait until August before slashing rates. The danger is that economic momentum seems to be recovering much faster than anticipated, and if consumer confidence gets a boost as the cost-of-living crisis eases further, there may not be much room for large rate cuts, especially as wage pressures have yet to subside substantially.

Thursday’s flash PMIs for May will likely support the narrative of rebounding growth, while Friday’s retail sales data will be vital too for underscoring the improving sentiment for the UK economy.

The brighter outlook could keep the pound’s current rebound versus the US dollar intact even as inflation heads lower, as long as the Fed is also seen to be cutting rates in the coming months.

BoJ hike in doubt as inflation is easing

Over in Japan, lower inflation will likely not be so welcome when the April report is released on Friday. Core CPI fell from 2.8% to 2.6% in March and is forecast to drop to 2.2% in April.

An inflation print too close to 2.0% combined with shrinking GDP would make it difficult for the Bank of Japan to raise interest rates again anytime soon. Investors see the BoJ hiking by at least a further 20bps in 2024 but not before September.

The flash PMIs on Thursday, however, might shed a more positive light on the economy. But that might not necessarily convince investors much that additional hikes are around the corner, and whether the yen can extend its recent bounce will depend on the dollar staying on the backfoot.

Fed hawks don’t seem to be budging

In America, economic data will take a backseat, with only existing home sales (Wednesday), new home sales (Thursday), and durable goods orders (Friday) attracting some attention. Not to forget, however, Thursday’s PMI surveys that will probably be scrutinized for more clues that the US economy is losing some steam, or at the very least, that input costs are rising at a slower pace.

Despite the lighter agenda, Fed rate cut expectations will remain front and centre, as the minutes of the May policy meeting are due on Wednesday, while FOMC officials will be out in force over the coming week, providing more up-to-date views than the minutes.

There’s been little deviation by policymakers from their hawkish remarks post the CPI report, and if there’s more ‘higher for longer’ rhetoric next week, the US dollar may recoup some of its recent losses and yields may edge higher too.

For equities, though, the absence of a dialling down of the hawkish Fed talk could deal a blow to Wall Street’s latest bid for fresh record highs.

RBNZ to stay on pause but focus is on timing

The Reserve Bank of New Zealand is the only major central bank that meets for a policy decision next week. Although inflation in New Zealand has been gradually on the decline over the past year, it hasn’t been receding as fast as policymakers would like.

While the cooldown in the labour market and falling inflation expectations bode well for the outlook, the RBNZ is concerned about the stickiness in non-tradable inflation. Hence, policymakers are not expected to open the door to a summer or autumn rate cut as they hold the cash rate at 5.50% on Wednesday.

Yet, there is a slight possibility that the RBNZ might bring forward the timing of its projected rate cut from the second quarter of 2025 to the first quarter or earlier when it publishes its updated Monetary Policy Statement, and this alone could be interpreted as a dovish tilt.

For the New Zealand dollar, however, even if it were to take a hit from revised forecasts pointing to an earlier cut, there is scope for some bullish correction in the future, as market expectations remain significantly far off, with investors betting on a cut starting in October.

Kiwi traders will also be keeping an eye on quarterly retail sales figures due on Thursday.

Will Eurozone recovery derail ECB cuts?  

In the euro area, the flash PMIs released on Thursday will be the main focal point. Both the services and manufacturing PMIs are forecast to have increased slightly in May’s preliminary estimates, with the composite PMI increasing further above 50.0.

The Eurozone exited a shallow recession in the first quarter and growth could accelerate further in the coming months. So whilst a rate cut in June seems like a done deal, there’s a risk that stronger-than-expected numbers might weigh on ECB bets beyond June, which would be positive for the euro.

However, if there’s a softer set of PMI readings, the euro’s rebound versus the dollar could falter, as investors would price in deeper rate cuts.

Short Term Elliott Wave in Silver (XAGUSD) suggests the metal rallies in impulsive structure from 10.3.2023 low. Up from there, wave (1) ended at 25.91 and dip sin wave (2) ended at 21.94. The metal then extended higher in wave (3) towards 29.79. Pullback in wave (4) ended at 26.02 as the 1 hour chart below shows. The metal has resumed higher in wave (5). Internal subdivision of wave (5) is unfolding as a 5 waves impulse Elliott Wave structure.

Up from wave (4), wave ((i)) ended at 27.51 and pullback in wave ((ii)) ended at 26.99. Silver then extended higher in wave ((iii)) towards 28.76 and pullback in wave ((iv)) ended at 27.94. The metal extended higher again in wave ((v)). Up from wave ((iv)), wave (i) ended at 29.18 and pullback in wave (ii) ended at 28.5. The metal extended higher in wave (iii) towards 29.84 and pullback in wave (iv) ended at 29.31. Expect the metal to continue higher to complete wave (v) of ((v)) of 1. Then it should pullback in wave 2 to correct cycle from 5.2.2024 low before it resumes higher. Near term, as far as pivot at 26.02 low stays intact, expect pullback to find support in 3, 7, 11 swing for further upside.

XAGUSD 60 Minutes Elliott Wave Chart

Silver (XAGUSD) Elliott Wave Video

https://www.youtube.com/watch?v=K9vH7LgVw3Q