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USD/CAD's correction from 1.3845 extended to 1.3608 last week, but recovered after drawing support from 55 D EMA (now at 1.3616). Initial bias is neutral this week first. Strong rebound from current level, followed by break of 1.3782 resistance, will retain near term bullishness. Further break of 1.3845 will resume larger rise from 1.3176 towards 1.3976 key resistance next. However, sustained trading below 55 D EMA will argue that whole rise from 1.3176 has completed already, and target 1.3477 support next.

In the bigger picture, price actions from 1.3976 (2022 high) are viewed as a corrective pattern only. 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 reversed after rising to 200.53 last week and fell sharply since then. Initial bias remains on the downside this week. Sustained break of 55 D EMA (now at 191.34) will extend the fall from 200.53, to 61.8% retracement of 178.32 to 200.53 at 186.80. On the upside, break of 195.73 minor resistance will turn intraday bias neutral.

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 182.98) holds, fall 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 reversed after initial rise to 171.58 last week and fell sharply. Initial bias remains on the downside this week. Sustained break of 55 D EMA (now at 163.94) will extend the fall from 171.58 to 61.8% retracement of 153.15 to 171.58 at 160.19. On the upside, above 167.37 will turn bias neutral.

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 157.53) 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 not signal 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 rebounded strongly last week after initial fall to 0.8529. Initial bias remains neutral this week with focus on 0.8582 resistance. Further decline is expected as long as 0.8582 resistance holds. Below 0.8529 will target 0.8491/7 support zone. However, decisive break of 0.8582 will bring stronger rise back to 0.8643 resistance instead.

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 fall from 1.6742 continued last week despite interim strong rebound. Initial bias stays on the downside this week. This decline is seen as the third leg of the corrective pattern from 1.7062. Further fall should be seen to expected to 1.6127 support, or further to 100% projection of 1.7062 to 1.6127 from 1.6742 at 1.5807. For now, risk will remain on the downside as long as 1.6494 resistance holds, in case of recovery.

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 1.5950) 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 rebound from 0.9563 should have completed at 0.9835 last week after rejection by 0.9847 resistance. Initial bias stays on the downside this week. Fall from 0.9835 is seen as the third leg of the corrective pattern from 0.9847, and should target 0.9563 support. For now, risk will stay on the downside as long as 0.9835 resistance holds, in case of recovery.

In the bigger picture, as long as 0.9563 support holds, rise from 0.9252 medium term bottom is still in favor to continue. Break of 0.9847 resistance will target 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.

U.S. Highlights

• The Federal Reserve held the policy rate steady this week and signaled that rates will likely remain higher for longer.
• The U.S. jobs engine slowed in April, adding 175k jobs. The unemployment rate rose modestly to a still low 3.9%.
• Last year’s productivity surge has come to an end. Productivity growth slowed to a stall speed in Q1, while unit labor costs turned sharply higher.

Canadian Highlights

• The Canadian economy continued to grow in February, but the momentum after January’s surge is beginning to wane. Still, first quarter GDP growth is on pace for a sturdy print.
• Trade data confirms that strength this quarter will be short-lived, with net trade posing a headwind to Q1 growth.
• The debate between a Bank of Canada rate cut in June or July cut rages on. We think a July cut is supported by fundamentals.

U.S. – Holding Steady for Longer

It was a very busy week on the economic data calendar, but the two headliners were a pulse check on the state of the labor market and the Federal Reserve’s interest rate announcement. Policymakers delivered no surprises this week, with the FOMC voting unanimously to hold the policy rate steady at the current target range of 5.25% - 5.5%. The same can’t be said for April’s employment report, which showed job growth coming in handily below expectations. Financial markets greeted the news positively, with the S&P 500 recouping its losses from earlier in the week, while the 10-year Treasury yield was down 14-bps to 4.53% at the time of writing.

It’s not that long ago that investors were expecting the first rate cut to come at this very meeting. But after three months of hotter-than-expected inflation readings, the FOMC appears to be on hold indefinitely, as it looks for “greater confidence that inflation is moving sustainability back towards 2%”. What exactly that means remains to be seen, but it will likely require a further rebalancing in the labor market, which ultimately leads to more sustained downward pressure on wage growth.

From that perspective, April’s jobs data was a Goldilocks report. Non-farm payrolls rose by 175k while the unemployment rate ticked up to 3.9%. Importantly, average hourly earnings cooled more than expected, with the 12-month change slipping to a near three-year low of 3.9% (Chart 1).

While the softening in wage growth will come as welcome news for Fed officials, it needs to be weighed against other measures of employee compensation, particularly the Employment Cost Index – the Fed’s preferred wage measure – which showed an unexpected acceleration. Moreover, after rising by a robust 1.5% in 2023, growth in non-farm productivity slipped to a near stall speed in Q1. Taken alongside last quarter’s uptick hourly compensation, unit labor costs (ULC) also rose sharply higher (Chart 2). This has important implications for inflation. ULC can best be thought of as a productivity adjusted cost of labor, making it a useful gauge on the extent to which the nominal pace of compensation growth is running above (or below) what would be consistent with achieving 2% inflation. However, with the Q1 reading not only turning higher but also running at an annualized rate that’s more than double where it should otherwise settle, provides yet another signal that progress on the inflation front has indeed stalled.

In the press conference following the release of the FOMC statement, Chair Powell noted that while ongoing progress is “not assured” he still expects that over the course of the year “inflation will move back down”. But Powell also emphasized that he’s become less confident in that forecast. Moreover, when asked if today’s rates were “sufficiently restrictive” Powell instead described them as only “restrictive”. While the Chair said further rate hikes are “unlikely”, the refusal to characterize today’s stance as sufficiently restrictive is an implicit acknowledgment that further policy firming cannot be ruled out. At this point, we view this as highly unlikely. But given the economy’s sustained strength alongside the recent stalling on inflation, we now expect the Fed to remain on hold until December.

Canada – A GDP Growth Blip

Canadian markets took their cue from events south of the border this week as the Federal Reserve policy meeting and payrolls data took center stage. The two and ten-year Canada yields fell by around 15 basis points (bps), while the CAD finished the week flat after being down almost one cent to the U.S. Dollar mid-week. The dovish messaging from the Fed trumped Canada’s weaker-than-expected economic growth report for February which saw GDP advance at a below-consensus 0.2% month-on-month (m/m).

Even though February growth disappointed expectations, it still builds on the robust growth from January. It also firms estimates that first-quarter GDP will come in stronger (at between 2-2.5%) than what was expected earlier this year. It is important to contextualize Canadian GDP growth over the first two months of the year. On one hand, growth over January and February was the strongest over a two-month period since exactly a year ago. However, the more important takeaway is that guidance for flat GDP in March signals that this rebound is unlikely to last. March’s soft handoff into Q2 suggests the re-emergence of weaker, below-trend growth patterns (Chart 1). Overall, Canada’s economy has weathered high interest rates relatively well, which has allowed the BoC to keep interest rates elevated to fight the last leg of the inflation battle.

Trade data for the month of March also confirms that the healthy growth expected in the first quarter growth will likely be short-lived. As we’ve seen in the past several quarters, net trade has been a major swing factor on the expenditure-side GDP readings. A sharp reversal in export volumes for March coupled with trade revisions for February now put net trade tracking as a headwind to growth (Chart 2).

As the dust settles on this week’s events, markets are slightly favouring the first BoC cut to occur at their next meeting in June. The Bank continues to acknowledge that they are growing more confident that inflation is on sustainable path back to 2 percent. We think the BoC can justify cutting rates in July based on economic fundamentals and will allow the Bank more time to analyze domestic data prints to confirm trends are durable. At the same time, the resilience in the U.S. economy has the Fed in no rush to lower policy rates–we’ve penciled in the first U.S. rate cut to take place in December.

We are now at a crossroads where a divergence between Canadian and U.S. interest rates could put further downward pressure on the Canadian dollar. Macklem’s remarks this week reiterated that policy setting in Canada is independent of U.S. developments despite the ties between the two countries. In any event, while the BoC may cut slowly at the beginning, we expect the Bank to accelerate the pace towards the end of this year. This would match when we think the Fed will be comfortable cutting rates, limiting policy rate differentials and keeping a floor under the loonie.

Summary

United States: April Brings Signs of Cooling in Economic Growth

• Q2 began on a softer note. Employment growth was sturdy in April, but the 175K jobs added was the smallest gain since October. The below-consensus gain was accompanied by an increase in the unemployment rate, which rose to 3.9%. Meanwhile, an unexpected acceleration in the Employment Cost Index was the latest indication that progress on inflation is plateauing. As such, the FOMC is likely to remain in a holding pattern in the months ahead.
• Next week: SLOOS (Mon.), Consumer Credit (Tue.), Consumer Sentiment (Fri.)

International: Eurozone Growth Gradually Recovering, Eurozone Inflation Gradually Slowing

• Eurozone Q1 GDP growth came in stronger than expected this week, and the April CPI showed further disinflation progress as the core CPI slowed to 2.7% year-over-year. Given an overall gradual economic recovery and ebbing inflation, we still see the European Central Bank as on course to deliver an initial 25 bps policy rate cut in June.
• Next week: Riksbank Policy Rate (Wed.), Bank of England Policy Rate (Thu.), Banxico Policy Rate (Thu.)

Interest Rate Watch: Stalling in Inflation Leaves FOMC Stalling for Time

• As universally expected, the FOMC voted unanimously to leave the target range for the federal funds rate unchanged at 5.25%-5.50% at its meeting this week. In our view, the statement and press conference suggested the Committee is not in any rush to cut rates.

Credit Market Insights: Corporate Bonds Signal Optimism

• The U.S. economy has shown remarkable resilience in the face of high interest rates. This has been reflected in the corporate bond market, which continues to signal optimism regarding future economic growth.

Topic of the Week: Yen Falls to 34-Year Low, Prompting Possible BoJ Intervention

• On Monday, the Japanese yen slid to a 34-year low against the dollar, prompting what appeared to be intervention by Japan's Ministry of Finance and central bank (BoJ) to support the beleaguered currency.

Full report here.

The Canadian labour market report will be watched closely next Friday for further signs of deterioration in the country’s economic backdrop.

We look for an increase of 15,000 workers after a small 2,000 drop in employment in March. But the unemployment rate will hold steady at 6.1%—its highest level since January 2022 and up from 5.8% in February. Employment numbers have mostly continued to edge higher, but not fast enough to keep up with rapid labour force growth. The unemployment rate is up a full percentage point from a year ago. The uptick in unemployment to date has been driven by unusually longer job search times for new labour market entrants—particularly students—rather than job losses. But permanent layoffs have also begun rising more significantly and were up 40% from a year ago in March.

The Bank of Canada will be watching for signs of whether softening labour markets are pushing wage growth lower. Average hourly earnings were still more than 5% above year-ago levels in March, but other indicators of wage growth in Canada have been more mixed. Separately released payroll employment numbers showed wage growth running about two percentage points lower than in the Labour Force Survey. Lower job openings flag further slowing in hiring demand and business surveys widely point to slower wage growth ahead.

Monday, May 6, 2024

Tuesday, May 7, 2024

Wednesday, May 8, 2024

Thursday, May 9, 2024

Friday, May 10, 2024