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EUR/AUD rose further to 1.6444 last week and breached 1.6434 resistance, but couldn't close above. Initial bias remains neutral this week first. On the upside, decisive break of 1.6434 resistance will carry larger bullish implications. However, considering bearish divergence condition in 4H MACD, firm break of 1.6216 should confirm short term topping, after rejection by 1.6389/6434 cluster resistance zone. Intraday bias will be back on the downside in this case, to 1.6033 support and possibly below.

In the bigger picture, focus stays on 1.6389/6434 cluster resistance (38.2% retracement of 1.9799 to 1.4281 at 1.6389). Sustained break there should confirm that whole down trend from 1.9799 (2020 high) has completed. Further rally should then be seen to 61.8% retracement at 1.7691. However, rejection by this cluster resistance will make medium term outlook neutral at best.

In the longer term picture, the strong break above 55 M EMA (now at 1.5646) raised the chance of bullish trend reversal. Firm break of 1.6434 resistance should confirm that the down trend from 1.9799 has completed. It's still early to decide if the up trend from 1.1602 (2012 low) is resuming. An assessment will be made after rise from 1.4281 reveals more of its structure.

EUR/CHF's extended decline last week argues that rebound from 0.9704 might have completed at 0.9995 already. More importantly, the corrective pattern from 1.0095 might be extending with another falling leg. Deeper decline is expected this week as long as 0.9889 resistance holds, towards 0.9704 support. On the upside, though, break of 0.9889 minor resistance will turn intraday bias back to the upside for stronger rebound.

In the bigger picture, prior rejection by 55 W EMA (now at 0.9989) and 38.2% retracement of 1.1149 to 0.9407 at 1.0072 suggests that medium term outlook is staying bearish. That is, down trend from 1.2004 is not completed yet and is in favor to resume through 0.9407 at a later stage. However, decisive break of 1.0095 resistance will raise the chance of bullish trend reversal. Rise from 0.9407 should then target 1.0505 cluster resistance (2020 low at 1.0505, 61.8% retracement of 1.1149 to 0.9407 at 1.1484).

In the long term picture, it's still way too early too call for bullish trend reversal with upside capped well below 55 M EMA and 1.0505 support turned resistance (2020 low). The multi-decade down trend could still continue.

Dollar fell to its lowest level of the year and breached a critical support, after being under pressure for most of the week. Yet, it staged a recovery towards the end, closing mixed only. Decelerating US inflation data was welcomed by risk market investors, but a lower terminal rate may not necessarily lead to an earlier rate cut. While risk-on sentiment received a boost, the markets seem somewhat uncertain. Whether the greenback can find a bottom at current levels may depend on overall developments in other markets like stocks and bonds.

Staying in the currency markets, Yen emerged as the week's worst performer, following new BoJ Governor Kazuo Ueda's persistent commitment to ultra-loose monetary policy. New Zealand Dollar came in as the second worst, largely due to a reversal in its cross against Australian Dollar. Swiss Franc ended as the strongest currency, followed by Canadian Dollar and Euro.

US Disinflation Continues, Fed Opinions Diverge on Rate Hikes

One of the major themes last week was that disinflation continued in the US as reflected by latest CPI and PPI data. Meanwhile, retail sales contracted for another month in March, indicating that inflation and higher interest rates were starting to bite into people's pockets. Jobless claims had also returned to a more "normal" level above 200k, suggesting that the economy has already be cooling.

However, opinions among Fed officials remain divided. Hawks, such as Fed Governor Christopher Waller, bemoaned the lack of "much progress" on core inflation. In contrast, doves like Chicago Fed President Austan Goolsbee urged caution, calling for restraint in tightening. Additionally, a dampener was put on inflation optimism as the University of Michigan's consumer inflation expectation for the year ahead spiked from 3.6% to 4.6%.

Regardless, Fed is undoubtedly nearing a pause in rate hikes, even if it remains uncertain whether it will be a "one and done" in May. Diverging opinions from Fed officials are expected during this stage of the cycle. What is more critical is when Fed will start reversing the rate hikes. Fed funds futures are pricing in a near 58% chance of rates staying at 5.00-5.25% in July (after one more hike in May) and a 68% chance of a cut in September. Excluding a resurgence and intensification of the banking crisis, these pricings are overly aggressive, considering that Fed officials and projections have essentially ruled out a cut this year. However, the situation is evolving week by week.

Dollar Index Testing Key Support Support, Yet Uncertainty Remains

Last week, Dollar Index dipped to a new 2023 low at 100.78 but found substantial support at 100.82, ultimately recovering to close at 101.55. From a technical perspective, the base case suggests that price movements from 100.82 are unfolding into a three-wave corrective pattern. As such, sustained break below 100.82 is not anticipated for now, and a rebound is due.

On the upside, a break through 102.51 resistance level would confirm short-term bottoming and trigger stronger rally towards 105.88 resistance, passing through 55 D EMA (now at 103.16).

Conversely, a decisive break below 100.82 would nullify this outlook and lead to a resumption of the overall downtrend from 114.77. In this scenario, Dollar Index may only find enough support for a bounce at 55 W EMA (now at 97.76), which is near to 38.2% retracement of 70.69 to 114.77 at 97.93.

Dollar's Fate Hangs in the Balance: Risk Appetite and Yields

Whether Dollar could rebound from the current level would very much also depend on the interaction with other markets. The extended rally in stocks and improvement in risk appetite is negative for the greenback. But at the same time, rebound in treasury yields should be supportive. It remains to be seen which factor would persist further and exert a larger influence on Dollar.

Recent development suggests that DOW's corrective pattern from 34712.28 has completed with three waves down to 31429.82 already. Further rise is expected as long as 55 D EMA (now at 33106.92) holds. Break of 34712.28 resistance is likely as the rally extends. The main level to watch is 61.8% projection of 28660.94 to 34712.28 from 31429.82 at 35169.54. If realized, the development would at least cap any rebound momentum of Dollar, with prospect of trigger deeper selloff.

10-year yield's strong close last week raises the chance of short term bottoming at 3.351. More importantly, the whole corrective pattern from 4.333 might have completed with three waves down to there too. Near term focus is shifted to 3.610 resistance. Firm break there will add to this bullish case and bring stronger rise back to 4% handle, or to 4.091 resistance. This development, if realized will help limit downside momentum in Dollar. However, rejection by 3.610 and 55 D EMA (now at 3.583) should extend the decline from 4.333 through 3.351 later.

Gold, though more influenced by the Dollar than vice versa, is still worth monitoring to confirm the greenback's underlying direction. While Gold rose further to 2048.26, it's starting to feel heavy ahead of 2070.06/2074.84 long term resistance zone. Bearish divergence in 4H MACD suggests that a short term top is possibly in place already. Deeper pull back is likely for 38.2% retracement of 1804.48 to 2048.26 at 1955.13, which is close to 1949.55. Strong support could be seen there to contain downside to bring rebound. But sustained break of this fibonacci level will bring deeper pull back to 61.8% retracement at 1897.60.

EUR/USD Weekly Outlook

EUR/USD's up trend resumed last week by breaking through 1.1032 resistance. However, a temporary top was formed after hitting 1.1075. Initial bias is neutral this week for consolidations first. Outlook will stay bullish as long as 1.0830 support holds. Above 1.1075 will resume larger up trend to 1.1273 fibonacci level. Break there will target 61.8% projection of 0.9534 to 1.1032 from 1.0515 at 1.1441.

In the bigger picture, rise from 0.9534 (2022 low) is in progress for 61.8% retracement of 1.2348 (2021 high) to 0.9534 at 1.1273. Sustained break there will solidify the case of bullish trend reversal and target 1.2348 resistance next (2021 high). This will now remain the favored case as long as 1.0515 support holds, even in case of deeper pull back.

In the long term picture, while it's still early to call for long term trend reversal at this point, the strong break of 1.0635 support turned resistance (2020 low) should at least turn outlook neutral. Focus will turn to 55 M EMA (now at 1.1166). Rejection by this EMA will revive long term bearishness.

Monday, Apr 17, 2023

Tuesday, Apr 18, 2023

Wednesday, Apr 19, 2023

Thursday, Apr 20, 2023

Friday, Apr 21, 2023

Summary

Over the last few weeks, headlines around the U.S. dollar losing its global reserve currency status have become widespread and captured attention. In our view, the U.S. dollar is not on the brink of losing global reserve currency status at any point in the foreseeable future. The dollar meets all the characteristics of a reserve currency, and is still the dominant currency in the global payments' marketplace as well as the currency of choice for FX reserve managers. While the FX reserve allocation to the dollar has declined over time, we believe this trend is a product of one-off developments and not necessarily a movement to shun the greenback. Going forward, we believe the dollar will maintain its status as the global reserve currency as EU fragmentation risks will prevent the euro from gathering momentum, a distorted Japanese Government Bond market counters the yen, and convertibility challenges limits the rise of the renminbi for the time being.

U.S. Dollar's Reserve Status Is Under False Scrutiny

In recent weeks, the U.S. dollar's status as the world's global reserve currency has come under intense scrutiny, with some analysts predicting the demise of the greenback's reign. Such speculation has occurred in the context of recently announced initiatives such as China and Brazil announcing clearing arrangements in each other's local currencies, Middle Eastern energy exporting countries agreeing to settle transactions in renminbi, and the BRICS nations announcing plans to develop a single currency to reduce dependence on the U.S. dollar. Still, while such initiatives could at the margin see less use of the U.S. dollar for trade or investment purposes, we see many characteristics which suggest the U.S. dollar will remain the preeminent global currency for the foreseeable future.

To be considered a “reserve currency” a currency must demonstrate certain characteristics. These desirable attributes include being:

• Freely convertible (i.e. not pegged and/or subject to capital controls)
• Widely accepted and used in trade and global transactions
• Backed by large and liquid debt markets easily accessible to foreign investors
• Not subject to undue political influence (i.e. associated with an independent central bank)

The U.S. dollar measures up well, and certainly better than any other currency, against these metrics, underpinning our view that the dollar's global reserve currency status will remain intact going forward. To that point, the greenback is the most used currency for trade and other cross-border transactions by a fairly wide margin. According to relevant and available data, no clear evidence exists that U.S. dollar usage is diminishing. According to the Bank for International Settlements (BIS) three-year survey of foreign exchange turnover—which indicate the prevalence of individual currencies across a range of transactions (spot, forward, swaps, options and other products)—the U.S. dollar's percentage share of FX turnover in April 2022 was 88.4%, which is higher than the 84.9% in April 2010 (Figure 1). Keep in mind given that foreign exchange transactions are two-sided, these percentages add to 200%. This relatively high usage reflects the ease of transacting in U.S. dollars, no convertibility issues, and the dollar's widespread acceptance around the world. Some distance behind the dollar is the euro at 30.5%; however, euro usage is down notably from 39.0% in April 2010. In fact, aside from the Chinese renminbi, all other key major currencies have seen their usage decline from 2010-2022. In the case of the Chinese renminbi, the yuan only appears in ~5% of total FX turnover. Data from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) confirms the U.S. dollar's prominence in the global marketplace. SWIFT publishes monthly figures of the proportion of global payments made in each currency. Once again, the U.S. dollar comes out on top, rising to 41.1% of total payments in February 2023 (Figure 2). To be fair, the U.S. dollar is not as dominant on this metric, with 36.4% of payments made in euros in February. However, other currencies such as the British pound, Japanese yen and Chinese renminbi are far behind. We also note that proportion of global payments in U.S. dollar has ranged between 35% and 45% since 2013, and there is no clear evidence of a trend decline of the use of the U.S. dollar in the SWIFT data.

FX Reserve Managers Continue to Choose the Dollar

In addition to usage in the global marketplace, the composition of foreign exchange reserves held by central banks around the world continue to be dominated by the U.S. dollar. At the end of 2022, foreign exchange reserve assets totaled US$11.963 trillion, of which the U.S. dollar represented the majority of these global FX reserve assets. According to these IMF data, the U.S. dollar is still the most popular choice of FX reserve managers in managing currency reserves. That said, we acknowledge there has been a gradual shift away from the proportion of FX reserves held in U.S. dollars over the past decades. In Q1-2000 FX reserve managers held 71.5% of global FX reserves in dollars. This number has since fallen to 58.4% by at the end of 2022 (Figure 3).

We see multiple relevant factors that have likely contributed to the gradual decline in the U.S. dollar's use as a reserve currency during this timeframe. First, the introduction and adoption of the euro in 1999 and early 2000s likely contributed to the dollar's initial downward trend. To that point, in the immediate years following the introduction of the euro, the decline in U.S. dollar-denominated FX reserves coincides with increasing usage of the euro as a reserve currency. However, holdings FX reserves in euros was a one-off occurrence (albeit a long one) and ran its course around 2010. The second phase of the decline occurred started around 2015 and lasted through 2020; however, we question, or at least cannot say with any certainty, whether the dollar was being shunned or if these dynamics were more statistical in nature. We say statistical in the sense that this was a period when a more robust sample of countries, most notably China, began reporting the composition of their FX reserves to the International Monetary Fund. Starting in 2015 and persisting for a few years, additional central banks became more transparent and a larger allocation of all global foreign exchange reserves became know. In 2018, the IMF was able to report that the currency allocation of 93% of global FX reserves were known, up from just 53% in late 2013 (Figure 3). With China's massive FX reserve position being included the composition calculation, disentangling whether the dollar's allocation declined as a result of FX reserve managers moving away from the greenback or whether China's FX reserves were allocated toward multiple currencies and not just the dollar is a bit of an unknown. Regardless of whether the decline was a product of FX reserve management or a statistical byproduct of changing areas of coverage, most importantly we note that proportion of FX reserves held in U.S. dollars has been stable since late 2020, and still far above the next most used currency by hard currency reserve managers.

Alternatives Are Limited. Dollar's Status is Secure

Moreover, we believe there are limits to how much lower, for now, the use of the U.S. dollar by FX reserve mangers can go. As we stated earlier, a desirable characteristic of a global reserve currency is one that is easily and freely tradable, as well as backed by large and liquid debt markets. Using data from the Institute of International Finance (IIF), government debt outstanding for the United States (US$30.3 trillion) and Japan (US$9.5 trillion) comfortably exceed the size of other major government bond markets (Figure 4). This should make those bond markets and their respective currencies popular choices for FX reserve managers, more so the case for the United States. For Japan, the government bond market has been, and continues to be, significantly distorted by the central bank's Yield Curve Control policy. In addition, the Bank of Japan holds a significant majority of all outstanding Japanese Government Bonds, and yields of Japanese debt remain quite low. While the independence of the Bank of Japan is not in question, the accessibility of the JGB market to foreign investors is something of a challenge and will likely limit the yen's ability to make significant headway toward becoming the dominant global reserve currency. In Europe, sovereign debt markets are sizable, although still not nearly as sizable as the U.S. or Japan, and in that sense are somewhat segmented. Fragmentation is also a relevant regional risk and one that has gathered momentum since the euro was adopted. Brexit—the risk of Frexit, Grexit, Italexit, Spexit and other percolating EU-fragmentation movements as well as further U.K.-EU tensions—in our view, are enough for FX reserve managers to at least pause when considering allocating an outsized amount to European government bonds. And finally, with respect to Chinese government bonds, capital controls as well as the managed nature of the renminbi and convertibility concerns should offer disincentive for reserve managers to allocate currency holdings toward Chinese assets at this point. Taking these factors into account, we see limited alternatives at the current juncture for FX reserve managers to U.S. government bonds and, accordingly, see limits as to how much lower holdings of U.S. dollar assets by reserve managers will go. With the use of the U.S. dollar for trade and other cross border transactions still widespread, and the use of U.S. dollar assets still a clearly favored choice of reserve managers, we view the U.S. dollar's status as the global reserve currency as secure for the foreseeable future.

Summary

United States: Spring Break Is Over

• On balance, this week's data show the U.S. economy is losing momentum, as the lagged effects of the FOMC's rapid pace of monetary policy tightening appear to be slowing growth as intended. In March, retail sales fell 1.0%, manufacturing production slipped 0.5% and the consumer price index rose a modest 0.1%.
• Next week: Housing Starts (Tue), Existing Home Sales (Thu), Leading Economic Index (Thu)

International: Bank of Canada's Waiting Game Continues

• The Bank of Canada (BoC) again held its policy rate steady at 4.50% at its monetary policy meeting this week. The central bank said growth in early 2023 will be stronger than previously forecast and that it remains prepared to tighten further if needed. At the same time, it expects past rate hikes will see growth slow as the year progresses and also expects inflation to slow quickly to around 3% by the middle of this year. Overall, we think the BoC remains comfortably on hold for now, with the main risk being that resilient economic trends see monetary easing beginning later than we currently expect.
• Next week: China GDP (Tue), U.K. CPI (Wed), Eurozone PMIs (Fri)

Interest Rate Watch: FOMC on Path for 25 bps Rate Hike on May 3

• With volatility in financial markets subsiding recently and with inflationary pressures remaining elevated, we look for the FOMC to hike rates by another 25 bps at its May 3 meeting. But we also think May 3 will mark the end of the tightening cycle that has been in place since last March.

Topic of the Week: Nothing Is Certain in Life Except Death and Taxes

• As millions of Americans have poured over their W-2s and 1099s in recent weeks, the culmination of the filing season will have important implications for the fiscal outlook, including the debt ceiling.

Full report here.

U.S. Highlights

• Headline inflation rose 0.1% m/m in March, while core rose by a strong 0.4% m/m. The 12-month change on headline slipped to a near two-year low of 5%, while core ticked higher to a still uncomfortable 5.6%.
• Retail sales (-1.0% m/m) slipped again in March, falling for a second consecutive month after an unusually strong start to the year. Declines were seen across most categories, leaving a weak handoff heading into Q2.
• Though there are tentative signs the economy is cooling, the Federal Reserve likely has one more 25 basis-point rate hike to follow through on in May, before pausing to better assess the full impact of rate hikes.

Canadian Highlights

• The Bank of Canada held the policy rate at 4.50% for a second straight decision. Markets believe interest rate cuts are on the docket in 2023, but Governor Macklem has pushed back against that notion.
• The Bank of Canada revised up 2023 GDP growth yet again in its latest Monetary Policy Report (MPR). The Canadian economy continues to power forward and expectations for 2023 growth are now at 1.4%, revised upward by 0.4 ppts from the January MPR.
• Canadian CPI inflation data is on watch for next week, where we expect a cooling in both headline and core measures.

U.S. - Calm Prevails As Economy Shows Tentative Signs of Cooling

Rounding the corner into earnings season, a sense of calm seemed to descend across financial markets this week. But with earnings season not officially in full swing until Friday morning, investor focus fell squarely on the economic data. The two headliners this week were the March readings of CPI inflation and retail sales, though the release of the FOMC meeting minutes also garnered some attention.

The latest move by the Federal Reserve occurred during the recent regional banking crisis, which ultimately forced the FOMC to rethink its trajectory for the federal funds rate. The uncertainty was on full display in the minutes, where several participants thought it was appropriate to hold the target range steady last month in light of recent events. This was an abrupt U-turn from what policymakers had communicated just a few weeks prior to the interest rate announcement, where the thought was rates needed to move both higher and faster relative to what had been assumed in the December’s Summary of Economic Projections. But perhaps the most noteworthy takeaway from the minutes was an explicit mention that considering the recent banking crisis “… the staff’s projection included a mild recession starting later this year, with a recovery over the subsequent two years”. Indeed, participants agreed that the actions taken by the Federal Reserve and other government agencies helped calm conditions in the banking sector but deemed that it was still too early to assess the confidence and magnitude of the effect of credit tightening on the real economy.

This morning’s retail sales gave a first glimpse into the impact that tighter credit conditions may already be having on households. Both nominal and real spending fell 1.0% m/m in March, marking the second consecutive month of declines. But even after accounting for the pullback, consumer spending is still tracking a robust 4.2% for Q1. However, the weak handoff from March suggests last quarter may have been the “last hurrah” as the cumulative effect of higher interest rates alongside the recent tightening in lending standards appear to be bearing down on the consumer.

From an inflation standpoint, the softening in demand has yet to manifest in any significant easing in core consumer price pressures. Indeed, headline inflation slipped to 5% y/y – a near two-year low – thanks to lower food and energy prices (Chart 1). However, core CPI rose 0.4% m/m, leaving the 3-month (annualized) and 12-month rates of change at 5.1% and 5.6%, respectively. Underpinning the gains was an acceleration in goods prices alongside continued strength in shelter (0.6% m/m) and non-housing services (0.3% m/m).

For a central bank who has become increasingly data dependent, the continued persistence in core inflation alongside the recent uptick in inflation expectations is unlikely to sit well (Chart 2). Provided there are no further flare-ups in financial markets, it is likely that the FOMC will need to raise the benchmark rate by another 25-bps in May, before pausing to better assess the full impact of the 500-bps of rate hikes.

Canada – Bank of Canada Versus Markets

The spotlight was on the Bank of Canada's (BoC) interest rate decision this week. As was widely expected, the Bank left the policy rate unchanged at 4.50% for a second straight decision. However, where markets and the Bank differ is how long this policy pause will last.

Markets are still maintaining their conviction that the policy rate will be cut later this year. But, when asked about the potential for near-term rate cuts, Governor Macklem's answer was explicit, "that doesn't look today like the most likely scenario to us". Markets caved a touch, shifting out the timing of a 25-basis point cut from September to December. As the dust settles, we too would lean against markets, and expect the 4.50% policy rate is here to stay for the remainder of the 2023.

At this meeting, the BoC struck out the reference to its 'conditional hold' and skewed its language toward a bias for potential further tightening. The BoC acknowledged that the return to the 2% inflation target could prove to be more difficult than expected. Inflation is cooling, and our forecast calls for Canadian inflation reaching 3% year-on-year (y/y) by the summer. This is progress, but it's not the 2% level the BoC is striving to achieve. The message was cemented by Macklem at an IMF meeting the following day where he stated, "that band, it’s not a zone of indifference. You need to aim for the middle if you want to be in the band most of the time".

As inflation continues to rein itself in, the BoC will take a narrower lens in assessing if easing price pressures are sustainable. Core inflation has been trending downward (Chart 1), but they will also continue to watch inflation expectations and wage growth, which are proving to be a bit stickier.

The Canadian economy is still showing signs of resiliency, forcing the BoC to revisit growth estimates yet again. The April MPR shows GDP growth for 2023 revised upward to 1.4%, 0.3 percentage points (ppts) higher than in the January MPR (Chart 2). A consumption led slowdown through the remainder of 2023 provides a weak hand off to 2024, leading to a downward revision to the growth forecast to a modest 1.3% (1.8% in the January MPR).

A smattering of Canadian data this week added further support to a strong first quarter. Manufacturing sales gave back some of January's 4.5% gain in February (-3.6% m/m), but sales are still tracking positive for the quarter. Existing home sales and prices were up in March, 1.4% and 2.0% m/m, respectively. This reinforces that housing markets are finding their bottom.

Next week’s highlight is the March inflation (CPI) release, where we expect a further cooling in headline and core inflation measures. We see headline inflation pulling back for a fifth straight month to 4.6% year-on-year (y/y) and core to moderate to 4.5%. Also on tap, retail sales for February are tracking another gain, following strong consumer spending in the last two months.

US

The first few banks are delivering a strong start to earnings season, reigniting soft landing calls, while large parts of Wall Street remain confident that the economy is recession bound as expectations remain that banking turmoil will persist.  Fed rate cut bets for later in the year have steadily increased and that has kept the dollar under pressure.

Investors will pay close attention to see if the regional Fed survey’s show minor improvements, if a few key housing readings show signs of stabilizing, and if the flash PMIs show the manufacturing activity remains stuck in contraction territory and as the service sector continues to soften.

In addition to a plethora of Fed speak, investors will closely pay attention to the Fed’s Beige Book.  The Beige Book will be released on Wednesday, the last time it highlighted a resilient economy. Fed’s Bowman will talk about central bank digital currencies on Tuesday. On Wednesday, Fed’s Goolsbee and Williams speak. On Thursday, Fed’s Waller talks about financial innovation, Mester discusses the economic and policy outlook, Bowman attends a Fed Listens event and Bostics talks about economic conditions.  On Friday, Fed’s Cook will talk about economic research.

Earnings season heats up as we hear from the rest of the banks and larger parts of the economy.  Key earnings for the week include results from Abbott Laboratories, American Express, ASML Holding, AT&T, Bank of America, Bank of New York Mellon, Blackstone, Charles Schwab, China Telecom, CSX, Discover Financial Services, DR Horton, Heineken, IBM, J&J, Lockheed Martin, Morgan Stanley, Nasdaq, Netflix, Philip Morris International, Procter & Gamble, SAP, Schlumberger, Taiwan Semiconductor Manufacturing, Tesla, Travelers, Union Pacific, US Bancorp, and Volvo.

Eurozone

Next week has a few standout economic releases, several central bank speeches, and a handful of big earnings. The eurozone outlook has improved even as Germany still appears to be headed for a shallow recession.

The euro has been rallying against the dollar on expectations the ECB will deliver a lot more tightening than the Fed going forward.  Investors will pay close attention to ECB President Lagarde’s comments on Monday. Tuesday’s release of the German ZEW survey is expected to show expectations modestly improve while the current situation remains deeply in negative territory and nowhere near the 10-year average of about 5.  ECB’s Elderson speaks on Tuesday in New York. On Wednesday, we get the second reading of euro area inflation and hear from ECB’s Schnabel, ECB’s Lane  and ECB’s de Cos.  On Thursday, traders will dissect the ECB March meeting account for any hints about future rate hikes and look to see if Eurozone consumer confidence contains anything larger than a minor improvement. On Friday, the April flash PMI readings for the eurozone will closely be watched as they reflect some of the banking turmoil that has hit the region; they are expected to show manufacturing activity improved, while service sector activity softened.

Key earnings to watch include ASML, Heineken, Nokia, and SAP.

UK

The upcoming jobs and inflation report will most likely impact bets on how much more tightening the BOE will deliver. The jobs report might look mixed as it could show the unemployment rate holding steady at 3.7%, while wages start to come down.  The main event for the UK is the inflation report.  Last month had a rather shocking hot headline print of 10.4%, but that is expected to ease towards 9.8%.  Inflation is widely expected to ease going forward, but any hot readings could keep the pressure on the BOE remaining aggressive. The March retail sales reading is expected to disappoint given the pressure on incomes and the wettest March in over 40 years. The flash PMIs are also expected to show manufacturing activity improved, while service sector activity was mostly steady.

Russia

Western sanctions are having little impact on Russian oil exports as they rise above pre-Ukraine war levels.  Pressure from the West will likely intensify.  Economic data is limited to a PPI release and the weekly gold and forex reserve totals.

South Africa

Following a larger-than-expected rate rise at the end of last month, traders will pay close attention to see if inflation remains elevated.  The headline YoY reading is expected to tick lower from 7.0% to 6.9%, still well above the 3-6% inflation target range.  Retail sales will also be released.

Turkey

Turkey will hold an important election on May 14th. Voters will decide if they want to keep President Erdogan, who has been in power for over two decades, or vote for a change.  Traders might start paying closer attention to polling which some are showing an edge to the main opposition.

Switzerland

Another very quiet week which contains only Money Supply data on Friday.

China

China is in the spotlight this week.  It starts with the one-year policy rate, which should remain unchanged on Monday, paving the way for commercial banks to keep their prime lending rates steady later in the week.  The biggest release of the week is first quarter GDP as it should see a major recovery as the economy reopened from its COVID lockdowns.  China Q1 GDP is expected to accelerate from 2.9% to 4.5%.  In addition to GDP, traders will dissect industrial output, investment and retail sales data releases, all of which are expected to show improvements.

India

Wholesale prices in March are expected to decline from 3.85% to 1.60%, further adding support to disinflation trends and supporting the RBI’s case to keep rates on hold.

Australia

Australia will have multiple economic releases along with the release of the RBA minutes of the April policy meeting.  Household spending, Westpac leading index, and the preliminary PMI readings will be released.

New Zealand

New Zealand’s key release of the week will be first quarter inflation.  The Q1 release is expected to show quarterly pricing pressures eased from 1.4% to 1.3%, while prices from a year ago softened from 7.2% to 6.7%.

Japan

Japan inflation is expected to continue to come down, softening from 3.3% to 3.2%.  The BOJ anticipates core inflation to fall over the next 12 months towards the 1.6% level, which is below the 2.0% target.

Singapore

The April policy decision by the Monetary Authority of Singapore did not go as expected as policymakers kept monetary policy settings unchanged. The upcoming week contains the March non-oil domestic export Y/Y reading which is expected to weaken from -15.6% to -18.2%.

Markets

Energy (Oil and Gas)

Oil’s fourth weekly advance has been mostly relentless as the OPEC+ output cut has sent global oil markets to a very deep supply deficit. The risk of a couple million barrel deficit in the second half of the year should keep prices supported.

Over the weekend, the G7 climate ministers gather in Japan to discuss climate change and investments in natural gas supplies. Energy giants, Baker Hughes and Schlumberger will post earnings.  Energy traders will pay special attention to China’s major economic releases that include first quarter GDP, industrial production, fixed-asset investment, and retail sales.

Natural gas is still looking oversupplied and with summer cooling demand a few weeks away, prices could remain heavy a little while longer.

Gold

Gold’s attempt at record territory failed after both core retail sales readings declined less than expected and hawkish Fed comments raised the risk that the Fed could do more tightening beyond May and that rates might need to stay higher for longer.

Over the short-term, gold could remain very volatile in both directions here. The start of earnings season has been relatively upbeat for the outlook for and that has boosted soft landing calls. For inflation to be conquered, we will need to see economic pain and that should support the bullish case for gold.

Crypto

Bitcoin and Ethereum are breaking out here.  Bitcoin has recaptured the $30,000 level, a pivotal level that was an entry level for many institutional investors in 2021. Ethereum is above $2,100 after a successful Shanghai upgrade.  Ethereum is now fully Proof-of-Stake and this milestone did not trigger a sell the news type reaction.  The next driver for crypto will likely stem from a return of banking turmoil that emerges from bank earnings and whether we see any updates on regulation or actions by authorities.

Saturday, April 15

Economic Data/Events:

• China property prices
• First day of Group of Seven energy, climate and environment ministers meeting in Japan

Sunday, April 16

Economic Events:

• China was expected to impose a no-fly zone north of Taiwan. They have denied these reports.
• Orthodox Easter is celebrated in Ukraine, Russia, and Greece

Monday, April 17

Economic Data/Events:

• India wholesale prices
• Italy CPI
• New Zealand food prices
• Singapore trade
• BOE’s Cunliffe delivers keynote speech at Innovate Finance Global Summit
• Fed’s Barkin speaks before the Richmond Association for Business Economics.

Tuesday, April 18

Economic Data/Events:

• US housing starts
• Canada CPI
• China Q1 GDP Q/Q: 2.1%e v 0.0% prior; Y/Y: 3.8%e v 2.9% prior, retail sales, industrial production
• Germany ZEW survey expectations
• Italy trade
• Mexico international reserves
• New Zealand home sales
• UK jobless claims, unemployment
• Big Bank Earnings from Goldman Sachs and Bank of America
• RBA minutes of April policy meeting
• Norges Bank Deputy Governor Pal Longva speaks on digital currency at an event organized by Polyteknisk Forening.

Wednesday, April 19

Economic Data/Events:

• Fed’s Beige Book
• Canada housing starts
• Eurozone Final CPI, new car registrations
• Japan industrial production
• South Africa CPI, retail sales
• UK CPI
• ECB’s Schnabel lectures at Leibniz-Zentrum für Europäische Wirtschaftsforschung in Germany
• SNB Maechler speaks at Fund Experts Forum in Rueschlikon
• SNB Schlegel speaks at event in Winterthur.
• BOE’s Mann speaks about “the economics of climate change” near Boston
• ECB’s de Cos speaks at Bloomberg’s New Economy Gateway Europe

Thursday, April 20

Economic Data/Events:

• US initial jobless claims, existing home sales, index of leading economic indicators
• China loan prime rates
• Eurozone consumer confidence
• Japan tertiary index, trade
• New Zealand CPI
• Spain trade
• Taiwan export orders
• ECB Minutes on March policy meeting
• ECB’s Visco speaks in London at the Official Monetary and Financial Institutions Forum event.
• ECB’s Holzmann makes opening remarks at Schumpeter lecture in Vienna.
• Fed’s Waller speaks at event hosted by Global Interdependence Center in Sarasota, Florida.
• Fed’s Harker speaks on “monetary policy and housing” a University of Pennsylvania/Wharton School event.
• Fed’s Mester discusses the economic and policy outlook at University of Akron in Ohio.
• Fed’s Bostic discusses regional and national economic conditions at Eastern Florida State College.
• Fed’s Bowman and Logan participate in a “Fed Listens” event on the Permian Basin at Odessa College in Texas.

Friday, April 21

Economic Data/Events:

• Canada Canada retail sales
• European Flash PMIs: Eurozone, Germany, France, and UK
• Hong Kong CPI
• Japan CPI

Sovereign Rating Updates:

• Greece (S&P)
• Italy (S&P)
• Netherlands (S&P)
• United Kingdom (S&P)
• France (Moody’s)
• Ireland (Moody’s)
• United Kingdom (Moody’s)

Growth in the Canadian consumer price index likely slowed sharply in March. We expect a deceleration to 4.1% year-over-year growth. That would be a full percentage point down from February and the lowest headline CPI reading since August 2021. Much of that decline is coming from lower energy prices. The price of gasoline was down 13% from March of last year, when the Russian invasion of Ukraine sent oil prices soaring. Food price inflation is still running hot (+9.7% year-over-year in February) but appears to be past its peak with annual growth likely to edge lower for a second straight month. But the breadth of price growth across other products and services has also been narrowing. And growth in the Bank of Canada’s preferred median and trim core CPI measures has slowed to a ~3.5% annualized rate over the three months ending in February (from a peak of 8% in summer of 2022). By our count, a little more than half of the goods and services in the CPI basket were still seeing inflation above the BoC’s 1% to 3% target range over that period, but that’s down from a peak of almost 90% last year.

Inflation is expected to drift even lower. Labour markets (and consumer demand) remained exceptionally firm early in 2023—but rising interest rates and elevated prices are increasingly cutting into household spending power. Delinquency rates on consumer loans are still low but on the rise. A preliminary estimate from StatCan was for a 0.6% decline in retail purchases in February, partially reversing a bigger 1.4% increase in January. And industry reports point to another decline in auto sales in March. Our own tracking of RBC debit and credit card spending has shown early signs of softer spending on discretionary goods. Services spending held up better but data from the Bank of Canada’s latest consumer survey suggests sentiment is softening there as well. We expect the easing in domestic inflation to persist–and for the Bank of Canada to hold the line on further interest rate increases through this year.

Week ahead data watch

We expect Canadian retail sales to edge down 0.6% during that month, in line with StatCan’s early indicator—due mainly to a price-related sales drop at gas stations. StatCan’s advance estimate suggested wholesale trade fell by 1.6% in February, largely driven by a sales decline in the motor vehicle and parts sector.

Canadian housing starts likely increased to 253,000 units in March from 244,000 units in the previous month. Residential building permit issuances have been slowing, with a 3-month rolling average of 248,000 units in February.

In the absence of further banking turmoil, it has been relatively calm waters in financial markets over the last two weeks. VIX volatility has traded at fairly low levels and yields have started to edge higher again, as focus turns away from risk of a banking crisis and back to data. Back in risk-on mode we have seen further USD weakening also supported by soft US data releases.

On balance, US data released during the Easter week was to the soft side with a decline in job openings and ISM data indicating slowdown in both manufacturing and the service sector. This does not square well with the more upbeat PMI reading from March, though. Thus the jury is still out on the current growth momentum. The jobs report was more or less as expected showing continued elevated wage pressures. Inflation declined in March taking some of the pressure off consumers, however underlying price pressures remain too high.

The inflation relief was short-lived, though, as higher oil prices once again dig into consumers' purchasing power after OPEC+ announced that they will cut oil production by more than 1 million barrels per day starting next month. We think weaker USD and reports that the US could start to rebuild strategic reserves has further driven oil prices to 2023 highs.

Euro area retail sales declined a further 0.8% in February and we continue to see the picture of a two-speed economy with the service sector being the clear growth driver. Economic data mostly pointed to an ongoing gradual recovery, see Euro Area Macro Monitor. In the Nordics, we got more modest core inflation prints in both Denmark and Sweden, than expected. Particularly Swedish inflation remains way too high, though, and we continue to expect a 75bp hike later this month.

With a completely new leadership at the Bank of Japan, markets were listening in on governor Ueda's speech at an inaugural news conference. He reiterated his intention to maintain monetary stimulus. This weakened JPY following considerable tailwinds through March. We do not read too much into Ueda's message, though, as a move to loosen the grip on the yield curve cannot be announced beforehand.

Next week, April PMIs will be the key releases from both the euro area and the US. In the former, services will probably remain the main growth (and inflation) driver for now, but it will be interesting to see whether manufacturing finally shows some positive spill-over effects from the Chinese re-opening. The US data will shed some light on economic activity after a blurry March picture. Generally we look for slow, yet still positive growth for Q2. From China we get Q1 GDP figures, which will show a post-Covid rebound. We will also keep an eye on Japanese March inflation figures. Inflation excl. fresh food and energy, now at 3.5%, has increased steadily for more than a year and has so far reached the highest level in over 40 years.

Full report in PDF.