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AUD/USD's decline from 0.7156 continued last week and accelerated to as low as 1.6716. There is no sign of bottoming yet. Immediate focus is on 0.6721 support this week. Decisive break there will carry larger bearish implication. Next target is 161.8% projection of of 0.6854 to 0.7028 from 0.6854 at 0.6539. On the upside, break of 0.6854 support turned resistance will argue that the pull back has completed, and turn bias back to the upside.

In the bigger picture, focus is now on 0.6721 structural support. Sustained break there will argue that whole rise from 0.6169 (2022 low) has completed at 0.7156, after rejection by 55 month EMA (now at 0.7179). Deeper decline would then be see back to 61.8% retracement of 0.6169 to 0.7156 at 0.6546, even as a corrective fall. Nevertheless, strong rebound from current level will retain medium term bullishness for another rise through 0.7156 later.

In the long term picture, initial rejection by 55 month EMA (now at 0.7179) retains long term bearishness. That is, down trend from 1.1079 (2011 high) could still resume through 0.5506 (2020 low) on resumption.

USD/CAD's rally continued last week and reached as high as 1.3664. Initial bias stays on the upside this week. Corrective pattern from 1.3976 should have completed at 1.3261. Firm break of 1..3684 resistance will bring retest of 1.3976. In case of retreat, further rally will remain in favor as long as 1.3515 support holds.

In the bigger picture, outlook stays bullish with 1.3222 cluster support (38.2% retracement of 1.2005 to 1.3976 at 1.3223) intact. Break of 1.3976 resistance will resume larger up trend from 1.2005 (2021 low) to 61.8% projection of 1.2401 to 1.3976 from 1.3261 at 1.4234.

In the longer term picture, price actions from 1.4689 (2016 high) are seen as a consolidation pattern only, 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 55 month EMA (now at 1.2971) holds.

GBP/JPY rose to 163.73 last week but retreated since then. Initial bias is neutral this week first. For now, the favored case is that correction from 172.11 has completed at 155.33 already. Above 163.73 will resume the rise from 155.33 to 169.26/172.11 resistance zone. However, break of 160.44 minor support will dampen this case and bring retest of 155.33 low instead.

In the bigger picture, corrective decline from 172.11 medium term should have completed at 155.33. With 38.2% retracement of 123.94 (2020 low) to 172.11 (2022 high) at 153.70 intact, medium term bullishness is retained. That is, larger up trend from 123.94 (2020 low) is still in progress. Break of 172.11 high to resume such up trend is expected at a later stage.

In the longer term picture, as long as 55 month EMA (now at 152.76) holds, rise from 122.75 could still extend higher at a later stage to 195.86 (2015 high).

EUR/JPY retreated after hitting 144.15 last week. Initial bias stays neutral this week first. Outlook is unchanged that corrective fall from1 48.38 has completed at 137.37 already. Above 144.15 will resume the rally form 137.37 to retest 148.38 high. Nevertheless, break of 142.13 and sustained trading below 55 day EMA (now at 142.08) will dampen this bullish view and bring deeper fall back towards 137.37 low.

In the bigger picture, as long as 55 week EMA (now at 139.21) holds, larger up trend from 114.42 (2020 low) is still in progress for 149.76 long term resistance. However, firm break of 55 week EMA will bring deeper fall to 38.2% retracement of 114.42 to 148.38 at 135.40. Sustained break there will raise the chance of trend reversal, and target 61.8% retracement at 127.39.

In the long term picture, outlook will stay bullish as long as 134.11 resistance turned support holds (2021 high). Sustained break of 149.76 (2014 high) will open up further rally, as resumption of the rise from 94.11 (2012 low), towards 169.96 (2008 high).

EUR/GBP's fall from 0.8977 resumed last week but recovered after hitting 0.8782. Initial bias is neutral this week first. Another decline is mildly in favor as long as 0.8927 resistance holds. Below 0.8782 will target 0.8720 support. On the upside, break of 0.8927 will revive near term bullishness and bring retest of 0.8977 high.

In the bigger picture, focus is back on 55 day EMA (now at 0.8807). Sustained trading below there will argue that fall from 0.9267 is in progress. Such decline is seen as a leg inside long term range pattern from 0.9499 (2020 high). Break of 0.8545 will pave the way back to 0.8201 (2022 low). On the other hand, strong rebound from current level will extend the rise from 0.8545 through 0.8977 at a later stage.

In the long term picture, long term range pattern is extending. But rise from 0.6935 (2015 low) is expected to extend at a later stage, to 0.9799 (2009 high).

EUR/AUD's rise from 1.5254 resumed by breaking through 1.5650 resistance last week. The development affirmed the case that corrective fall from 1.5976 has completed at 1.5254. Initial bias is now on the upside this week for 1.5749 resistance first. Break there will bring retest of 1.5976 high. For now, further rally will remain in favor as long as 1.5512 support holds, in case of retreat.

In the bigger picture, it's still early to confirm if rise from 1.4281 represents bullish trend reversal. But as long as 1.5271 support holds, such rally is in favor to continue. Break of 1.5976 will target 1.6434 key resistance next. On the other hand, firm break of 1.5271 will retain medium term bearishness instead.

In the longer term picture, focus stays on 55 month EMA (now at 1.5590). Sustained trading above there will raise the chance of bullish trend reversal, and at least bring further rally to 1.6434 cluster resistance, 38.2% retracement of 1.9799 (2020 high) to 1.4281 at 1.6389. However, rejection by 55 month EMA will suggest that down trend from 1.9799 is still in progress for another low below 1.4281.

EUR/CHF stayed in range above 0.9844 last week and outlook is unchanged. Initial bias remains neutral this week first. In case of another fall, downside should be contained by 38.2% retracement of 0.9407 to 1.0095 at 0.9832, to complete the corrective pattern from 1.0095. On the upside, decisive break of 0.9923 should turn bias back to the upside for stronger rebound towards 1.0067/0095 resistance zone.

In the bigger picture, with 0.9832 support intact, rise from 0.9407 (2022 low) is still expected to continue. Break of 1.0095 and sustained trading above 55 week EMA (now at 1.0021) will be a medium term bullish signal, and bring further rally to 1.0505 cluster resistance (2020 low at 1.0505, 61.8% retracement of 1.1149 to 0.9407 at 1.1484). However, firm break of 0.9832 support will revive medium term bearishness and bring retest of 0.9407 low instead.

In the long term picture, it's still way to early too call for bullish trend reversal with upside capped well below 55 month EMA and 1.0505 support turned resistance (2020 low).

Monday, Feb 27, 2023

Tuesday, Feb 28, 2023

Wednesday, Mar 1, 2023

Thursday, Mar 2, 2023

Friday, Mar 3, 2023

U.S. Highlights

• A second read on fourth-quarter GDP showed that the U.S. economy grew by 2.7% (q/q annualized) instead of 2.9% as reported previously. A measure of underlying domestic demand was revised down from 0.2% to an even softer 0.1%.
• Real consumer spending rose a solid 1.1% month-on-month (m/m) in January. Core PCE inflation came in hotter than anticipated, rising to 4.7% year-on-year in January from an upwardly revised 4.6% in December.
• Despite hopes for an improvement to the housing narrative at the start of 2023, existing home sales fell 0.7% (m/m) in January, extending their losing streak to 12 consecutive months.

Canadian Highlights

• CPI updates for January provided some respite from uncomfortable levels of inflation that far exceeded the Bank of Canada’s target. Interest rates are working their way through various channels to bring inflation down.
• Strong U.S. macro data likely influenced the Canadian rates picture. The increase in U.S. yields over the week dragged Canadian rates up in tandem, possibly distorting the effects of domestic developments that could support a moderating in Canadian rates.
• GDP figures for the fourth quarter are on tap for next week. The Canadian economy has shown resilience, but we expect momentum to continue to moderate into the year.

U.S. - Sticky Inflation Means Higher Rates

Not all economic data was positive this week, but a strong rebound in consumption and evidence of sticky inflation continued to build the case that the Fed will take the policy rate higher. Rising Treasury yields took a toll on equity markets, with the S&P 500 down 3.3% from last week’s close (at time of writing).

A second reading on fourth-quarter GDP showed that the U.S. economy ended 2022 on softer footing than previously reported. The headline measure was revised down from 2.9% quarter-on-quarter (q/q) annualized to 2.7%. Net exports and inventory investment, two inherently volatile components, continued to make up the bulk of gain, while final sales to private domestic purchasers – a measure of underlying domestic demand – was downgraded from 0.2% to an even softer 0.1%. This as consumer spending was shaved down noticeably from 2.1% to 1.4%.

However, January’s personal income and outlays report showed that consumer spending rebounded strongly to start the year. Real consumer spending rose 1.1% month-on-month (m/m) in January, reflecting gains in both goods and services. Following in the footsteps of a strong retail sales report, real goods spending rose a sharp 2.2% (m/m), while services spending rose 0.6%. Overall, this is a very good start to first-quarter consumption, which we anticipate will expand in the 1.5-2.0% (q/q annualized) range. A tight labor market, which is helping support healthy growth in wages and salaries, will also help in this regard.

The above report also provided an update on inflation. Total PCE inflation accelerated to 5.4% year-on-year (y/y) from 5.0% in December. The Fed’s preferred inflation gauge, core PCE, accelerated modestly, rising to 4.7% y/y from an upwardly revised 4.6% in December. The key point to highlight here is that core PCE inflation looks to have picked up some steam recently (Chart 1).

The fact that inflation is showing signs of stickiness and that the labor market remains hot, raises the odds that the Fed will need to take the policy rate higher and perhaps keep it there for longer. Minutes from the latest FOMC meeting, which showed members’ resolve to keep fighting inflation through additional rate hikes based on incoming data, helps further cement this view. Marked odds still favor a rate hike of 25 basis points (bps) at the March meeting, but odds for a 50-bps hike crept higher following the PCE report and are hovering around 33% as of writing.

Among other things, a “higher for longer” policy rate, means that there could be additional fallout for interest-sensitive areas of the economy. On this front, existing home sales fell again in January (-0.7% m/m), extending the losing streak to 12 consecutive months. Since interest rate changes tend to influence sales activity with a lag, past declines in mortgage rates could drive some improvement in sales over the near-term. But given that mortgage rates turned higher again, housing activity will continue to be tested. High frequency data second this view, with mortgage purchase applications falling to a 28-year low last week (Chart 2). Indeed, it appears that the start of a new and improving trend in housing is still some time away.

Canada – A Slight Sigh of Relief

It was a busy week on the Canadian economic calendar with the welcome cooling in inflation in January the main event. The Bank of Canada's (BoC) conditional hold on the policy rate has been tested by recent upside surprises from the labour market and consumer spending data. At this juncture, every new data point is critical to the further assessment of the BoC's policy stance.

Headline inflation for January decelerated to 5.9% year-on-year (y/y), below the 6.1% consensus estimate and down from 6.3% in December. Core inflation pressures remain elevated but continue to ease. CPI ex-food and energy came in at 4.9% y/y, down from 5.3% in December. The BoC's primary core inflation measures (CPI-trim and CPI-median) both ticked down two-tenths of a percent to 5.1% and 5.0% y/y, respectively. As we show in Chart 1, the trajectory of inflation is broadly evolving in line with the BoC's objective of bringing prices back to their mandated 2% target.

Although current inflation is moving in the right direction, the path back to 2% may not be smooth sailing. Canadian economic growth continues to exhibit surprising strength. Retail sales ended 2022 on a high note, rising 0.5% month-on-month (m/m) in December with volumes up 1.3%. TD's own consumer spending data suggests that the strength carried forward into January, with figures chalking up another gain. And it is not just domestic strength. The growth outlook for Europe and China has substantially improved, which can further slow the disinflationary impulse in Canada. See our updated Q&A for a complete discussion on the balance of risks around the inflation outlook.

This week we saw another leg higher in yields, with U.S. macro data showing incredible resilience (Chart 2). This upturn in economic data has reinforced the higher-for-longer policy rate narrative. Market pricing for the Canadian policy rate wavered a touch over the last several days but is still largely pricing in one more 25-bp hike by Q3-2023. Markets do not expect rate cuts to materialize in 2023. We are not as confident, as a slowdown in economic momentum is still on the horizon. If the data evolve consistently with our outlook, it is probable that the BoC cuts rates by the end of the year. We currently have a cumulative 50 bps of cuts penciled in for the fourth quarter.

The main event for next week is Q4 Canadian GDP growth. These figures will inform how the BoC's forecasts in January's Monetary Policy Report (MPR) are shaping up, while also providing a foundation for the hand-off into the first quarter of this year. Also keep watch on Q4 quarterly productivity figures. Productivity in Canada notoriously lags other developed economies, but any sign of a rebound could mean another strong quarter of growth is in the cards.

Summary

United States: Mixed Housing Data and Upside Inflation Surprise

• Existing home sales declined 0.7% in January, while new home sales leaped 7.2%. Real personal spending shot higher in January, and solid growth in discretionary spending suggests continued consumer resilience. The core PCE deflator surprised to the upside, which could compel the FOMC to go higher for longer.
• Next week: Durable Goods (Mon), Construction Spending (Tue), ISM (Wed/Fri)

International: Improving Sentiment in U.K. and Eurozone, Encouraging Inflation Trends in Canada

• February's PMI surveys shed some brighter light on sentiment in the U.K. and Eurozone, particularly for the services sector. While we still forecast both economies to fall into recession this year, we expect growth to be more resilient than previously forecast. Meanwhile, Canada's CPI release showed that the trend of lower consumer prices continued in January, with CPI inflation receding more than expected to 5.9% year-over-year.
• Next week: China PMIs (Wed), Canada GDP (Wed), Eurozone CPI (Thu)

Interest Rate Watch: 50 bps at the Next FOMC Meeting?

• Minutes of the Jan. 31-Feb.1 FOMC meeting show that a "few" FOMC members favored raising rates by 50 bps at that time. Given the run of stronger-than-expected data in recent weeks, could a few more members join them at the next meeting on March 22?

Credit Market Insights: Increasing Delinquency Rates for Young Borrowers

• Due to decades high inflation increasing the costs of everything from groceries to discretionary activities, consumers have been facing increasing pressure on household balance sheets. While the increase in credit card and auto loan delinquency rates for all borrowers is similar to that experienced in the previous two quarters, younger age groups experienced comparably stark increases compared to their older counterparts.

Topic of the Week: Israeli Shekel Detached from Fundamentals

• We have not said this too often. But, the Israeli shekel is underperforming relative to the rest of the emerging market currency complex. We see merit in entering positions at current levels, and we believe a move toward ILS3.40 by the end of Q1-2023 is imminent.

Full report here.