Sample Category Title

Daily Pivots: (S1) 1.5642; (P) 1.5763; (R1) 1.5984; More...

Intraday bias in EUR/AUD remains on the upside for the moment. Current rally from 1.4281 should target 61.8% projection of 1.4281 to 1.5704 from 1.5271 at 1.6150. On the downside, below 1.5683 minor support will turn bias neutral and bring consolidations. But outlook will remain bullish as long as 1.5441 support holds, in case of retreat.

In the bigger picture, as long as 1.5271 support holds, rise from 1.4281 medium term bottom is expected to continue to 1.6434 key resistance next. However, firm break of 1.5271 will argue that such rebound has completed, and keep medium term outlook neutral at best. But in this case, more range trading should be seen above 1.4281 low first.

Euro is now the strongest one for the week, following the post-ECB rally overnight. Swiss Franc is trailing the common currency as the next strongest, and then Canadian. Dollar tried to rebound overnight on risk-off sentiment. Some progress is made by the greenback but more is needed to prove a reversal. Australian and New Zealand Dollar are currently the worst performers, followed by Yen.

Technically, a short term top should be formed in Gold at 1824.31 on bearish divergence condition in daily MACD. Deeper pull back is now in favor back to 55 day EMA (now at 1741.01). Reaction from there would reveal whether rebound from 1616.51 has finished. Such development would also be a signal on whether Dollar is ready for a near term bullish reversal.

In Asia, Nikkei dropped -1.93%. Hong Kong HSI is up 0.53%. China Shanghai SSE is down -0.18%. Singapore Strait Times is down -0.74%. Japan 10-year yield is down -0.0036 at 0.254. Overnight, DOW dropped -2.25%. S&P 500 dropped -2.49%. NASDAQ dropped -3.23%. 10-yaer yield dropped -0.053 to 3.450.

Japan PMI manufacturing fell to 48.8, but services improved to 51.7

Japan PMI Manufacturing fell slightly from 49.0 to 48.8 in December, above expectation of 48.0. That's the worst contractionary reading since October 2020. PMI Services, however, improved from 50.3 to 51.7. PMI Composite also rose back from 48.9 to 50.0.

Laura Denman, Economist at S&P Global Market Intelligence, said:

"The Japanese private sector economy saw a stabilisation in business activity in the final month of the year, with flash data indicating that the divergence between the manufacturing and services sectors has grown further. As has been the case since the launching of the National Travel Discount Programme in October, service providers have reportedly continued to profit from a boost in tourism volumes. Notably, firms have seemingly gained some pricing power as a result of improving demand within the sector and raised their selling prices at the sharpest rate since October 2019.

"Conversely, manufacturing firms continued to struggle in the face of subdued demand conditions and severe inflationary pressures with the latest flash PMI reading the lowest since October 2020. December data saw production and order books at Japanese manufacturers contract further, but at paces that were slower than in November. At the same time, though historically sharp, inflationary pressures cooled with the rate of input price inflation at the lowest level since September 2021."

NZ BusinessNZ manufacturing dropped to 47.4, negative dynamic at play

New Zealand BusinessNZ Performance of Manufacturing Index dropped from 49.3 to 47.4 in November. That is the first time the PMI has shown consecutive months of contraction since the first nationwide lockdown in 2020.

Looking at some details, production fell slightly from 49.9 to 49.6. Employment fell from 48.7 to 46.7. New orders dropped further from 44.4 to 41.8. Finished stocks rose from 55.0 to 56.1. Deliveries dropped from 55.4 to 50.7.

BNZ Senior Economist, Craig Ebert stated "it's been quite the sag in the PMI, compared to just three months ago when everything appeared positive. Of course, the PMI can dive down to the 40-zone when things get recessionary. And November's result wasn't that awful. That said, it also had componentry showing a negative dynamic at play".

Australia PMI composite dropped to 47.3, first signs of desired soft landing

Australia PMI Manufacturing dropped from 51.3 to 50.4 in December, a 31-month low. PMI Services dropped from 47.6 to 46.9, an 11-month low. PMI Composite dropped from 48.0 to 47.3, also an 11-month low.

Warren Hogan, Chief Economic Advisor at Judo Bank said:

"The December results are one of the most up to date readings on the Australian economy and show that higher interest rates are starting to have the desired impact on activity. The Flash PMI readings for December are still well above levels that would normally be associated with recession. What we are seeing could be the first signs of a desired soft landing for the Australian economy in 2023...

"The slowing in this leading indicator of Australian economic activity will be welcomed by the RBA. Tighter monetary policy is having the desired effect, that is, a gradual slowing in domestic demand that should eventually filter through to lower inflation...

"This important leading indicator of Australian economic activity raises the prospect of an extended pause in the rate hiking cycle. As the rate hikes of 2022 continue to work through the economy over the first half of 2023, the RBA appears to have some scope to sit back and watch for a while."

Looking ahead

UK will release retail sales and PMIs. Eurozone will release PMIs, trade balance and CPI final. Later in the day, Canada will release wholesales while US will release PMIs.

EUR/AUD Daily Outlook

Daily Pivots: (S1) 1.5642; (P) 1.5763; (R1) 1.5984; More...

Intraday bias in EUR/AUD remains on the upside for the moment. Current rally from 1.4281 should target 61.8% projection of 1.4281 to 1.5704 from 1.5271 at 1.6150. On the downside, below 1.5683 minor support will turn bias neutral and bring consolidations. But outlook will remain bullish as long as 1.5441 support holds, in case of retreat.

In the bigger picture, as long as 1.5271 support holds, rise from 1.4281 medium term bottom is expected to continue to 1.6434 key resistance next. However, firm break of 1.5271 will argue that such rebound has completed, and keep medium term outlook neutral at best. But in this case, more range trading should be seen above 1.4281 low first.

Economic Indicators Update

Japan PMI Manufacturing fell slightly from 49.0 to 48.8 in December, above expectation of 48.0. That's the worst contractionary reading since October 2020. PMI Services, however, improved from 50.3 to 51.7. PMI Composite also rose back from 48.9 to 50.0.

Laura Denman, Economist at S&P Global Market Intelligence, said:

"The Japanese private sector economy saw a stabilisation in business activity in the final month of the year, with flash data indicating that the divergence between the manufacturing and services sectors has grown further. As has been the case since the launching of the National Travel Discount Programme in October, service providers have reportedly continued to profit from a boost in tourism volumes. Notably, firms have seemingly gained some pricing power as a result of improving demand within the sector and raised their selling prices at the sharpest rate since October 2019.

"Conversely, manufacturing firms continued to struggle in the face of subdued demand conditions and severe inflationary pressures with the latest flash PMI reading the lowest since October 2020. December data saw production and order books at Japanese manufacturers contract further, but at paces that were slower than in November. At the same time, though historically sharp, inflationary pressures cooled with the rate of input price inflation at the lowest level since September 2021."

Full release here.

Australia PMI Manufacturing dropped from 51.3 to 50.4 in December, a 31-month low. PMI Services dropped from 47.6 to 46.9, an 11-month low. PMI Composite dropped from 48.0 to 47.3, also an 11-month low.

Warren Hogan, Chief Economic Advisor at Judo Bank said:

"The December results are one of the most up to date readings on the Australian economy and show that higher interest rates are starting to have the desired impact on activity. The Flash PMI readings for December are still well above levels that would normally be associated with recession. What we are seeing could be the first signs of a desired soft landing for the Australian economy in 2023...

"The slowing in this leading indicator of Australian economic activity will be welcomed by the RBA. Tighter monetary policy is having the desired effect, that is, a gradual slowing in domestic demand that should eventually filter through to lower inflation...

"This important leading indicator of Australian economic activity raises the prospect of an extended pause in the rate hiking cycle. As the rate hikes of 2022 continue to work through the economy over the first half of 2023, the RBA appears to have some scope to sit back and watch for a while."

Full release here.

New Zealand BusinessNZ Performance of Manufacturing Index dropped from 49.3 to 47.4 in November. That is the first time the PMI has shown consecutive months of contraction since the first nationwide lockdown in 2020.

Looking at some details, production fell slightly from 49.9 to 49.6. Employment fell from 48.7 to 46.7. New orders dropped further from 44.4 to 41.8. Finished stocks rose from 55.0 to 56.1. Deliveries dropped from 55.4 to 50.7.

BNZ Senior Economist, Craig Ebert stated "it's been quite the sag in the PMI, compared to just three months ago when everything appeared positive. Of course, the PMI can dive down to the 40-zone when things get recessionary. And November's result wasn't that awful. That said, it also had componentry showing a negative dynamic at play".

Full release here.

The Bank of Japan has remained an outlier compared to the other major central banks which have been raising interest rates at a fast pace throughout 2022 in a synchronized attempt to bring inflation to heel. This resulted in a tumbling yen and forced Japanese authorities to intervene in the currency market in September and October. But, after hitting a 32-year low against the US dollar, the yen staged a comeback, with the BoJ coming under the microscope as investors try to figure out whether a policy tweak is on the cards sooner rather than later. The Bank meets early on Tuesday, but no policy action is expected.

Kuroda wants to see wages at 3%

At its latest gathering, the BoJ kept its ultra-loose policy untouched and maintained its dovish guidance that interest rates will remain at “present or lower levels”.

After that gathering, Governor Kuroda has been adamant on the need to maintain ultra-low interest rates and pushed back against calls for reviewing the policy framework. He has been also repeating that the rise in core consumer prices is driven mostly by surging import costs and that inflation would return back to 2% during the next fiscal year. In a semi-annual testimony before parliament, he noted that the Bank needs to focus on supporting growth until wages increase more, adding that they need to rise by around 3%.

With average monthly cash earnings slowing to 1.8% y/y in October from 2.2% in September, and headline inflation accelerating to 3.7% y/y from 3.0%, real wages shrank the most since July 2020. Combined with the GDP data revealing a small contraction during Q3, this makes the case for any change in policy or language at Tuesday’s meeting unlikely.

Officials unlikely to pull a rabbit out of a hat

What adds to that hypothesis is that this meeting will be one of the smaller ones that are not accompanied by updated economic projections. Moreover, inflation excluding fresh food and energy rose to 2.5% y/y in October, not far above the BoJ’s target and well below the core metrics of other major nations, whose central banks have already started slowing their tightening crusades.

Yes, the spotlight is likely to fall on Kuroda’s post-meeting briefing, but he might decide to not pull a rabbit out of his hat and perhaps wait for the January gathering, the last that offers an economic outlook and updated projections before he steps down on April 8. And yet, if data allows them, officials could wait a bit longer, perhaps after the “shunto” spring wage talks in March, when blue-chip firms meet with unions to discuss salaries for the upcoming fiscal year.

Yen unlikely to react at the decision, recovery may continue

Putting everything together, the yen is unlikely to be affected much by Tuesday’s decision. With dollar traders not touched by the Fed’s last hawkish play for 2022, narrowing yield differentials between the US and Japan could continue working in favor of the yen. The currency might also reclaim its safe-haven status in case concerns about the performance of the global economy resurface. Should market participants continue pricing in 50bps worth of Fed rate cuts by the end 2023, the yielding dollar could lose the title of the “ultimate safe haven”, and dollar/yen may continue to slide.

From a technical standpoint, dollar/yen continues to trade below the prior uptrend line taken from the low of March 30 and below the newly drawn downtrend line taken from the high of October 21. This paints a negative picture, but with the pair receiving support from the 200-day and the 134.00 zone, a break lower may be needed to reaffirm the bearish case.

Such a dip could pave the way towards the 130.50 barrier, marked by the low of August 2, and if there are no buyers to be found there either, then the downtrend may extend towards the 126.50 territory, defined as a support by the low of May 25.

For the bearish outlook to be dismissed, a break above the high of November 22 at 142.30 may be required. This would signal the pair’s return above both the moving averages and the two aforementioned trendlines, and may encourage the bulls to climb towards the psychological zone of 145.00 marked by the inside swing low of October 27. That zone was also proven a strong resistance between September 7 and October 4, but if it fails to stop the advance this time, the rally could stretch towards the 148.80 territory, marked by the highs of October 30 and November 1.

Key insights from the week that was.

This week, we received updates on consumer and business confidence and the labour market for Australia. Offshore, a string of 50bp rate hikes were seen across the US, Europe and the UK.

The December Westpac-MI survey reported a welcome 3% lift in consumer sentiment; although at 80, confidence amongst households remains comparable to the low points seen during the pandemic and the GFC. Inflation remained the primary concern of households, though ‘budget and taxation’, ‘economic conditions’ and ‘interest rates’ were also prominent. All of these factors are likely contributing to the weak state of family finances which, versus a year ago and for the year ahead, are respectively 25% and 19% below long-run average levels despite a strong labour market (see below) and favourable expectations for employment. In turn, households’ financial concerns are restricting their plans for major purchases, with ‘time to buy a major household item’ 33% below average.

The November labour force survey provided the largest domestic surprise this week. Against the market consensus for a 19k gain in employment, a striking 64k jobs were created in the month. Additionally, the 71k increase in the size of the labour force saw the participation rate return to a historic 66.8%; the employment-to-population ratio print a fresh record high of 64.5%; and the underemployment rate – which has lagged the broader recovery to date – fall 0.2ppts to 5.8%. Clearly, Australia’s labour market is a resounding source of strength for households as the year draws to a close, echoed by favourable expectations for employment in the Westpac-MI survey. Note though, with the unemployment rate holding firm at 3.4% in November, Westpac’s forecast for a quarter-average unemployment rate of 3.3% will be harder to achieve given the unexpected strength in participation.

It is promising to see the continued recovery in immigration flows and growth in the working age population consequently rise well above pre-pandemic levels to 2.0%yr. Being derived from estimates of Australia’s overseas arrivals and departures, the solid recovery in migrant flows is resulting in significant upward revisions to the size of the Australian labour force. It is worth mentioning that net arrivals are holding at very high levels among temporary workers (+13.5k/mth average) and students (+17.7k/mth average) after many months of significant net outflows due to the pandemic. Should the strength in net visa arrivals be sustained, the severe labour constraints facing businesses can be alleviated in time, thereby facilitating the longer-term recovery of the Australian economy.

In terms of the outlook, Chief Economist Bill Evans discussed the key implications from the consumer sentiment survey for consumption and housing in his video update this week. The evolution of both consumer demand and business conditions in 2023 was also the primary focus of our December Market Outlook in conversation podcast. For a full view of our forecasts for 2023 and 2024, see the December 2022 & January 2023 Market Outlook.

Moving offshore, first to New Zealand. GDP grew by a very strong 2% in Q3, more than twice the market and RBNZ expectation. As detailed by our New Zealand Economics team, GDP is now 8% above its end-2019 level, prior to the pandemic, with half of this gain coming in the last two quarters as international tourism returned. In Q3, solid-to-strong gains in activity were also seen outside of tourism-related sectors, highlighting the strength of current momentum in New Zealand’s economy. With supply still constrained, this result supports the view that the RBNZ will open 2023 with another large increase in the cash rate (75bps at the February meeting) even as other major central banks slow their pace of tightening and begin to consider drawing their hiking cycles to a close.

Over in the US, debate over the peak for fed funds and how quickly rate cuts will follow rages on. The updated economic forecasts of the FOMC make clear that the Committee remains resolute in their determination to fight inflation (a peak of 5.1% for fed funds now seen in 2023, to be followed by only modest cuts in 2024) as their assessment of price risks remains tilted to the upside. Still, in the press conference, Chair Powell made clear that their decisions would be data dependent and materially reduced the duration of his comments regarding financial conditions.

On the latter, whereas getting term interest rates well into contractionary territory has been his focus for the past year, in this press conference Chair Powell’s response to a question on financial conditions was focused on fed funds, the overnight policy rate. Arguably, this points to a recognition that, late in the tightening cycle, the market inevitably will price in the timing and scale of the rate cuts to come. Managing these expectations is critical to getting inflation back to target and doing so without a lasting hit to activity. Regarding activity growth, it is clear that both the FOMC and the market is becoming more concerned. The FOMC now only see cumulative growth through 2022 and 2023 of 1.0%; though, highlighting the downside risks present, that is still twice Westpac’s expectation. The data released this week also spoke to these downside risks. Of particular significance, control group retail sales fell 0.2% in November and October’s gain was revised down.

In Europe, the ECB delivered a 50bp rate hike across all policy rates as widely anticipated, slowing from the 75bp pace of the prior two meetings. However, a clear hawkish shift was adopted within the accompanying statement and the following press conference, with President Lagarde advocating for large, sustained increases in interest rates over the period ahead. Indeed, the Governing Council’s updated macroeconomic projections continue to paint a bleak picture for the outlook. That inflation is not expected to return to the medium-term target of 2% over the forecast horizon (6.3% in 2023; 3.4% in 2024 and 2.3% in 2025) suggests a growing concern over the structure and pace of core inflation, which itself held firm at 5.0% in November. Reinforced with plans to reduce the APP portfolio from March 2023, the ECB’s tightening cycle will likely run further into 2023, but this will depend crucially on the flow of data over the next few months as the Governing Council gauges the evolution of inflation pressures and resilience of the economy over winter.

The Bank of England meanwhile provided relatively fewer surprises, also slowing the pace of tightening to 50bps in December. The decision statement was very similar to that of last month, the Committee stating that the economy is evolving broadly in line with the projections laid out in the November report. The dovish shift in the voting profile (6-3 for 50bps in December; 7-2 for 75bps in November) had little market impact, with any signal of a shift of sentiment within the Committee being overshadowed by the still formidable inflation outlook that warrants further increases in interest rates over coming months.

A final note on China. This week we have continued to see further progress away from COVID-zero, with broad-based regular testing for the virus resigned to the past. Authorities are also making a concerted effort to hold up then stoke confidence in the outlook as COVID-19 spreads across the country, inevitably causing health consequences for at-risk groups. For our growth expectations to be met for 2023, confidence amongst households must be robust, else they continue to choose to stay home and not spend. How consumption responds a month or two after the removal of restrictions will determine the skew of risks for household demand in 2023. That in turn will give a guide on the likelihood of an upturn in domestically-focused investment, across the business sector and for housing. As outlined in Market Outlook, the global green transition and Asia’s structural development are creating broad-based and long-lasting export opportunities for China. But the initial wave of investment could prove bumpy given both domestic and global uncertainties, even with the policy stance highly accommodative and China’s competitiveness improving ahead of anticipated FX appreciation.

This is the last edition of Cliff Notes until late January 2023. Merry Christmas and best wishes for 2023.

Key Highlights

• USD/JPY started a consolidation phase above the 134.50 level.
• A key bearish trend line is forming with resistance near 137.15 on the 4-hours chart.
• EUR/USD extended its increase above the 1.0680 resistance zone.
• The Bank of England raised interest rates from 3% to 3.5%.

USD/JPY Technical Analysis

The US Dollar saw a bearish moves after it settled below the 142.00 level. USD/JPY even declined below the 140.00 support level to move into a bearish zone.

Looking at the 4-hours chart, the pair settled well below the 140.00 level, the 100 simple moving average (red, 4-hours), and the 200 simple moving average (green, 4-hours).

There was also a drop below the 136.50 support level. The recent low was formed near 134.51 before there was an upside correction. The pair corrected above the 135.80 resistance zone. However, the bears are active near the 137.20 zone.

There is also a key bearish trend line forming with resistance near 137.15 on the same chart. The next major resistance may perhaps be near 137.50. A clear move above the 137.50 resistance might start a steady increase.

In the stated case, USD/JPY may perhaps rise towards the 138.50 level. Any more gains could lead the pair towards the 140.00 resistance zone.

If not, there is a risk of a fresh decline below the 135.50 support. The next major support is near the 134.50 zone. Any more losses might send the pair towards the 133.80 support zone.

Looking at EUR/USD, the pair extended its increase above the 1.0680 resistance and there are chances of more upsides.

Economic Releases

• Germany’s Manufacturing PMI for Nov 2022 (Preliminary) - Forecast 48.2, versus 48.3 previous.
• Germany’s Services PMI for Nov 2022 (Preliminary) - Forecast 46.3, versus 46.1 previous.
• Euro Zone Manufacturing PMI for Nov 2022 (Preliminary) – Forecast 47.1, versus 47.1 previous.
• Euro Zone Services PMI for Nov 2022 (Preliminary) – Forecast 48.5, versus 48.5 previous.
• UK Manufacturing PMI for Nov 2022 (Preliminary) – Forecast 46.3, versus 46.5 previous.
• UK Services PMI for Nov 2022 (Preliminary) – Forecast 48.5, versus 48.8 previous.
• US Manufacturing PMI for Nov 2022 (Preliminary) – Forecast 47.7, versus 47.7 previous.
• US Services PMI for Nov 2022 (Preliminary) – Forecast 46.8, versus 46.2 previous.

• CHFJPY rising inside short-term impulse wave 3
• Likely to rise to resistance level 149.0

CHFJPY continues to rise inside the short-term impulse wave 3, which previously broke the

resistance level 147.00 standing near the resistance trendline of the daily down channel from September.

The breakout of the resistance level 147.00 continues the clear multi-month uptrend inside which the pair has been moving from the start of this year.

CHFJPY can be expected to rise further toward the next resistance level 149.0 (top of the previous waves (b) and (ii) and the target for the completion of the active wave (iii)).

• Gold formed daily Evening Star
• Likely to fall to support level 1750.00

Gold earlier reversed down strongly from the pivotal resistance level 1805.00 (which has been reversing the price from the middle of May).

The downward reversal from the resistance level 1805.00 created the daily candlesticks reversal pattern Evening Star.

Gold can be expected to fall further toward the next support level 1750.00 (forecast price for the completion of the active wave (ii)).