Sample Category Title

EUR/JPY's up trend resumed last week and hit as high as 148.38. But subsequent retreats indicates that it's turned into another consolidation phase. Initial bias is turned neutral this week first. Downside should be contained by 140.88/144.06 support zone to bring another rally. Break of 148.38 will resume larger up trend to 100% projection of 133.38 to 145.62 from 137.32 at 149.56, which is close to 149.76 long term resistance.

In the bigger picture, the up trend from 114.42 (2020 low) is still in progress for 149.76 (2014 high). Decisive break there will pave the way to 161.8% projection of 114.42 to 134.11 from 124.37 at 156.22. This will now remain the favored case as long as 137.32 support holds.

In the long term picture, there is sign of upside acceleration with strong break of long term channel resistance. Outlook will stay bullish as long as 134.11 resistance turned support holds. 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 edged lower to 0.8577 last week but recovered again. Initial bias stays neutral this week first. Further decline is expected as long as 0.8869 resistance holds. Break of 0.8577 will resume the fall from 0.9267, towards 0.8201/8388 support zone. However, firm break of 0.8869 will indicate that such decline has completed after defending 55 day EMA. Intraday bias will be back on the upside for retesting 0.9267 instead.

In the bigger picture, current development suggests that fall from 0.9267 is a down leg inside long term range pattern. Deeper fall could be seen towards 0.8201/8338 support zone. But strong support should be seen there to bring reversal.

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 edged higher to 1.5685 last week but turned into consolidation then. Initial bias remains neutral this week first. Downside of retreat should be contained by 1.5165 support to bring another rally. Break of 1.5685 will resume the rise from 1.4281 and target 161.8% projection of 1.4281 to 1.4965 from 1.4716 at 1.5823 next.

In the bigger picture, a medium term bottom should be in place at 1.4281, on bullish convergence condition in daily MACD. Further rise would be seen back to 1.6434 key resistance next. Break of 1.4965 resistance turned support is needed to indicate reversal. Otherwise, further rally will remain in favor.

In the longer term picture, breach of 55 month EMA (now at 1.5613) raises the chance of medium term bullish reversal. Focus is back on 1.6434 cluster resistance, 38.2% retracement of 1.9799 (2020 high) to 1.4281 at 1.6389). Sustained break there will confirm and target 61.8% retracement at 1.7691.

EUR/CHF's rally resumed last week and rose to as high as 0.9883, despite loss of upside momentum. 61.8% projection of 0.9407 to 0.9798 from 0.9641 at 0.9883 was met but there is no sign of topping. Initial bias stays on the upside this week. Sustained trading above 0.9864 will solidify the case of medium term bottoming and target 100% projection at 1.0032. This will remain the favored case as long as 0.9641 support holds, even in case of retreat.

In the bigger picture, considering bullish condition in daily MACD, firm break of 0.9864 resistance will confirm medium term bottoming at 0.9407. Stronger rally should then be seen to 55 week EMA (now at 1.0128), even as a corrective rebound. Nevertheless, rejection by 0.9864 will bring down trend resumption through 0.9407 next.

In the long term picture, capped below 55 month EMA, EUR/CHF is seen as extending the multi-decade down trend. There is no prospect of a bullish reversal until firm break of 1.0505 support turned resistance (2020 low). In case of resumption, next target is 138.2% projection of 1.2004 to 1.0505 to 1.1149 at 0.9033.

Monday, Oct 24, 2022

Tuesday, Oct 25, 2022

Wednesday, Oct 26, 2022

Thursday, Oct 27, 2022

Friday, Oct 28, 2022

US

Wall Street will pay close attention to the first look at third-quarter GDP. After two consecutive quarters of negative readings, growth is expected to bounce back into expansion territory with a 2.3% reading. The consensus range for third-quarter GDP is between 1.1% and 3.0%. The October flash PMIs will also closely be watched, with manufacturing activity expected to edge lower but still remain in expansion territory. Service sector activity is expected to tick higher but still remain entrenched in contraction territory.

Peak earnings are here and everyone will want to see how mega-cap tech performs and what the oil giants will say about their future CAPEX plans. Attention on Thursday will be on Apple and Amazon’s quarterly results. Oil giants, Exxon and Chevron report before Friday’s opening bell.  This is the critical week for guidance from mega-cap tech that will either make or break risk appetite.

EU

The headline event next week will be the ECB meeting on Thursday when the central bank is widely expected to hike rates by 75 basis points. The question is how much further will they go? Markets are pricing in another 75 basis points over the course of the following two meetings and then 25 after that for two meetings. That would leave rates well below what we’re seeing elsewhere which is interesting when inflation is close to 10% and has been rising.

President Christine Lagarde also makes an appearance on Saturday, ahead of next week’s decision. PMIs on Monday get the week off to a fast start, with GDP and inflation seeing us into the weekend.

UK

A new week will bring a new Prime Minister in the UK, the third in two months, following the resignation of Liz Truss. Of course, if Boris wins then it will technically be two Prime Ministers. It would also nicely sum up the mess that is British politics right now that the man removed from office by his own party could be welcomed back so quickly. The first step is MPs giving their backing to candidates, with the threshold this time being 100 votes in order to speed up the process. In theory, we could have a winner by Monday but if it goes to the membership, it will be Friday.

PMIs on Monday may also be of interest among all of the drama.

Russia

The CBR is expected to leave interest rates unchanged on Friday at 7.5% following a cycle of easing that’s seen the Key Rate fall from a peak of 20% in March.

South Africa

Finance Minister Enoch Godongwana will deliver the medium-term budget policy statement on Wednesday which provides economic forecasts, budget updates and any changes to spending.

PPI inflation data will also be released on Thursday.

Turkey

The CBRT will release its quarterly inflation report on Thursday which will no doubt be an interesting read. Official inflation above 80% in the midst of another aggressive easing cycle, the last rate cut being 1.5%, doesn’t suggest there’ll be many lessons learned. The CBRT also signalled another could follow at the next meeting, taking the rate to 9%, before it pauses again.

Switzerland

ZEW expectations survey and KOF leading indicator are the only releases of note next week.

China

The conclusion of China’s Party Congress will likely be followed up with the delayed release of GDP and activity data.  The economy was losing steam battling strict anti-COVID measures and a deflated real estate sector.  This year’s GDP reading could be the second slowest year of growth since 1976.  The September retail sales and export data are also expected to show a significant deceleration.

India

No major economic releases or speeches are expected.

Australia & New Zealand

The focus for Australia will be both on the delayed release of key Chinese activity data and the RBA’s preferred inflation gauge. Core inflation could hit a 31-year high and that could bolster the RBA to deliver another large rate hike.

In New Zealand, traders will also closely watch the swathe of Chinese economic data and a couple of key confidence reports.  On Tuesday, the  ANZ Business Confidence report is published and Thursday contains the consumer confidence readings.

Japan

The Bank of Japan is not expected to deliver any changes to its ultra-low interest rate and asset purchases. It will be hard to continue to maintain this dovish stance as inflation is above their target. A suspected intervention on Friday came following days of warnings from the Finance Ministry. How successful will this one be? The previous attempt didn’t hold off the yen bears for long.

Singapore

On Tuesday, September inflation is expected to remain hot but tick lower to 7.4%. Inflation is expected to remain high well into next year and that should keep the MAS in tightening mode.

Economic Calendar

Saturday, Oct. 22

Economic Data/Events

• China’s Party Congress ends
• BOE MPC member Mann speaks at a Marshall Society Speaker event in Cambridge
• ECB President Lagarde participates in the “Mein Leiblingstuck” event at the Alte Oper Frankfurt

Sunday, Oct. 23

Economic Events

• Japan PM Kishida meets his Australian counterpart, Anthony Albanese, in Perth to discuss security issues and other regional concerns
• French President Macron meets with Italian President Mattarella in Rome

Monday, Oct. 24

Economic Data/Events

• US Flash PMIs
• Australia PMI data
• European PMIs: France, Germany, UK
• Japan PMIs
• Mexico bi-weekly CPI
• German Chancellor Scholz holds a forum with Ukrainian President Volodymyr Zelenskiy
• RBA’s Kent addresses the Commonwealth Bank Global Markets Conference in Sydney

Tuesday, Oct. 25

Economic Data/Events

• US Conference Board consumer confidence
• Germany IFO business climate
• Japan department store sales, machine tool orders
• Mexico international reserves
• Singapore CPI
• Thailand trade
• BOE Chief Economist Pill speaks at an Office for National Statistics event titled “Understanding the Cost of Living Through Statistics”
• European Union and G7 nations hold a Ukraine reconstruction conference
• Australian PM Albanese’s government presents its first budget
• The IEA holds a meeting of ministers responsible for nuclear energy in Washington

Wednesday, Oct. 26

Economic Data/Events

• US MBA mortgage applications, wholesale inventories, new home sales
• Australia CPI
• BOC rate decision: Expected to raise rates by 0.5%
• France consumer confidence
• Japan PPI, leading index
• New Zealand business confidence
• Russia industrial production
• Singapore industrial production
• The BOJ is expected to announce the outright purchase amount of government securities
• EIA crude oil inventory report

Thursday, Oct. 27

Economic Data/Events

• US GDP, durable goods orders, initial jobless claims
• ECB rate decision: Expected to raise rates by 75bps
• Australia export/import price index
• China industrial profits
• Mexico trade, unemployment
• Russia gold and forex reserves
• Mega-cap tech earnings from Apple and Amazon
• BOE Deputy Governor Woods speaks at Mansion House
• Germany Chancellor Scholz holds talks with Greek Prime Minister Kyriakos Mitsotakis in Athens.

Friday, Oct. 28

Economic Data/Events

• US personal income, personal spending, pending home sales, University of Michigan consumer sentiment
• BOJ Rate Decision: No change expected with the 10-year target and policy bank rate
• France CPI
• Germany GDP, CPI
• Canada GDP
• Australia PPI
• Eurozone economic confidence, consumer confidence
• Japan Tokyo CPI, unemployment
• New Zealand consumer confidence
• Russia rate decision
• Singapore unemployment, home prices
• Thailand foreign reserves, forward contracts
• Key earnings from Exxon and Chevron
• Deadline for the Northern Ireland government to be restored, or the UK Secretary of State for Northern Ireland Heaton-Harris will call an election

Sovereign Rating Updates

• Portugal (Fitch)
• Sweden (S&P)
• Finland (S&P)
• Poland (Moody’s)
• Italy (DBRS)

United States: Momentum Continues to Slow

• This week's data show that while the U.S. economy has remained resilient thus far, tighter monetary policy is certainly starting to impact some key sectors. Industrial production regained its footing in September, but there are signs of slower growth ahead, while regional manufacturing surveys support this loss of momentum. Meanwhile, the real estate sector has been significantly affected by rising interest rates, with total housing starts falling 8.1% in September. Peering ahead, the forward-looking Leading Economic Index points to a recession in the coming year.
• Next week: New Home Sales (Wed), Q3 Real GDP (Thu), Personal Income & Spending (Fri)

International: Robust Consumer Inflation, Subdued Consumer Spending

• This week saw more evidence on the international front of divergent economic trends—with consumer inflation remaining rapid and consumer spending staying subdued. Inflation surprised to the upside in the United Kingdom, Canada and New Zealand. Meanwhile, retail spending data were subdued in the United Kingdom and Canada. For now, rapid inflation remains a greater concern than slower growth for foreign central banks, and we anticipate further monetary tightening in the weeks and months ahead.
• Next week: U.K. PMIs (Mon), Bank of Canada (Wed), European Central Bank (Thu)

Credit Market Insights: ARMs Make a Comeback as Mortgage Applications Plummet

• The Mortgage Bankers Association (MBA) reported on Wednesday that mortgage applications for purchase fell 4.5% during the week ended October 14. The long skid has helped push application counts to their lowest level since 1997. With markedly higher financing costs squeezing demand for mortgages, there is one type of home loan that has made a comeback this year, the adjustable rate mortgage (ARM).

Topic of the Week: "Modest" Is the Word of the Day in a Mixed Beige Book

• From employment in New York to overall economic activity in Dallas, "modest" was the word of the day in the newest Beige Book released by the Federal Reserve. Modest growth was broad-based, manufacturing activity improved on net and demand for services remains strong. That said, the outlook continues to worsen.

Full report here.

The Canadian economy is slowing, but inflation is still too high to prevent another aggressive interest rate hike from the Bank of Canada. We expect a 50 basis point increase next week to take the overnight rate to 3.75%. That’s smaller than the 75 basis point hike in September and the 100 basis point jump in July. But it’s still larger than ‘normal.’ And risks remain that the central bank could go bigger: markets are currently leaning toward a 75 basis point increase.

Economic growth has slowed into the summer. And we expect next week’s August GDP report will be little changed from July (in line with Statistics Canada’s early estimate.) That loss of momentum likely stretched into the fall as hours worked in September fell 0.6%. The BoC’s Q3 Business Outlook Survey also flagged softening business sentiment. Labour markets remain incredibly tight with job openings outpacing available unemployed workers. But inflation isn’t likely to return fully and sustainably to the central bank’s target range of 2-3% until the economy slows further. That’s keeping monetary policymakers firmly focused on rate hikes, even as the growth outlook softens.

There are some early signs that broader measures of inflation are starting to ease. The BoC’s preferred ‘median’ and ‘trim’ CPI measures are still up 5% from a year ago but recent month-over-month increases have been smaller. And longer-run business inflation expectations have edged lower. But the 7% headline annual inflation rate in September is still more than twice the BoC’s inflation target range.

We continue to expect higher inflation and interest rates to push Canada into a moderate recession in the first half of next year. That would put the central bank in a position to pause interest rate hikes by the end of 2022. And indeed, we expect the overnight rate to end the year at 4%. But risks to that assumption are still tilted to the upside, and are contingent on broader inflation trends showing further evidence of slowing.

Week ahead data watch:

We expect Canadian GDP edged up 0.1% in August – consistent with Statistics Canada’s early estimate that output was “essentially unchanged” in the month. Manufacturing output likely edged lower and home resales continued to retrench, but retail and wholesale sale volumes increased in August.

We expect U.S. GDP increased 1.8% in Q3 – boosted by a surge in net trade and modest growth in consumer spending offset partially by weaker residential investment and a pull-back in inventories.

U.S. Highlights

• UK policymakers abruptly U-turned on its recently proposed “mini” budget, forcing Prime Minister Liz Truss to resign.
• Existing home sales fell 1.5% m/m in September to 4.7 million units. Sales have now fallen for eight consecutive months and are down 23% year-to-date.
• Housing starts fell 8.1% m/m to 1.4 million units, with declines felt across both the single-family (-4.7% m/m) and multi¬family (-13.2% m/m) segments. The number of units currently under construction continued to edge higher, rising to a historic high of 1.7 million units.

Canadian Highlights

• Canadian consumer price inflation took a small step in the right direction in September, easing to 6.9% year-on-year, down from 7.0% in August.
• Worrisomely, the monthly inflation numbers showed a re-acceleration, with food and shelter costs proving more enduring.
• The Bank of Canada’s business and consumer surveys were also released, showing heightened fears that a recession will hit Canada in the next year.

U.S. - Hey Housing, How Low Can You Go?

This week brought some calming to global financial markets, helped along by UK policymakers abrupt U-turn on its proposed “mini” budget which had included £45 billion of unfunded tax cuts. UK Prime Minister Liz Truss resigned on Thursday, leaving the Conservative Party to elect a new leader sometime later next week. Yields on longer duration Gilts were down 50 basis points (bps) on the week, while the Sterling lost a modest 0.5% vis’-a-vis the dollar.

Investors also continued to digest last week’s CPI report, which led to further pressure on U.S. yields. At the time of writing, the 10-year has moved up an additional 30-bps this week to 4.3%, reaching both a new cyclical high and also the highest level since mid-2007. Top of mind on the inflation front, has been the recent turn higher in energy prices. Indeed, since peaking in July, gasoline prices had fallen by nearly 30% through mid-September. However, the recent announcement by OPEC+ members to pare back production quotas has led to renewed pressure on oil prices, which has also pulled gasoline prices higher. In an effort to provide some relief to consumers, the Biden Administration announced this week that they will be digging further into its Special Petroleum Reserve (SPR) and releasing an additional 15 million barrels in December. After including this week’s announcement, the cumulative release through December will total nearly 180 million barrels over the six-month preceding period. And its impact on gas prices cannot be understated. The U.S. Treasury estimated that the release of reserves to date has lowered retail fuel prices by as much as 42 cents per-gallon. That has come at the expense of an unprecedented drawdown in the SPR, which will eventually need to be topped up (Chart 1). According to the Biden Administration, this will happen once oil prices fall below $70 per-barrel.

The renewed pressure on interest rates has brought the housing market squarely back into focus. With the 30-year fixed mortgage rate now at 7.25%, buyer affordability has eroded to levels beyond the lows pre-dating the mid-2000 housing crisis. Demand continues to soften, with existing home sales falling 1.5% m/m to 4.7 million units in September and are now down 23% year-to-date. No reprieve appears to in sight, as leading indicators such as pending home sales and mortgage applications both point to further weakness in the months ahead.

Beyond the sales side, the combination of rising rates and elevated material costs has also heavily weighed on builder sentiment, with September housing starts falling 8.1% m/m in September. Declines were seen across both the single-family (-4.7% m/m) and multifamily (-13.2% m/m) segments, though the former has disproportionately accounted for most of the pullback year-to-date. Interestingly, the number of homes currently under construction remains at a historical high, as labor and building material shortages have significantly lengthen the time it takes to build a home (Chart 2). Perhaps most worrying is the fact that the number of single-family homes under construction currently sits at a 16-year high. With demand in this segment quickly receding, builders have already started reducing prices and adding additional incentives in an effort to attract buyers. However, with record amounts of new supply still in the pipeline, further declines in home prices are all but certain.

Canada – Inflation Leading to a Drop in Sentiment

It was a busy calendar for Canadian data this week. With CPI showing even greater persistence, we saw yields rise across the curve on changing expectations for the Bank of Canada (BoC). Adding even more colour to the inflation picture was the release of the BoC's own surveys of business and consumer sentiment. Both showed heightened fears of a recession on the back of stubbornly high inflation. The BoC will have these reports in hand as it prepares for its forthcoming interest rate announcement next Wednesday.

The release of the Canadian Consumer Price Index on Wednesday was the headliner on the economic calendar. As widely expected, the headline index declined on a year-on-year basis, reaching 6.9% in September, the lowest level since April 2022 (Chart 1). This decline occurred on the back of a 7.4% drop in gasoline prices. Though this was a welcomed sign, the underlying figures were not encouraging. On a month-on-month (m/m) annualized basis, the index increased by 4.8%, compared to 0.8% in August. This was driven by a 14.7% m/m gain in food prices and a 6.0% rise in shelter costs. Both of these factors are concerning. On the food side, there has been a re-acceleration in household staples like beef, poultry, and dairy products. Regarding shelter, the rise in mortgage interest costs is far outpacing the adjustment in house prices. Given the lags within the shelter component and the uncertainty regarding global food supplies, this raises the risk that inflation will take even longer to return to normal levels.

Inflation persistence has also had an impact on businesses. The Bank of Canada's Business Outlook Survey showed a sizable drop in overall confidence, with the main index falling to a level of 1.7 in 2022 Q3, from 4.9 in 2022 Q2. Driving this was a deterioration in the outlook for future sales, with more than 50% of firms expecting a recession in the next 12 months. The culprit here is the belief that the BoC will go too far in its fight against inflation, with interest rates set to further dent housing activity and weigh on household consumption. This was echoed in the BoC's parallel release of its Canadian Survey of Consumer Expectations. Here too, the economic outlook has dwindled, with most Canadian's thinking a recession will occur sometime in the next year.

The BoC is set to hike interest rates by 75 basis points next week and provide an update to its outlook for economic growth and inflation (Chart 2). We will be keenly attentive to any change in the BoC's inflation forecast given the impact this is having on sentiment. As we saw in both BoC surveys mentioned above, expectations for future inflation remain high. This should keep the BoC's tone very hawkish as it needs to cement pricing for higher interest rates in order to bring down expectations for future inflation. Though the bank's aggressive policy to date is starting to have an impact, as business inflation expectations are easing somewhat, there is still more to be done.

On Wednesday at 14:00 GMT, the BoC will decide on monetary policy, with market participants raising bets of a 75bps hike after the inflation numbers for September, despite economists’ consensus staying at 50bps. However, the size of the rate hike may not be the only focal point. Investors may also be eager to find out how officials are planning to move forward.

Inflation revives bets of a 75bps hike

At its September meeting, the BoC raised interest rates by 75bps, refraining from verifying expectations of a slower path from there onwards. However, with data showing inflation decelerating notably in August, traders have brought down their rate-path projections. Just before the September CPI numbers, they were expecting a 50bps hike at next week’s gathering, and only two more quarter-point increments thereafter.

Inflation slowed further in September, but by less than anticipated, with the core rate rising and the trimmed mean and median rates staying unchanged. This implies that the slide in the headline rate was mainly due to volatile items like energy and suggests that, like in the US and the UK, inflation in Canada is also becoming stickier. Ergo, market participants brought back bets of a 75bps hike, with the terminal rate being lifted by around 25bps.

Economy stays soft but will the BoC care?

Besides the CPIs, other data since the last meeting has been pointing towards a bleak economic outlook. The monthly GDP rate exited the negative territory in July, rebounding from -0.1% to +0.1%, but retail sales shrank 2.5% m/m during that month. As for the labor market, although it gained 21.1k jobs in September, it was after losing a sum of 113.5k during the summer months.

Although these numbers make a 50bps hike look as the safest choice, a few days ago BoC Governor Tiff Macklem said that he has not changed his mind on interest rate hikes, even as expectations grow about a possible recession next year. That’s maybe why investors did not hesitate to raise bets over a 75bps hike immediately after the latest CPI numbers.

Loonie destined to stay in downtrend against the dollar

Another triple hike could support the Canadian dollar initially, but for the currency to record decent gains, officials may need to sound hawkish with regards to their future course of action as well. Otherwise, hints that they will proceed slower compared to current market expectations could force the currency to give back its hike-related gains. Now in case policymakers decide to proceed with a 50bps hike, it could come under selling interest instantly.

Having said all that though, even in the case of a 75bps hike accompanied by a hawkish language, a bearish trend reversal in dollar/loonie seems unlikely. With market participants now expecting the Fed to raise interest rates to 5% by March and the Canadian dollar being subject to changes in the broader market sentiment, the pair may be destined to continue trending higher. Although Canada is a major oil producing and exporting nation, dollar/loonie has been more linked to the S&P 500 rather than to changes in oil prices. Therefore, with an aggressive Fed expected not only to support the dollar further, but to weigh on equities as well, any decision-related slide in the pair could be seen as just a corrective move within the broader uptrend.

What does the technical picture say?

Such a correction could meet buyers at around the 1.3650 zone or even lower, near the trough of October 5^th, at 1.3500. If so, a rebound could aim for another test at the peak of October 13 at 1.3980, the break of which would take the pair into territories last seen back in May 2020, The next resistance may be the high of May 14 at 14135, but if the bulls are not willing to stop there, they may put the 1.4265 zone under their radar, marked by the high of April 21 of that year.

For the bears to gain the upper hand in the near term, a break below 1.3500 may be needed. This would confirm the completion of a non-failure swing top and could open the way towards the 1.3225 zone, defined as a support by the low of September 20 and the inside swing high of July 14.