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Markets

A75 bps rate hike is not the new norm (according to ECB’s Lagarde yesterday at the ECB press conference). Also the Fed pledged to set interest rates in line with incoming economic data. That said, after the assessments made by ECB Chair Lagarde and Fed Chair Powell yesterday, markets currently see anything different from a 75 bps rate hike by both the ECB and the Fed at their next meetings as highly unlikely. A further reappraisal is very much possible, especially if inflation were the stay at elevated levels for longer. However, after recent sharp repositioning and 75 bps hikes ‘discounted,’ markets understandably were ripe for a pause. Technical considerations and a calendar deprived of any key economic data facilitated a wait-and-see attitude. The US 2-y yield for new is ‘blocked’ at strong resistance near 3.50%. That said, it still holds near levels not seen since 2007. The US 10-y (3.28%) yield also nears key resistance in the 3.36/3.50% area. Similar narrative on the EMU interest rate markets. The EMU 10y swap and German 10-y yield almost touched the closing peak levels as set mid-June. The EMU 2-y yield intra-day backtracked after touching a new cycle top. In this (admittedly labile) consolation US yields currently are trading almost unchanged across the curve. German yields initially eased 5bps+ across curve (except for the 30-y), but already reversed intraday losses. The pause in the bond sell-off also provides relief for other markets. US and European, equities are rebounding (EuroStoxx 50 +2.0%, Nasdaq +1.1%). European gas prices continue a gradual but protracted correction of the historic record levels reached two weeks ago as EMU energy ministers are contemplating  new mechanisms to cap unwarranted high pricing, or at least try to reduce the negative impact of these prices on the broader economy. The reference Dutch future contract eases to € 212 p/MWH (peak was (€349). On the other hand, oil rebound after recent sharp, with Brent rebounding north of $ 91 p/b.

On FX markets, recent aggressive USD bid also eased on the  broader risk-relief. The DXY index currently trades near 109 compared to 109.50 this morning, but well of the intraday lows. USD/JPY also further leaves from recent multi year highs 142.30). In recent USD ascent, the euro often outperformed most other G10 currencies (NZD, AUD, CHF, SEK, NOK….). This pattern was completely revered today. The euro is losing against most other ‘smaller’ G10 currencies, the Canadian dollar being the exception to the rule (cf infra). EUR/USD, this morning briefly filled offers north of 1.01, but a sustained upside failed despite the broader USD correction, a better risk sentiment, the ECB catching up the broader tightening move….EUR/USD currently only maintains a ‘meagre’ daily gain (1.0040 vs 0.9997 at yesterday’s close). Sterling also gained a few ticks against the single currency. However, EUR/GBP still holding with reach of the 0.87/0.8721 resistance area, only suggests fragile underlying sentiment against the UK currency. The Bank of England delayed its September meeting by one week to Sept 22 due to the national mourning for Queen Elisabeth 2.

News Headlines

The Canadian Labour Force Survey showed a 39 700 job loss in August. It’s the third month running of declining employment. Details pointed to a decrease of 77 200 full time jobs and an increase of 37 500 part time jobs. Diving in the numbers, educational services (- 50 000), construction (-28 000) and public sector (-28 000) were the most hard hit sectors. The unemployment rate rose for the first time in seven months, from 4.9% to 5.4%. An increase of the participation rate (64.8% from 64.7%) softens the blow. Hourly wage growth accelerated from 5.4% Y/Y to 5.6% Y/Y. The loonie had a strong run against the dollar going into Canadian payrolls thanks to the friendly risk environment. USD/CAD drifted temporary below 1.30 for the first time since end August before the labour market report halted the Canadian currency’s rally.

• The Canadian labour market shed 40k positions in August, with full-time employment down 77k and part-time employment up 37.5k.
• The unemployment rate rose by 0.5 percentage points, to 5.4%, as August's jobs decline was met by a 66k expansion in the labour force. The participation rate also rose to 64.8% (up 0.1 percentage points).
• By industry, employment losses were felt in educational services (-50k) and construction (-28k), though somewhat offset by gains in professional, scientific, and technical services (+14k), as well as 'other services' (+15k).
• The bulk of the jobs decline was concentrated in the public sector (-28k), although employment also fell in the private sector (-4k). Meanwhile, self-employment was down 8k.
• On a geographic basis, the report noted employment losses in British Columbia (-28k), Manitoba (-10k), and Nova Scotia (-5.2k). Gains were noted in Quebec (+27k), while Ontario was flat on the month.
• Lastly, total hours worked were unchanged in August following July's 0.5% monthly decline. Wages were up 5.4% year-on-year, marking an acceleration from July's 5.2% pace.

Key Implications

• That's three negative job prints in a row, with the accumulated job losses now reaching 114k. With the bounce back in the number of people engaged in the labour market, the unemployment rate has decisively moved back towards a more sustainable level of 5.4%.
• Though this report is likely to get some people worried, we'd argue that a slowing labour market is what is needed to ensure that this high inflation environment does not become entrenched. The labour market is coming from levels of extreme tightness and has been due for some giveback. This is exactly what is currently playing out.
• This report shouldn't cause the Bank of Canada to change course. Wage growth has increased again and domestic demand driven inflation is only continuing to rise. This has us expecting a 50 point hike in October, with the policy rate getting to 4% by year-end.

The Australian dollar has posted sharp gains today. In the European session, AUD/USD is trading at 0.6837, up 1.27%.

China inflation falls unexpectedly

China’s economy has been stalling, as global demand has weakened and China rigorously enforces a zero-Covid policy. The slowdown in the Chinese economy has hurt global growth, but the silver lining is that August inflation also dropped, which has taken the edge off global inflation. China is a key driver of external inflation pressures, and the decline will be welcome news in the major economies, where inflation remains enemy number one and has led to a sharp tightening in policy.

China released the August inflation earlier today. On an annualized basis, August CPI was up 2.5%, lower than the 2.7% gain in July and below the consensus of 2.8%. The Producer Price Index for August slowed to 2.3%, down from 4.2% and below the estimate of 3.1%. The drop in CPI in the world’s number two economy has raised risk sentiment and sent risk-related currencies like the Aussie sharply higher today.

The RBA raised rates by 0.50% earlier this week, bringing the cash rate to 2.35%. RBA Governor Lowe said on Thursday that the RBA would need to raise interest rates at least twice more to contain the “scourge” of inflation. Lowe reiterated that the pace and extent of future rate hikes would be data-dependent, especially inflation and wage growth. After four straight hikes of 0.50%, the RBA may decide to ease up in October with a small hike of 0.25%. Next week’s employment report will be an important factor in the RBA’s rate decision.

AUD/USD Technical

• AUD/USD is testing support at 0.6737. Below, there is support at 0.6661
• There is resistance at 0.6737 and 0.6846

Daily Pivots: (S1) 0.9944; (P) 0.9986; (R1) 1.0042; More...

Intraday bias in EUR/USD remains mildly on the upside at this point. Rebound from 0.9863 short term bottom would target 55 day EMA (now at 1.0170). Sustained break there will raise the chance of larger reversal, and target 1.0368 resistance. On the downside, firm break of 0.9863 will resume larger down trend.

In the bigger picture, down trend from 1.6039 (2008 high) is still in progress. Next target is 100% projection of 1.3993 to 1.0339 from 1.2348 at 0.8694. In any case, outlook will stay bearish as long as 1.0368 resistance holds, even in case of strong rebound.

Daily Pivots: (S1) 1.1456; (P) 1.1508; (R1) 1.1556; More...

GBP/USD's break of 1.1608 minor resistance suggests short term bottoming at 1.1404, on bullish convergence condition in 4 hour MACD, after defending 1.1409 low. Intraday bias is back on the upside for 55 day EMA (now at 1.1942). On the downside, decisive break of 1.1409 will resume larger down trend.

In the bigger picture, based on current momentum, fall from 1.4248 (2018 high) is probably resuming long term down trend from 2.1161 (2007 high). Sustained break of 1.1409 will target 61.8% projection of 1.7190 (2014 high) to 1.1409 (2020 low) from 1.4248 (2021 high) at 1.0675. This will remain the favored case for now as long as 1.2292 resistance holds.

Daily Pivots: (S1) 143.43; (P) 144.00; (R1) 144.67; More...

USD/JPY's retreat from 144.98 is extending but stays above 1.3937 resistance turned support. Intraday bias remains neutral first. Downside should be contained by 139.37 resistance turned support to bring another rally. On the upside, break of 144.98 will resume larger up trend to 147.68 long term resistance. Break there will target 161.8% projection of 126.35 to 139.37 from 130.38 at 151.44 next.

In the bigger picture, up trend from 101.18 is still in progress, as part of the whole up trend from 75.56 (2011 low). Further rise should be seen to 147.68 (1998 high). For now, break of 130.38 support is needed to be the first indication of medium term topping. Otherwise, outlook will stay bullish even in case of deep pull back.

Daily Pivots: (S1) 0.9677; (P) 0.9730; (R1) 0.9758; More...

USD/CHF's decline from 0.9868 accelerates to as low as 0.9546 so far. Current fall is seen as the corrective pattern from 1.0063. Intraday bias stays on the downside for 0.9369 support. On the upside above 0.9707 minor resistance will turn intraday bias neutral first.

In the bigger picture, current development suggests that up trend from 0.8756 (2021 low) is still in progress. Sustained break of 1.0063 will target 100% projection of 0.9149 to 1.0063 from 0.9369 at 1.0283, and then 1.0342 (2016 high). For now, this will remain the favored case as long as 0.9369 support holds, even in case of deep pull back.

Dollar's decline accelerates today on improving risk sentiment and pull back in treasury yields. Aussie is gaining most so far but Yen catching up quickly. Euro is struggling to extend the post-ECB rally, as dragged down by selloff in crosses, in particular against Swiss Franc. Canadian Dollar turned weaker after huge employment miss.

Technically, EUR/CHF's fall form 0.9684 extends lower today and outlook is unchanged. That is, corrective rebound from 0.9550 has completed and larger down trend is ready to resume. Retest of 0.9550 should be seen next and break of confirm this bearish view. For now, USD/CHF is also diving after prior rejection by 0.9884 resistance. If EUR/CHF could hold firm above parity, down trend resumption in EUR/CHF would mean steeper decline in USD/CHF.

In Europe, at the time of writing, FTSE is up 1.47%. DAX is up 1.39%. CAC is up 1.48%. Germany 10-year yield is down -0.041 at 1.688. Earlier in Asia, Japan 10-year JGB yield rose 0.53%. Hong Kong HSI rose 2.69%. China Shanghai SSE rose 0.82%. Singapore Strait Times rose 0.91%. Japan 10-year JGB yield dropped -0.0008 to 0.251.

Canada employment dropped -39.7k in Aug, unemployment rate jumped to 5.4%

Canada employment dropped -39.7k in August, much worse than expectation of 15.0k growth. Unemployment rate jumped from 4.9% to 5.4%, above expectation of 5.0%. That's the first rise in unemployment rate in seven months. Participation rate ticked up 0.1% to 64.8%. Average hourly wages of employees rose 5.4% yoy.

ECB Knot: we only have one problem on our plate - inflation

ECB governing council member Klaas Knot told Dutch radio BNR today, "We expect inflation to keep rising in the coming months, so that means we only have one problem on our plate: inflation. And that will mean that we will have to slow economic growth at least a bit to reduce inflation".

Another Governing Council member Peter Kazimir said , "Inflation remains unacceptably high. The priority now is to vigorously continue the normalization of monetary policy." While not commenting on the terminal rate of the current cycle, he said that ECB was still "quite far" from neutral rate.

Francois Villeroy de Galhau said, the central bank must be "orderly and determined" with rate hike. He expects inflation to stay high next year and come back to 2% target by 2024.

BoJ Kuroda: We will watch exchange rate moves carefully

BoJ Governor Haruhiko Kuroda said, "When the yen is moving 2 to 3 yen per day, that's a rapid move. We will watch exchange rate moves carefully." The comment came after Kuroda met Prime Minister Fumio Kishida, where currency matters were discussed.

Separately, Finance Minister Shunichi Suzuki said the the government would not rule out any options on foreign exchange moves.

USD/CHF Mid-Day Outlook

Daily Pivots: (S1) 0.9677; (P) 0.9730; (R1) 0.9758; More...

USD/CHF's decline from 0.9868 accelerates to as low as 0.9546 so far. Current fall is seen as the corrective pattern from 1.0063. Intraday bias stays on the downside for 0.9369 support. On the upside above 0.9707 minor resistance will turn intraday bias neutral first.

In the bigger picture, current development suggests that up trend from 0.8756 (2021 low) is still in progress. Sustained break of 1.0063 will target 100% projection of 0.9149 to 1.0063 from 0.9369 at 1.0283, and then 1.0342 (2016 high). For now, this will remain the favored case as long as 0.9369 support holds, even in case of deep pull back.

Economic Indicators Update

Canada employment dropped -39.7k in August, much worse than expectation of 15.0k growth. Unemployment rate jumped from 4.9% to 5.4%, above expectation of 5.0%. That's the first rise in unemployment rate in seven months. Participation rate ticked up 0.1% to 64.8%. Average hourly wages of employees rose 5.4% yoy.

Full release here.

Market picture

Bitcoin was little changed on Thursday, ending around $19,400, but added more than 7% on Friday morning. So, in a period with relatively low liquidity, the BTCUSD has won back over two weeks of a slow slide down in one move.

Does this look like a reversal? For now, it is more like an attempt to make a pump in a low-liquid market. However, closing the week at current or higher levels would be a bullish sign, but it would be premature to turn bullish before.

The overall capitalisation of the crypto market is adding 5.7% as it has yet to keep up with the flagship. However, there is a local victory here as well – crossing the 1 trillion mark – which needs to be held at least until the end of the week before we can talk about a bullish victory.

News background

The number of institutional investors in Ethereum could grow after the move to PoS due to more attractive returns, according to Chainalysis. Stacking ETH would offer investors up to 10-15% per annum, making it an attractive alternative to bonds.

Former BitMEX CEO Arthur Hayes suggested that if The Merge update is successful, Ethereum will reach the $3,000 mark this year. According to him, a sharp decline in the coin’s issuance rate would boost ETH’s growth.

According to Coincub research, Germany is the best country for crypto investors in terms of tax policy, whereas Italy, Switzerland, Singapore, and Slovenia follow.