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Daily Pivots: (S1) 1.2838; (P) 1.2887; (R1) 1.2915; More...

USD/CAD is losing some downside momentum as seen in 4 hour MACD. But further decline is expected with 1.2988 minor resistance intact. On the downside, break of 1.2818 support will bring deeper fall back to 1.2516 key support. On the upside, above 1.2988 minor resistance will turn bias back to the upside for retesting 1.3222 instead.

In the bigger picture, down trend from 1.4667 (2020 high) should have completed at 1.2005, after defending 1.2061 long term cluster support. Rise from there should target 61.8% retracement of 1.4667 to 1.2005 (2021 low) at 1.3650. This will remain the favored case now as long as 1.2516 support holds.

Daily Pivots: (S1) 0.6884; (P) 0.6910; (R1) 0.6962; More...

AUD/USD retreated quickly after edging higher to 0.6937. Intraday bias remains neutral first. On the upside, above 0.6937 will resume the rebound from 0.6680 to 55 day EMA (now at 0.6967). Sustained break there will target 0.7282 structural resistance next. On the downside, however, below 0.6801 minor support will turn bias back to the downside for retesting 0.6680 low instead.

In the bigger picture, price actions from 0.8006 could still be a corrective pattern to rise from 0.5506 (2020 low). But current downside acceleration is raising the chance that it's a bearish impulsive move. In either case, outlook will remain bearish as long as 0.7282 resistance holds. Next target is 61.8% retracement of 0.5506 to 0.8006 at 0.6461.

Daily Pivots: (S1) 136.81; (P) 137.84; (R1) 138.39; More...

USD/JPY's correction from 139.37 is still in progress and intraday bias remains neutral first. Downside of retreat should be contained by 134.73 support. On the upside, break of 139.37 will resume larger up trend to 100% projection of 114.40 to 131.34 from 126.35 at 143.29.

In the bigger picture, current rally is seen as part of the long term up trend from 75.56 (2011 low). Next target is 100% projection of 75.56 (2011 low) to 125.85 (2015 high) from 98.97 at 149.26, which is close to 147.68 (1998 high). This will remain the favored case as long as 126.35 support holds.

Daily Pivots: (S1) 0.9641; (P) 0.9690; (R1) 0.9716; More...

Intraday bias in USD/CHF stays neutral at this point. Fall from 0.9884 is seen as a falling leg of the consolidation from 1.0063. Below 0.9652 will target 0.9493 support. On the upside, though, above 0.9788 minor resistance will turn bias back to the upside for 0.9884 resistance.

In the bigger picture, medium term up trend from 0.8756 (2021 low) is still in progress. Next target is 1.0342 (2016 high). Sustained break there will resume long term up trend from 0.7065 (2011 low). This will remain the favored case as long as 0.9471 resistance turned support holds.

Daily Pivots: (S1) 1.1926; (P) 1.1965; (R1) 1.2040; More...

Intraday bias in GBP/USD stays neutral as range trading continues. On the downside, break of 1.1759 low will resume larger down trend. Next target is 100% projection of 1.2666 to 1.1932 from 1.2405 at 1.1671. On the upside, firm break of 1.2055 minor resistance will confirm short term bottoming at 1.1759. Bias will be turned back to the upside for 1.2405 resistance next.

In the bigger picture, fall from 1.4248 (2018 high) could be a leg inside the pattern from 1.1409 (2020 low), or resuming the longer term down trend. Deeper decline is expected as long as 1.2666 resistance holds. Next target is 1.1409 low. However, firm break of 1.2666 will bring stronger rise back to 55 week EMA (now at 1.3065).

Key insights from the week that was.

In Australia and abroad, it was a quiet week for data, keeping the focus on monetary policy.

At home, the July RBA minutes and speeches by RBA Governor Lowe and Deputy Governor Bullock made clear there is more work to do to contain inflation and related risks. The minutes of the July meeting showed little debate over the choice between a 25bp or 50bp hike, with the latter seen as appropriate given “the level of interest rates was still very low for an economy with a tight labour market and facing a period of higher inflation”. “Members [also] agreed that the outlook for domestic economic activity had [only] eased a little.” Consumption is to be carefully monitored given the sharp drop in consumer confidence in recent months, but the strength of the labour market; accumulated savings; and the still–elevated level of the savings rate give cause for a sanguine baseline view for near–term spending. The strong financial position of Australian households was further elaborated on by Deputy Governor Bullock in her speech.

The July minutes also noted that “the current level of the cash rate is well below the lower range of estimates for the nominal neutral rate” albeit without giving clarity on what level was seen as neutral. Governor Lowe subsequently provided further detail, outlining in his speech that “most approaches [to modelling neutral] suggest that the neutral real rate for Australia is at least positive” and so, assuming inflation averages 2.5%yr over time, “the neutral nominal rate is at least 2½ per cent”.

Following the above RBA comments and last week’s labour force survey, Chief Economist Bill Evans today unveiled revisions to our forecasts for 2022–2024. With the RBA perceiving neutral as “at least” 2.5%, the labour market historically tight and inflation risks material, we now forecast 50bp increases in August and September to be followed by 25bp increases each month until February 2023 to a peak cash rate of 3.35%. While this course will, in time, bring inflation back to target, there will also be a significant cost for growth and the labour market. In 2023 and 2024, GDP growth is now forecast to be 1.0% and 2.0% (previously 2.0% and 2.5%) while the unemployment rate is projected to rise by 2ppts to around 5.0% end–2024. Rate cuts in 2024 should subsequently stabilise the economy and also the housing market, the latter after a circa 16% peak–to–trough decline through 2022 and 2023.

Further emphasising a need for careful monitoring of inflation pressures in the antipodes, New Zealand’s Q2 CPI came in ahead of expectations at 1.7%/7.3%yr as a result of supply–side factors and tight domestic capacity. While our New Zealand team expect Q2 to prove the peak period for CPI inflation, they do not expect to see annual inflation back within the RBNZ’s target range until the middle of 2023 – at the earliest. However, with the RBNZ’s tightening cycle already well advanced, much of the inflation seen to date coming from offshore, and early signs that the domestic economy is cooling, our New Zealand team continue to believe a 50bp hike in August followed by two additional 25bp increases will close out this tightening cycle at 3.50% in November. That said, ahead of the August meeting, it will be important to monitor the next round of labour market outcomes to assess upside risks emanating from domestic factors.

Australia’s Q2 CPI report is due next week; a headline outcome similar to that seen in New Zealand is anticipated.

The long–awaited July ECB meeting also delivered a hawkish surprise this week, with the Governing Council deciding to lift all of their key rates by 50bps after previously telegraphing a 25bp first move. Underlying this decision were concerns around the inflation outlook (headline 8.6%yr; core 3.7%yr) and inflation expectations despite the latter presently being well anchored. As with many central banks across the developed world, the ECB’s front–loaded start to this tightening cycle is a clear indication of their commitment to return inflation back to their medium–term target of 2%.

The economic impact of the ECB’s rate hike is expected to be cushioned by the introduction of a new tool to manage fragmentation risks. The Transmission Protection Instrument (TPI) will provide unrestricted support through purchasing government debt securities in markets where uneven monetary policy transmission is present, with some room to consider corporate debt if need be. Until its activation, the ECB will continue to employ ongoing reinvestments of proceeds from maturing securities in a flexible manner across Euro Area rate markets.

On the broader outlook, the ECB seemed quite sanguine given the strength of the labour market and the reopening; however, they acknowledged considerable uncertainty clouds the outlook. Russia’s invasion of Ukraine hit confidence hard and materially weakened growth prospects, while tighter lending standards already look to be impacting households and businesses. Still, the inflation challenge remains the clear focus; hence we still expect the ECB to raise the main refinancing rate by 50bp in September and to a year–end peak of 1.50%.

Turning then to the US. While profit reporting season provided many positive surprises for the market this week, economic updates disappointed yet again. Existing home sales fell over 5% in June as affordability and market supply continued to restrict activity; and housing starts fell another 3% after a near 12% fall in May. Received last Friday, though retail sales marginally beat expectations in June, adjusted for inflation, activity in the sector fell again, increasing the odds of a second consecutive quarter of negative GDP growth in Q2. As we continue to emphasise, the key risk for the US is not a technical recession but rather a prolonged period of stagnation, impacting activity and employment outcomes into the medium–term. Increasingly this risk is set to weigh on US term interest rates and the dollar; if a further deterioration in conditions is seen in coming months, either or both of the last two hikes we forecast for the FOMC this cycle could also come up for renewed debate.

Finally to China. Late last week we received Q2 GDP and the final partial data for June. While the market received the large negative outcome for Q2 GDP it was anticipating, the key partial data was constructive on growth prospects into year end and for 2023. Notably, despite the heavy burden of COVID–zero restrictions through Q2, nominal fixed asset investment growth sustained above 6% year–to–date throughout Q2. The trade surplus also continued to print successive highs during the quarter as exports grew strongly and imports growth slipped. Heading into Q3, retail also looks to have momentum, annual growth having recovered from –11% in April, when COVID–zero policies were in full effect, to +3% by June. The Q2 GDP outcome likely rules out authorities’ 5.5% growth ambition being achieved on a year–average basis in 2022, but it can still be seen through the year to December as long as the economy is able to rebound without restriction during the second half. A similar annual gain through 2023 would see year–average growth for 2023 at 7.0% after a 3.5% gain in 2022.

The European Central Bank (ECB) rose its three policy rates by 50bp at yesterday’s monetary policy meeting, versus 25bp expected by analysts. But the ECB decision wasn’t a big surprise given that many investors were expecting to see the ECB to come up with a bigger rate hike after the EURUSD fell below parity last week.

Euro below parity against the US dollar makes things even more complicated for the ECB’s fight against inflation, and shifts the ECB’s rhetoric from Mario Draghi’s ‘whatever it takes’ to something like ‘whatever… we can’. Even Mario Draghi’s resignation, the dissolution of the Italian government and the spike in the Italian yields didn’t change the ECB’s decision. We saw a determined ECB to tame inflation down to the 2% policy target.

One of the major highlights of yesterday’s ECB decision was the anti-fragmentation tool, TPI, transmission protection instrument. The name is fancy but what it could do to help the ECB is unsure for now, as the eligibility to the TPI sounds complicated - so complicated in fact that during her press conference yesterday, Christine Lagarde repeated ‘no, no it’s not that complicated’ several times when she answered questions.

In… simple, there is a set of fiscal and macro conditions that will determine whether a euro zone country is eligible to the TPI program. However, the neediest economies may not be eligible due to fiscal and macroeconomic restrictions.

The complicated TPI tool is perhaps why the euro and the European stocks gave back the early gains yesterday. The EURUSD flirted with 1.0280 mark but is back below the 1.02 this morning. Investors will likely give the ECB the benefit of doubt, but the euro will remain under a meaningful negative pressure until we see the higher ECB rates translate into lower inflation.

With the ECB shifting to rate-tightening phase, we have no more than Switzerland and Japan left in the negative rate territory. The Swiss National Bank (SNB) already surprised the market with a 50bp hike in its last meeting and pledged to do more, but the Bank of Japan (BoJ) maintained its policy unchanged yesterday, and said it has ‘absolutely no plan’ to raise the interest rates. Happily, the US dollar was softer yesterday, so that the USDJPY remained capped around the 138 level. Yet, the divergence between a more hawkish shift worldwide, and the insistently dovish BoJ should continue playing against the yen in the medium run.

Summer vacation for the US stocks?

The US dollar was softer yesterday, and the barrel of American crude slipped again below the $100 mark. The idea that lower energy prices will ease the inflationary pressures gave an additional boost to the US stocks, even though the US jobless claims climbed to the highest levels since last November. If the jobless claims data is volatile, it’s also an early sign that a labour market shift could happen. Especially, when the data is combined to the latest news of jobs cuts.

After Apple earlier this week, Microsoft announced it will slow hiring in its security software unit and Azure cloud business in the foreseeable future. 7-Eleven also said it will cut around 880 jobs, and Snap announced it will slow its rate of hiring ‘substantially’, as well. Therefore, the next jobs figures may not be as enchanting as the latest ones. But for now, the US stocks extend recovery. The S&P500 gained 1% for the third straight day, as Nasdaq jumped 1.36%. The stronger-than-expected earnings from Netflix and Tesla helped improving the market mood this week. Tesla, for example, jumped near 10% posterior to earnings announcement.

Snap, however, hasn’t been that lucky, as its share price dived more than 26% in the afterhours trading after the company missed estimates on a major slowdown in the ad industry due to economic jitters. The Snap results came as a warning for other Big Tech names that rely on ad revenue. Therefore, FAANG stocks, which recovered to an almost 2-month high yesterday, may not extend gains to the weekly close as the latest Snap results could reverse appetite for at least a couple of them, including Google and Meta before the closing bell.

Volatility was the winner overnight, with a multitude of data points and events leaving market price action messier than a teenager's bedroom. The European Central Bank surprised markets by lifting policy rates by 0.50%, ending over a decade of negative interest rates. The Euro has already been rallying, but its gains were tempered by the collapse of the Italian government, and post the ECB meeting, German/Italian bond spreads started widening noticeably. The ECB’s Lagarde said policy decisions would be made on a meeting-by-meeting basis going forward, tossing their forward guidance out.

Perhaps more importantly, Russian gas started flowing back down the Nord Stream 1 gas pipeline yesterday, albeit at flows resembling the 40% of capacity before it closed for maintenance. Still, when it comes to Europe and energy, any news is good news as fears had risen that Russia would leave it turned off. EUR/USD had already started rallying on this news, which was likely the major reason that oil prices fell overnight in another 5.0% intra-day range session. European equities were far more mixed, with some stark winners and losers. For that, we can thank the Italian political situation, widening North/South bond spreads, and the ECB’s 0.50% rate hike.

In the US, a multi-month high for US Initial Jobless Claims and a soft Philly Fed Business Conditions Index spooked bond markets and saw US yields move quite a bit lower overnight. The US curve now looks bowl-shaped after US 10-years fell by over 15 basis points. That saw the US Dollar weaken as well, as US recession fears also ramped up. I must say, Initial Jobless Claims rising by 7,000 to 251,000 does seem like clasping at straws.

Wall Street liked what they saw, rallying powerfully once again overnight. Lower bond yields and some solid earnings results keep sentiment perky during the main session. That has changed a bit after hours after weak Snap. Inc results saw their stock price plummet by 25%. That dragged down the other social media-esque giants. As Meta found out earlier in the year, markets will severely punish richly valued tech stocks at the first sign of trouble, and there is now some risk to the broader equity markets from the FAANGS yet to report.

This morning, we have seen Australian and Japanese Manufacturing and Service PMIs come in on the soft side, along with Japanese Inflation, which edged lower in June YoY to 2.40%. We have a bunch of S&P Global PMIs still to come for the European heavyweights, the Eurozone, and the US today. It looks like they will all have downside risks for obvious reasons, but I am not sure it will be enough to deter the FOMO gnomes of Wall Street.

I will be covering my last FOMC meeting next week, and it seems likely that this will be the defining moment for markets in what has been a tumultuous month. 0.75% or 1.0% I know not, although my gut says 0.75%. The statement will be crucial and, depending on how it plays out, could stop what I consider a bear market rally, in its tracks. Inflation remains and will remain stubbornly high, geopolitical risk abounds, growth is slowing around the world, and recession risks are rising. I can’t see how that is a productive environment for equities, and that’s before the rest of big-tech reports quarterly earnings.

That said, the technical pictures across the equity and currency space suggest we have more room for a further retracement. AUD/USD and NZD/USD have broken up out of falling wedges, with GBP/USD about to do so. The S&P 500 is approaching resistance at 4,020.00, as is the Dow right here at 32,030.00, although the Nasdaq’s lies far away still at 13,500.00. Failure of 106.40 by the dollar index will signal a much deeper correction lower, and the slump in US yields overnight is setting up USD/JPY for a serious culling of long positions.

Two warning signs remain for me. One is that the US Dollar moves lower has all but passed the Asia FX space buy. Most USD/Asia pairs remain at or near recent highs, which in some cases, are record highs. We likely need to see a much bigger fall in US yields and/or oil prices to change that. I can’t see the Fed being so happy to see the US yield curve slump at this stage in the process, though. The second is gold. Gold’s price performance has been appalling in July, remaining at multi-month lows no matter whether the US Dollar or US yields have rallied or fallen. The US Dollar usually rallies during a recession, part of the “dollar smile” complex. Gold seems to be telling us that we call “peak dollar” at our peril.

One news event that may lift sentiment in Asia today is an announcement by Turkish officials overnight, saying that an agreement to resume Black Sea grain exports from Ukrainian ports will be signed at some stage today. Fingers crossed on that one.

Happy Friday, everybody.

Asian markets are content to follow Wall Street higher.

Asian markets are mostly higher today, content to follow Wall Street’s overnight rally. The Snap after-market results are tempering US futures, taking the sheen of Asia’s rallies today. The fall of oil prices overnight is also supportive of Asian markets, although weekend event risk may also be staying investors' hands.

On Wall Street, the S&P 500 finished 0.99% higher, the Nasdaq jumped by 1.36%, with the Dow Jones rose by 0.51%. In Asia, the Snap results have seen tech companies come under some pressure, pushing US futures lower. S&P 500 futures have fallen by 0.40% lower, Nasdaq futures are off 0.65%, with Dow futures down 0.20%.

In Asia, Japan’s Nikkei 225 is 0.20% higher, but South Korea’s Kospi has fallen by 0.40%. In China, the Shanghai Composite has gained 0.35%, while the CSI 300 has climbed by 0.55%, and Hong Kong has risen by 0.60%.

Singapore is 0.70% higher in regional markets, with Taipei edging 0.15% higher. Jakarta has added 0.10%, Kuala Lumpur by 0.37%, Bangkok by 0.30%, and Manila is unchanged. Australian markets are also relatively subdued, the All Ordinaries have risen by just 0.10%, and the ASX 200 is unchanged.

European markets had a very mixed day, with a resumption of gas flows from Russia offset by the surprise 0.50% rate hike by the ECB and Italian political chaos, although given that has been the natural state of affairs since 1945, we should be used to it. The widening of German/Italian bond spreads was more troublesome, and the ECB may need to roll out that fragmentation tool sooner than later. With weekend event risk ahead, and the reality of gas flows resuming at reduced rates, Italian politics, and the decade of ECB negative interest rates being over, it is hard to see European equities finishing the day on a high note.

US Dollar falls overnight.

The US Dollar resumed its correction lower overnight as the Euro rose on renewed Russian gas flows, US yields fell, and investor sentiment rose in the equity space. The dollar index fell by 0.40% to 106.60 overnight, although heightened nerves in the equity space today have seen it rise by 0.23% to 108.84. The 106.40 area was tested for the 4th time overnight and now looms as a critical inflexion point. Failure signals more losses towards 1.0500 and 1.0350. Resistance is at 107.30 and 108.00.

EUR/USD traded in a wide range overnight, bounced around by Russian gas, Italy, and the ECB. In the end, it had onto much of its gaseous gains, finishing 0.50% higher at 1.0230. The first sign of trouble in US stock futures has prompted a US Dollar rally in Asia, which doesn’t bode well for the single currency. EUR/USD has fallen 0.32% to 1.0197 as a result. It has resistance at 1.0275, but only a sustained break above 1.0360 would suggest a longer-term low is in place. EUR/USD has support at 1.0150 and 1.0100.

GBP/USD closed almost unchanged overnight at 1.2000, having spiked to a low of 1.1900 intraday. In Asia, the dollar rebound sees GBP/USD easing 0.25% to 1.1975. Sterling has support at 1.1900 and 1.1800, with resistance at 1.2060 and 1.2200. A rise above the 1.2060 wedge formation signals a larger rally to the 1.2400 regions, but it would take a sustained break above 1.2400 to call for a longer-term low by sterling. Its fate is probably tied to EUR/USD’s direction today.

Lower US yields across the curve saw the Japanese Yen emerge a winner overnight as the US/Japan rate differential narrowed, with the street still long to the eyeballs of USD/JPY. USD/JPY finished 0.65% lower at 137.35 overnight, rising slightly to 137.55 in Asia. A loss of 137.00 could set off a deeper correction to 135.50 initially. Initial resistance is distantt at 139.00, followed by 139.40. The US/Japan rate differential continues to hold USD/JPY in its thrall.

AUD/USD and NZD/USD rose overnight, falling 0.20% and 0.35% to 0.6920 and 0.6230 on US Dollar strength in an inconclusive Asian session this morning. They continue consolidating their respective topside wedge breakouts. Only a move back below either 0.6800 or 0.6150 changes the short-term bullish technical outlook.

Bank Indonesia surprised markets by holding rates unchanged yesterday, and unsurprisingly, USD/IDR is above 15,000.00 at 15,015.00 this morning. Asian currencies were a mixed bag overnight, without any strong directional moves. The US Dollar correction continues to pass the Asia FX space by, with regional currencies remaining at, or near, recent lows versus the greenback. We may need to wait for the FOMC outcome next week to see another directional move.

Oil prices fall overnight.

Brent crude and WTI had another session of 5.0% intraday ranges overnight, closing quite a bit lower than their opening levels. Global recession fears and the resumption of Russian gas flows to Europe seem to have been the catalyst, although I am sure that trading volatility recently is reducing liquidity as well, exacerbating movers. The futures markets remain deeply in backwardation, suggesting that prompt supplies are as tight as ever in the real world.

The leaders of Saudi Arabia and Russia had a phone call today, with Saudi Arabia affirming Russia’s importance to the OPEC+ group and further emphasising which side OPEC’s bread is buttered regarding US relations. Along with Saudi Arabia making noises about rapidly approaching production capabilities, that has sent oil prices higher in Asia today ahead of the weekend.

Brent crude closed 2.45% lower at $103.85 overnight, climbing 1.30% to $105.20 a barrel in Asia today. WTI closed 3.55% lower at $96.40 overnight, gaining 1.0% to $97.55 a barrel in Asia. Brent crude has well-denoted resistance at $108.00 a barrel on the charts and then 111.00. It has support at $104.00 and $101.00 a barrel. WTI traced a double bottom at $94.30, its overnight low and 200-day moving average. (DMA). That makes this level quite pivotal now, a sustained failure signalling a retest of $90.00. Resistance is at $100.00, followed by 104.00 a barrel.

Gold remains on the long-term injured list.

Gold traded in a wide $40.00 range overnight between $1680.00 and $1720.00, with the price action suggesting that some sell-at-worst long-liquidation occurred as $1700.00 failed. The longer-term support is around $1675.00 an ounce, barely holding but also emphasising its importance. In the end, a weaker US Dollar and falling US yields allowed gold to record a decent gain for the day, although on the scale of recent moves in other asset classes, gold remains entrenched in the danger zone.

Gold finished 1,32% higher at $1719.00 overnight, easing 0.26% lower to $1715.00 an ounce in Asia today as US Dollar strength resumed. ​ It has support now at $1680.00, and then the longer-term support around $1675.00 an ounce zone. A sustained failure of $1675.00 will signal a much deeper move, targeting the $1450.00 to $1500.00 an ounce regions. Gold has resistance nearby at $1720.00, then $1745.00, and now a triple top.

In volume term, UK retail sales dropped -0.1% mom in June, better than expectation of -0.3% mom. Ex-fuel sales rose 0.4% mom, above expectation of -0.3% mom.

Compared with the same period a year earlier, sales volume dropped -5.8% yoy, versus expectation of -5.3% yoy. Ex-fuel sales dropped -5.9% yoy, versus expectation of -6.2% yoy.

In value term, retail sales rose 1.3% mom, 14.4% yoy. Ex-fuel sales rose 1.3% mom, 12.9% yoy.

Full release here.

Daily Pivots: (S1) 1.0135; (P) 1.0204; (R1) 1.0252; More...

EUR/USD quickly retreated after edging 1.0277 and intraday bias is turned neutral again. On the upside, above 1.0277 will resume the rebound from 0.9951 to 1.0348 support turned resistance, and then channel resistance at 1.0514. Nevertheless, break of 1.0118 minor support will argue that larger down trend is ready to resume, and should bring retest of 0.9951 low first.

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 1.0773 resistance holds, in case of rebound.