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Daily Pivots: (S1) 1.2990; (P) 1.3033; (R1) 1.3090; More...

USD/CAD's rally resumed after brief consolidations and intraday bias is back on the upside. Sustained break of 1.3022 fibonacci level will carry larger bullish implications. Next target will be 100% projection of 1.2005 to 1.2947 from 1.2401 at 1.3343. On the downside, break of 1.2919 minor support will turn bias back to the downside for 1.2712 support instead.

In the bigger picture, focus stays on 38.2% retracement of 1.4667 (2020 high) to 1.2005 (2021 low) at 1.3022. Sustained break there should confirm that the down trend from 1.4667 has completed after defending 1.2061 long term cluster support. Further rise would then be seen towards 61.8% retracement at 1.3650. However, rejection by 1.3022 will maintain medium term bearishness. Break of 1.2005 will resume the down trend from 1.4667 and that carries larger bearish implications too.

Daily Pivots: (S1) 0.6804; (P) 0.6879; (R1) 0.6928; More...

Intraday bias in AUD/USD stays on the downside for the moment. Current fall is part of the decline from 0.8006 and should target 0.6756 medium term fibonacci level next. On the upside, break of 0.7029 support turned resistance will turn intraday bias neutral again first. But outlook will remain bearish as long as 0.7265 resistance holds.

In the bigger picture, price actions from 0.8006 are seen as a corrective pattern to rise from 0.5506 (2020 low) with fall from 0.7660 as the third leg. Deeper fall should be seen to 50% retracement of 0.5506 to 0.8006 at 0.6756. This coincides with 100% projection of 0.8006 to 0.7105 from 0.7660 at 0.6760. Strong support is expected from 0.6756/60 cluster to contain downside to complete the correction. However, sustained break of 0.6756/60 would argue that AUD/USD is indeed in a medium term down trend.

Overall market sentiment stabilize in Asia today, with Nikkei leading other major indexes higher. Bitcoin is trading back above 20k, arguing that the climax of the crypto rout is over. In the currency markets, both Dollar and Yen are paring some recent gains while commodity currencies recover. But for the week, Yen is still the strongest, followed by the greenback and then Canadian. Aussie is the worst performer, followed by Kiwi and then Euro.

Technically, EUR/USD is now in proximity to 2017 low at 1.0339. There is no sign of bottoming yet and break of this low is likely. The main question is whether downside momentum will pick up further, and the reaction to parity. This will be the main focus for the rest of May.

In Asia, Nikkei closed up 2.55%. Hong Kong HSI is up 1.96%. China Shanghai SSE is up 0.58%. Singapore Strait Times is up 1.16%. Japan 10-year JGB yield is down -0.0059 at 0.245. Overnight, DOW dropped -0.33%. S&P 500 dropped -0.13%. NASDAQ rose 0.06%. 10-year yield dropped -0.104 to 2.817.

Fed Powell: Appropriate for 50bps increases at the next two meetings

Fed Chair Jerome Powell said in an interview that "what we were actively considering, and this is just a factual recitation of what happened at the meeting, was a 50-basis point increase... if the economy performs about as expected, that it would be appropriate for there to be additional 50-basis point increases at the next two meetings".

Powell also said that a "soft landing", getting back to 2% inflation while keeping the labor market strong, is "quite challenging to accomplish that right now". Unemployment is "very, very low", the labor market's "extremely tight", and inflation is "very high".

"What we can control is demand, we can't really affect supply with our policies. And supply is a big part of the story, here. But more than that, there are huge events, geopolitical events going on around the world, that are going to play a very important role in the economy in the next year or so. So the question whether we can execute a soft landing or not, it may actually depend on factors that we don't control," he explained.

Fed Daly: Going up in 50bps increments makes quite a bit of sense

San Francisco Federal Reserve President Mary Daly said yesterday she'd like to Would like to see continued tightening of financial conditions to help bring down inflation. Yet, 75bps rate hike is "not a primary consideration".

"Going up in 50-basis-point increments to me makes quite a bit of sense and there's no reason right now that I see in the economy to pause on doing that in the next couple of meetings," she added.

BoC Gravelle: We need higher interest rates, the economy can handle it

BoC Deputy Governor Toni Gravelle said yesterday, "our policy rate, at 1%, is too stimulative, especially when inflation is running significantly above the top of our control range. We need our policy rate to be at more neutral levels."

"Simply put, with demand running ahead of the economy's capacity, we need higher interest rates to cool domestic inflation. And as we've said before, the economy can handle it," he said.

Still he noted that outlook remained unusually uncertain and therefore it's not easy to hike by 75bps in one go.

On the data front

New Zealand BusinessNZ PMI dropped from 53.7 to 51.2 in April. Japan M2 rose 3.6% yoy in April. Eurozone industrial production will be featured in European session. US will release import price index and U of Michigan consumer sentiment later in the day.

AUD/USD Daily Report

Daily Pivots: (S1) 0.6804; (P) 0.6879; (R1) 0.6928; More...

Intraday bias in AUD/USD stays on the downside for the moment. Current fall is part of the decline from 0.8006 and should target 0.6756 medium term fibonacci level next. On the upside, break of 0.7029 support turned resistance will turn intraday bias neutral again first. But outlook will remain bearish as long as 0.7265 resistance holds.

In the bigger picture, price actions from 0.8006 are seen as a corrective pattern to rise from 0.5506 (2020 low) with fall from 0.7660 as the third leg. Deeper fall should be seen to 50% retracement of 0.5506 to 0.8006 at 0.6756. This coincides with 100% projection of 0.8006 to 0.7105 from 0.7660 at 0.6760. Strong support is expected from 0.6756/60 cluster to contain downside to complete the correction. However, sustained break of 0.6756/60 would argue that AUD/USD is indeed in a medium term down trend.

Economic Indicators Update

DXY:

On the H4, with price expected to reverse off the stochastics indicator, we have a bearish bias that price will drop from our 1st resistance in line with the swing high resistance to our 1st support where the swing low support is. Alternatively, price may break 1st resistance structure and head for 2nd resistance where the 127.2% Fibonacci extension is.

Areas of consideration:

• H4 time frame, 1st resistance at 103.989
• H4 time frame, 1st support at 103.221

XAU/USD (GOLD):

On the H4, with price moving below the ichimoku, we have a bearish bias that price will drop from our 1st resistance at 1869 where the horizontal pullback resistance is to our 1st support at 1834 in line with the swing low support. Alternatively, price may break 1st resistance structure and head for 2nd resistance where the horizontal pullback resistance is.

Areas of consideration:

• H4 time frame, 1st Resistance at 1869
• H4 time frame, 1st Support at 1834

GBP/USD:

On the H4, with price moving below the ichimoku, we have a bearish bias that price will drop from our 1st resistance at 1.22689 where the 23.6% Fibonacci retracement and pullback resistance is to our 1st support at 1.21723 in line with the 161.8% Fibonacci extension. Alternatively, price may break 1st resistance structure and head for 2nd resistance where the horizontal pullback resistance is.

Areas of consideration:

• H4 1st resistance at 1.22689
• H4 1st support at 1.21723

USD/CHF:

On the H4, with price moving above the ichimoku cloud, we have a bullish bias that price will rise to our 1st resistance at 1.00568 where the61.8% Fibonacci projection is from our 1st support at 0.98412 in line with the horizontal swing low support. Alternatively, price may break 1st support structure and head for 2nd support where the horizontal swing low support is.

Areas of consideration

• 1st support level at 0.98412
• 1st resistance level at 1.00568

EUR/USD :

On the H4, with price expected to bounce off the stochastics indicator, we have a bullish bias that price will rise to our 1st resistance at 1.05791 where the swing high resistance is from our 1st support at 1.04994 in line with the horizontal swing low support. Alternatively, price may break 1st support structure and head for 2nd support where the 127.2% Fibonacci extension is.

Areas of consideration :

• H4 1st resistance at 1.05791
• H4 1st support at 1.04994

USD/JPY:

On the H4, with price moving above the ichimoku cloud, we have a bullish bias that price will rise to our 1st resistance at 131.240 where the swing high resistance is from our 1st support at 129.028 in line with the horizontal swing low support. Alternatively, price may break 1st support structure and head for 2nd support where the horizontal swing low support is.

Areas of consideration:

• H4 time frame, 1st resistance at 131.240
• H4 time frame, 1st support at 129.028

AUD/USD:

On the H4, with price moving below the ichimoku, we have a bearish bias that price will drop from our 1st resistance at 0.70354 where the pullback resistance is to our 1st support at 0.68805 in line with the 61.8% Fibonacci projection and 161.8% Fibonacci extension. Alternatively, price may break 1st resistance structure and head for 2nd resistance where the horizontal pullback resistance is.

Areas of consideration

• H4 1st resistance at 0.70354
• H4 1st support at 0.68805

NZD/USD:

On the H4, with price moving below the ichimoku cloud, we have a bearish bias that price will drop from our 1st resistance at 0.63986 where the 23.6% Fibonacci retracement is to our 1st support at 0.62579 in line with the 200% Fibonacci projection. Alternatively, price may break 1st resistance structure and head for 2nd resistance.

Areas of consideration:

• H4 time frame, 1st support at 0.62579
• H4 time frame, 1st resistance at 0.63986

USD/CAD:

On the H4, with price moving above the ichimoku cloud, we have a bullish bias that price will rise to our 1st resistance at 1.30780 where the 78.6% Fibonacci projection is from our 1st support at 1.29118 in line with the horizontal pullback support. Alternatively, price may break 1st support structure and head for 2nd support where the horizontal pullback support is.

Areas of consideration:

• H4 time frame, 1st resistance at 1.30780
• H4 time frame, 1st support at 1.29118

OIL:

On the H4, with price expected to reverse off the ichimoku cloud, we have a bearish bias that price will drop from our 1st resistance at 105.86 where the 61.8% Fibonacci retracement is to our 1st support at 103.01 in line with the 38.2% Fibonacci retracement. Alternatively, price may break 1st resistance structure and head for 2nd resistance where the horizontal pullback resistance.

Areas of consideration:

• H4 time frame, 1st resistance of 105.86
• H4 time frame, 1st support of 103.01

Dow Jones Industrial Average:

On the H4, with price expected to bounce off the stochastics indicator, we have a bullish bias that price will rise to our 1st resistance at 32553 where the swing high resistance is from our 1st support at 31753 in line with the horizontal swing low support. Alternatively, price may break 1st support structure and head for 2nd support where the 161.8% Fibonacci extension is.

Areas of consideration :

• H4 time frame, 1st resistance at 32553
• H4 time frame, 1st support at 31753

Fed Chair Jerome Powell said in an interview that "what we were actively considering, and this is just a factual recitation of what happened at the meeting, was a 50-basis point increase... if the economy performs about as expected, that it would be appropriate for there to be additional 50-basis point increases at the next two meetings".

Powell also said that a "soft landing", getting back to 2% inflation while keeping the labor market strong, is "quite challenging to accomplish that right now". Unemployment is "very, very low", the labor market's "extremely tight", and inflation is "very high".

"What we can control is demand, we can't really affect supply with our policies. And supply is a big part of the story, here. But more than that, there are huge events, geopolitical events going on around the world, that are going to play a very important role in the economy in the next year or so. So the question whether we can execute a soft landing or not, it may actually depend on factors that we don't control," he explained.

Full interview here.

San Francisco Federal Reserve President Mary Daly said yesterday she'd like to Would like to see continued tightening of financial conditions to help bring down inflation. Yet, 75bps rate hike is "not a primary consideration".

"Going up in 50-basis-point increments to me makes quite a bit of sense and there's no reason right now that I see in the economy to pause on doing that in the next couple of meetings," she added.

BoC Deputy Governor Toni Gravelle said yesterday, "our policy rate, at 1%, is too stimulative, especially when inflation is running significantly above the top of our control range. We need our policy rate to be at more neutral levels."

"Simply put, with demand running ahead of the economy's capacity, we need higher interest rates to cool domestic inflation. And as we've said before, the economy can handle it," he said.

Still he noted that outlook remained unusually uncertain and therefore it's not easy to hike by 75bps in one go.

Key insights from the week that was.

Confidence in the economy (and financial instruments) has been a key talking point for markets this week.

For Australia’s business sector, NAB’s April survey showed a decline in confidence in the month despite a further pick up in conditions to a level materially above average. This confidence measure is still best considered consistent with a generally positive mood amongst business however, despite global risks – which escalated in May – and the additional uncertainty created by a Federal election.

From the conditions detail, the re-opening of Australia’s economy is clearly a big positive and is expected to remain that way with forward orders continuing to show strength. However, of concern is that upstream price pressures and labour costs hit new record highs in the month, highlighting the lasting consequence of the pandemic on global goods supply and migration to Australia – for an update on the latter, see below.

Rolling forward a month and across to the household sector, our May Westpac-MI consumer sentiment report made for sombre reading, a 5.6% fall in the month leaving the index at just 90.4. This is the lowest reading since August 2020, when households were concerned over Victoria’s second-wave lockdown, and is also 8.4% below the average of 2019, when consumer spending was essentially flat over the year.

This pronounced deterioration in sentiment stems from the dramatic rise in Australian inflation to March 2022 and the RBA’s response to this development – May’s 25bp rate hike. Consumers are anticipating both of these headwinds will have a lasting effect on their finances, with views on family finances for the year ahead down 11% in the month to be 13% below average. Also note, ‘time to buy a major household item’ is now 27% below average, having falling 6% in May.

As detailed by Chief Economist Bill Evans in his video update, some of the biggest moves seen recently in the survey relate to housing. ‘Time to buy a dwelling’ is 25% lower than a year ago and 34% below average. House price expectations are similarly 26% lower than a year ago, albeit only 4% below average. Westpac continues to expect a 13% decline in capital city house prices from mid-2022 to mid-2024; a full discussion of the sector’s outlook was included in the team’s latest Market Outlook in conversation podcast.

April’s arrivals and departures meanwhile reported an acceleration (+200.9k and +275.8k respectively), pointing to strong momentum in the recovery of overseas travel. The component detail for March showed a doubling of short-term visitor arrivals over the month to 162k. On departures, Australian residents leaving on a long-term basis reached a series high at nearly 61k – reflecting the pent-up demand for overseas travel/work, likely among young Australians. Given that New Zealand represents the largest source of monthly foreign arrivals, New Zealand’s full reopening by end-July is a welcome sign that Australia-NZ travel should return to normal operations quickly.

Offshore, the primary data release of the week was April’s US CPI. The headline inflation result was more or less in keeping with expectations, the monthly pulse falling from 1.2% to 0.3%. However, the core CPI (excludes food and energy) was materially above expectations at 0.6% (consensus 0.3%), supporting fears of persistently high inflation.

Nonetheless, it is clear US inflation is slowing. Taken together, March and April imply an annualised inflation pulse of 5.5%, down from 7.0% in the five months to February, and 10% at this time a year ago. Further, looking at the component detail of the CPI basket, it is evident the imbalances caused by the pandemic are abating, with fiscal support for demand long past and the supply-side recovering.

With annualised core inflation still a multiple of the FOMC’s 2.0%yr target however, there is a long way to go in resolving the US’ inflation concerns. A wealth effect is unlikely to slow demand and inflation hence, but the hit to real incomes from inflation should. In our view, it is likely to take until late-2023 for real incomes to recover the losses of the past year. By that time, remaining supply-side concerns related the pandemic and Russia’s invasion of Ukraine should have abated, while 2022’s abrupt tightening of financial conditions will, by then, have had a year to impact. With inflation risks having subsided, the FOMC will be able to cut the fed funds rate back to 2.125% in 2024 to maintain growth near potential and a robust labour market into the medium-term.

The most significant risks to this view are a further escalation of global tensions which feed into inflation and wage expectations. And/or a doubling down by the FOMC or market on the outlook for rates, tightening financial conditions to an outright contractionary level. The possibility of the latter was flagged this week by the US 10yr falling back to 2.85% having run up to 3.20% following the FOMC and Bank of England meetings last week.

Increasingly it seems the risks the US faces may become the baseline expectation for the UK and Europe, with both central banks increasingly intent on raising interest rates despite growth looking as though it has stalled and will remain weak for an extended period. While UK GDP growth in Q1 overall was robust at 0.8%, the monthly data shows an abrupt change in the economy over the period, a 0.7% gain in January followed by no growth in February and a 0.1% decline in March.

This deterioration makes the uncertainty highlighted last week by the Bank of England for late-2022 and 2023 immediate, and also emphasises how skewed to the downside the risks have become. Like the US, real incomes in the UK have been hit hard; unlike the US, there is another wave of pain to come as higher wholesale energy prices feed through to the consumer and the labour market deteriorates.

The data flow for Europe has been very light this week, but a number of regional monetary policy officials including ECB President Lagarde have continued to raise concerns over inflation and the appropriateness of the ECB’s policy stance. Consensus at the ECB is often difficult to gauge, particularly in periods of heightened uncertainty; but an end of asset purchases in June now seems highly probable. It also seems a growing group of Governing Council members want rate hikes to follow quickly.

Arguably, the initial step of returning the deposit rate to zero from -0.50% could prove neutral (or even positive) for the economy as long as a succession of additional refi rate hikes are not expected immediately after. So, absent a clear decline in activity in Q2 data, we now look for the ECB to move the deposit rate back to zero in Q3. We still believe best policy would be to leave refi rate hikes to 2023, but the intent of the Council looks instead to be a move to 0.25% at the December meeting assuming contraction is avoided in Q3.

With inflation coming down quickly through 2023, additional rate hikes are likely to be limited to another 50bps, allowing activity growth to recover quickly. For the Bank of England, we believe it would be best to similarly limit their response to inflation to minimise the cumulative impact on activity and the labour market. A peak in the Bank Rate of 1.75% continues to be forecast.

These developments and the risks have weighed heavily on Euro and Sterling in recent weeks, seeing spot trade at USD1.04 and USD1.22 respectively overnight. However, we continue to see a move higher to year end for both currencies as risks abate with respect to inflation and the policy response as well as the conflict itself. A slowing US economy with reduced inflation risk should further support this trend. Full detail on our long-term forecasts can be found on Westpac IQ.

WTI prices continued to move in a rather tight range for the past several weeks, indirectly displaying some uncertainty in the Oil market. Traders have a lot of information to consider at this point, with a number of geopolitical and technical subjects moving prices and making things interesting for market participants. In this report, we will explain the main subjects driving Oil prices currently and provide our personal views on how the market could react to them. We intent to close this outlook with a technical analysis displaying levels and trends that could prove useful.

The Oil market’s sensitive nature towards geopolitical tensions is currently exposed with the ongoing Russian war in Ukraine. Energy prices in general have headed higher since the war has started more than 2 months ago. Yet in the past days the situation may have escalated with Russia and the EU imposing sanctions on each other for countries buying Oil and Gas. Some commodity traders will be banning their purchases of Russian Oil by May the 15th. As the war continues, we could see more European nations moving away from Russian Oil and subsequently creating some worries in the market. Russia on the other hand may find it more suitable to push further Oil into Asia. However, the International Energy Agency (IEA) through its Oil market report for May, stated it did not see Oil supply levels being impacted by sanctions on Russia. The constant rise in output by both the US and the OPEC plus group in the coming months could compensate for the loss, while the lower demand from China as a result of the ongoing lockdowns imposed in some provinces may defend the situation as well.

Moreover, excluding Russia from global Oil supply could put further pressure on other Oil producers like Saudi Arabia and the US, requiring them to be even more consistent with output. In the scenario of any other Oil supply disruptions from other major Oil producers, we could see Oil prices being lifted further.

On Wednesday the 11th of May the important Energy Information Administration’s (EIA) Crude Oil Inventories weekly release displayed the large 8.5m barrel surplus. This is the second highest surplus in the current year for the EIA and WTI dropped approximately $0.50 upon release. WTI’s price reaction could be implying that trader’s attention for now remains on the subjects we mentioned above and not the weekly releases. As we are referring to the US Oil production, we must note that Oil analysts expect countries maneuvering Russian Oil to be turned towards West Texas Intermediate possibly favoring US Oil companies like Exxon Mobil (#XOM) and Chevron (CVX). The stocks of these companies have managed to gain on a year to date basis, as the ongoing circumstances driving the Oil industry are working towards their advantage.

On a separate note, we would suggest traders to constantly monitor developments in China as they could prove crucial for predicting future price action. China’s virus lockdowns could impact global demand and subsequently move Oil prices. In our opinion, if further lockdowns are announced or even prolonged, we could see Oil prices moving lower as China remains the largest Oil consumer internationally.

Technical Analysis

WTICash H4

WTI continues to trade in a large sideways motion between our currently noted (R1) 107.85 resistance and the (S2) 93.75 support level. This range is currently highlighted on our chart, with sky blue in order to emphasize the current trend. If the (R1) 107.85 is clearly breached, then a move towards the (R2) 115.15 line is likely imminent. Our highest resistance remains the (R3) 123.50 barrier which was last tested in March and remains the year to date high for WTI. In the opposite direction, a move below the (S1) 100.00 support barrier, could force the price action even lower towards the (S2) 93.75 hurdle. Please note the (S2) has not been breached downwards since late February making it a solid barometer for the strength of a bearish momentum. As our final support we note the (S3) 87.50 which could be engaged in a rather intense selloff scenario. The RSI indicator below our chart seems to be running across the 47-level displaying some bearish interest in the short term.

Short Term View in USDCAD suggests cycle from 04.21.2022 low is in progress as a 5 waves impulse Elliott Wave structure. Up from April 21 low, wave ((i)) ended at 1.288 and dips in wave ((ii)) ended at 1.2709. Pair then resumes higher in wave ((iii)) with internal subdivision as an impulse in lesser degree. Up from wave ((ii)), wave (i) ended at 1.2868 and pullback in wave (ii) ended at 1.281. Pair then resumes higher in wave (iii) towards 1.3037, wave (iv) ended at 1.295. Final wave (v) ended at 1.305 which completed wave ((iii)).

Pullback in wave ((iv)) unfolded as a zigzag structure. Down from wave ((iii)), wave (a) ended at 1.295, wave (b) ended at 1.304, and wave (c) ended at 1.2917 which completed wave ((iv)). Wave (c) ended at the 100% – 161.8% Fibonacci extension of wave (a). This area is denoted as a blue box on the chart. Pair has resumed higher in wave ((v)). Up from wave ((iv)), wave (i) ended at 1.3076. Near term, as far as pivot at 1.2917 low stays intact, expect pullback to find support in 3, 7, or 11 swing for further upside.

USDCAD 45 Minutes Elliott Wave Chart