Daily Market Outlook by Kate Curtis from Trader's Way

[katetrades]

Forex Major Currencies Outlook (Nov 15 – Nov 19)

Consumption data from around the world led by retail sales from the US will dominate the week ahead of us which will start with preliminary Q3 GDP reading from Japan.​

USD

Inflation continues to run rampant in October. Headline CPI number came in at 6.2% y/y vs 5.8% y/y as expected while core CPI came in at 4.6% y/y vs 4.3% y/y as expected. Gasoline and energy were the biggest contributors along with prices of used cars, but other categories also showed increases in prices indicating that inflation pressures are widely spread. Inflation readings are at 30-year highs with no signs of stopping. Some analysts see headline number climbing to 7%. Rampant inflation should see Fed increasing their QE taper starting from January of 2022 with possibility of ending it by the end of Q1 2022. Markets are now pricing in a greater probability of a June 2022 rate hike. San Francisco Federal Reserve Governor, Mary Daly stated that inflation is “eye popping” but still consider it transitory.

This week we will have consumption data, expected to show a modest decline from the September reading.

Important news for USD:

Tuesday:

• Retail Sales

EUR

ZEW survey for November showed a big drop in current conditions for German economy. The reading came at 12.5 vs 18 as expected and down from 21.6 in October. Ongoing supply chain constraints coupled with rising price pressures weighted heavily on the current conditions. On the other hand, expectation category showed a jump to 31.7 from 22.3 in October indicating that German financiers see improvements in the coming months. Eurozone expectations category shared the similar assessment and came in at 25.9, up from 21 the previous month.

European commission went out with new economic projections. They now see 2021 GDP at 5% vs 4.8% previously. Growth for 2022 has been reduced to 4.2% from 4.5% as previously seen while GDP for 2023 is left unchanged at 2.4%. On the inflation front, inflation for 2021 is seen at 2.4%, up from 1.9% previously. For 2022 they see inflation at 2.2%, up from 1.4% previously while inflation for 2023 is unchanged at 1.4%.

This week we will have a second estimate of the Q3 GDP.

Important news for EUR:

Tuesday:

• GDP

GBP

Preliminary Q3 GDP came in at 1.3% q/q vs 1.5% q/q as expected. Private consumption was up 2% in the third quarter while business investment was up 0.4%. The largest contributors were hospitality (30%), arts and recreation (19.6%) and health (3.5%) as parts of the further reopening of the economy.

This week we will have employment, inflation and consumption data. All three will have a significant impact on BOE and their potential decision to hike rate at their December meeting. Employment will show the strength of the labor market post-furlough scheme.

Important news for GBP:

Tuesday:

• Claimant Count Change
• Unemployment Rate

Wednesday:

• CPI

Friday:

• Retail Sales

AUD

Employment data for October was abysmal. Employment change came in at -46.3k vs 50k as expected. The unemployment rate jumped from 4.6% in September to 5.2%. Only a mild jump to 4.8% was expected. Participation rate rose to 64.7% from 64.5% the previous month but markets were expecting it to go to 64.9%. Full-time employment dropped -40.5k while part-time was at -5.9k. AUD was pummeled on the release but it seems that survey was done before the reopening in the state of Victoria so it failed to take that into account. November report will provide us with a clearer picture of labor market conditions.

October trade data showed China set a new record surplus of $84.5bn. Exports have risen 27.1% y/y while imports came in at 20.6% y/y, weaker than expected but still rising faster than in the previous month. Recent changes in government policies impacted incomes and could lead to further deterioration in demand thus negatively impacting imports. Exports are expected to stay high as incoming holiday season will lead to increase in demand for goods from China. Additionally, rising exports may signal easing of supply chain constraints. Overall we see net exports increasing in Q4 and being a positive contributor to the GDP reading. Both inflation data for the month of October jumped. CPI came in at 1.5% y/y, up from 0.7% y/y in September while PPI came in at 13.5% y/y, up from 10.2% y/y the previous month. Increase in energy and raw material prices led to jump in PPI and we can see those costs spilling over into the CPI. Non-food prices were the biggest contributor to the rise in CPI coming in at 2.4% y/y.

This week we will have production and consumption data.

Important news for AUD:

Monday:

• Industrial Production (China)
• Retail Sales (China)

NZD

Electronic card retail sales, which covers around 70% of retail sales, rebounded in October and came in at 10.1% m/m vs 0.9% m/m in September and -7.6% y/y vs -14.9% y/y the previous month. Data from New Zealand continues to improve as economy is firing on all cylinders and we can expect to see yet another strong quarter with a 25bp rate hike from RBNZ.

CAD

Oil posted a third consecutive week of declining prices. The price is holding above the $80 level but the streak is of little help to CAD. Coupled with USD strength after huge CPI reading and USDCAD rallied hard and the pair is be seen at levels not seen since October 6. With QE being removed and strong economic data from Canada prompting BOC to state that output gap should be closed in middle quarters of 2022, CAD should be buy on dips.

This week we will have inflation and consumption data.

Important news for CAD:

Wednesday:

• CPI

Friday:

• Retail Sales

JPY

PPI data for October came in at 1.2% m/m and 8% y/y. The yearly figure represents a 40-year high, highest since January of 1981, for the reading. Rising cost pressures, especially fuel related, in combination with timber goods were the main culprits. Weak JPY also contributed to the rise of prices of imported goods. Transmission of these prices to consumers could have a big impact since wage growth is weak. Newly appointed Prime Minister Kishida announced his plans to deliver a range of cash payouts to households as part of a fresh stimulus package.

This week we will have a preliminary Q3 GDP reading that is expected to come in negative and induce a further stimulus from the government.

Important news for JPY:

Monday:

• GDP

CHF

Seasonally adjusted unemployment rate for October ticked down to 2.7% from 2.8% in September thus continuing the trend of falling unemployment. Labor market has been tightening every month since July. SNB total sight deposits for the week ending November 5 came in at CHF718.4b vs CHF717.1b the previous week. With EURCHF spending the entire week below the 1.06 level SNB is ramping up its activities in the market, buying EUR, in order to lift the pair to more appropriate levels.

 

[katetrades]

Forex Major Currencies Outlook (Nov 22 – Nov 26)

RBNZ meeting will dominate the week ahead of us with preliminary PMI data from Eurozone, the UK and Japan following suit. Thanksgiving holiday falls on Thursday, stock and bond markets will be closed on that day and close early on Black Friday as well, thus significantly lowering liquidity in the market.​

USD

October retail sales came in at 1.7% m/m vs 0.8% m/m as expected indicating that holiday shopping came early this year. This could be seen in non-store retailers posting a jump of 4% m/m. Additionally, high gasoline prices attributed to the rise in retail sales. Ex-autos category also rose 1.7% m/m. Control group, data from it is used for GDP calculation, came in at 1.6% m/m vs 0.9% m/m as expected, thus pointing to a strong start to Q4 and potential for GDP to reach 6% in the stated quarter. Industrial production snapped a streak of 5 drops in yearly figures and in October came in at 5.1% y/y, up from 4.6% y/y in September. President Biden announced that he will announce his decision regarding next Fed Chairman before Thanksgiving. Current chairman Powell and Lael Brainard are candidates for the spot.

This week we will have second reading of Q3 GDP, Fed’s preferred measure of inflation (PCE) and FOMC minutes from the latest meeting.

Important news for USD:

Wednesday:

• GDP
• PCE
• FOMC Minutes

EUR

Eurozone trade balance in October slumped to €6.1bn from €11.1bn in September. This is the first time that surplus was a single digit number since April of 2020. To further complicate the things and show how supply chain issues are devastating exporting countries the September reading was downgraded to €9.7bn. Q3 GDP second reading came in unchanged from the preliminary reading at 2.2% q/q and 3.7% y/y. Final inflation reading for the month of October showed headline number unchanged at 4.1% while core ticked down to 2% y/y from 2.1% y/y as preliminary reported. ECB sticks with their “transitory inflation” narrative and core staying at their targeted level leaves them with enough room to remain patient.

This week we will have preliminary November PMI readings, expected to point to further declines but still stay safely in the expansion territory.

Important news for EUR:

Tuesday:

• Markit Manufacturing PMI (EU, Germany, France)
• Markit Services PMI (EU, Germany, France)
• Markit Composite PMI (EU, Germany, France)

GBP

October claimant counts came in at -14.9k vs -51.1k in September which led claimant count rate to drop to 5.1% from 5.2% the previous month. The ILO unemployment rate for September dropped to 4.3% from 4.5% in August with employment change showing 247k 3m/3m. Earnings showed a slight declines from the elevated levels seen in the previous months but that is no way detracting from a strong labor market which now shows 32.52m people employed. Additionally, earnings are higher than inflation. The expected rise in the unemployment rate after the furlough scheme ended is missing thus giving another nudge for BOE to go for a hike in December. They will have one more employment report before the meeting.

October inflation figures went through the roof with headline jumping to 4.2% y/y vs 3.9% y/y as expected and up from 3.1% y/y in September. The jump in core was less pronounced as it came at 3.4% y/y vs 3% y/y as expected and up from 2.9% y/y the previous month. Household and household services were the biggest contributor, electricity, gas and other fuels leading the way, while transport and restaurants and hotels also pushed prices higher. The reading should add more credence to the theory that BOE will hike 15bp in December and GBP is gaining strength on the back of it.

AUD

RBA minutes from the November meetings reiterated that the bank is not going to raise interest rates until wage growth and inflation targets are met. According to their central scenario these conditions will not be met until 2024. The bank did leave room open for a potential rate hike in 2023 if the criteria is met. RBA Governor Lowe stated in speech that underlying inflation of 2.5% will warrant a rate hike. He added that inflation needs to persistently stay in their targeted range of 2-3% for the rate hike to occur. Additionally, if the prices start rising sharply it will have different effects on policy, however, transitory spikes in core inflation will be overlooked if they are not followed by the growth in wages. Wage price index for Q3 came in at 0.6% q/q and 2.2% y/y, as was expected, thus confirming wage growth inadequate for a rate hike in 2022. RBA wants to see wages above 3% y/y in order to sustain inflation within the 2-3% targeted range.

Data from China showed improvements. Industrial production snapped a seven-month streak of declines in October and came at 3.5% y/y vs 3.1% y/y in September. Retail sales continued to improve and now we have a two months of improving data. October reading came in at 4.9% y/y, up from 4.4% y/y in September. Digging further into the details we can see mining contributing the most to the rise in industrial production while the beginning of the spending season prompted retail sales higher.

NZD

GDT price index came in at 1.9%, continuing its rise for the third consecutive auction. RBNZ’s Q4 survey of 2-year inflation expectations came in at 2.96% vs 2.27% in Q3. For the 1-year inflation expectation the reading printed 3.7%, up from 3.02% in Q3. The results give near certainty to the new 25bp rate hike at the upcoming RBNZ meeting while a possibility of a 50bp rate hike starts to gain traction.

This week we will have consumption data for Q3 as well as RBNZ meeting. All of the incoming data was uplifting so we expect RBNZ to continue down the rate hike path and hike by 25bp.

Important news for NZD:

Monday:

• Retail Sales

Wednesday:

• RBNZ Interest Rate Decision

CAD

Headline inflation in October continued to rise according to the trend from around the world. The reading printed 4.7% y/y, up from 4.4% y/y in September and it is now at the highest level since February of 2003. All of the inflation components rose with the biggest rise seen in transport category. Its rise was spurred by the exploding energy prices, gasoline primarily. Core readings were unchanged with median, common and trim readings coming in at 2.9% y/y, 1.8% y/y and 3.3% y/y respectively.

JPY

Q3 GDP data came in at -0.8% q/q vs -0.2% q/q and -3% y/y vs -0.8% y/y as expected. Household consumption fell -1.1% q/q while business investment fell by -3.8% q/q. Exports were down -2.1% q/q and it represents the first fall in 5 quarters. GDP deflator, measurement of inflation, came in at -1.1% q/q, continuing to decline making it a third consecutive declining quarter. Abysmal data was led by declines in autos (both investment and consumption) as well as household electronic consumption. Q3 was heavily impacted by the states of emergencies and other covid induced movement restrictions. Since they are now behind us we may expect to see a bounce back in Q4.

The government has revealed its stimulus package over the weekend and it is said to be north of JPY40 trillion. There will be JPY100k handouts in cash and vouchers for underage children as well as for students facing financial difficulties. The stimulus will also include aid of up to JPY2.5m per business for businesses suffering from virus caused issues. Japanese cabinet has approved the package and total size will be JPY55.7 trillion.

CHF

SNB total sight deposits for the week ending November 12 came in at CHF719.2bn vs CHF718.4bn the previous week. With EURCHF persistently below the 1.06 level, hovering around 1.0540, the SNB sees the need to increase their intervention in the markets by buying EUR and thus attempting to lift up the pair. During the week EURCHF pair has dropped below the psychological 1.05 level so total sight deposits in the coming weeks will show SNB’s resolution to fight the Swissy strength.

This week we will have Q3 GDP data.

Important news for CHF:

Friday:

• GDP

 

[katetrades]

Forex Major Currencies Outlook (Nov 29 – Dec 3)

As we enter into the final month of the year we will have NFP and Canadian employment report coupled with Q3 GDP data from Australia and Canada as well as PMI data from China.​

USD

PCE data for the month of October continue to show price pressures mounting in the US. Headline number came in at 5% y/y vs 4.6% y/y as expected and up from 4.4% y/y in October. Core PCE number came in at 4.1% y/y as expected, up from 3.7% y/y the previous month. The biggest contributor to price rises was energy goods and services category which jumped astonishing 30.2% y/y. Food prices notched a jump of 4.8% y/y. Personal income rose 0.5% while personal spending jumped 1.3% as Americans started their holiday shopping early.

The White House has re-nominated Jerome Powell to a new four-year mandate as a Fed Chairman. Lael Brainard was nominated to be a vice-chairman in the Fed Board of Governors, thus replacing Richard Clarida. This outcome ensures that monetary policy will stay on its course with QE tapering. Markets are pricing in two full rate hikes in 2022, most likely at September and December meetings. San Francisco Fed President Mary Daly, considered a dove, stated that the case for speeding up the taper can be seen. When a well-known dove comments in a hawkish way markets listen. Her comments should keep USD supported.

This week we will have ISM PMI data as well as NFP on Friday. Headline number is expected to come around 550k with the unemployment rate slipping to 4.5%.

Important news for USD:

Wednesday:

• ISM Manufacturing PMI

Friday:

• Nonfarm Payrolls
• Unemployment Rate
• Average Hourly Earnings
• ISM Non-Manufacturing PMI

EUR

Eurozone preliminary PMI data for the month of November surprised to the upside. Manufacturing came in at 58.6 vs 57.3 as expected and up from 58.3 in October. Services came in at 56.6 vs 53.5 as expected and up from 54.6 the previous month which pushed composite to 55.8 vs 53.2 as expected and up from 54.2 in October. Both German and French readings were showed improvements from last month with new orders subindex expanding further. Supply chain disruptions are still causing issues for the manufacturing sector and Markit notes that potential new lockdowns across the continent may hurt rebound seen in services sector. Costs component in PMI data continued to increase and it dovetails nicely with the comment from ECB’s Executive Board member Isabel Schnabel, given in a Bloomberg interview, that “the risks to inflation are skewed to the upside”. Her remark may be indicating that ECB is preparing to gradually remove loose monetary policy stance and that we can expect confirmation of PEPP program ending in March of 2022 at the December meeting.

German Ifo business climate for the month of November came in at 96.5 as expected, down from 97.7 in October. Current conditions and outlook came in line with expectations (99 and 94.2 respectively), but were both down from the previous month (100.1 and 95.4 respectively). Business climate and outlook are falling for the fifth consecutive month while current conditions notched three consecutive months of declines. Ifo economist Klaus Wohlrabe stated that falls in Ifo indexes give cause for concern adding that supply bottlenecks are still ongoing and putting pressures on companies. Increasing number of companies plans to transfer price pressures to consumers. Finally, he sees Q4 GDP stagnating.

This week we will have a preliminary November inflation reading, expected to continue rising.

Important news for EUR:

Tuesday:

• CPI

GBP

Preliminary November PMI data was mixed compared to the previous month, but all of the readings beat the expectations. Manufacturing PMI improved to 58.2 from 57.8 in October while services slipped to 58.6 from 59.1 the previous month. Composite also slipped down to 57.7 from 57.8 in October. According to Markit, output continued to grow in both services and manufacturing with new businesses accelerating growth indicating a strong December as well. Supply chain issues persist and price pressures continue to mount as we get closer to the year-end.

AUD

Q3 Capex slumped -2.2% q/q vs -2% q/q as expected. Q2 reading was revised down from 4.4% q/q to 3.4% q/q. Australia experienced heavy lockdowns during Q3 and it reflected on investment, particularly in equipment, plant and machinery which showed a decline of -4.1% q/q vs 2.7 q/q in Q2 as well as in building and structures which came in at -0.2% q/q vs 4.2% the previous quarter. Preliminary retail sales for the month of October showed a high jump to 4.9% m/m vs 2.2% m/m as expected and up from 1.3% m/m in September showing that consumer will guide economic rebound in Q4 after the lockdown impacted Q3.

This week we will have Q3 GDP data from Australia and both official and Caixin PMI data from China.

Important news for AUD:

Tuesday:

• Manufacturing PMI (China)
• Non-Manufacturing PMI (China)
• Composite PMI (China)

Wednesday:

• GDP
• Caixin Manufacturing PMI (China)

Friday:

• Caixin Services PMI (China)
• Caixin Composite PMI (China)

NZD

RBNZ has raised the official cash rate (OCR) by 25bps as was widely expected. The rate now stands at 0.75% and board members noted that it is appropriate to continue with reducing monetary stimulus in order to keep inflation low and achieve maximum sustainable employment. The bank has put out new projections which see OCR at 0.94% in March of 2022 vs 0.86% previously and at 2.14% in December of 2022 vs 1.62% previously indicating that they are firmly on the rate hike path. Inflation is seen at 3.3% by the end of 2022, it was 2.2% in previous projection and assessment is that inflation will peak at 5.7% in Q1 of 2022 before returning toward 2% in the next couple of years. Governor Orr stated in a press conference that the 25bp rate hike gives them more options and that due to a high debt load, the bank needs to be cautious. Retail sales for Q3 came in at -8.1% q/q vs -10.5% q/q as expected. New Zealand was under lockdown during Q3 and it reflected in retail sales numbers. Still the reading managed to beat expectations showing additional strength of the economy and consumer.

CAD

Canadian dollar had another slow week with USDCAD falling for the fifth straight week and moving closer to the 1.28 level. The decline was exacerbated with a discovery of new covid strain, named Omicron, which sent oil prices dropping below $70 and dragging CAD down.

This week we will have Q3 GDP data as well as November employment report.

Important news for CAD:

Tuesday:

• GDP

Friday:

• Employment Change
• Unemployment Rate

JPY

Preliminary November PMI data showed improvements across the board. Manufacturing climbed to 53.5 from 53.2 in October while services went deeper into expansion and posted a second consecutive month above the 50-level coming in at 52.1. Composite was thus pushed up to 52.5 from 50.7 the previous month. Output and new orders components showed stronger growth while new orders mostly pointed to growth. Input prices point to a stronger inflation while employment slowed down and outright declined in the service sector. Markit notes that "private sector companies were strongly optimistic that business activity would rise in the year ahead. Positive sentiment was the strongest on record".

Inflation for Tokyo area in November improved to 0.5% y/y vs 0.1% the previous month on the back of rising energy prices. Both ex fresh food category and ex fresh food, energy came in at 0.3% y/y. With inflation running rampant around the world even Japan managed to post increase in overall prices. JPY gained strength as the new covid variant, called Omicron by the WHO, originating in South Africa. It is thought to have the most mutations off all of the existing variants. It has brought a risk-off environment in the markets and JPY was the biggest benefactor of it with thin liquidity market conditions adding to the magnitude of moves.

CHF

SNB total sight deposits for the week ending November 19 came in at CHF719.3bn vs CHF719.2bn the previous week. This is a rather surprising data point since EURCHF dropped below the 1.05 level in the previous week and SNB did not intervene. Q3 GDP data show that economy grew by 1.7% q/q vs 2% q/q as expected and 4.1% y/y vs upwardly revised 8.6% y/y in the previous quarter. The details of the report show accommodation and food category doubling from Q2 while big growth was also seen in arts, entertainment and recreation.

 

[katetrades]

Forex Major Currencies Outlook (Dec 6 – Dec 10)

RBA and BOC meetings will highlight the week coupled with inflation data from the US as we get closer to the year-end.​

USD

Fed Chairman Powell dropped a bomb onto the markets in his testimony in front of the Congress. He stated that it is time to retire “transitory” for inflation and added that it is appropriate to speed up the pace of tapering at the incoming meeting. USD reacted positively to his hawkish remarks and gained more than 100 pips against most currencies during Powell’s testimony. Markets have interpreted that inflation will stay for a longer period of time and that faster taper adds more to the credibility of two rate hikes in 2022 and even open up a possibility of a rate hike in May. Regarding the impact of Omicron variant Powell stated that there is not enough information at the moment and that they will know more in 5-10 days.

ISM manufacturing PMI for the month of November continued to improve and came in at 61.1, up from 60.8 the previous month. Production and new orders indexes are above the 60-level indicating a very healthy and strong sector. Backlog of orders is also above the 60-level while customer inventories continue to drop suggesting pricing power for producers and that demand will keep the sector strong well into 2022 and will give a big push to Q4 GDP.

Headline NFP number in November printed just 210k when it was expected to show 550k. The unemployment rate dropped to 4.2% from 4.6% in October while participation rate rose to 61.8% from 61.6% the previous month. Wages, on the other hand, slipped to 0.3% m/m and 4.8% y/y from 0.4% m/m and 4.9% y/y in October. It was a mixed report that had something for everyone. More people returned to the work force, however wages slid and that is deflationary. Fed should continue to speed up taper as planned at their December meeting.

This week we will have inflation data. The readings are expected to continue their rise.

Important news for USD:

Friday:

• CPI

EUR

Preliminary November CPI data shows prices spiralling upwards with headline number coming in at 4.9% y/y vs 4.5% y/y as expected and up from 4.1% y/y in October. Core CPI also jumped, it came in at 2.6% y/y vs 2.3% y/y and up from 2% y/y the previous month indicating that price pressures are increasing across different categories. Headline number is now at a 30-year high while core reading posted a new record high! Energy prices are the main culprit, rising 27% y/y with goods prices also adding pressures to inflation. EUR was bid on the hopes that high inflation reading will push ECB to raise rates faster than expected. ECB stance is that inflation is transitory and that it will slow down going into 2022, German VAT will step out of the calculation in January, and return to their 2% target in H2 of 2022.

GBP

Final PMI reports saw a downside revisions to preliminary reading, however manufacturing PMI still managed to improve from October reading and came in at 58.1 vs 57.8 the previous month. Services slipped to 58.5 while composite was at 57.6. The readings show a healthy economy in the Q4 with mounting price pressures posing a cause for concern. BOE policymaker Michael Saunders stated that they will look at economic impact of omicron, making it a key consideration at the December meeting. He added that omicron could significantly impact the economic outlook, however a delay of rate hikes could be very costly in the future.

This week we will have October GDP data giving us another data point for Q4.

Important news for GBP:

Friday:

• GDP

AUD

Q3 GDP data surprised to the upside and showed that Australian economy posted a -1.9% q/q decline vs -2.7% q/q as was expected. The country spent great majority of third quarter under strict lockdowns and it reflected on household consumption which fell -4.8% q/q. Net exports were a positive contributor with exports rising 1.2% q/q while imports fell -4% q/q. Government consumption was also a positive input, rising 3.6% q/q.

Official PMI data from China for the month of November showed manufacturing returning to expansion territory after two months of sub-50 readings. The number came in at 50.1 vs 49.6, matching the previous August reading. Services PMI slipped to 52.3 from 52.4 in October which was enough to keep the composite reading at 52.2, up from 50.8 the previous month. Caixin manufacturing reading, on the other hand, fell to 49.9 from 50.6 in October. Services PMI also declined and came in at 52.1, down from 53.8 the previous month which dragged composite reading to 51.2 from 51.5 in October.

This week we will have RBA meeting from Australia as well as trade balance and inflation data from China. RBA may announce it plans to finish the bond-buying program in February. Omicron is uncertainty that will be addressed in the statement.

Important news for AUD:

Tuesday:

• RBA Interest Rate Decision
• Trade Balance (China)

Thursday:

• CPI (China)

NZD

Final business confidence data for November showed improvement from preliminary reading (-16.4 vs -18.1), however it was down from -13.4 in October. ANZ notes that “Business confidence, export intentions, and investment intentions were all a little higher, but own activity, and capacity utilisation dipped. Overall, the theme continues to be gradually easing activity indicators but cost and inflation pressures remain extreme.”

CAD

Q3 GDP data blew up expectations and came in at 5.4% q/q vs 2.5% q/q as expected and up from downwardly revised -3.2% q/q in the second quarter of 2021. Household consumption was the biggest contributor with exports following in the second place. Gross fixed capital formation and inventories were the biggest drag on the reading.

November employment report was stellar. Employment change came in at 153.7k vs 35k as expected. The unemployment rate fell to 6% from 6.7% in October while the participation rate stayed unchanged at 65.3%. Wages rose 3% y/y vs 2.1% y/y the previous month indicating signs of wage pull inflation. Jobs were evenly distributed with full-time jobs gaining 79.9k and part-time jobs adding 73.8k. The strength and tightness of labor market in Canada is impressive.

This week we will have a BOC meeting. The drop in oil prices has negatively impacted CAD, but we expect them to stay on their tightening course, especially after magnificent employment report. Omicron is uncertainty that will be addressed in the statement.

Important news for CAD:

Wednesday:

• BOC Interest Rate Decision

JPY

Retail sales for the month of October came in at 1.1% m/m and 0.9% y/y. After state of emergency was lifted consumers returned to spending with clothing and food leading the way with a surge of 9.2%. Out of all the categories measured auto sales was the only category that showed a decline. Final manufacturing PMI improved to 54.5 and now represents a four-year high. Services PMI also improved to 53 and pushed composite to 53.3 indicating a much healthier economy in Q4 than the one of Q3.

This week we will have a final Q3 GDP reading.

Important news for JPY:

Wednesday:

• GDP

CHF

SNB total sight deposits for the week ending November 26 came in at CHF719.4bn vs CHF719.3bn the previous week. The EURCHF pair spent the whole week below the 1.05 level and even going below the 1.045 level but SNB has not intervened. They are most likely waiting for the right opportunity to strike in order to achieve the most with as little intervention as possible. Headline inflation for the month of November came in at 1.5% y/y, up from 1.2% y/y in October while core reading rose to 0.7% y/y from 0.6% y/y the previous month. Small increases in inflation, particularly in core reading, will not pose any concerns for the SNB, especially when it is compared to the rest of the world, excluding Japan.

 

[katetrades]

Forex Major Currencies Outlook (Dec 13 – Dec 17)

We are in for a huge week. No less than 5 central banks (Fed, ECB, BOE, BOJ and SNB) will have their final meetings for the year. Additionally, we will have preliminary PMI data for the Eurozone coupled with inflation data from Canada and the UK.​

USD

November inflation report came in line with expectations. Headline came in at 6.8% y/y, up from 6.2% y/y in October and core reading came in at 4.9% y/y, up from 4.6% y/y the previous month. Headline inflation is at the highest level since March of 1982 while core is at the highest level since October of 1984, going way back in time. Fed will not be detracted by the reading and will continue on their course with increased tapering.

This week we will have consumption data as well as the final Fed meeting for the 2021. With inflation running red hot we can expect to see hawkish messages from the members. The speed of the taper should be increased so it finishes by the end of Q1 of 2022. The dot plot should point to at least two rate hikes in 2022.

Important news for USD:

Wednesday:

• Fed Interest Rate Decision
• Retail Sales

EUR

German ZEW survey for the month of December showed assessment of current situation plunge into negative territory with -7.4, down from 12.5 in November. The uncertainty relating to the omicron variant and its possible negative impact on the economy is breaking investors spirit. On the other hand, expectations category just slightly slipped to 29.9 from 31.7 the previous month indicating that investors still hold a positive outlook for the future. Eurozone expectations improved to 26.8 from 25.9 in November. Final Q3 GDP reading for the Eurozone came in unchanged at 2.2% q/q and slightly improved to 3.9% y/y vs 3.7% y/y as reported in the second reading. Olaf Scholtz has been officially elected as a Chancellor and thus succeeds Angela Merkel after her 16-year reign.

This week we will have preliminary PMI readings for the month of December as well as the ECB meeting. Next round of macroeconomic projections will be put forward at the meeting. PEPP program will conclude in March of 2022 so the meeting can bring an increase, temporary most likely, in APP to ease the effects of removing PEPP. Additionally, this will be the last meeting for the outgoing Bundesbank president Jens Weidmann.

Important news for EUR:

Thursday:

• ECB Interest Rate Decision
• Markit Manufacturing PMI (EU, Germany, France)
• Markit Services PMI (EU, Germany, France)
• Markit Composite PMI (EU, Germany, France)

GBP

October GDP number came in at 0.1% m/m vs 0.4% m/m as expected. It shows that the economy is still expanding in Q4, however at a much slower pace. Prime Minister Boris Johnson stated that Omicron is growing at much higher rate than the previous variant and it is time to move to so-called “Plan B”. Reintroduction of stay and work from home guidance with facemask requirement further extended to most public venues. Health Minister Javid stated that main purpose of “Plan B” is to slow down spread of Omicron and help to avoid action later.

This week we will have employment, inflation and consumption data along side the BOE meeting. The chances of a rate hike at the meeting are growing slimmer. MPC member Broadbent stated that he is still unsure about the way he will vote at the meeting. Omicron poses a big uncertainty while MPC member Saunders said he wants further information on the Omicron before deciding how to vote. We expect that first rate hike will come in Q1 of 2022, most likely at the February meeting.

Important news for GBP:

Tuesday:

• Claimant Count Change
• Unemployment Rate

Wednesday:

• CPI

Thursday:

• BOE Interest Rate Decision

Friday:

• Retail Sales

AUD

RBA has kept its cash rate at 0.10% as was widely expected. The statement shows concern regarding potential effect of omicron on the economy. They still expect economy to return to its pre-Delta path in H1 of 2022. The purchase of government securities will continue at the pace of AUD4bn/week until at least mid-February and will be evaluated at February meeting. Incoming data from leading indicators is very encouraging as it points to a strong recovery in the labor market. Bank members expect a further pickup in wage growth. The central forecast for underlying inflation is to reach 2.5% over 2023. Housing prices have increased strongly but the rate of increase has eased. They have reiterated their stance that there will be no increase in the cash rate until actual inflation is sustainably within 2-3% target range.

PBOC has decided to cut the RRR (Reserve Requirement Ratio) by 50bp (0.5%). The decision will take effect from December 15. PBOC has stated that they will continue with prudent monetary policy and will keep liquidity at reasonable levels. With inflation stabili\ing and at low levels the bank has decided that pumping additional liquidity will support the economy as well as push short and long-term interest rates lower. Later during the week they have increased foreign reserve ratio from 7% to 9. This is the first increase in 15 years. November trade balance data showed first decline in surplus since March. The reading came in at $71.72bn, down from $84.5bn in October. Exports have risen 22% y/y while imports jumped 31.7% y/y vs 19.5% y/y as expected. The jump in imports may indicate strong domestic demand which is a positive sign for the global economy. Inflation data for the month of November show CPI at 2.3% y/y, up from 1.5% y/y in October but lower than 2.5% y/y as expected. PPI data came in at 12.9% y/y, still very elevated, but down from 13.5% y/y printed the previous month.

This week we will have employment data from Australia as well as consumption and production data from China.

Important news for AUD:

Wednesday:

• Retail Sales (China)
• Industrial Production (China)

Thursday:

• Employment Change
• Unemployment Rate

NZD

NZD had a weak week, falling against all of the pairs but the drop was not great as RBNZ is still on the path of rate hikes which keeps the currency supported.

This week we will have Q3 GDP data.

Important news for NZD:

Wednesday:

• GDP

CAD

BOC has left rate unchanged at 0.25% as was widely expected. The statement showed that after strong GDP growth in Q3 it is now about 1.5% below the pre-pandemic level. Recent economic indicators suggest the economy had considerable momentum into the fourth quarter. Inflation will stay elevated but it should return to the 2% level in H2 of 2022. Bank members reiterated that slack in the economy should be absorbed “sometime in the middle quarters of 2022”. Finally, they have acknowledged that Omicron has introduced some uncertainty which could “weigh in on growth by compounding supply chain disruptions and reducing demand for some services”. Employment is back above the pre-pandemic level, incomes are rising and in combination with savings made during the pandemic it points to a strong demand and healthy economy. All of this should prompt BOC to start hiking rates in late Q1 or early Q2 of 2022.

This week we will have inflation data which is expected to continue rising.

Important news for CAD:

Wednesday:

• CPI

JPY

Final reading of Q3 GDP saw it reduced to -0.9% q/q from -0.8% q/q as preliminary reported. Household consumption came in at -1.4% vs -1.2% while business investment improved to -2.3% from -3.8% as preliminary reported. Net exports did not have any contribution with exports falling -0.9% and imports declining -1%. The country went through state of emergencies through the Q3 which negatively impacted household consumption, but data from the start of Q4 imply that rebound is in the making. Additionally, improvement in business investment bodes well for the future.

This week we will have BOJ meeting. No changes to rate or monetary policy are expected.

Important news for JPY:

Friday:

• BOJ Interest Rate Decision

CHF

SNB total sight deposit for the week ending December 3 came in at CHF720.3bn vs CHF719.4bn the previous week. The bank has increased its activities in the markets, however with a strong risk off mood prevailing, leading to EURCHF falling below the 1.04 level, they have decided to act slowly, looking for a better opportunity to fight the Swissy strength. Tightness of the labor market in Switzerland continues to impress. Latest data show seasonally adjusted unemployment rate for November sliding to 2.5% from 2.7% in October.

This week we will have SNB meeting. No changes to rate are expected, however talks about recent Swissy strength are expected which could lead to more intervention in the market.

Important news for CHF:

Thursday:

• SNB Interest Rate Decision

 

[katetrades]

Forex Major Currencies Outlook (Jan 10 – Jan 14)

We are up for a quiet week from the economic data standpoint. US and China inflation data and US retail sales will be the highlights of the week.​

USD

ISM manufacturing PMI came in at 58.7 vs 60 as expected and down from 61.1 in November. Still, when we go down into the details of the report there are many positives. Employment index improved from the last month, backlog of orders increased to almost 63 while prices paid component dropped to 68.2 from 82.4 the previous month. A drop in prices paid component indicates that fewer companies are reporting rises in input costs. Additionally, there was a drop in supplier delivery times index indicating that supply bottlenecks are easing. New orders and production component declined slightly but are still at a very healthy levers, above 60 or close to it.

Similarly to the manufacturing reading, ISM services PMI fell more than expected. It came in at 62 vs 66.9 as expected. The drop was caused by the Omicron disruptions, but still there is a lot to like in the reading. Employment index improved, new export orders jumped and supplier deliveries eased. Prices paid component rose at the slower pace while new orders are still holding above the 60 level.

NFP report for December provided us with another miss on the headline number which came in at 199k vs 410k as expected. USD weakened on the release, but when we dig deeper into the report we find some encouraging signs. The unemployment rate dropped to 3.9% from 4.2% in November with participation rate staying unchanged at 61.9%. The most impressive reading was a rise in the average hourly figures which came in at 0.6% m/m vs 0.4% m/m the previous month. Fed will take a look at this data and may come to conclusion that wage inflation is picking up thus spurring them to act faster and raise interest rates sooner. USD has gained strength on that assumption after the initial drop on the headline number.

FOMC minutes from the December meeting were loaded with hawkish sentiment. They were leaning toward a faster normalization path that will lead to a reduction in the Fed’s balance sheet after the first rate hike. Fed funds futures are now pricing around 80% chance for a rate hike in March. Voting member Bullard stated that he sees three rate hikes this year with first one probably coming at the March meeting.

This week we will have inflation and consumption data. Headline inflation is expected to rise above 7% while core should cross the 5% threshold.

Important news for USD:

Wednesday:

• CPI

Friday:

• Retail Sales

EUR

Final manufacturing PMI reading for the month of December was unchanged at 58, down from 58.4 the previous month. French reading improved compared to the preliminary reading, however German reading was downgraded, thus ensuring that Eurozone reading stayed the same. Markit noted that supply chain disruptions seem to ease a bit which also led to input prices rising at the slowest rate since April of 2021. Services reading, on the other hand, declined to 53.1 from 53.4 as preliminary reported. The decline was caused by the rising number of Omicron cases and restrictions along the continent which hit particularly hard Germany whose reading fell to 48.7. On the composite front, December reading came in at 53.3 while German reading fell into contraction territory, coming in at 49.9.

Preliminary CPI data for the Eurozone in the month of December saw headline reading coming in at 5% y/y, up from 4.9% y/y in November while core reading came in unchanged at 2.6% y/y. Energy prices rose astonishing 26% y/y while food, alcohol and tobacco rose 3.2% y/y. If we exclude energy prices inflation would be 2.8% y/y. Retail sales for November came in at 1% m/m vs 0.5% m/m as expected and 7.8% y/y showing that demand was improving prior to the Omicron outbreak. Alternatively, high reading may be caused by the front-running of the holiday season shopping.

GBP

A small improvement to the December manufacturing PMI (57.9 vs 57.6 as preliminary reported). Markit notes that production rose at the quickest pace in the previous four months and that there appear to be signs that supply chains are stabilizing “with vendor delivery times lengthening to the weakest extent for a year in December.” Services reading improved to 53.6 from 53.2 as preliminary reported and recorded a smaller decline from 58.5 in November. The reading was heavily impacted by the virus-curbing restrictions, however Markit sees brighter future noting that: “Around 55% of the survey panel anticipate a rise in output during 2022 as a whole, while only 10% expect a decline.” Composite reading also came in at 53.6. BOE has conducted a survey and its results show that firms are planning to raise prices in the next 12 months to the tune of around 5%. The companies justify their intention by saying that it is necessary in order to cover rising costs. This is a classical example of costs being transferred from producers to consumers and it will attribute to the inflation pressures.

AUD

Caixin manufacturing PMI returned into expansion territory in December by coming in at 50.9 vs 50 as expected. It printed 49.9 in November. Government measures, mainly a cut of 5bp in 1 year Loan Prime Rate, managed to assist SME companies and the reading reflects it. The report shows that supply was strong and that demand rebounded. Input costs rose at a slower pace while employment index was still in the negative territory as firms remain cautious about hiring amid uncertainties relating to the virus. Services followed suit and improved to 53.1 from 52.1 in November despite concerns regarding Omicron. Composite was thus increased to 53 from 51.2 the previous month.

This week we will have inflation data from China, expected to show a modest tick up.

Important news for AUD:

Wednesday:

• CPI (China)

NZD

First dairy auction of the year showed GDT index rise 0.3% after falling -1.5% at the mid-December auction. This puts it at 9 auctions with rising prices out of the last 10 auctions. A rise in prices of New Zealand’s biggest export is a great boost to the economy.

CAD

December employment report provided us with another strong data point for the Canadian economy. Headline number saw 54.7k jobs added vs 24.5 as expected. The unemployment rate ticked down to 5.9% while participation rate remained at 65.3%. All of the jobs added were full-time jobs (123k) while part-time jobs declined (-68k). A small dent to the stellar report was brought by the average hourly earnings which rose at a pace of 2.7% y/y compared to 3% y/y rise in November. BOC will happily stay on its course for the Q2 rate hike after the report showed tight labor market conditions.

JPY

Final manufacturing PMI for December was slightly improved to 54.3 from 54.2 as preliminary reported. Markit notes that "firms continued to note moderate growth in both production and new orders" while "Delivery delays and material shortages remained a dampener on production and sales." Services reading was upgraded to 52.1 from 51.1 as preliminary reported which lifted composite reading to 52.5 from 51.8 as preliminary reported. Tokyo headline CPI for the month of December came in at 0.8% y/y thus making it the highest reading in almost two years. Rising energy prices were the main culprit for the rise in the reading as ex-fresh food, energy category stayed at -0.3% y/y.

CHF

SNB total sight deposits for the week ending December 31 came in at CHF722.8bn vs CHF722.3bn the previous week. EURCHF has spent almost the entire week below the 1.04 level, however SNB concluded that time to fight Swissy strength is not now. They are saving their ammo and biding their time so that when they do make a bigger intervention in the market it will yield desired results. Inflation for December stayed unchanged at 1.5% y/y while core CPI ticked up to 0.8% y/y from 0.7% y/y the previous month. SNB will stay firmly on its course after the latest inflation reading.

 

[katetrades]

Forex Major Currencies Outlook (Jan 17 – Jan 21)

This week we will have a BOJ meeting, followed by inflation data from the UK and Canada as well as employment data from the UK and Australia, coupled with Q4 GDP data from China.​

USD

World Bank came out with 2022 projections of global GDP growth and shrank it to 4.1% from 4.3%. US GDP for 2022 was downgraded to 3.7% from 4.2% previously. They project global GDP for 2023 to rise at 3.2%. Possible surge in Omicron cases that leads to the overwhelming of health systems could shave off additional 0.7pp from projected numbers.

Fed Chairman Powell made testimony in front of the Senate and reiterated the Fed’s stance. Asset purchases will finish in March and rate hike cycle will begin around that time. Powell added that the Fed may begin reducing the size of the balance sheet near the end of the year if the economy continues accelerating as expected and it will be done "sooner and faster" than last time. On the inflation front, chairman stated that Fed will fight to defend price stability adding that inflation may stay elevated through the H1.

Inflation report for December showed headline number at 7% y/y as expected. The last time it was at 7% Volcker was Fed chairman and yield on UD10y was 14%! It was back in 1982. In comparison, current yield on US10y is around 1.75%. Core inflation reading came in at 5.5% y/y vs 5.4% y/y as expected. Used car prices rose 3.5% y/y with a jump in clothing prices of 1.7% y/y. Housing and food categories also contributed to price increases while decreases were seen in the fuel category. The headline figure suggests that Fed will need to step up and proceed with faster tightening. St. Louis Fed president Bullard was talking about 4 rate hikes after the report while Cleveland Fed president Mester, both are well known hawks, called for faster tightening policy.

Retail sales for December showed a decline across the categories. Headline number showed a drop of -1.9% m/m vs 0% m/m as expected. Control group, the reading used for GDP calculation, dropped even deeper as it came in at -3.1% m/m. Omicron fears contributed to the miserable result. There is also a possibility that surging inflation led to the fall in disposable income, therefore reflecting in lower spending.

EUR

Industrial production in the Eurozone for the month of December rose 2.3% m/m vs 0.5% m/m as expected and dropped -1.5% y/y vs 0.6% y/y as expected. Previous month’s readings were heavily downgraded, thus making the headline numbers look less impressive. German and French reading dipped slightly while the Spanish and Dutch readings improved. However, there are positives in the reading, mainly production and backlog of orders continue to rise. This indicates that the issue is on the supply side, that is supply chain disruptions and labour shortages due to restrictions. Germany reported GDP for the entire 2021 at 2.7%. There are still concerns that Q4 GDP has dropped.

GBP

November GDP surprised positively by coming in at 0.9% m/m vs 0.4% m/m as expected. Additionally, October reading was revised up to 0.2% m/m from 0.1% m/m. The UK is on the path for another quarter of GDP growth and GDP has now surpassed pre-pandemic levels. The reading has increased chances of BOE rate hike in February with implied probability of hike hovering around 75%. Services output advanced 0.7%, industrial production rose 1% while construction output jumped 3.5%. Prime minister Johnson is facing growing discontent within the UK voters for the way he handles covid situation as well as for the growing number of scandals. Latest scandal included party in Downing Street during the lockdown in May of 2020. He has apologized for his transgression but his popularity took another hit. Labour Party leader characterized Prime minister’s excuse as was "ridiculous" and "offensive."

This week we will have employment, inflation and consumption data.

Important news for GBP:

Tuesday:

• Claimant Count Change
• Unemployment Rate

Wednesday:

• CPI

Friday:

• Retail Sales

AUD

Australian trade balance for November came in at AUD9.42bn, down from AUD10.78bn the previous month. Although global demand subsided due to emergence of Omicron variant, exports still managed to increase 2%. Lifting of restrictions led to increase in domestic demand which contributed to imports rising 6%. Inflation data from China for the month of December showed CPI at 1.5% y/y vs 1.8% y/y as expected and down from 2.3% y/y in November. PPI recorded a second consecutive month of prices rising at slower pace and came in at 10.3% y/y vs 12.9% y/y in the previous month. December trade balance data from China showed surplus rising to $94.6bn due to a plunge in imports (19.5% vs 31,7% in November). Exports were stable at 20.9% vs 22% the previous month. 2021 was a great year for China's trade as trade surplus widened to a new record high of $ 676.4bn on the back of exports rising almost 30%.

This week we will have employment data from Australia as well as GDP, production and consumption data from China.

Important news for AUD:

Monday:

• GDP (China)
• Industrial Production (China)
• Retail Sales (China)

Thursday:

• Employment Change
• Unemployment Rate

NZD

Kiwi had a decent week thanks to the weak data coming from the US and subsequently weak USD, so NZDUSD rallied around 90 pips. Concerns regarding potential China shutdown due to the omicron outbreak caused it to be much weaker against the safe haven JPY and NZDJPY dropped almost 150 pips for the week.

CAD

CAD has enjoyed a tremendous week. Helped by rising oil and lumber prices as well as weak USD it has rallied more than 150 pips against the USD during the week and more than 250 pips from the highs of the week. USDCAD pair has ticked its monthly low, however further falls cannot be excluded.

This week we will have inflation and consumption data.

Important news for CAD:

Wednesday:

• CPI

Friday:

• Retail Sales

JPY

BOJ survey showed that 78.8% of households expect prices to rise in the year ahead while 80.8% expect prices to rise 5 years ahead. The survey may influence BOJ decision next week and we could see a drop of reference to downside inflation risks. BOJ has raised its assessment for all 9 regions compared to October of 2021 as economic activity picks up across the country followed by the removal of restrictions.

This week we will have BOJ meeting. There will be no changes to the rate or yield curve control, however we may see changes to the inflation expectations.

Important news for JPY:

Tuesday:

• BOJ Interest Rate Decision

CHF

SNB total sight deposits for the week ending January 7 came in at CHF724.6bn vs CHF722.8bn the previous week. Increase in SNBs activity probably led to EURCHF climbing over the 1.04 level and staying there.

 

[katetrades]

Forex Major Currencies Outlook (Jan 24 – Jan 28)

FOMC and BOC meetings will dominate the week which will also see a preliminary PMI data from the EU, the UK and Japan as well as preliminary Q4 GDP data from the US and inflation data from the US, Australia and New Zealand.​

USD

Building permits in December came in at 1.873m vs 1.71m as expected and 1.717m in November for almost a 10% monthly rise! Housing starts came in at 1.702m vs 1.678m the previous month adding to the strength of the housing sector. The yield on 10y treasuries touched the 1.9% level during the week, the first time it went that high since 2019. Calls are being made for 2% in the short-term and 2.25% by the end of the year. Market probability of a March hike now stands at 88.2%

This week we will have preliminary Q4 GDP reading, Fed’s preferred inflation metric PCE and FOMC meeting. There is a possibility that FOMC members decide to end QE program and thus prepare ground for a March hike.

Important news for USD:

Wednesday:

• Fed Interest Rate Decision

Thursday:

• GDP

Friday:

• PCE

EUR

The first data of the year is ZEW survey which showed German current conditions fall to -10.2 from -7.4 at the end of 2021. Uncertainty around the current German economy is mounting, however the outlook component jumped to 51.7 from 29.9 back in December. The jump indicates that investors are seeing brighter conditions for the economy in H2. Similar situation is with the Eurozone expectations reading which came in at 49.4, up from 26.8 the previous month. German PPI reading rose 5% m/m, thus making it the biggest rise since the end of World War II. In response to the mounting price pressures yield on 10y German bonds reached 0% for the first time since 2019.

Final inflation data for Eurozone in the month of December was unchanged from preliminary reading with headline at 5% y/y and core at 2.6% y/y. ECB meeting minutes revealed increased importance of wage growth in forming a monetary policy. ECB President Lagarde stated that ECB is not forced to follow Fed.

This week we will have preliminary PMI data for January.

Important news for EUR:

Monday:

• Markit Manufacturing PMI (EU, Germany, France)
• Markit Services PMI (EU, Germany, France)
• Markit Composite PMI (EU, Germany, France)

GBP

Employment report for the month of December showed claimant count change drop by -43.3k. ILO unemployment rate slid to 4,1% from 4.2% in November. Wages continued to slide as well penning this as a mixed report. Labor market getting tighter, the fall in the unemployment rate increases chances of a February hike, however wage pressures slowly subsiding and falling below inflation numbers indicating that BOE will not raise interest rates at the pace that markets are pricing in.

Inflation data for December showed headline number climbing to 5.4% y/y from 5.1% y/y in November with core coming in at 4.2% y/y vs 4% y/y the previous month. Another data point speaking in favor of February rate hike. Retail sales dropped -3.7% m/m and -0.9% y/y with ex-fuel category dropping -3.6% m/m and -3% y/y. All of the readings were in healthy positive territory the previous month although they were revised down. The reading indicates devastating effect of inflation on consumer spending combined with impact of Omicron and post-Christmas shopping. BOE will stay on a hiking track to fight inflation.

The swap market is pricing in around 90% chance of a hike at the February meeting with four rate hikes expected this year. If BOE decides to hike rates in February it would lift the base rate to 0.50%, which is the threshold necessary for allowing a reduction of the balance sheet.

This week we will have preliminary PMI data for January.

Important news for GBP:

Monday:

• Markit Manufacturing PMI
• Markit Services PMI
• Markit Composite PMI

AUD

December employment report showed employment change at 68.4k vs 30k as expected. The unemployment rate dropped to 4.2% from 4.6% the previous month for the lowest reading since 2008. Participation rate stayed the same at 66.1% which enhances the impressiveness of the drop in the unemployment rate. Full-time jobs contributed with 41.5k with part-time jobs adding additional 23.3k. Some banks suggest that with such a tight labor market RBA may act and hike rates in August of 2022, however Governor Lowe explicitly stated numerous times that they wish to see wage growth above 3% before acting on rate hikes.

Q4 GDP came in at 1.6% q/q and 4% y/y, thus beating the expectations of 1.1% q/q and 3.6% y/y. This puts overall 2021 GDP at 8.1%. The reading is elevated due to the low base in 2020 which saw GDP rise only 2.2%. Industrial production in December came in at 4.3% y/y for the third consecutive month of faster rises putting the reading for the entire 2021 at 9.6% y/y. The biggest contributors were industries for “new energy” cars and industrial robots while on the service side it was activities in telecommunications. Retail sales grew measly 1.7% y/y in December, dragged down by the slumping car sales. In 2021 retail sales grew impressive 12.5% y/y.

PBOC has cut its MLF (Medium-Term Lending Facility) by 10bp from 2.95% to 2.85%. Additionally, they **** 7-days reverse repo rate, also by 10bp. Later during the week further cuts have been made. 1-year LPR (Loan Prime Rate) was cut by 10bp from 3.8% to 3.7% while 5-year LPR was cut by 5bp from 4.65% to 4.6%. All of the moves are intended to stimulate the lending and thus the economy. Lowering of rates cannot force banks to increase lending as they still see risks looming in the credit market so PBOC may be forced to ease more in the future.

This week we will have a Q4 inflation data.

Important news for AUD:

Tuesday:

• CPI

NZD

Second GDT auction in January brought a 4.6% rise in dairy prices. Whole milk prices rose 5.6% followed by butter prices with 5% rise. The reading will additionally improve New Zealand’s terms of trade.

This week we will have a Q4 inflation data.

Important news for NZD:

Wednesday:

• CPI

CAD

December CPI reading showed headline number ticking up to 4.8% y/y for the highest reading since 1991! The biggest contributors were “homeowners” home and mortgage insurance with 9.3% rise, passenger vehicles with 7.2% and food with 5.2% price rise. All three core measures increased as well with median and trimmed now at or above 3% while common is at 2.1% y/y. The report will increase chances of the rate hike at the incoming meeting.

This week we will have a BOC meeting. Markets are now pricing over 85% chance of a rate hike and with BOC quarterly business survey reaching record high level in Q4 the hike is crossing to almost certain.

Important news for CAD:

Wednesday:

• BOC Interest Rate Decision

JPY

Core machinery orders, a leading indicator of capital spending, 6-9 months in the future, surged 3.4% m/m and 11.6% y/y in November vs 1.5% m/m and 6.1% y/y as expected. The reading shows a positive sign that private firms are spending which in turn should lead to faster recovery for the economy.

BOJ has left the interest rate unchanged at -0.10% as well as targeted yield on 10y JGB at around 0% as was widely expected. They see risks for price outlook broadly balanced and for economic activity skewed to the downside. Inflation projections for 2022 and 2023 have been revised up to 1.1%. GDP for 2022 has also been revised up to 3.8% from 2.9% previously. BOJ governor Kuroda reiterated stance that the bank will no hesitate to ease further, adding that weak yen is not a bad thing for the economy. He also added: “We're expecting long and short-term policy rates to remain at the current levels or fall even lower...Raising rates is unthinkable."

Prime Minister Kishida announced new restrictions for 13 prefectures, including Tokyo and its surrounding area. Restrictions will start on January 21 and will last all the way through February 13. The area under restrictions is responsible for almost 50% of GDP. There is also a possibility that even greater part of the country will be put under restrictive measures thus making even bigger blow to the economy.

CHF

SNB total sight deposits for the week ending January 14 came in at CHF724.5bn vs CHF724.6bn the previous week. Virtually no change in the reading as investors have pushed EURCHF above the 1.05 level.

 

[katetrades]

Forex Major Currencies Outlook (Jan 31 – Feb 4)

RBA, BOE and ECB are all meeting in huge week ahead of that will also see NFP on Friday coupled with employment data from Canada. Additionally, we will get preliminary Q4 GDP and January CPI data along with Q4 employment data from New Zealand.​

USD

Fed has left rates unchanged at their January meeting as was widely expected. There was no speeding up of taper, it will end in early March. With inflation running at well above 2% and strong labor market committee members stated that it will be appropriate to start raising interest rates at the coming meetings. Fed funds rate remains primary tool for the tightening of monetary policy. Chairman Powell did not rule out hiking at every meeting adding that "Quite a bit of room to raise rates without hurting jobs". He added that discussion about balance sheet reduction will be held at the next two meetings. Separately published document regarding balance sheet it was stated that "reducing the size of the Federal Reserve's balance sheet will commence after the process of increasing the target range for the federal funds rate has begun". Markets are now pricing in a rate hike in March at around 80%.

Advance reading of Q4 GDP came in at 6.9% vs 5.5% as expected. Personal consumption rose 3.3% vs 2% in Q3 and thus contributed 2.25bp to the reading. The biggest contributor was gross private domestic investment with 5.15bp. Inventories surprised with a 4.9bp contribution to the Q4 GDP. December PCE headline number ticked up to 5.8% y/y from 5.7% y/y in November while core PCE came in at 4.9% y/y vs 4.7% y/y the previous month. The IMF downgraded forecast for global GDP in 2022 to 4.4% from 4.9% projected in October. The virus, higher inflation, and high debt levels were key considerations. Failure to pass Build Back Better infrastructure project also contributed to the downgrade.

This week we will have ISM PMI data as well as NFP data on Friday. Headline number is expected to come at around 240k with the unemployment rate staying at 3.9% while earnings are expected to come above 5% y/y.

Important news for USD:

Tuesday:

• ISM Manufacturing PMI

Thursday:

• ISM Non-Manufacturing PMI

Friday:

• Nonfarm Payrolls
• Unemployment Rate
• Average Hourly Earnings

EUR

Preliminary PMI data from Eurozone were influenced by improvements in German readings and drops in French readings. Manufacturing managed to climb to 59 from 58 in December thanks to German reading coming in at 60.7. Services reading fell to 51.2 which is the lowest level since April of last year. The drop was influenced by Omicron outbreak but as Markit notes the fact that reading is still above 50 indicates that impact of the virus on the economy should not be severe. Composite reading came in at 52.4 assisted by German reading returning to expansion with a healthy 54.3. Markit notes that “prices for goods and services are rising at a joint-record rate as increasing wages and energy costs offset the easing in producers’ raw material prices, dashing hopes of any imminent cooling of inflationary pressures.” Business have reported that input prices are rising at a much slower pace, slowest since April, which should ease inflation pressures.

German Ifo survey showed a break in the six-month downtrend for business climate and expectations categories. They came in at 95.7 and 95.2, up from 94.8 and 92.7 in December respectively. Current situation category continued to deteriorate and came up at 96.1, down from 96.9 the previous month. Bright spots are on the horizon, as Ifo economist notices, same as in the preliminary PMI reports, that there is easing in supply shortages in both industrial sector and in raw materials.

This week we will have preliminary Q4 GDP and January CPI data as well as ECB meeting. No changes in rate and policy are expected but wording will be monitored for information on how the bank plans to navigate stimulating the economy with fighting the inflation.

Important news for EUR:

Monday:

• GDP

Wednesday:

• CPI

Thursday:

• ECB Interest Rate Decision

GBP

UK preliminary PMI data showed manufacturing drop to 56.9 from 57.9 the previous month and services slide to 53.3 from 53.6 in December. Markit noted that "Business confidence in the outlook also picked up, driving sustained solid jobs growth. With inflationary pressures remaining elevated at near-record levels, this all adds to the likelihood of the Bank of England hiking interest rates again at its upcoming meeting.” Similar to the Eurozone reading there are signs of supply chain issues resolving which should lead to lower input costs for business and lower costs for consumers (lower inflation).

This week we will have a BOE meeting. A 25bp rate hike is expected which will lift bank rate to 0.50%. The BoE said they will stop reinvestments of maturing bonds (QE) when the Bank rate hits 0.5%, thus we see quantitative tightening starting from this meeting.

Important news for GBP:

Thursday:

• BOE Interest Rate Decision

AUD

Inflation data for Q4 showed headline CPI rising 1.3% q/q and 3.5% y/y vs 0.1% q/q and 3.2% y/y as expected. Trimmed mean reading, it is a core inflation readings which RBA targets to be in 2-3% y/y range, came in at 1% q/q and 2.6% y/y vs 0.7% q/q and 2.4% y/y. The numbers are elevated but still well within RBA’s range, therefore they will not have impact on the incoming monetary policy meeting. Additionally, RBA’s main concern is wage growth. Data for Q4 wages will not be available until the end of February.

This week we will have a RBA meeting and later on a Statement on Monetary Policy. The meeting will bring and end to bond purchases, planned to go through at least mid-February.

Important news for AUD:

Tuesday:

• RBA Interest Rate Decision

NZD

Q4 inflation data printed 1.4% q/q and 5.9% y/y. Both came in higher than expected with yearly figure now at a 31-year high. RBNZ will not be deterred from its rate hike path. Some analysts call for at least 7 rate hikes while others scream for a 50bp hike at the February 23 meeting.

This week we will have Q4 employment data.

Important news for NZD:

Tuesday:

• Employment Change
• Unemployment Rate

CAD

BOC delivered a mild surprise for investors by keeping the rate unchanged at 0.25%. Although there was a reduced chance of a rate hike since we wrote our call for a rate hike, markets were still giving it around 70% chance. Bank members now see that overall economic slack is absorbed and have removed exceptional forward guidance on interest rate. They see Omicron as a threat to the activity in Q1 but expect economy to continue strongly and see GDP for 2022 at 4%. Inflation is expected to reach 5% in H1 of 2022 due to supply constraints. Governor Macklem stated that BOC will need to raise interest rates in order to fight inflation and that they will go on a path of rate hikes. It seems that they are waiting to see how Fed will act and take clues from them. March 2 is the next meeting and we expect BOC to deliver a rate hike.

This week we will have employment data.

Important news for CAD:

Friday:

• Employment Change
• Unemployment Rate

JPY

Preliminary PMI data for January show manufacturing improving to 56.6 from 56.3 the previous month on the back of stronger growth seen in output, new orders (export orders as well) and backlog of orders. Output prices see stronger inflation, while input prices show weaker inflation as input costs are starting to subside. Services PMI, on the other hand, recorded a sharp drop to 46.6 from 52.1 in December. The drop was caused by the Omicron outbreak and all components of the reading are declining. Composite was dragged to 48.8 by the drop in services reading and only bright spot are new export orders which point to a stronger growth.

CHF

SNB total sight deposits for the week ending January 21 came in at CHF724.8bn vs CHF724.5bn the previous week. It is a bit surprising that SNB is standing on the sidelines when EURCHF has breached the multi-year lows. Most likely they are biding their time waiting to strike when they will be able to make the most with the least amount of intervention.

 

[katetrades]

Forex Major Currencies Outlook (Feb 7 – Feb 11)

After two highly eventful weeks full of central bank meetings, we will have a quiet week ahead of us dominated by inflation data from the US and Q4 GDP data from the UK, thus leaving investors time to contemplate recent events and formulate their strategies.​

USD

Atlanta Fed president Raphael Bostic stated in an interview with Yahoo Finance that 50bp rate increase in March is not preferred policy action. He still sees 3 rate hikes in 2022. Kansas City Fed president Esther George, a voting member in 2022, stated that current very accommodative stance of monetary policy is out of sync with the economic outlook, adding that it could be appropriate to more earlier on balance sheet reduction. She is a well known hawk.

NFP headline number in January surprised to the upside coming in at 476k vs 150k as expected. Participation rate increased to 62.2% from 61.9% in December which caused the unemployment rate to tick up to 4% from 3.9% the previous month. Wages were the highlights of the show as they rose 0.7% m/m and 5.7% y/y. This will add more to the demand-pull inflation and it will show up in the next week’s reading. Additionally, this data point cements Fed rate hike in March. A question about a 50bp will start popping up again. Probability of a 25bp rate hike at March meeting according to FedWatch Tool is at 80.8% while a 50bp rate hike probability rose to 19.2%.

This week we will have inflation data. Both readings are expected to continue rising with headline number printing 7.2% y/y and core number printing 5.9% y/y.

Important news for USD:

Thursday:

• CPI

EUR

Preliminary Q4 GDP reading showed the Eurozone economy expanding by 0.3% q/q and 4.6% y/y. The impact of the Omicron did not derail the economy as much as feared and proved that Europeans are learning to live with the virus. Growth was seen in France, Italy and Spain, while German economy contracted and negatively impacted overall GDP. According to seasonally adjusted data GDP growth for 2021 was at 5.2%.

German retail sales for December fell -5.5% m/m. A combination of post-holiday shopping and increasing inflation weighs on consumers and we may expect similar results from other EU countries. Stark contrast in inflation data saw German reading fall to 4.9% y/y from 5.3% y/y in December due to the reversal of VAT base effects from the calculation, reminder VAT was scrapped when pandemic began and then reintroduced in January of 2021. Expectations were for a bigger drop in inflation, 4.3% y/y. On the other hand, French reading ticked up to 2.9% y/y from 2.8% y/y the previous month, however still well below the German reading. Finally, preliminary EU inflation data for January came in at 5.1% y/y vs 4.4% y/y as expected and up from 5% y/y in December. The main culprit for the record high reading were energy prices which rose 28.6% y/y. Core inflation, on the other hand, came in at 2.3% y/y vs 1.9% y/y as expected, down from 2.6% y/y in December. Core numbers indicate that there is not muc spillover effect from the surging energy prices.

ECB left rates unchanged and came out with a virtually unchanged statement. The only difference from December’s statement was that Governing Council is now prepared to adjust its instruments “in either direction”. PEPP will end in March and APP purchases will end shortly before the rate hikes begin. Q1 growth will be slower due to restrictions caused by Omicron, particularly services sector. Later year growth will increase on the back of domestic demand. Then a true hawkish shift came in at the press conference. ECB president Lagarde started by saying that inflation will be elevated for longer than expected adding that it may be significantly higher than expected this year. She did not exclude a possibility of a rate hike later in the year. EURUSD rose almost 100 pips on her comments and continued to rise as market participants see rate hikes incoming by the year-end. March meeting is seen as a turning point for the monetary policy with some analysts calling for ending of APP program in June and first hikes in September. Others even see a hike in December following the one from September or just one in December.

GBP

BOE has delivered what all of the investors were expecting and raised interest rates by 25bp to 0.50%. The vote for rate hikes was split 5-4 but the 4 members voted for a 50bp interest rate hike to 0.75%. Members stated that rate hike is necessary due to the tightness of labor market and signs of greater persistence of domestic cost pressures. Inflation peak is now seen at around 7.25% in April. With the rate now at 0.50% BOE will start the first phase of balance sheet reduction, which consists of not reinvesting proceeds from matured bonds. A very hawkish BOE that will continue to raise rates at the March meeting. Governor Bailey has added at the conference that impact of Omicron will be short-lived. He also had an interesting remark that basically comes down to workers should not be pushing for higher wages right now. He meant it as a way to curb inflation but his comments came out as very insensitive. Later on her added: "I am not saying don't give your staff a pay rise, this is about the size of it".

This week we will have a preliminary Q4 GDP reading.

Important news for GBP:

Friday:

• GDP

AUD

RBA February meeting saw cash rate remain at 0.10% and an end to their QE program as we stated previous week. Bond purchases (QE) will conclude on February 10. The accompanying statement said “The Omicron outbreak has affected the economy, but it has not derailed the economic recovery.” Board members recognized that inflation has increased recently, however they think it is too early to conclude that it is sustainably within the target band of 2-3% for core CPI. Additionally they pose the question persistent the pick-up in inflation will be once problems on the supply-side get resolved. Members have reiterated their stance that “will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range". They added that wage growth is modest and that they expect a gradual rise in wages. As a reminder, governor Lowe stated repeatedly that they wish to see wages rise north of 3% before considering increasing rates. Regarding the balance sheet reduction statement says “The Board will consider the issue of the reinvestment of the proceeds of future bond maturities at its meeting in May.”

Both official and Caixin manufacturing PMI data showed that sector is struggling at the beginning of the year. Data in January came in at 50.1 and 49.1 respectively, falling from 50.3 and 50.9 in December. Growing covid cases and China’s zero-covid policy are putting pressure on the sector with Caixin reading returning into contraction and printing the lowest number since February of 2020.

NZD

Employment data for the Q4 were mixed. The unemployment rate slipped to 3.2% from 3.4% in Q3 and it is now at the lowest level since 1986. Digging into the details we can see that participation rate slipped down to 71.1% from 71.2% in the previous quarter. Wages continued to rise with average hourly wages increasing 3.8% q/q and private wages going up by 2.8% q/q. However, employment change stalled as it grew by 0.1% q/q and 3.7% y/y in Q4 compared to 2% q/q and 4.2% y/y in Q3. This reading will strengthen the chance of a rate hike by RBNZ at their meeting on February 23. There was another strong global dairy auction that saw GDT Price Index rise 4.1%. This makes a second consecutive auction of rises over 4% improving New Zealand’s terms of trade at a fast pace.

CAD

Employment report for January presented us with a picture of economy heavily impacted by Omicron. Restrictions in most provinces led to employment change coming in at -200k vs -125k as expected. Other data are not encouraging as well with participation rate dropping to 65% from 65.4% in December and the unemployment rate jumping to 6.5% from 6% the previous month. Wages also declined coming in at 2.4% y/y vs 2.7% at the end of the last year. Now that the restrictions have been lifted we will see improvement in February reading which will strengthen BOCs determination to raise rates at March meeting. November GDP figure came in at 0.6% m/m vs 0.4% m/m as expected. October reading was at 0.8% m/m.

JPY

Industrial data from Japan showed a slowdown in December by coming in at -1% m/m, however projections for the new year are much brighter. Retail sales also slumped by -1% m/m in December but with potential for another state of emergency around the country looming, chances of it getting stronger are low.

CHF

SNB chairman Jordan stated that some of the inflation is transitory and that bank expects it to come down in the coming months, however central banks must make sure that it does not become permanent which requires a careful monitoring of the situation. He added that strong Swissy is limiting inflation and that he sees no signs of wage price cycle. Retail sales in December fell -2% m/m and -0.4% y/y. November y/y reading was at 5.3%. A combination of post-holiday shopping and increasing inflation weighs on consumers.