On the month:
The euro gained 1.7% in the month and the pound 0.2%. The S&P 500 is on track for a 0.2% decline this month.
The kinds of doji star patterns like on the CAC chart above are typical. That highlights the uncertainty in the market, but also the opportunity for a rebound. Unfortunately, the seasonals aren’t great for stocks in June.Full Article
Month-end buying in the US dollar combined with downbeat New Zealand business survey data and a risk-off tone to US trade as market participants there returned from a long weekend weighed heavily on NZD/USD on Tuesday. The pair dropped back to probe the 0.6500 level, having been as high as the 0.6560s as recently as Monday, where it currently trades lower on the day by about 0.7%.
Regarding the downbeat New Zealand data, the headline ANZ Business Outlook Index for May dropped to -55.6% from -42.0% a month earlier, while the ANZ Own Activity Index dropped to -4.7% from 8.0% previously. That marked the worst reading since April 2020, when much of the global economy was under lockdown due to the initial spread of Covid-19.
The data triggered fears that New Zealand’s economy might be headed towards/already in stagflation. Meanwhile, remarks from the RBNZ’s Deputy Governor that the central bank needs to keep decreasing stimulus and tighten conditions beyond the neutral rate of 2.0% added to concerns about the outlook for the economy. Tighter financial conditions tend to boost a currency, but not if they risk sending the economy into recession.
US data in the form of robust Chicago PMI and CB Consumer Confidence survey data for May have likely helped the US dollar hold onto earlier session gains. But tier one US data releases later this week in the form of ISM Manufacturing PMI and the official labour market report, also for May, will be more important. Despite Tuesday’s losses, NZD/USD still looks on course to end the month just shy of 1.0% higher.Full Article
All eyes are on the US economy, alert for signs that businesses are beginning to feel the impact of an inflation-weakened US consumer on their bottom line.
The Purchasing Managers’ Index (PMI) for manufacturing from the Institute for Supply Management is expected to slip to 54.5 in May from 55.4. The New Orders Index is forecast to rise to 53.6 from 53.5 and the Employment Index should edge to 53.6 from 50.9. Prices are predicted to climb to 86.2 from 84.6 in April.
In April, overall PMI was down from its recent high in February of 58.6. New Orders had faded from 61.7 in the same month and employment was down from 56.3 in March, its best level since 57.7 a year earlier.
Inflation has been taking an ever increasing bite of US wages for more than a year. With the Consumer Price Index at 8.3% annually in April and the headline Personal Consumption Expenditure Price Index at 6.3% and the core rate at 4.9%, the purchasing power of workers wages declined 2.6% in April and 2.7% in March.Salaries have been losing ground to inflation for 14 months.
While Retail Sales and Personal Spending, the two main gauges of consumption, have been relatively stable, consumers have been forced to dig deep into savings in order to maintain their purchasing habits. The US saving rate fell to 4.4% in April, the lowest since 2008, according to a Commerce Department report.
Almost two-thirds of US economic activity is tied to the consumer. It is an open question how long families and households can continue to deplete their savings. To put it another way, unless either wages rise or inflation falls, people will soon be forced to reduce discretionary spending in order to maintain the necessities, food, shelter and transportation, all of which have increased in price more than the general inflation rates.
The Federal Reserve’s newly minted inflation policy is expected to hike the fed funds rate by an additional 200 basis points to 3.0% by the end of the year, now just seven months distant.
The US economy contracted 1.5% in the first three months. Second quarter growth is running at 1.9% in the Atlanta Fed GDPNow estimate with one month to go.
Rate increases are designed to curb inflation by reducing economic growth. Can the Fed maintain its hard line against inflation if the US economy slips into a traditional recession in the second quarter?
The answer to that question will not be known until GDP is reported in late July, after the next two Fed meetings. A 50 basis point increase is expected on June 15 and again on July 27.
It will be the US consumer who determines second quarter growth. At the moment it appears Americans have decided on the optimistic course, hoping for economic improvement.
Indexes for May from S&P Global came in as expected for the service sector at 57.5, though down from 59.2 in April. Manufacturing PMI was lower at 53.5 than the 55.2 forecast and April’s 55.6 reading. The Composite Index dropped to 53.8 from 56.0.
The services index has been lower than manufacturing over the past six months, and both have bounced around but neither have exhibited a negative trend.
Markets are primed for negative economic US news that has not yet arrived.
Equities are flirting with bear market averages concerned that inflation will force the US consumer to curtail spending precipitating a recession. Or, possibly, that Fed rate increases will slow an already feeble economy into a decline.
Treasury yields have fallen from their early May highs as credit markets have factored in the impending inflationary drag on consumption. The dollar has been sold as Treasury yields peaked and then reversed. Earlier safety trade flows have been withdrawn as the Ukraine war has subsided into stalemate and its immediate threat to the global economy has waned.
Market risk is heavily on the downside as a poor result will tend to confirm existing fears, with equities, the dollar and Treasury yields all likely falling in response.
Readings at or better than forecast will mitigate immediate fears but not provide confidence in the future, pausing current market trends rather than promoting higher levels in stocks, Treasury returns or the dollar.Full Article
The USD/CAD broke below 1.2650 and fell to 1.2628, reaching a fresh monthly low. The pair resumed the downside despite the Canadian GDP reading coming below expectations and ahead of Wednesday’s Bank of Canada meeting.
The loonie rose across the board during the last hours as the GDP report did not affect rate hike expectations from the BoC. The Canadian economy, measured by the GDP, rose by 3.1% during the first quarter (annualized), below the 5.4% of market consensus. Analysts at RBC Economics explained growth was supported by “robust household consumption and business investment that offset a sizable decline in net trade. Consumption expenditure increased 3.4% from the prior quarter despite a soft start to the quarter in January”.
On Wednesday, the Bank of Canada is expected to announce a 50 bp rate hike. “A strong economy, booming jobs market, and elevated inflation argue for another ‘forceful’ 50bp hike. And the BoC is unlikely to stop there, with a red hot housing market and support from rising commodity prices suggesting it may be even more aggressive than the Fed this year”, said analysts at ING.
The USD/CAD is falling despite the recovery of the US dollar. The DXY is having the best day in almost two weeks as US yields move higher. A deterioration in market sentiment is also helping the greenback. The Dow Joines is falling by 0.78% and the Nasdaq drops by 0.71%.
If USD/CAD rises back above 1.2650 the loonie will likely lose momentum favoring a return to the 1.2685/1.2650 range. Below the daily low, attention would turn to 1.2600. Ahead of the BoC meeting, volatility is set to remain elevated.Full Article
Gold spot (XAU/USD) snaps two days of gains and retraces towards the 20-DMA after bouncing off the 200-DMA amidst a sour sentiment trading session as US traders come back from a three-day weekend and are propelling up the greenback and US Treasury yields. At $1842.36, XAU/USD remains on the defensive, almost 0.50% down.
Investors’ mood shifted negatively, as witnessed by global equities falling. The US Dollar Index, a gauge of the greenback’s value vs. a basket of rivals, advances 0.50%, sitting at 101.811, underpinned by elevated yields on US Treasuries. The 10-year benchmark note rate is gaining five bps, up at 2.868%.
The factors mentioned above, alongside fears of inflation anchored above the US Federal Reserve 2% target, caused a shift towards safe-haven assets. Meanwhile, 10-year breakeven inflation expectations are rising up to 2.63%, signaling that investors are not sure about buying the dip.
Elsewhere, China’s released its official PMIs for Mat, which increased by 49.6 from 47.4 in April, signaling a minimal recovery after May’s Covid-19 lockdowns. Additionally, reports on Monday’s Asian session said that Shanghai and Beijing would ease some of their restrictions to boost economic growth.
In the meantime, the US economic calendar released Housing data, which came mixed but close to forecasts. The highlight was May’s CB Consumer Confidence, which came at 106.4, better than the 103.9 expected. The report showed that inflation expectations for one year are at 7.4%, lower than April’s 7.5%.
Additionally, the Fed Regional banks keep releasing their Manufacturing Indexes ahead of June’s 1 ISM Manufacturing PMI. Chicago’s PMI for May rose by 60.3, higher than the 55 expected, but the Dallas Fed Index contracted to -7.3, lower than April’s reading.
Gold’s Tuesday price action witnessed a test of the 200-DMA at $1840.86, quickly rejected, as depicted by the candlestick. However, gold bears appear to be leaning towards the 20-DMA at $1846.76, maintaining the spot price seesawing in the $5 range. It’s worth noting that the Relative Strenght Index (RSI) is at 43.06, in bearish territory, aiming lower, meanings that gold seems poised to break to the downside.
Therefore, the XAU/USD path of least resistance is tilted to the downside. The XAU/USD’s first support would be the 200-DMA at $1840.86. Break below would expose the 4-year-old upslope trendline around $1830-34, which, once cleared, would send gold tumbling towards the Bollinger’s band bottom band at $1805.44.Full Article
A cocktail of bullish factors supported global oil prices on Tuesday, with front-month WTI futures coming within a whisker of hitting the $120 per barrel mark earlier in the session before backing off somewhat following a risk-averse start to the final trading day on Wall Street of the month. At current levels just above $118, WTI is still trading with gains of around $0.50, having on Monday broken above key support in the form of the late March highs in the $116s.
Market commentators cited expectations for rising demand in the coming months as North America and Europe enter the peak summer driving season plus positive developments regarding the Covid-19 situation in China (lockdown easing continues as new infections in the country fell back under 100 for the first time since early March). Probably the most important development underpinning prices right now, however, is the news early on Tuesday that EU 27 leaders came to an agreement on a Russian oil embargo.
Seaborne crude oil imports from Russia will be completely phased out within the next six months and, while oil delivered via pipeline is exempt from sanctions to placate land-locked Hungary, other EU nations that import a lot of Russian crude oil via pipeline have pledged to end purchases by the end of the year. In sum, the bloc will have phased out 90% of its purchases of Russian crude by the end of the year, a devasting blow to the Russian energy industry.
OPEC+ are scheduled to meet later in the week and sources on Monday said that, despite the EU’s (widely anticipated) ban on Russian oil imports, they would stick to their existing policy of steady 432K barrel per day increases in output quotas each month. The group’s slow approach to increasing output at a time when many of its smaller producers are struggling to keep up and Russian output is collapsing from pre-Ukraine invasion levels has contributed to a significant tightening of global oil markets.
Highlighting this tightness, commodity analysts on Tuesday pointed to a continued steepening of the current contango of the oil futures curve. The premium to buy Brent crude futures for delivery in August versus six months later rose to a fresh nine-week high of near $15.Full Article
WTI crude is up $2.72 to $117.83 today. OPEC continues to struggle to match its quotas and that will continue with OPEC quotas set to continue to rise through Q3.Full Article
The Bank of Canada (BoC) is set to announce its interest rate decision on Wednesday, May 1 at 14:00 GMT and as we get closer to the release time, here are the expectations as forecast by the economists and researchers of six major banks, regarding the upcoming announcement.
The BoC is set to deliver another 50-basis point hike raising the Overnight Rate to 1.50% with a hawkish policy statement.
“We look for the BoC to deliver another 50bp hike in June to bring the overnight rate to 1.50%. With little uncertainty around the decision itself, the focus will shift to the policy statement where we expect a hawkish tone. The Bank will note that growth and inflation are both tracking above the April MPR, and repeat that rates will need to rise further. Global factors remain a crucial driver of the loonie, likely limiting the impact of the BoC’s anticipated 50bp rate hike. As a result, we expect USD/CAD to maintain the 1.26-1.30 range through the summer months but will look to fade extremes.”
“A strong economy, booming jobs market, and elevated inflation argue for another ‘forceful’ 50bp hike. And the BoC is unlikely to stop there, with a red hot housing market and support from rising commodity prices suggesting it may be even more aggressive than the Fed this year. We expect CAD to benefit from BoC tightening in the medium-term.”
“The overnight interest rate is widely expected to rise by another 50 bps to 1.5% as the BoC continues its efforts to fight inflation. The hike will build on the BoC’s 50 bp increase in April and 25 bp rise in March – with more increases likely in the months ahead.”
“The BoC is widely expected to follow April’s 50 basis point rate hike – which was the first in over twenty years – with another half-percentage-point hike, bringing the overnight target to 1.5%. With the announcement of QT already behind us and now underway, the focus will remain squarely on the Bank’s guidance for its key interest rate. For now, the BoC appears set to quickly move towards its 2-3% neutral range (implying a third straight 50 bp move in July) but thereafter, the outlook is murkier. That said, we don’t expect the Bank to show its cards on Wednesday. Instead, look for the Governing Council to retain flexibility.”
“The BoC will have to sound hawkish. After all, non-standard 50bp hikes don’t happen every day, particularly back-to-back. Moreover, inflation has continued to surprise to the upside. However, any admission that the housing market is already responding to higher interest rates should also be seen as an admission that excess demand is about to become less excessive. That is one of the key reasons why we think that, after another 50bp hike in July, the pace of hikes will slow down, and the Bank won’t need to take rates any higher than the 2.5% mid-point of its neutral band to achieve 2% inflation sometime in 2023.”
“We expect a 50bp rate hike from the BoC taking the policy rate to 1.5%.”Full Article
Banco de México (Banxico) raised the policy rate by 50bps in May. Economists at Standard Chartered now expect Banxico to raise the policy rate by 75bps in June (versus 25bps prior). In their view, hawkish Banxico should support the Mexican peso in the near-term.
“The increasing possibility of a 75bps rate hike from Banxico in June should exert downward pressure on USD/MXN.”
“In the near-term, with broad FX volatility declining, high carry should continue to support the peso. However, MXN has shown a rising correlation to US equities, which warrants caution given shaky risk sentiment.”
“Despite vulnerability to broader market moves, we think MXN benefits from attractive underlying macro fundamentals. Mexico’s external vulnerabilities are limited, with low foreign positioning in fixed income and a current account bolstered by record remittances.”
“Over the medium-term, anaemic domestic growth and a lack of structural reforms will remain a headwind, while the potential for a US slowdown is a key risk to watch.”Full Article
Last storm ahead of the summer – that seems to be the case for USD/CAD as it faces an imminent 50 bps rate hike by the Bank of Canada. While raising the Overnight Rate to 1.50% is in the price, a pledge to ferociously fight inflation has room to lift the loonie. Moreover, other factors also provide a backdrop for a bearish bias on USD/CAD.
As elsewhere in the world, inflation is rising in Canada. However, the northern nation is similar only to the US in suffering rapid rises in underlying prices. The Core Consumer Price Index (Core CPI) jumped by 5.7% YoY in April. That is just below 6.3% in America – yet at least it is trending down south of the border.
Canadian core inflation:
Increases in energy and food prices are impacted by global factors which central banks cannot control. However, when inflation is widespread, the BOC can cool lending and encourage saving by raising interest rates.
As mentioned earlier, markets know that BOC Governor Tiff Macklem and his colleagues are set to fight deep inflation with a 50 bps rate hike. But, what will they signal about the future?
Inflation can become a self-fulfilling prophecy if consumers expect prices to rise and increase purchases now to get ahead of rising prices. In that, Canada already exceeds the US and many other developed economies.
Source: The Economist
Macklem needs to signal more rapid rate hikes are coming, perhaps indicating a move to tight monetary policy – raising interest rates above the level of inflation in order to choke off rising prices. Such a stance would boost the loonie.
Domestic inflation is not the only consideration for Macklem, but also the work of his peer in the US, Federal Reserve Chair Jerome Powell. The Canadian economy is highly dependent on US demand and the BOC is watching the Fed closely. The recent hawkish stance from Powell and his colleagues – Governor Waller hinted at non-stop 50 bps hikes – may also force policymakers in Ottawa to act more aggressively.
As I have explained, the Bank of Canada is ready for a hawkish hike, but how is USD/CAD positioned? The latest significant release from Ottawa was quarterly Gross Domestic Product (GDP) which came out at 3.1% vs. 5.4% projected. The substantial miss weakened the Canadian dollar.
On the other hand, it is essential to remember that the BOC foresaw an expansion of 3% in the first quarter – which means growth exceeded expectations. The softer loonie is ripe for strengthening.
Just as the BOC releases its rate decision on June 1 at 14:00 GMT, the US ISM Manufacturing Purchasing Managers’ Index comes out. Recent US figures have mostly missed expectations, and there is room for another weak figure that would hit the dollar.
The forward-looking ISM Manufacturing PMI is trending down:
All in all, it seems like the perfect storm for USD/CAD to resume its falls.
It is hard to see the Bank of Canada stray away from the hawkish tones of the Fed and also the European Central Bank, the Reserve Bank of New Zealand and others. The Canadian real estate market may take a hit, but the BOC may “do whatever it takes” to bring inflation to its knees.Full Article
EUR/GBP has broken over the resistance line drawn from April highs and is comfortably above the 40-week moving average of 0.8442 as a sign of budding recovery. Hawkish European Central Bank (ECB) rhetoric also adds fuel to the upmove, Benjamin Wong, Strategist at DBS Bank reports.
“EUR/GBP is now comfortably above the 40-week moving average at 0.8442 and trying to sustain gains over a minor intermediate dropped-down resistance line from 0.8719, the late April highs. The moving average convergence divergence (MACD) signal is grinding out a nascent buy signal, so all looks good for a budding recovery.”
“ECB hawkish rhetoric is driving the cart. The next ECB policy meeting scheduled for 9 June is watching out for signs of a July policy lift-off. Given that inflation has nudged to 8.1% in May for the eurozone, Klass Knot (a noted hawk, President of the Dutch central bank) has remarked a 50 bps rate hike is not off the table.”
“EUR/GBP has edged higher and paved cloud support at 0.8358 on the daily Ichimoku charts. Nonetheless, the cross still has hurdles to clear. 0.8618 the mid-May spike high and 0.8659 are intermittent resistance levels to break.”Full Article
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