Flash PMIs and Bank of Canada Rate Decision in Focus

Forex

Economic

Summary:

Let's see how if that consensus holds out tomorrow when the ECB meets for the first time this year.

After an initially positive start European markets finished the day lower after as the sugar rush from reports of a large-scale Chinese stimulus plan, gave way to scepticism that it would be enough to deliver the help needed when what is needed is proper economic reforms as opposed to more liquidity.

US markets underwent another record-breaking session with the Nasdaq 100 and S&P500 securing new record highs, while the Dow finished the day lower, as Netflix beat expectations after the closing bell on its Q4 numbers.

Last night's positive finish in the US looks set to see markets in Europe open higher again today, though we could well struggle to hang onto the gains if recent experience is any guide.

If the ECB ever had a reason to think about cutting rates, then today's manufacturing and services PMIs would offer a compelling reason but for the fact that headline inflation is at 2.9% and core inflation is at 3.4%, and policymakers have insisted that tackling prices is their priority.

Let's see how if that consensus holds out tomorrow when the ECB meets for the first time this year.

Over the last 15 months both the French and German manufacturing sectors have been very much in recessionary territory when it comes to economic activity. Last month France manufacturing hit its lowest levels since the Covid lockdowns at 42.1, while in Germany we saw a modest improvement to 43.3 from 42.6, having been as low as 38.8 in July last year.

We are expected to see modest improvements in today's January flash numbers but nothing to suggest a significant uptick with expectations of an improvement to 42.5 and 43.7 respectively.

Service sector activity hasn't been much better with France edging up to 45.7 in December having been as low as 44.4 in September. German services activity does appear to be showing a little more resilience but was still subdued at 49.3 in December and is expected to come in unchanged.

The UK economy on the other hand despite its many challenges has shown slightly more resilience but has struggled as far as manufacturing is concerned, sliding to 43 in August last year, although we have seen a slight improvement since then, although we did slow to 46.2 in December.

The whole of Europe and the UK has been in a manufacturing session for over a year now, while the services sector has also struggled. On services the UK has shown slightly more resilience rising sharply at the end of last year to 53.4 from 50.6. While welcome, this somewhat jars against what we saw in December retail sales which plunged -3.2%. Today's January services flash PMI is expected to show a slowdown to 53.

We also have the Bank of Canada rate decision which is expected to see the central bank keep rates unchanged at 5% with the likelihood we could see a hawkish bias, after headline inflation in December ticked up to 3.4% and hourly wages for permanent employees jumped from 5% to 5.7%..

EUR/USD – at risk of sliding towards the December lows at 1.0720, having slipped below the 200-day SMA at 1.0830. Currently capped at the 50-day SMA with main resistance up at 1.1000.

GBP/USD – pushed up towards 1.2750 yesterday before slipping back with support at the 50-day SMA as well as the 1.2590 area needed to hold or risk a move lower towards the 200-day SMA at 1.2540. We need to get above 1.2800 to maintain upside momentum.

EUR/GBP – still finding support at the 0.8540/50 level which has held over the last 2-months. A fall through here could see further falls towards the 0.8520 area. We still have resistance at the 0.8620/25 area and the highs last week.

USD/JPY – edged beyond the 148.50 area towards 148.80 as it looks to close in on the 150.00 area. Pullbacks likely to find support at the 146.25 level cloud, as well as the 50-day SMA.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading. Following any strategies or investment methods may lead to potential losses. The content on the site is provided by our contributors and analysts for information purposes only. You are solely responsible for determining whether any trading assets, securities, strategy, or any other product is suitable for investing based on your own investment objectives and financial situation.

Comments

Add to Favorites

Damon

Central Bank

Economic

Forex

The forex markets are currently extending a phase of indecision. Dollar, after briefly rallying against Euro and Swiss Franc, saw its gains diminish. Australian Dollar's initial surge, fueled by optimism over China's proposed stock market rescue plan, also quickly dissipated.

Presently, Japanese Yen emerges as the strongest currency for the week, continuing its near-term consolidation. It is closely followed by Dollar and British Pound. On the other end of the spectrum, Australian Dollar is lagging, trailed by Canadian Dollar and Euro.

But it's emphasized that all major pairs and crosses are trading inside last week's range, only except GBP/CHF. PMI data from Eurozone UK has the potential to trigger some meaning movement, especially in EUR/GBP. Then, the spotlight will turn to BoC rate decision later in the day.

It's widely anticipated that BoC will hold the interest rate steady at the 22-year peak of 5.00%. This expectation is set against the backdrop of Canada's headline inflation rate, which recently re-accelerated to 3.4% in December. BoC Governor Tiff Macklem is expected to underscore the ongoing challenge of taming inflation and to caution against any premature considerations for a rate cut.

The consensus among economists is that any potential rate reduction by the BoC would most likely occur in June or later. Given that's it's only January now, it is improbable that Macklem will offer any substantial hints or directional guidance at this juncture.

Technically, AUD/CAD's rebound from 0.8562 should have completed at 0.9063, after hitting 50% retracement of 0.9545 to 0.8562 at 0.9054. Deeper fall should be seen to 0.8765. Sustained break there will target 0.8562 low. This will remain the favored case as long as 55 D EMA (now at 0.8912) holds. Forex Markets Hesitant, Eurozone and UK PMIs, BoC in Focus_1

Forex Markets Hesitant, Eurozone and UK PMIs, BoC in Focus_1

In Asia, at the time of writing, Nikkei is down -1.00%. Hong Kong HSI is up 0.42%. China Shanghai SSE is down -0.70%. Singapore Strait Times is up 0.21%. Japan 10-year JGB yield is up 0.0900 at 0.727. Overnight, DOW fell -0.25%. S&P 500 rose 0.29%. NASDAQ rose 0.43%. 10-year yield rose 0.048 to 4.142.

Japan's PMI shows modest growth, manufacturing still in contraction

Japan's PMI Manufacturing rose fractionally from 47.9 to 48.0 in January, below expectation of 48.2. Manufacturing remained in contraction for the eighth consecutive months. PMI Services rose from 5.15 to 52.7. PMI Composite rose from 50.0 to 51.1.

Usamah Bhatti, Economist at S&P Global Market Intelligence, noted that while "modest" the private sector is having the strongest growth since September. However, there was disparity between the sectors, with services reaching a four-month high, while manufacturing marked its eighth consecutive month of contraction.

Regarding inflation, Bhatti said input price inflation "remains high historically". But output inflation eased to its "lowest since February 2022". This indicates that while input costs are still elevated, businesses are not passing these costs fully onto consumers.

Japan's exports exceed JPY 1T in 2023, US reclaims top export destination

Japan's exports rose 9.8% yoy to JPY 9648B in December, marking the biggest increase in a year. This boost was largely driven by 20.4% yoy jump in exports to US, predominantly from the automotive sector, while exports to Europe climbed by 10.3% yoy. Notably, shipments to China saw 9.6% yoy rise, registering their first growth in 13 months, primarily led by chip-making equipment. In contrast, imports declined -6.8% yoy to JPY 9586B. Consequently, trade balance turned positive, recording JPY 62.1B surplus.

Analyzing the whole year, Japan's trade deficit in 2023 more than halved to JPY -9.29T from the previous year. The country's total exports rose by 2.8% to reach JPY 100.89T , surpassing the JPY 100T mark for the first time ever. Meanwhile, total imports saw -7.0% decrease to JPY 110.18T.

A significant shift was observed in Japan's export destinations in 2023. US reclaimed its position as the largest recipient of Japanese exports by value for the first time in four years, surpassing China. Exports to US reached JPY 20.27T, showing 11.0% increase, while exports to China decreased by -6.5% to JPY 17.76T.

New Zealand CPI slows to 0.5% qoq, 4.7% yoy in Q4

New Zealand CPI rose 0.5% qoq in Q4, down from 1.8% qoq in Q3, matched expectations. Tradeable inflation turned negative to -0.2% qoq, from 1.8% qoq. Non-tradeable inflation slowed to 1.1% qoq, down from 1.7% qoq.

Annually, CPI slowed from 5.6% yoy to 4.7% yoy, matched expectations. Tradeable inflation slowed from 4.7% yoy to 3.0% yoy. non-tradeable inflation also slowed from 6.3% yoy to 5.9% yoy.

"While this is the smallest annual rise in the CPI in over two years, it remains above the Reserve Bank of New Zealand's target range of 1 to 3 percent," consumers prices senior manager Nicola Growden said.

Australia's PMI manufacturing Hits 11-month high, services Lagging

Australia PMI Manufacturing rose from 47.6 to 50.3 in January, back in expansion, and a 11-month high. PMI Services rose slightly from 47.1 to 47.9, a 3-month high. PMI Composite rose from 46.9 to 48.1, a 4-month high, but still in contraction.

Warren Hogan, Chief Economic Advisor at Judo Bank noted the PMI data indicates a that the economy remains on RBA's "narrow path" for soft landing. He highlights the manufacturing sector's rebound as a key factor in mitigating broader economic downturn risks.

Despite the general economic slowdown, Hogan observes that labor demand remains unexpectedly robust, differing from past economic cycles. However, he cautions that inflation pressures are still high, pointing out, "Input and output price indexes remain at levels suggesting CPI inflation is above the RBA's target range."

SNB's Jordan: Real Franc appreciation hurts, yet no recession in sight

SNB Chairman Thomas Jordan, in his overnight address at an event, acknowledged the impact of the Franc's nominal appreciation on lowering inflation. However, he warned, the "Franc has also appreciated in real terms in 2023. And that hurts, companies feel that."

Despite the challenges posed by Franc's appreciation, Jordan expressed confidence in the Swiss economy's resilience. "Economists are confident that there won't be a recession — and we are also confident, otherwise we would forecast one," he commented, adding "So no recession, just weak growth."

Looking ahead, Jordan reiterated SNB's inflation expectations, stating that they anticipate Swiss inflation to approach but not exceed the 2% ceiling of their target range this year. The central bank does not foresee inflation breaching this mark until 2026.

Looking ahead

PMI from Eurozone and UK are the main focuses in European session. Later in the day, spotlight is on BoC rate decision. US will publish PMIs too.

EUR/USD Daily Outlook

EUR/USD's breach of 1.0843 temporary low suggests that fall from 1.1138 is resuming. Intraday bias is back on the downside for 1.0722 support first. Decisive break there will argue that whole rise from 1.0447 has completed, and target this low. Nevertheless, on the upside, firm break of 1.0915 will indicate short term bottoming, on bullish convergence condition in 4H MACD, and turn bias back to the upside for stronger rebound. Forex Markets Hesitant, Eurozone and UK PMIs, BoC in Focus_2

Forex Markets Hesitant, Eurozone and UK PMIs, BoC in Focus_2

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern to rise from 0.9534 (2022 low). Rise from 1.0447 is seen as the second leg. While further rally could cannot be ruled out, upside should be limited by 1.1274 to bring the third leg of the pattern. Meanwhile, sustained break of 1.0722 support will argue that the third leg has already started for 1.0447 and below. Forex Markets Hesitant, Eurozone and UK PMIs, BoC in Focus_3

Forex Markets Hesitant, Eurozone and UK PMIs, BoC in Focus_3

Source: ActionForex

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Comments

Add to Favorites

Zi Cheng

Traders' Opinions

Forex

Fundamental Analysis

Consumer inflation in New Zealand during the fourth quarter aligned with expectations, but despite a slowdown, it continues to hover at elevated levels, maintaining its proximity to the central bank's target range of 1% to 3%. Annual inflation stood at 4.7% in the fourth quarter, a deceleration from the 5.6% recorded in the third quarter, marking its lowest level since mid-2021, as reported by Statistics New Zealand on Wednesday.

The quarter-on-quarter increase in the Consumer Price Index (CPI) was 0.5%, a deceleration compared to the 1.8% rise in the third quarter. The data met economists' expectations in a Reuters poll, with no significant market reaction observed.

Statistics New Zealand highlighted that the primary contributors to annual inflation were food, alcohol and tobacco, and housing and household utilities. Notably, non-tradeable inflation remained elevated at 5.9%, prompting concerns among economists and raising potential considerations for the central bank.

Traders may opt for a cautious approach, holding back on making bold directional bets and choosing to await significant US macroeconomic releases scheduled for the latter part of the week. The Advance Q4 GDP print and the Core PCE Price Index are key indicators that could influence market dynamics. Meanwhile, during the early North American session on Wednesday, the flash US PMIs, along with developments in US bond yields and the overall risk sentiment, are expected to impact the NZD/USD pair.

Technical Analysis

NZD/USD had some bullish momentum when the news was released however it was just a short while. After the news, NZD/USD is back to consolidate around the 0.61000 key level. NZD/USD has been in a short term downtrend since the start of the year as the Dollar has been stronger than the New Zealand Dollar.

As we can see from the chart attached below, NZD/USD is currently at the important dynamic support level, 200 Day Moving Average. The 200 Day Moving Average is a strong indicator where if price manage to cross above, it is likely to see higher prices and vice versa. Yesterday, NZD/USD managed to cross below but from the Daily candle, it ended up closing back above the 200 Day Moving Average. It is too early to say that we are going to see lower prices, we want to see a clean candle closing below the 200 Day Moving Average before making any sell decisions.

Besides that, we also have a support level (marked in green rectangle box) that held the NZD/USD from going lower yesterday. The current level is definitely a strong support level and with just the CPI news from NZD it is not enough to break the strong support level.

NZD/USD Remains Calm Even After CPI Data_2

Risk Warnings and Disclaimers

Comments

Add to Favorites

Alex

Political

Donald Trump, the former president, won his second straight nominating contest over challenger Nikki Haley, the only other Republican left in the race, by besting her in Tuesday's New Hampshire primary.

Haley, who served as Trump's ambassador to the United Nations, was attempting to keep the margin close in order to argue she has a viable path forward.

Meanwhile, President Joe Biden easily won the Democratic primary, even though he wasn't officially on the ballot.

Here are takeaways from the New Hampshire primary:

No Worries

It is hard to lose to a candidate who isn't on the ballot, but Democrat Dean Phillips pulled it off on Tuesday.

For Biden, the result in New Hampshire brings a sigh of relief that his campaign avoided what could have been a mortifying night that would provided talk-show fodder for weeks. He was on track to win the primary by a 50-percentage-point margin after voters wrote his name in on their ballots.

The primary offered Phillips a chance to make a name for himself after the national Democratic Party punished New Hampshire for refusing to follow the more diverse South Carolina on the Democratic primary calendar. Since no delegates will be awarded from the New Hampshire primary, Biden did not bother with qualifying for the ballot.

Local Democratic officials, looking to ensure their state did not become a political punchline, mounted a write-in effort on Biden's behalf.

Phillips, a Minnesota congressman and the only mainstream Democrat challenging Biden for the nomination, aired a surprising number of TV and radio ads in the run-up to the primary while the Biden campaign kept its distance from the whole thing.

Some independent voters told Reuters this week that they would vote in the Republican primary for Nikki Haley and then decide whether to back Biden in November's general election.

The first official Democratic primary in South Carolina will be held Feb. 3.

Indies to the rescue?

Haley needed a healthy number of independent voters, who are permitted to vote in the primary, to come out for her to offset Trump's strength with traditional conservatives.

There were early signs that may have been occurring, based on exit polls from Edison Research.

According to Edison, 34% of voters who turned out considered themselves moderates or liberals, compared to 29% in 2016, when Trump won the primary handily.

Of the 45% percent who called themselves independents, Haley was winning 61% of their vote compared to 35% for Trump. She was winning 76% of those who call themselves moderates.

On the flip side, Trump was dominating with self-declared conservatives, winning them by a 70% to 28% margin.

More than half the voters (51%) believe Biden did not win the 2020 election fairly, according to the poll. Trump, who has perpetuated that false claim since he lost to Biden, was getting the vast majority of those voters at 88%.

More than half the voters (52%) also said they believed Trump would be fit for the presidency even if convicted of a crime, the poll said.

Conversely, 44% said he would be unfit, and Haley was earning 84% of those voters. That suggests Trump's legal problems could hamper him in a general-election matchup against Biden.

Good Times, Bad Times

The exit polls showed that the economy continues to be the top concern of voters, with Haley showing surprising strength on the issue.

Of the 36% who said the economy was their top priority, Trump had a slight edge at 52% to 46%, according to Edison. Overall, 73% of voters said the economy was “not so good or poor.”

Those who thought things are in dire straits were more likely to vote for Trump, while voters who believed the economy is in relatively good shape went for Haley.

That makes some sense, given Haley's supporters tend to be more moderate, educated and affluent. Among voters who said they earned $100,000 or more annually, Haley was beating Trump 53% to 44%.

Trump got 77% of the voters who cited immigration as their top concern.

Haley was doing well with voters who prioritized foreign policy – a focus for her on the trail given her background at the United Nations, thumping Trump 66% to 33%.

And although abortion was not a leading issue for many voters in New Hampshire, Haley, who has often called for a less confrontational approach on the matter, was outpacing Trump 65% to 26%.

Among New Hampshire voters who listed temperament as the top quality they were looking for in a candidate, Haley was crushing Trump 86% to 11%

Source: Reuters

Risk Warnings and Disclaimers

Comments

Add to Favorites

Thomas

Economic

Central Bank

Japan's biggest business lobby Keidanren and trade unions kicked off annual labour talks on Wednesday that may pave the way for the central bank to exit its decade-long super-loose monetary policy.

The talks come a day after the Bank of Japan (BOJ) took a hawkish turn in policy even as it maintained its accommodative monetary settings, with markets increasingly betting on a shift towards normalising rates in March or April.

Japan's big firms are expected to offer their unions wage hikes of 3.85 per cent on average this year, the highest wage increase in 31 years, according to a poll of 37 economists conducted Dec. 25-Jan. 9 by Japan Centre for Economic Research, a private think tank.

The 3.85 per cent estimate beat last year's three-decade high of 3.6 per cent, the biggest gain since Japan's asset bubble burst in the early 1990s. An agreement for a 3.85 per cent hike would mark the fastest growth in annual pay since 1993 when wages grew 3.89 per cent.

"This year, we are aiming for wage hikes that beat inflation in order to achieve structural wage hikes," Keidanren chief Masakazu Tokura said in a video message, underscoring the importance of improving labour productivity through sustainable wage hikes.

Tokura stopped short of specifying target pay hike levels.

Since last year, a number of major firms had already announced their intention of delivering large pay hikes, though struggling smaller firms have lagged behind.

Small firms that employ seven out of 10 workers hold the key to wage hike talks and their ability to pass on costs to their bigger clients would determine if they are able to jump on the bandwagon of higher pay.

Base Pay

In terms of the impact on Japan achieving sustainable inflation, a key criterion set by the BOJ to exit its easy policy, base pay hikes matter more than the seniority-based automatic annual raise built into the pay scale, analysts say.

Base pay rises of 3 per cent would be enough to meet the BOJ's 2 per cent inflation target, they say. At the moment, however, the base pay gains fall below that level.

Of the overall hikes of 3.85 per cent expected by analysts for 2024, base pay rises make up 2.15 per cent, while seniority-based automatic annual wage hike is 1.7 per cent, according to the poll of analysts.

Rising base pay feeds into increased fixed labour costs, burdening companies with higher costs of retirement fees and pension payments.

It's a key reason why many Japanese firms shied away from base pay hikes for years when the economy stagnated in the early 2000s.

Source: Reuters

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Comments

Add to Favorites

Zi Cheng

Forex

Traders' Opinions

Economic

In the last quarter of 2023, inflation in New Zealand showed signs of deceleration, despite persistent strength in domestic price indicators. This suggests that policymakers are likely to maintain their current stance until a clearer economic picture emerges.

Government data released on Wednesday revealed that annual consumer price growth moderated to 4.7% from 5.6% in the third quarter, aligning with economists' expectations. This figure was slightly below the Reserve Bank's forecast of 5%. Additionally, consumer prices increased by 0.5% in the fourth quarter compared to the previous three months, consistent with estimates.

New Zealand Inflation Reduces As Expected_1

The recent record-low inflation rate, not seen since mid-2021, suggests that the central bank has successfully implemented sufficient tightening measures to align with its 1-3% target. Despite this achievement, policymakers remain cautious about persistently high core prices. Investors are speculating that the Reserve Bank of New Zealand (RBNZ) will initiate a reduction in the Official Cash Rate (OCR) during the second quarter, aiming to bring the benchmark down to 4.75% by the end of the year. Currently, the OCR is set at 5.5%.

New Zealand Inflation Reduces As Expected_2

The primary contributor to the annual inflation rate in the December 2023 quarter was housing and household utilities, primarily influenced by higher prices in rent, construction, and rates.

Over the 12 months leading up to the December 2023 quarter, rent prices saw a 4.5 percent increase, while construction and rates rose by 3.6 percent and 9.8 percent, respectively.

The overall cost of housing demonstrated a notable increase throughout 2023, with rent becoming 4.5 percent more expensive compared to the end of the previous year. Although the rate of price increase in building new houses has reduced to 3.6 percent, it still stands at a considerable 41 percent higher than pre-pandemic levels, as highlighted by Growden.

Source: Stats NZ

The second-largest factor contributing to the annual increase was food, attributed to the escalating prices of ready-to-eat food, confectionery, nuts, and snacks.

Over the 12 months leading up to the December 2023 quarter, prices for ready-to-eat food witnessed a 7.3 percent increase, slightly lower than the 9.4 percent rise observed in the 12 months to the September 2023 quarter.

Confectionery, nuts, and snacks experienced a 9.7 percent increase in the 12 months to the December 2023 quarter, following a 10.9 percent surge in the 12 months to the September 2023 quarter.

The subsequent significant contributor was alcoholic beverages and tobacco, influenced by the upward trend in prices for cigarettes and tobacco, as well as spirits and liqueurs.

The leading contributors to the housing and household utilities group were rent and construction, witnessing increases of 1.1 percent and 0.7 percent, respectively.

However, mitigating the quarterly upturn were declines in prices within the food group, primarily driven by lower prices for vegetables, down by 14.9 percent, and for milk, cheese, and eggs, down by 2.8 percent.

"Throughout the December 2023 quarter, food prices experienced a decline each month, primarily influenced by reduced prices for summer seasonal vegetables," remarked Growden.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Comments

Add to Favorites

Westpac

Economic

Central Bank

Consumer prices rose by 0.5% in the December quarter, leaving them up 4.7% over the past year. The December result was in line with our forecast, but below the RBNZ's expectation.

Consumers Price Index, December quarter 2023

Quarterly change: +0.5%

Westpac forecast: +0.5%, RBNZ (Nov MPS): +0.8%

Market median: +0.5%, range +0.3% to. +0.8%

Annual change: +4.7%

Westpac forecast: +4.7%, RBNZ (Nov MPS): +5.0%, Market: +4.7%

Key points

Consumer prices rose by 0.5% in the December quarter. That saw the annual inflation rate dropping to 4.7%, down from 5.6% in the year to September.

Today's result was in line with our forecast, but it was lower than the RBNZ's last published forecast which was finalised back in November.

Driving the fall in inflation (and the surprise to the RBNZ's forecast) has been a fall in import prices. Much of that relates to volatile items like food and airfares. Movements in those sorts of volatile items are not the key focus for the RBNZ when setting monetary policy.

More importantly, domestic inflation pressures remain strong. Non-tradable prices were up 1.1% over the quarter – higher than our own or the RBNZ's forecasts. On an annual basis, non-tradables inflation is running at a still-strong rate of 5.9%.

Core inflation measures have been dropping back, but remain elevated at rates of over 4%. Non-tradables excluding housing costs is tracking at an annual rate of 6.9%.

Implications

The divergence between the domestic and imported components of inflation helps to illustrate the big concerns that the RBNZ is trying to balance. Inflation is coming down, and faster than the RBNZ has been expecting. That will be important for stabilising inflation expectations and means that the RBNZ will feel more comfortable keeping the OCR on hold for now (recall that the RBNZ's last policy statement in November signalled some chance a further rate rise).

However, this still leaves us with a picture of ‘lower' inflation; not low inflation. That's because domestic inflation is still running at rates that are much higher than the Monetary Policy Committee is comfortable with two years after the hiking cycle began. As a result, rate cuts won't be on the table in the near term.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Comments

Add to Favorites