FX Playbook for Geopolitical Risks

Forex

Summary:

Geopolitical risks are up on the radar again this week, and safety bids could continue. Dollar and gold continue to be supported by current macro framework along with conflict risks. CHF and JPY are also getting a safe-haven appeal, but JPY less so and CHF also faces lack of monetary policy support.

Friday's price action was a clear case of run to safety. Equities sold off while bonds, dollar, Swiss franc and Gold rallied. There were threats from Israel's military about "significant ground operations" and a potential invasion of Gaza, which sent more than half a million Palestinians fleeing south. Meanwhile, comments from Iran that it will "not remain an observer" also fuelled further anxiety especially in the oil markets, given Iran's significant ramp up in oil production and exports this year. This also garnered a huge bid in oil, with Brent up 5.7%.

The Asian session however saw some of these trends reversing marginally with US and its allies attempting to prevent further escalation in the Israel-Hamas conflict. Geopolitics will continue to be a key driver for markets in the week ahead as investors continue to weigh the risks of an escalation with the approach of the US authorities to prevent the conflict spreading to rest of the Middle East region.

Dollar and gold remain the safe havens of choice, given the boost to these from a variety of factors. Dollar, in addition to the geopolitical premium, also continues to enjoy US economic resilience and carry advantages. We have noted previously that dollar upside is starting to get limited, and carry advantage could also be eroded as it becomes expensive amid rising volatility and the decline in bond yields.

Meanwhile, Gold has added advantages from declining real yields with the safety bid in Treasuries driving nominal yields lower and inflation expectations remaining anchored, however a stronger dollar may lead to some compromise in Gold's gains.

Other safe haven choices are CHF and JPY, but JPY has shown less of a safety bid in this situation due to the increased risks from the higher oil prices as an oil importer. Monetary policy is also not supportive of the CHF as inflation becomes less of a concern and recession risks take centre stage. The other way is to play the potential oil price upside, most evident in NOK and CAD, in addition to another bid in the USD. Meanwhile, EUR is at risk due to the potential of an energy shock.

Market Takeaway: Dollar remains a buy on dips amid the geopolitical uncertainty, although upside is getting limited. Gold (XAUUSD) could be the safe-haven of choice as decline in real yields also adds to the shine, while CHF and JPY are only getting a limited safety bid. EURCHF has broken below 0.95 and could target 2022 lows of 0.9410.

AUD: China data and stimulus on watch

Any upside in AUD continues to be precarious. Not only are the current geopolitical risks a reason to stay away from risk-sensitive currencies, but also the slowing growth environment but sustained inflation levels have continued to make the macro environment extremely complicated. But AUDUSD continues to find support at 0.63, even though upside is limited.

China's activity and GDP data, out this week on Wednesday, could be key. If there is a beat on headline numbers, rhetoric on stimulus impacting activity will gain traction. There are also increased calls for stimulus again after China returned from holidays, and any measures could temporarily support the AUD. RBA meeting minutes due on Tuesday will unlikely be a game changer. AUDUSD could target 0.64, but USD strength and geopolitics will still likely remain the over-arching themes this week.

Market Takeaway: Potential for a spike in AUDUSD if China activity data surprises to the upside this week, but overall bearish picture still remains in place.

NZD: Opposition victory brings a respite

Weekend elections brought a victory for the opposition National Party and Christopher Luxon will be the new prime minister, ending six years of Labor Party rule. The new government faces a challenging economic outlook with the RBNZ forecasting a recession as it plans to keep interest rates high to curtail inflationary pressures. NZD popped higher on the reports, but focus will quickly turn back to geopolitics and the overarching USD strength. NZ also reports Q3 CPI tomorrow morning, and it is expected to pick up to 1.9% QoQ from 1.1% QoQ in second quarter but cool to 5.9% YoY from 6.0% YoY previously. A softer inflation print could prompt a further dial-back on RBNZ rate hike expectations, pressuring NZD.

Market Takeaway: NZDUSD reversed back above 0.59 on weekend elections resulting in opposition victory but geopolitics and macro themes could still mean another test of the YTD low at 0.5859.

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Economic

Forex

Is consumer spending starting to cool?

The U.S. economy has been chugging along quite nicely in 2023 despite hitting several bumps on the road and Fed policy becoming more restrictive than what many investors had anticipated at the start of the year. The Atlanta Fed's GDPNow forecast model is estimating third quarter growth of 5.1% - that's well above the recent average of just above 2.0%.

Consumption has been the main driver of this exceptionally strong growth, which is unusual at this late stage of the tightening cycle. This week's retail sales data will be key in gauging whether consumer spending kept up pace towards the end of the quarter.

Dollar to Seek Direction from US Retail Sales as Yield Rally Stalls_1

After rising by 0.6% month-on-month in August, retail sales are forecast to have grown by a much more moderate pace of 0.3% in September. Excluding automobile sales, retail sales are expected to have edged up 0.2% m/m, while the core figure that strips out gasoline, building materials and food services in addition to autos is projected to have been flat in September, which would suggest households have started to tighten their belts.

Powell may have final say before Fed blackout

Slowing consumer spending isn't the only risk to growth beyond the third quarter. The possibility of a government shutdown, ongoing strike action and tightening financial conditions could all weigh on growth in the final three months of the year.

The latest round of selloff in U.S. Treasuries and other government bonds has led to a significant tightening in financial conditions, as long-term Treasury yields have surged to pre-financial crisis era levels. More importantly, this hasn't gone unnoticed at the Fed and officials appear to all be in agreement with one another that the jump in long-term borrowing costs since the last FOMC meeting in September broadly amounts to an equivalent 25-basis-point rate hike.

However, investors have yet to hear from the Fed chief himself, so Jay Powell's address on Thursday before the Economic Club of New York could be crucial. Powell may well use his speech to guide market expectations before the blackout period for the October 31-November 1 meeting begins at the weekend.

Dollar might shrug off retail sales data

For the markets, the retail sales numbers are not expected to be a game changer as the odds of a November rate hike are virtually zero. However, a stronger-than-expected report on the back of the solid payrolls and CPI readings could nevertheless bolster the case for a December move, or at the very least, lead investors to scale back some of their aggressive bets for rate cuts in 2024.

Any fresh boost for the U.S. dollar could push the euro towards the $1.04 level, which marks the 50% Fibonacci retracement of the September 2022-July 2023 uptrend.

Dollar to Seek Direction from US Retail Sales as Yield Rally Stalls_2

But if retail sales disappoint or Powell endorses his colleagues' views and signals that interest rates have likely peaked, the euro could easily rebound towards its 50-day moving average just above the $1.07 handle.

Safe-haven support for the greenback

Investors should be wary, though, not to completely rule out the chance of another rate hike as a Fed pause is conditional on the 10-year yield remaining elevated near 5.0%, while the Israel-Gaza war is seen as maintaining upside risks to inflation, with oil prices already lifted by the conflict.

The latter even has a two-sided effect on the greenback as it's generating demand for safe havens. Any pullback in yields might therefore not spark a proportionately sized selloff in the dollar as long as geopolitical tensions are brewing.

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

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Energy

Commodity

Palestinian-Israeli conflict

Gold shines as Israel-Hamas tensions flare up

Gold surged more than 3% on Friday as the escalating conflict between Israel and Hamas forced market participants to seek safety.

On Friday, Israel's infantry carried out raids inside the Gaza Strip, warning residents of the northern half of Gaza to flee to the south. This was the first shift from missile attacks to ground war, a week after Hamas rampaged through southern Israel.

For the financial community, this was a clear risk-off alert, with market participants rushing into every asset they consider as a safe haven. Even the yen gained against its US counterpart, but with the BoJ maintaining its ultra-loose stance, the dollar/yen pair remained close to potential intervention levels around 150. Bonds were probably also a choice, evident by the slide in Treasury yields, which were detached from the US dollar, as the world's reserve currency wore its safe-haven armor as well.

Having said all that, gold was the safe haven of choice, with the precious metal briefly surpassing the $1,930 zone. Although it is pulling back today, the geopolitical uncertainty remains elevated and further escalation may result in another rally, and perhaps take the price closer to the $1,985 region, which acted as strong resistance between May and July.

Philly Fed President Harker says they are probably done

Another reason why gold was the better haven choice may be the reduced expectations of another hike by the Fed. Although Thursday's hotter-than-expected CPI data allowed some market participants to raise again bets of another increment before the end credits of this tightening crusade roll, the escalating conflict in the Middle East and dovish remarks by Philadelphia Fed President Patrick Harker forced them to scale those bets back.

With Harker saying that he believes the US central bank is probably done raising interest rates and that holding them steady will let monetary policy do its work, investors are now assigning only a 32% probability of another 25bps increment, while they expect interest rates to end 2024 at around 4.7%, well below the Fed's own projection of 5.1%.

So, with most investors holding the view that interest rates will not rise further and that they will be cut next year, the non-yielding gold regained its shine. Even if the greenback continues to attract safe-haven flows due to the intensifying Israel-Hamas war, the lowering of the implied Fed rate path may keep any further dollar gains in check. For the US currency to resume its prevailing uptrend, incoming data and Fed rhetoric may need to start favoring one more rate increase and/or less rate cuts for next year.

Oil skyrockets on concerns of supply disruptions

The Canadian dollar was also among the currencies that outperformed the US dollar on Friday, despite not being classified as a safe haven. On the contrary, the loonie is considered a risk-linked asset. However, Friday's risk aversion turned out to be positive for this currency, as oil prices skyrocketed again, with both WTI and Brent benchmarks gaining almost 6%.

The possibility that the conflict could involve oil-producing countries may have increased after Israel's decision to invade Gaza, heightening fears of supply disruptions even as Saudi Arabia pledged last Wednesday to help stabilize the market.

On Saturday, Iran warned that if Israel does not stop its war crimes, then the situation could spiral out of control. Taking that into account, if Iran decides to directly be involved, the US could reinforce its sanctions on the nation's oil exports, even as it softened its stance this year due to efforts to improve diplomatic ties with Tehran.

Therefore, although Friday's rally suggests that the involvement of other nations may be factored into the market to some extent, should those fears turn into reality, an actual impact on oil supply could easily send WTI prices back up to the $95.00 territory and even higher.

Wall Street cares about geopolitics as well

On Wall Street, despite the Dow Jones gaining slightly on Friday, both the S&P 500 and the Nasdaq slipped, with the latter losing more than 1%, even as the market lowered its implied Fed rate path and even as big commercial banks announced better-than-expected quarterly profits.

This suggests that investors are currently more focused on the war in the Middle East than the earnings season, but this could well change when tech giants begin to report and needless to say, conditional upon no further escalation in geopolitical tensions. On that matter, Tesla and Netflix will make their numbers public on Wednesday after the closing bell.

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Forex

Commodity

Israel-Hamas war --> Gold

In response to Israel's warning, investors sought safety in gold, driving the precious metal up by 3.0% to $1,932 and near its 200-day simple moving average (SMA).

The risk of escalation remains intact as the timing of a possible invasion remains unclear while clashes with Lebanon's Hezbollah militants intensify and Iran's engagement is not ruled out.

US officials, including President Biden, want a less harsh retaliation to Hamas attacks. If the situation deteriorates this week, the precious metal may try to rise above the 1,940 barrier. Then, the focus could turn to the 1,975 resistance, while a more exciting bull run could reach the 2,000 psychological level.

UK data --> GBP/USD

In Europe, the calendar will mainly include UK data releases. On Tuesday, the employment report is expected to show a third month of job cuts (-197k) and a steady unemployment rate near a two-year high of 4.3%. Growth in average earnings is forecast to ease to 8.3% y/y but remain among the highest levels in two years. Should the data arrive weaker-than-expected, further reducing the need for another rate hike, GBP/USD could retest the 1.2100 on the downside or possibly meet October's low of 1.2036.

If the decline becomes steeper, it could drive the pair towards the key 1.1965 support zone. But traders may not react forcefully until the UK CPI inflation data comes around on Wednesday at 06:00 GMT. Forecasts suggest a softer print of 6.5% y/y and a slightly higher monthly increase of 0.4% y/y. The bears could take the upper hand if the figures continue to decelerate towards the BoE's target.

The US factor could be another important market mover for GBP/USD. US retail sales for September are forecast to erase a two-month progress on Tuesday. Yet, a speech by the Fed chief Jay Powell on Thursday and comments from board members could generate stronger volatility if central bankers send new signals about future rate hikes ahead of the next FOMC policy meeting.

Technically, the pair keeps trading within bearish territory and below important resistance levels. A decisive rally above the 1.2500 region is still needed to improve the short-term outlook.

China GDP --> AUD/USD

Last but not least, China's GDP growth figures should not be missed on Wednesday as the world's second largest economy has been progressing at a notable pace over the past year despite its Q2 growth of 6.2% y/y felt moderately short of expectations. Analysts have set their projections lower at 4.4% y/y for Q3. If China's GDP exceeds expectations, the currencies of Australia and New Zealand, which are influenced by China, may experience a rebound.

Specifically, AUD/USD could secure the floor at 0.6283 and bounce up to 0.6430 if the 0.6330 nearby resistance proves easy to pierce. Still, from a technical perspective, the pair has not entirely eliminated downside risks, suggesting that a drop to 0.6200 might not be a big surprise.

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Samantha Luan

Forex

USD: Will US retail sales slow and will the dollar soften?

Events in the Middle East are keeping investors nervous, although equity markets have been able to deliver some modest gains at the start of the week. The US 3Q earnings season picks up pace this week, where both Goldman and Bank of America release results today. Technical analysts will no doubt be looking at an upside gap on the S&P 500 chart, where closes above it might remove some of the downside threat.

Elsewhere, US yields have quietly climbed higher today - as has market pricing of the low point in the Fed Funds cycle two to three years out. This suggests this 'higher-for-longer' policy rate narrative will be a stubborn one to shift. That brings us to the highlight of today's session, which is the 1430CET release of the September US retail sales figure. Our US economist, James Knightley, warns that ex-autos and gasoline, the underlying figure could be a soft one. This is based on the softening in credit card sales over recent months.

Given that powerful US growth and the US 'exceptionalism' story has largely been based on the US consumer staying in work and spending, a softer retail sales figure could test some of the late arrivals to the long dollar trade. That should mean that DXY will struggle to break 106.75 resistance and instead may end up pressing intra-day support at 106.00.

In addition to retail sales, today also sees US industrial production - also expected soft on the back of the auto-sector strikes - and several Fed speakers. Again, we are on the lookout for any consistent language from the Fed that tighter financial conditions (from the rise in bond yields) mean that the Fed does not need to tighten any further.

One final point: late in the US day, we get to see Treasury International Capital (TIC) flow data for August. The release contains updates on what major foreign nations are doing with their US Treasury holdings. Chinese holdings of US Treasuries have fallen to $821bn from $1.04tn at the start of 2022. A further decline could add to woes in the US bond market and also start to question whether a rise in US Treasury yields on the back of a higher term premium really is good news for the dollar after all.

EUR: Probably trapped in tight ranges

EUR/USD has edged slightly higher on the back of a mildly positive equity environment. In the background, we also see China-linked commodities such as iron ore doing quite well - perhaps on the back of more fiscal and monetary stimulus expected from China. This is slightly supportive for the growth-oriented euro. We suspect today's path for EUR/USD will be largely determined by the US retail sales release. If we're right about the risks of a softer number, EUR/USD could push through intra-day resistance at 1.0575/85 towards the 1.0610/15 area. Any close above there suggests EUR/USD could be in for a decent correction after all.

In terms of the local calendar, consensus expects some mild improvement in the weak German and Eurozone ZEW investor survey readings. However, this data is typically not a big market mover. We also see a whole host of ECB speakers, where the interest will be in whether hawks like Klaas Knot feel that the ECB has done enough tightening.

Away from data and speakers, we are also interested in reading reports on how the EU's plans to use Russia's frozen assets are moving forward. Here, Belgium is proposing to use the profits of Russian assets frozen at Euroclear to set up a fund to boost Ukraine. The report suggests the ECB is fearful of such a move in that this precedent might damage the prospects for foreign investment in Eurozone asset markets. This links to our earlier remarks regarding China's holdings of US Treasuries.

Elsewhere, Polish asset markets enjoyed some strong gains yesterday after weekend election results pointed to a change in government. Please see our Chief Economist in Poland, Rafal Benecki's take on the result and its implications here.

GBP: Wages heading in the right direction for the BoE

This morning's release of UK wage data for August has softened a little and will be marginally better news for the Bank of England. Our UK economist, James Smith, says:

No unpleasant surprises in the UK wage data at first glance. Private-sector wage growth ticked lower on a year-on-year basis and is also lower on a three-month annualised metric too. However, a lot of the data we usually get at the same time - including unemployment - has been delayed by a week due to quality concerns. The main event is tomorrow's services inflation data - and it would probably take a big upside surprise there to unlock a November hike.

EUR/GBP ticked slightly higher on the release, and given that the market still prices in 18bp of further tightening in this cycle, it looks like EUR/GBP can grind towards 0.8700 - should tomorrow's release of September CPI also point to a benign outcome.

CAD: : BoC might be more tolerant of inflation bumps

Canada releases inflation figures for September today, and expectations are for no MoM change after the 0.4% August print, which would leave the YoY rate at 4.0%. Core measures are expected to slow down very marginally and stay close to 4.0%.

Market expectations for Bank of Canada tightening have remained high compared to the Fed, with 20bp priced in for January. Last week, BoC Governor Tiff Macklem said,"it's not so much about where inflation is now, it's about where inflation's going to be", possibly lifting some focus off the September CPI read and striking a seemingly more cautious tone. The still very tight jobs market argues against having a dovish turn, but there is a good chance that with higher market rates doing the tightening in Canada the BoC will be more tolerant of bumps in the disinflation path.

Given market pricing, the balance of risks appears tilted to the upside today. USD/CAD has moved back to the 1.3600 area, but there is some room for a rebound in the near term.

Source: ING

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CMC

Forex

European markets started the week cautiously higher in the absence of an escalation of tensions over the weekend, although you can be sure that investors will be keeping a wary eye on events in the Middle East as Israel weighs its next move.

US markets followed suit with slightly more enthusiasm and a much stronger session, despite a sharp rise in US 10-year yields, while the US dollar and gold both slipped back.

This resilience continued this morning as Asia markets also pushed higher while markets here in Europe look set for a flat open as investors gear up for a longer lead up time to a possible Gaza incursion and an extended conflict.

Yesterday we heard from Bank of England chief economist Huw Pill who warned that rates would have to remain higher for longer in order to get on top of current inflation trends, reiterating his “Table Mountain” comments from a month ago. These comments are particularly noteworthy as were Bank of England governor Andrew Bailey's comments in Morocco last week that potential UK economic growth was likely to be weaker at 1.5%, and below the previous trend of 2.25% and 2.5% due to lower business investment trends.

Today's wages growth data is also likely to continue to cause headaches for the Bank of England going forward given that for the last 2 months it's been trending at a record high of 7.8%, for the last 2 months, and is likely to remain at this level in today's August numbers.

With the addition of one-off bonuses, the actual number soared to 8.5% in July, and is only set to slow to 8.3% in today's August numbers which may spark concerns of another rate hike at the next meeting in November. These concerns seem overstated and really shouldn't be a problem in the short term given the massive hit to consumer incomes over the past 18-months that has made consumers worse off.

It will take some time for the cumulative effect of the rate hikes of the last few months to be fully felt so the Bank of England will have to exercise patience when it comes to seeing how their monetary medicine has been absorbed by the patient.

This means that rates probably won't need to rise any further, even though they will need to stay higher for longer with little prospect of a rate cut much before the second half of 2024. The latest ILO unemployment figures have been deferred to next week, and are expected to remain unchanged at 4.3%.

We'll also be getting an insight into the latest US retail sales numbers for September, which could see a possible downside surprise despite remarkable resilience in recent Q3 numbers. After a slow start to the year US retail spending has got stronger as the year has progressed, driven mainly by a strong labour market and low unemployment.

The rise in gasoline prices may well prompt some slowdown in discretionary spending, however both July and August saw resilient levels of retail sales of 0.5% and 0.6%, with today's September retail sales figures expected to see a modest slow down to 0.3%. The recent US consumer credit numbers showed that US consumers pulled back spending quite sharply in September, while recent consumer confidence numbers have seen a slowdown, which raises the risk that we might see a downside surprise.

EUR/USD – has seen a modest rebound from the lows last week at 1.0495, but needs to break through trend line resistance from the July highs, as well as breaking above the 1.0640 level to open up a retest of the 1.0740 area. The main support remains at the October lows at 1.0450, as well as the 1.0400 area which is 50% retracement of the 0.9535/1.1275 up move.

GBP/USD – saw a modest pullback from last week's lows at 1.2120 but needs to rise above the 1.2340 area to unlock a move to the 1.2430 area and 200-day SMA. A move below 1.2000 targets the 1.1835 area, 50% retracement of the move from the record lows at 1.0330 to the recent peaks at 1.3145.

EUR/GBP – still respecting trend line support from the August lows, now at 0.8625 and which is currently intersecting just above at the 50 and 200-day SMA. Resistance at the 200-day SMA at 0.8720 area.

USD/JPY – continues to find itself capped at the highs this month at 150.16, with a break of 150.30 targeting a move towards 152.20. Below 147.30 signals the top is in and a possible move towards 145.00.

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Samantha Luan

Economic

Forex

The currencies from the Southern Hemisphere, Australian and New Zealand Dollars, saw notable volatility in Asian session today. Aussie is gaining traction following release of RBA minutes, highlighting a low tolerance for inflation surprises and opening the door for another rate hike next month. In contrast, Kiwi is facing downward pressure after disappointing CPI data dampened the prospects of further RBNZ tightening. These developments have placed the two currencies at opposite ends of the daily performance spectrum.

On a wider scale, Dollar is having a mild recovery following retreat in the previous session, though its overall direction remains ambiguous. A sense of stability has returned to the risk environment, with US stock indexes and treasury yields both climbing. The Swiss Franc finds itself not far behind Dollar, positioning itself as the third strongest. Meanwhile, Canadian Dollar mirrors the downtrend of its New Zealand counterpart, emerging as the second weakest, closely followed by British Pound. Euro and Yen currently display mixed dynamics.

A slew of significant economic data is slated for release today, including UK employment figures, German ZEW economic sentiment, Canadian CPI, and US retail sales. The spotlight will be on UK wage growth and Canadian inflation data, pivotal in shaping expectations around the continuation of the tightening cycles by BoE and BoC. The volatility post these data releases might parallel the dramatic moves seen in Aussie and Kiwi during Asian session.

On the technical front, GBP/AUD's retreat from 1.9322 extends lower today, but it's trying to draw support from 55 4H EMA. For now, further rise is in favor as long as 1.9043 support holds. Break of 1.9322 will pave the way to 61.8% retracement of 1.9967 to 1.8854 at 1.9542, even as a corrective move. On the downside, break of 1.9043 will suggest that recovery from 1.8854 has completed, and bring retest of this low.

Asian Session Sees Antipodean Currency Waves, Sterling and Canadian Braced for Movement Next_1

In Asia, at the time of writing, Nikkei is up 1.12%. Hong Kong HSI is up 0.70%. China Shanghai SSE is up 0.26%. Singapore Strait Times is up 0.31%. Japan 10-year JGB yield is up 0.023 at 0.778. Overnight, DOW rose 0.93%. S&P 500 rose 1.06%. NASDAQ rose 1.20%. 10-year yield rose 0.083 to 4.712.

RBA minutes reveal hawkish tilt, another hike in Nov?

Minutes of RBA's October meeting surprised market participants with a more hawkish tone than anticipated. The board seriously contemplated a rate hike at the meeting, but opted to hold due to a lack of "sufficient new information.

Additionally, the central bank underscored its "low tolerance" for a delayed return of inflation to target. It suggested that "some further tightening" might be imminent if inflation proves to be more persistent than current expectations.

As RBA steers ahead, its forthcoming November meeting is expected to be crucial. The board will be equipped with additional economic data on factors such as inflation, labour market dynamics, and overall economic activity. Additionally, they will have at their disposal revised staff forecasts

The minutes highlighted, "members considered two options for monetary policy at this meeting: raising the cash rate target by a further 25 basis points; or holding the cash rate target steady." However, the decision to maintain the status quo was reached as "members agreed that the case to leave the cash rate target unchanged at this meeting was the stronger one." This consensus was influenced by the absence of "sufficient new information over the preceding month from economic data or financial markets to necessitate an adjustment in the stance of monetary policy."

However, the upcoming November meeting might paint a different picture. The board is set to receive "additional data on economic activity, inflation and the labour market, as well as a set of revised staff forecasts."

"In reaching their decision, members noted that some further tightening of policy may be required should inflation prove more persistent than expected. The Board has a low tolerance for a slower return of inflation to target than currently expected," the minutes detailed.

New Zealand CPI slowed to 5.6% yoy in Q3, dimming prospects of RBNZ hike

New Zealand's CPI recorded a decline in its annual inflation rate, dropping from 6.0% yoy to 5.6% yoy in Q3. This figure not only fell short of the anticipated 5.9% yoy but was also well below RBNZ's own forecast of 6.0% yoy for the quarter. Such a deceleration would curb the likelihood of another interest rate hike in November.

A breakdown of the inflation contributors indicates that food prices played a dominant role in driving the annual inflation rate. Following closely were the costs associated with housing and household utilities, with the inflation in this sector being attributed to escalating expenses of construction and rental services.

Nicola Growden, the senior manager of consumer prices, stated, "Prices are still increasing, but are increasing at rates lower than we have seen in the previous few quarters."

On a quarterly perspective, Q3 CPI reflected a growth of 1.8% qoq, marking an upturn from Q2's 1.1% qoq. However, it missed the estimated rise of 1.9% qoq. An analysis of sector-wise performance shows that the transport sector experienced significant inflationary pressures. Specifically, the costs of petrol and new motor vehicles surged by 16.5% and 4.6%, respectively.

AUD/NZD soars amidst diverging predictions for RBA and RBNZ moves

AUD/NZD surges sharply in Asian session, buoyed by the combined effects of more hawkish RBA minutes and the disappointing New Zealand inflation numbers. This series of events has led to heightened speculation of another interest rate hike by RBA come November, while RBNZ is more likely opt to hold their stance.

The strong break of 1.0720 resistance confirms short term bottoming in AUD/NZD . More importantly, fall from 1.1050 could have completed with three waves down to 1.0620 too. Immediate focus is on 55 D EMA (now at 1.0773). Sustained trading above there will strengthen this case and target 1.0914 resistance and above. In case of retreat, risk will now stay on the upside as long as 1.0620 support holds.

Asian Session Sees Antipodean Currency Waves, Sterling and Canadian Braced for Movement Next_2

In the bigger picture, price actions from 1.0469 (2022 low) could still be interpreted as consolidation to the down trend from 1.1489 (2022 high). Thus, strong resistance could be seen in AUD/NZD as it enters into resistance zone of 1.0914/1.1050.

ECB's Lane emphasizes long road ahead before rate cuts

In an interview with Het Financieele Dagblad, ECB Chief Economist Philip Lane stressed the European Central Bank's stance on the prevailing inflationary conditions. Highlighting the central bank's efforts, Lane remarked, "Because inflation is too high, we're trying to deliver interest rates that are significantly above the neutral range." He affirmed the bank's commitment to maintaining this position, stating, "We will keep interest rates high for as long as necessary."

Lane also opened the door to potential policy adjustments, emphasizing that, "If we have inflation shocks that are sufficiently large or sufficiently persistent, we have to be open to doing more."

He projected that inflation would return to ECB's target of 2% by 2025. However, he also signaled that the journey to this target is not short-term. "Only when we are sufficiently confident of reaching that target, we can normalize policy," he said, adding, "But this is quite some distance from where we are now."

Delving into what he perceives as necessary to gain more clarity, Lane expressed a personal need for "more information about the wage settlements for 2024." He highlighted that a considerable amount of time would elapse before gaining confidence in the inflation trajectory, noting, "we will have to wait until spring next year before many countries release that information."

He said, "So it's going to be some time before we can have a high degree of confidence that inflation is on its way back to 2%."

Fed's Harker advocates for rate pause amid struggles of small businesses

As Fed grapples with the consequences of its tightening monetary policy, Philadelphia Fed President Patrick Harker voiced concerns regarding the implications for small businesses. In a virtual event, Harker underscored the challenges small firms are facing due to limited access to capital, and suggested Fed should refrain from contemplating additional interest rate hikes

"Small firms are really struggling with access to capital," Harker pointed out, echoing the sentiments of bankers who are wary that their business models may not withstand further hikes.

"Some of the bankers I've talked to are concerned that their business plans just aren't going to be able to make it at the higher rates. I heard that warning a lot over the summer," Harker elaborated.

In light of these concerns, Harker advocated for a pause in rate adjustments to evaluate the full impact of the existing policy on small businesses. By holding rates steady, Fed can provide a reprieve for struggling firms and assess the broader economy before making further moves.

"This is why we should hold rates steady, we should not at this point be thinking about any increases, because if that's true — and it is true — then we should let that ride out," Harker asserted.

Looking ahead

UK employment and Germany ZEW economic sentiment will be release in European session. Later in the day, Canada CPI and US retail sales will take center stage.

USD/CAD Daily Outlook

Intraday bias in USD/CAD remains neutral at this point as range trading continues. On the upside, above 1.43699 will target 1.3784 first. Break there will will resume larger rise from 1.3091 to retest 1.3976 high. On the downside, below 1.3568 will bring another falling leg to extend the near term corrective pattern from 1.3784 instead. Asian Session Sees Antipodean Currency Waves, Sterling and Canadian Braced for Movement Next_4

Asian Session Sees Antipodean Currency Waves, Sterling and Canadian Braced for Movement Next_4

In the bigger picture, current development revives the case that corrective pattern from 1.3976 (2022 high) has completed with three waves down to 1.3091. Decisive break of 1.3976 high will confirm resumption of up trend from 1.2005 (2021 low). Next target will be 61.8% projection of 1.2401 to 1.3976 from 1.3091 at 1.4064. This will now remain the favored case as long as 1.3378 support holds. Asian Session Sees Antipodean Currency Waves, Sterling and Canadian Braced for Movement Next_5