Aussie and Yen Decline, Loonie Awaits Crucial CPI Data

Samantha Luan

Central Bank

Economic

Forex

Summary:

Australian Dollar weakened broadly during Asian session as its recent rally lost momentum...

Australian Dollar weakened broadly during Asian session as its recent rally lost momentum. Despite RBA minutes revealing that a rate hike was considered earlier this month, which should have been supportive for the Aussie, this positive sentiment was countered by weak consumer sentiment readings. Additionally, Aussie seemed to be weighed down by a pullback in regional stock markets, particularly with the retreat in Hong Kong's HSI.

Meanwhile, Japanese Yen continued its broad-based decline, albeit at a slow pace. Japanese Finance Minister Shunichi Suzuki reiterated that foreign exchange rates should be determined by market fundamentals and move in stable manner. He also explained the government's aim to achieve wage growth that outpaces inflation, a challenging goal if prices keep rising strongly. This highlights Japan's cautious stance against a steep depreciation of Yen, which would increase import prices and inflation pressures.

In contrast, British Pound and Euro are currently the strongest performers of the day, followed by a recovering Dollar. New Zealand Dollar and Canadian Dollar are among the weakest, trailing behind Aussie and Yen, while Swiss Franc is positioned in the middle.

The focus today is on Canadian Dollar with release of Canadian CPI data. This data will be crucial in determining the likelihood of a rate cut by BoC in June. From a technical perspective, USD/CAD is struggling around 55 D EMA for now. Strong boucne from current level, followed by break of 1.3689 resistance, will retain near term bullishness. Rise from 1.3176 could then be ready to resume through 1.3845. However, sustained break of 55 D EMA will argue that rise from 1.3761 has completed, and turn near term outlook bearish. The upcoming CPI data will likely provide the market with a clearer direction. Aussie and Yen Decline, Loonie Awaits Crucial CPI Data_1

Aussie and Yen Decline, Loonie Awaits Crucial CPI Data_1

In Asia, at the time of writing, Nikkei is down -0.05%. Hong Kong HSI is down -2.05%. China Shanghai SSE is down -0.41%. Singapore Strait Times is down -0.35%. Japan 10-year JGB yield is up 0.0017 at 0.981. Overnight, DOW fell -0.49%. S&P 500 rose 0.09%. NASDAQ rose 0.65%. 10-year yield rose 0.017 to 4.437.

Fed officials express caution on inflation, uncertainty over rate cuts

Fed Governor Philip Jefferson issued a cautious message in a speech last night, stating that while April's inflation data was "encouraging," it remains "too early to tell" if the recent slowdown in disinflation will be "long lasting." He described current monetary policy as restrictive and declined to predict whether rate cuts will happen this year. He emphasized the importance of continuing to closely monitor incoming economic data, the outlook, and the balance of risks.

Separately, Cleveland Fed President Loretta Mester told Bloomberg Television that she is reconsidering her earlier forecast of three interest rate cuts this year. Although not her "base case," Mester noted that if progress on reducing inflation stalls or reverses, Fed is "well positioned" to increase rates if necessary.

San Francisco Fed President Mary Daly also shared her views, expressing doubt about achieving the 2% inflation target in the near term. Daly highlighted that while there are expectations for improvement in shelter inflation, the progress is not expected to be rapid.

RBA minutes highlight debate over rate hike

RBA minutes from May 7 meeting reveal that a rate hike was considered but ultimately, the decision was made to hold cash rate target steady at 4.35%. The board emphasized that recent data indicated that "risks around inflation had risen somewhat," acknowledging the considerable uncertainty and the difficulty in "ruling in or ruling out" future changes in interest rate.

The minutes detailed that raising the cash rate could be appropriate if the board believed that the staff forecasts were "overly optimistic" about the forces driving down inflation, leaving the balance of risks tilted to the upside. Additionally, a higher cash rate might be necessary even with ongoing weakness in aggregate demand if "other factors slowed the pace of disinflation."

Conversely, the decision to hold the cash rate steady was based on the view that, although there had been significant updates on the economy since the last meeting, these updates were "not sufficient to warrant a change in the stance of monetary policy." Inflation was still declining towards the target, and the new information "did not materially alter its trajectory."

Australian Westpac consumer sentiment falls -0.3% mom amid budget disappointment

Australia Westpac Consumer Sentiment index fell by -0.3% mom to 82.2 in May. Westpac highlighted that the primary takeaways from the May survey are "no let-up in the weak consumer environment" and the cautious mindset of consumers. Consumers are more inclined to use funds from fiscal measures to repair their finances rather than go on spending sprees, which aligns with RBA's efforts to bring inflation back to target.

The May survey, conducted during budget week, provided a clear comparison of sentiment before and after the budget announcement. Sentiment among those surveyed before the budget was relatively optimistic, with an index reading of 86.8, marking a 5.3% increase from April. However, sentiment plummeted to 76.6 after the budget announcement, reflecting a 7% decline from April. This -11.8% drop in sentiment post-budget contrasts with a -7.4% decline observed last year.

Looking ahead

German PPI, Eurozone current account and trade balance, will be released in European session. Later in the day, Canadian CPI will take center stage.

AUD/USD Daily Report

AUD/USD dips mildly today as consolidation from 0.6713 continues. Intraday bias stays neutral for the moment. Further rally is expected as long as 0.6578 support holds. As noted before, fall from 0.6870 has probably completed with three waves down to 0.6361 already. Above 0.6713 will target 0.6870 resistance next. Aussie and Yen Decline, Loonie Awaits Crucial CPI Data_2

Aussie and Yen Decline, Loonie Awaits Crucial CPI Data_2

In the bigger picture, price actions from 0.6169 (2022 low) are seen as a medium term corrective pattern to the down trend from 0.8006 (2021 high). Fall from 0.7156 (2023 high) is seen as the second leg, which could have completed at 0.6269 already. Rise from there is seen as the third leg which is now trying to resume through 0.6870 resistance. Aussie and Yen Decline, Loonie Awaits Crucial CPI Data_3

Aussie and Yen Decline, Loonie Awaits Crucial CPI Data_3

Source: ActionForex

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Samantha Luan

Economic

Central Bank

Thailand's new finance minister has refrained from pressuring the central bank and has a chance to improve relations amid a longstanding disagreement on interest rates, former finance minister Thirachai Phuvanatnaranubala said on Tuesday.

Speaking in the Reuters Global Markets Forum, Thirachai said Prime Minister Srettha Thavisin's repeated public push for a rate cut had created unnecessary strain and new Finance Minister Pichai Chunhavajira was in a position to smooth things over.

"The new finance minister must try to find a way to convince the Bank of Thailand there is a need for a more relaxed monetary policy," Thirachai, who is also former central bank deputy governor, told the Reuters forum.

For months, Srettha has been at odds with the central bank, which has refused to bow to his pressure to cut rates, currently at a more than decade-high of 2.50%. The next rate review is on June 12.

Srettha and his ruling Pheu Thai Party maintain the current monetary policy stance is hurting an economy he says is in crisis. Srettha, a real estate mogul and political newcomer, has repeatedly said he respects the central bank's independence.

Pheu Thai and previous incarnations also founded by influential former premier Thaksin Shinawatra have dominated politics for the past two decades and have clashed previously with the BOT on rates.

Billionaire Thaksin has officially retired but remains a towering figure in Thai politics, with sway over the current government.

His politician daughter and Pheu Thai leader Paetongtarn Shinawatra recently caused a stir, calling the BOT's independence an "obstacle" in resolving economic problems.

STRONG POSITION

Thirachai was at the BOT the last time a Thai central bank governor was sacked in 2001, by Thaksin, a move he said would be difficult to repeat now.

"The position of the governor is fairly strong because Thailand has a tradition of giving weight and protection to the Bank of Thailand," he said.

"We had amended the law to make it difficult for the government, for any government, to remove the central bank governor, unless there is a real, apparent, necessary cause."

New Finance Minister Pichai Chunhavajira has recently said he is more worried about people's access to finance than the level of interest rates. On Tuesday, he reiterated the government's position that economic stimulus was needed.

Thirachai said he believed the current interest rate of 2.50% was perhaps a little high and in his opinion, monetary policy should be more relaxed.

He said there should be no concern over weakness of the baht curreny if there were to be a rate cut.

The BOT has said a rate cut could give the economy a short-term boost, but that benefit would be outweighed by potential long-term negative impacts it might create on the economy, which needed to be restructured.

Source: Reuters

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Warren Takunda

Economic

The call by Robert Howard, market analyst at Reuters, comes ahead of Wednesday's important UK inflation print which is expected to firm the likelihood of a summer interest rate cut.

Markets are already fully priced by a cut being delivered by August, but upping expectations for two consecutive cuts would require a significant market recalibration that would weigh notably on Pound exchange rates.

"Back–to–back BoE cuts would pull the rug from under GBP," says Howard, who warns the Pound to Dollar could fall as far as 1.23 under such circumstances.

If EUR/USD remains steady under such a scenario, the Pound to Euro exchange rate could dip as far as 1.15.

"The received wisdom is that the BoE will reduce rates on either June 20 or August 01 – but not on both dates," explains Howard.

He says if June sees a cut, it will probably be delivered by the narrowest of margins, 5-4, with Andrew Bailey, Ben Broadbent and Sarah Breeden most likely to join Dave Ramsden and Swati Dhingra in voting for it.

Broadbent said on May 20 that the Bank would cut interest rates this summer if the Bank's forecasts simply met expectations, which implies something of a low bar to cross.

"Should that come to pass, a follow-up cut in August is by no means impossible, given last week's relatively dovish comments from BoE Chief Economist Huw Pill and hawk Megan Greene," says Howard.

August will also see Clare Lombardelli cast her first Monetary Policy Committee rate vote as she joins the MPC, having succeeded the outgoing Broadbent.

"Unlike the U.S., UK inflation in recent quarters has undershot the central bank's expectations and is likely to return to target in the next month or two," says Michael Saunders, Senior Economic Advisor to Oxford Economics and a former member of the Bank's Monetary Policy Committee.

"We expect the BoE will start to cut rates in June or August, with June marginally the more likely, but this will depend on upcoming pay and price data," he adds.

Yet, some analysts warn there is a risk services inflation will deliver another upside surprise on Wednesday, which could scare a number of MPC members into voting to hold rates next month.

This means a strong services inflation print would scupper risks of back-to-back rate cuts as August emerges as the favoured start date, bolstering Pound exchange rates in the process.

"We think services inflation could come in hotter than expected, and if we're right, that would favour another 'on hold' decision next month," says James Smith, Developed Markets Economist at ING Bank.

Services inflation is the aspect of the inflation basket that has proven resilient and might ultimately undermine a sustained fall in the headline rate to fall to 2.0%. It is why the Bank won't see a 2.1% reading in headline CPI as proof of victory over inflation and an automatic trigger to lower interest rates.

But, a sharp deceleration in services inflation could well raise the risks of a June start and consecutive August cut, which will weigh on the Pound.

Source: Poundsterlinglive

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Devin

Economic

Stock market momentum is waning as a dearth of fresh economic clues sees the feverish punting over the pace of Federal Reserve rate cuts finally settle down.

Most Asian equity indexes declined on Tuesday, led by the Hang Seng's more than 2% retreat from the previous session's multi-month high. Japan's Nikkei stood out as the sole beneficiary of the Nasdaq's record run overnight into Nvidia's much-anticipated earnings on Wednesday.

AI fever aside, the Fed sits squarely at the center of the market universe, with all asset classes in its orbit. That includes crude oil, gold and base metals, and soaring cryptocurrencies, even if idiosyncratic drivers are also at play.

Investors rushed to reintroduce Fed easing bets after a long-in-coming downside CPI surprise last week, but Fed officials have been less sanguine, collectively striking a cautious posture.

As it stands now, about 40 basis points of easing are priced in for this year, with a quarter-point reduction by November considered a lock, much like where odds stood a week ago. News Vacuum Sucks Momentum from Markets_1

News Vacuum Sucks Momentum from Markets_1

More Fedspeak is in store today, with Governor Christopher Waller and no fewer than four regional Fed bosses taking the podium at various events. Minutes of the Fed's last policy meeting due Wednesday will be valuable, but predate the softening in CPI after three straight months of upside surprises.

Elsewhere, Bank of England Governor Andrew Bailey gives a lecture at the London School of Economics. UK CPI will be closely watched, but isn't due till Wednesday.

Tuesday's local data docket is light, with the highlight around Europe being German producer price figures for April.

Key developments that could influence markets on Tuesday:

-Germany producer prices (April)

-BoE Governor Andrew Bailey speaks

-Fed Governor Waller, New York Fed's Williams, Atlanta Fed's Bostic, Cleveland Fed's Mester, Boston Fed's Collins, Richmond Fed's Barkin all speak at various events

Source: Reuters

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Samantha Luan

Energy

Economic

Shi Mei and her husband earn a decent enough living by growing corn and millet on their small farm in eastern China's Shandong province. In 2021, they diversified by investing in solar energy — signing a contract to mount some 40 panels on their roof to feed energy to the grid.

Now, the couple get paid for every watt of electricity they generate, harvesting the equivalent of $10,000 per year that Shi can track through an app on her phone.

“When the sun comes out, you make money,” Shi said.

The Shi family is on the leading edge of a solar boom in China, which has long dominated global solar manufacturing but didn't always install a lot of it at home. That's changing as the government focuses on the urgency of cutting its worst-in-the-world greenhouse gas emissions at the same time it grows its green economy. China wants one-fifth of its power to come from renewables by 2025, and it's offered a wide range of subsidies to local governments and businesses.

The push — in both industrial solar and in rooftop installations like Shi's — is working so well that the grid now has more power than it can handle. Shi was fortunate to get in early; some cities across Shandong province, including her village, are halting new rooftop solar installations.

Analysts and solar companies say the future remains bright if China can quickly adapt to the oversupply. Companies and utilities are scrambling to build battery capacity to store all the power being generated. They'd like to see more flexible energy pricing that could shape demand to better match supply. And they'd like technology that makes it easier to start and stop coal power so it's not always the clean energy of solar power that gets “curtailed” — in industry jargon — when the grid can't take any more supply.

“China has the great potential and opportunity to make its power sector achieve its carbon peak by 2025,” said Grace Gao, a Climate and Energy senior campaigner at Greenpeace in China. “I am looking forward to seeing Shandong truly become a leader in renewable energy and showcase its best practices to the rest of China.”

SOLAR POWERHOUSE

As with many infrastructure projects in China, it is installing solar at breakneck speed and scale. China added 216 gigawatts of solar in 2023, a little over half in large solar farms, according to the country's National Energy Administration. China's total is more than half of what the entire world added last year, according to research from the consultancy Wood Mackenzie.

A gigawatt of solar is enough to supply the energy needs of about 320,000 Chinese households for a year, Gao said.

Shandong province added about 14 gigawatts of solar in 2023, and the province now has the ability to produce more power than it can use at certain times during the day. It's the leading province for renewable energy capacity, but that also means it's the first to encounter the difficulties of rapid growth.

“Other provinces will also meet these problems, because there will be more and more solar energy,” said Peng Peng, the secretary general of China New Energy Investment and Financing Alliance, an industry group.

BOOM YEARS

After China announced subsidies for both rooftop and industrial solar in 2014, Shandong, with an advanced manufacturing industry, was a good candidate to take the early lead in solar development compared to less populous provinces like Qinghai or Inner Mongolia.

Wang Xingyong installs and maintains rooftop solar panels for clients ranging from villagers to factories, and said his business has doubled every year since 2016.

“In the beginning, maybe we’d just do a project for one client, a farmer, and it’d be worth ten thousand yuan, fifty thousand,” he said. “Later, we’d do a couple hundred thousand, millions, for just one project.”

The business model varies, but many companies like Wang's solicit villagers and factories for the chance to use their roofs. Villagers buy the systems and get payouts from selling the electricity to the grid. Wang gets paid to build and maintain the solar setups for factories that use the electricity they generate.

Wang said the concept was a hard sell at first, with few people believing the government would pay them for generating electricity. Wang said he slowly won people over, starting with his family and friends, putting forward the money for the equipment himself, and then moving on to other villages with the results.

While pitching, few talk about big concepts like the country’s target to ensure carbon emissions peak at 2030. It comes down to cash in people's pockets. Shi, the farmer, said her neighbors installed solar panels on their roofs after seeing her investment do well.

“Compared to just putting your money in a savings account, the rate of return is higher," she said. Thanks to her contract from 2021, she's still earning money even though the village has stopped allowing new installations.

A second model allows families to basically get paid rent to allow solar to be installed on their roof — as much as 3,000 yuan ($414) a month, said Liu Wenping, an investor in solar companies. They might also get a free air conditioner or refrigerator as an extra incentive, and get a small percentage from the electricity sold, though not as much as people who buy the solar equipment.

SOLUTIONS IN PROGRESS

Chinese battery companies, EV manufacturers and utilities are all racing to develop more advanced batteries to store the electricity from solar panels. Batteries are getting cheaper, but still affect the overall model’s profitability. The Shandong provincial government is running a pilot program in Dezhou with lithium iron phosphate batteries that can store power during peak production and feed it to the province's grid later as needed.

Other fixes include moving to what's called spot market pricing, with the price fluctuating in an open market. China currently uses prices set by regulators for its electricity, updated after intensive research. Without pricing flexibility, China can't incentivize customers to shift some use to non-peak times by lowering prices during those times.

But just last year, regulators in Shandong introduced trough pricing, with prices slashed sharply to encourage people to use electricity right when it was being generated abundantly but use was very low — in this case, the lunch period when factories typically all break at the same time. Factories responded by shifting some of their use to get some of the cheaper power.

Solar analysts say they expect China to eventually move towards completely market-driven pricing with the grid.

Meanwhile, China is intent on improving its grid. The National Development and Reform Council, which oversees economic policy and implementation, in February called on provinces to focus on increasing flexibility to the grid. It included a call to retrofit old coal plants with new technology so they can power up and down much more quickly. The council also wants a “smart” grid that can quickly decide the best time to distribute the power being generated.

“Every country in the world that is installing a lot of renewables and then facing the challenges that arise from all this variable intermittent generation, is searching for smart ways, intelligent AI-enabled or at least model-backed approaches to distributing this power and using it in the most efficient and effective way," said David Fishman, a senior manager at the Lantau Group consultancy who tracks China's energy industry. “Certainly that's where China is heading.”

There's no sign of a pause in China's solar buildout. Companies are flocking to other provinces in the south that aren't as far along as Shandong.

And in Shandong, Wang, the solar installer, is optimistic about his prospects despite the halt in new projects, because he still has industrial clients. He's already planning to invest in upgrading transformers. And he's intrigued by a trend driven by China's electric car explosion, with the installation of all-in-one stations that combine solar generation, battery storage and electric vehicle charging.

“I trust the future will be better and better," he said.

Source: AP

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Alex

Economic

Cryptocurrency

Japan's tech-heavy Nikkei edged higher though, driven by chip shares after the Nasdaq hit a record high overnight ahead of Nvidia earnings due on Wednesday.

Gold inched back towards Monday's all-time peak, while crude oil prices eased on worries of U.S. interest rates staying high for longer as Fed officials maintained a cautious view on a recent easing of inflation.

Cryptocurrencies ether and bitcoin climbed to new six-week highs amid speculation that the U.S. Securities and Exchange Commission (SEC) may approve a spot ether exchange-traded fund (ETF).

Markets currently factor in about 41 basis points of Fed rate reductions this year, with a quarter-point cut fully priced in for November.

Traders rushed to rebuild easing bets after data earlier this month showed consumer price pressures mitigated in April, following a string of three months of upside surprises at the start of the year.

Even so, Fed officials are reluctant to declare inflation is coming under control, with Vice Chair Philip Jefferson saying on Monday that it was too early to tell if the slowdown is "long lasting," and Vice Chair Michael Barr saying restrictive policy needs more time.

MSCI's broadest index of Asia-Pacific shares outside Japan slipped 0.6%, weighed down by the Hang Seng's more than 1% pullback from Monday's multi-month peak.

Japan's Nikkei was a rare bright spot, rising 0.2%, adding to the previous day's 0.73% rally.

Nasdaq futures inched 0.1% lower after the cash index climbed 0.65% overnight to close at an all-time high. S&P 500 futures were flat after Monday's 0.1% gain.

"Market sentiment remains relatively robust, with implied volatility low, supported by greater confidence in U.S. rate cuts this year," Kyle Rodda, senior markets analyst at Capital.com, wrote in a note.

At the same time, record highs for metals such as gold and copper "is being pointed to as a signal economic activity is improving globally, and that may be a factor keeping inflation sticky," Rodda said.

Gold eased 0.2% to about $2,420 per ounce, after pushing to the cusp of $2,450 for the first time overnight.

The dollar firmed slightly against major peers on Tuesday, with the dollar index up 0.1% to 104.69 after a similar rise on Monday.

The 10-year Treasury yield was little changed at 4.4453%, after ticking up 1.7 basis points on Monday.

Brent crude futures declined 12 cents, or 0.1%, to $83.34 a barrel, while U.S. West Texas Intermediate crude (WTI) eased 8 cents, or 0.1%, to $79.72 a barrel.

Meanwhile, the standout performers of Monday continued their rise, as traders snapped up cryptocurrencies following a report that the SEC had abruptly asked exchanges that want to trade ether ETFs to update regulatory filings, boosting bets that approval could come this week.

Bitcoin climbed as high as $71,957 and ether jumped to $3,720.80, both hitting levels not seen since April 9.

"Speculation around the ether ETF has certainly played its part in the move, throwing fuel on the crypto bull market bonfire that had reignited after last week's cooler U.S. CPI data," said IG analyst Tony Sycamore.

Sycamore expects bitcoin to retest the all-time high at $73,803.25 in coming days before making a push for $80,000.

Source：Reuters

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Thomas

Economic

Central Bank

Minutes of the Reserve Bank's May 6-7 gathering showed the board discussed two options when it left the key rate at 4.35%, noting the risks around its economic forecasts were still “balanced” despite stronger-than-expected data in the run-up to the meeting.

“Members considered that the staff forecasts presented a credible path back to the inflation target,” the minutes showed. “Members judged it remained reasonable to look through short-term variation in inflation to avoid excessive fine-tuning.”

Read more: RBA Retains Neutral Policy Bias as Key Rate Held at 12-Year High

The central bank, which upgraded its near-term inflation forecasts, still expects consumer prices to return to its target in late-2025, from 3.6% in the first three months of this year. The updated forecasts used a technical assumption of no change in rates until mid-2025.

The minutes showed that the rate-setting board had “limited tolerance” for inflation returning to target later than 2026.

“Members agreed that it was important to convey that recent data and other information had signaled that the risks around inflation had risen somewhat,” the minutes showed. “It was difficult either to rule in or rule out future changes in the cash rate target.”

Governor Michele Bullock has previously suggested the RBA won't need to wait for inflation to be inside the 2-3% band before cutting. Even so, she has repeatedly pushed back against speculation over near-term easing, reflecting the RBA's forecasts that inflation will only return to target late next year.

Economists expect the RBA to begin cutting rates in November whereas financial markets are fully pricing in the first easing in the first half of next year.

The RBA's gathering followed a highly-anticipated decision by the Federal Reserve, when Chair Jerome Powell kept hopes alive for a rate cut this year while acknowledging a burst of inflation has reduced confidence that price pressures are ebbing.

Data recently has indicated that Australia's economy is broadly slowing with GDP contracting on a per-person basis, while tepid retail sales reflect downbeat consumer sentiment. The RBA said in the minutes that it expects weakness in household spending to continue this year.

At the same time, the labor market remains resilient, giving policymakers optimism that they can engineer a soft landing — bringing down inflation while holding onto the enormous job gains of recent years.

The minutes showed that raising the cash rate could be appropriate if:

The board formed a view that the judgments underpinning the staff forecasts risked being overly optimistic about disinflationary forces
If consumer spending picked up somewhat more rapidly, labor market outcomes remained benign, real household disposable income recovered and household balance sheets remained relatively strong. That together with further growth in public demand and business investment could delay inflation's return to target
If trend productivity growth turned out to be weaker than assumed