Surprise BoC Hike Fuels Hawks Around the World

Central Bank

Summary:

The surprise 25bp hike from the Bank of Canada (BoC) yesterday sent shockwaves across the financial markets.

Uh oh. The surprise 25bp hike from the Bank of Canada (BoC) yesterday sent shockwaves across the financial markets. BoC decision to resume its rate hikes after a two-meeting pause and the surprise 25bp from the Reserve Bank of Australia (RBA) a day earlier fueled the central bank hawks around the world and boosted the Federal Reserve (Fed) rate hike expectations as well.

Now it's important to note that the U.S. Fed isn't a fan of this kind of surprises, so the pricing of expectations before meetings are generally accurate. Activity on Fed funds futures now gives around one third chance of a 25bp hike at June meeting, and a two thirds chance for at least a 25bp hike when the FOMC meets in July.

As a result, the U.S. 2-year yield, which captures the Fed rate expectations is under a renewed pressure above the 4.50% mark, while the U.S. 10-year yield is around 3.80%.

If the Fed expectations become more hawkish, we will likely see the 2-year yield headed to 5%, but the upside potential in the 10-year yield is much less, as the aggressive rate hikes coming from once-too-patient-but-now-impatient policymakers will push the world economy into a deeper chaos in H2, Higher recession odds for a potentially deeper recession will inevitably resurface and further widen the gap between the 2 and 10-year papers.

What does Russell 2000 try to tell us?

The surprise RBA and BoC hikes, and the rising yields are bearish for stock valuations. The TSX gave back 0.36% yesterday, the S&P500 rebounded lower by a similar amousummer'sm last summer peak levels, while the rate-sensitive Nasdaq dived 1.75%, as the overbought names of the past weeks, like Nvidia for example, were rapidly sold to lock in profits. Nvidia lost more than 3% yesterday.

But the Russell 2000, which has underperformed the S&P500 and Big Tech stocks since the bank crisis, jumped almost 2.50% yesterday after a 2.70% gain recorded the day before. According to the Bear Traps Report, there have been only two days since 1990 when the S&P500 gained less than 0.25% and the Russell 2000 jumped more than 2.5%.

Note that, the Russell 200 rally doesn't mean that small caps could better weather the rising rates, on the contrary, small companies are more vulnerable to the rising rates and tightening credit conditions, but the surprise small cap rally could be a sign that the rally in Big Tech has certainly gone too far, and there is some rebalancing happening in the portfolios.

FX and commo

The U.S. dollar consolidates near the highest levels since mid-March, but hawkish bets for other major central banks keep the dollar's upside potential limited at the current levels. The EUR/USD remains bid around the 1.07 level, Cable bulls aim at the 50-DMA, near 1.2460, for a further rise toward the 1.25 mark, while the USD/JPY finds sellers at the 140 level. The data released this morning hinted at a higher Japanese trade surplus in April, while the Q1 growth was revised higher.

In Turkey, the lira lost 7% against the U.S. dollar yesterday, as the Treasury and Finance Ministry, under the leadership of freshly appointed Mehmet Simsek asked the central bank to wane its FX interventions. Interventions apparently resumed after the USD/TRY hit the 23 mark, yet the recent jitters in the Turkish lira is a sign that Turkey will abandon its costly and unsustainably FX interventions. The risks for USD/TRY are tilted to the upside and the pair could easily jump to 30/35 if left trade free.

Elsewhere, gold is also under the pressure of rising yields and strong U.S. dollar. The price of an ounce is testing the 100-DMA, near the $1940 level, to the downside and the selloff could accelerate if support is taken out. The next reasonable target for gold bears is $1905, the major 38.2% Fibonacci retracement on November to May rally, and which should distinguish between the actual positive medium-term trend, and a bearish reversal.

In energy, U.S. crude recovered past the $73pb yesterday as the EIA data revealed a surprise 500K barrels decline in U.S. crude inventories last week. But rising rates, tightening financial conditions and rising recession worries are bearish for oil, which – on top – failed to capitalize on OPEC output cut earlier this week. Risks remain tilted to the downside. Expect strong resistance into the 50-DMA, which stands a touch below the $75pb level, with a possible return below the $70pb level.

Source: Swissquote Bank

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Samantha Luan

Forex

The global forex markets are in a state of relative tranquillity today, as the dust begins to settle following two central bank surprises. With a light economic calendar on the horizon, trading activity is predicted to stay muted. Australian Dollar currently retains its pole position, closely pursued by its Canadian counterpart. However, with the release of Friday's job data, the latter has the potential to clinch the top spot for the week. New Zealand Dollar finds itself at the other end of the spectrum as the week's poorest performer, followed by Dollar and then Swiss Franc. Euro is mixed together with Yen.

Technically, though, there is risk of a more violent move in Yen today and tomorrow, subject to development in treasury yields. US 10-year yield received notable support from 55 D EMA (now at 3.602) and recovered notably this week. The development keeps near term bullish bias intact. Break of 3.859 resistance will confirm resumption of whole rise from 3.253. Further break of trend line resistance will solidify upside momentum to 4.091 resistance next. If realized, Yen pairs could follow in tandem, in particular, with USD/JPY breaking through 140.90.

Currency Markets Hold Steady, AUD and CAD Strong, JPY Eyes Yields_1

In Asia, Nikkei closed down -0.86%. Hong Kong HSI is down -0.04%. China Shanghai SSE is up 0.55%. Singapore Strait Times is down -0.22%. Japan 10-year JGB yield is up 0.436 at 0.0174. Overnight, DOW rose 0.27%. S&P 500 dropped -0.38%. NASDAQ dropped -1.29%. 10-year yield rose 0.085 to 3.784.

Top mover AUD/NZD on track to 1.1085, what next?

AUD/NZD is currently the biggest mover for the week, trading up around 1%. Near term rally from 1.0556 accelerated further after surprised RBA rate hike earlier in the week. At the same time, market participants are also factoring in the possibility of further rate hikes from RBA.

In a recent Reuters poll, a snapshot of economists' expectations reveals a divide: 16 out of 26 expect RBA to hit the pause button in August, while 10 predict another 25bps hike. Looking beyond, a majority (20 out of 26) anticipate another 25bps increase by the end of September.

There's a consensus among the major local banks – ANZ, CBA, and NAB – that a pause in July is likely, while Westpac is bracing for another 25bps bump. All four banks foresee a terminal rate of 4.35% by the close of September. However, given the uncertainty that even RBA is grappling with regarding the road ahead, these forecasts are subject to revision ahead of each upcoming meeting.

Contrarily, the question of whether RBNZ rate has already peaked at the current 5.50% is under debate. Views are split on the prospect of a further 25bps hike in August.

Technically, this week's rally should confirm that AUD/NZD's correction from 1.1085 has completed with three waves down to 1.0556. Near term outlook will stay bullish as long as 1.0881 support holds. Next target is 1.1086 resistance. Firm break there will resume whole rise from 1.0469 (2022 low) to 100% projection of 1.0469 to 1.1085 from 1.0556 at 1.1172.

Currency Markets Hold Steady, AUD and CAD Strong, JPY Eyes Yields_2

The second half of the year will likely be marked by whether AUD/NZD can hurdle this key 1.1172 projection level. Rejection at this level could frame the rise from 1.0469 as merely a corrective move, and potentially set the stage for a later resumption of overall decline from 2022 high of 1.1489 at a later stage However, a decisive break above 1.1172 could catalyze a more substantial upside move, potentially retesting 1.1489 high.

The outcome will largely hinge on the future steps of RBA and RBNZ post their next move. Currency Markets Hold Steady, AUD and CAD Strong, JPY Eyes Yields_3

Currency Markets Hold Steady, AUD and CAD Strong, JPY Eyes Yields_3

USD/CAD and EUR/CAD eyeing important cluster support levels

Canadian Dollar is currently the second best performer of the week after yesterday's surprised 25bps rate hike by BoC to 4.75%. Most economists see the move after a 2-meeting pause as a "restart" of the tightening cycle rather than a "one-off". Another rate hike is now generally expected in July to bring interest rate to 5.00% level.

The biggest question is whether 5.00% is "sufficiently restrictive" enough to bring supply and demand back into balance and return inflation to 2% target. It's a big unknown for the markets as well as BoC.

Technically, while Canadian Dollar is strong this week, tough resistance levels lie just ahead. The key level is 1.3224 cluster support, with 38.2% retracement of 1.2005 to 1.3976 at 1.3233. Price actions from 1.3976 could still be considered a sideway corrective pattern as long as 1.3224/33 holds. That is, larger up trend would remain intact.

However, firm break of 1.3299 support would risk downside acceleration to push USD/CAD through 1.3224/33 decisively. 100% projection of 1.3860 to 1.3299 from 1.3653 at 1.3092 would be the immediate target, with risk of even deeper decline in the medium term.

Currency Markets Hold Steady, AUD and CAD Strong, JPY Eyes Yields_4

As for EUR/CAD, it's now quickly approaching the key zone of 1.4236 cluster support (38.2% retracement of 1.2867 to 1.5111 at 1.4254). There is still prospect of a bounce from the zone. Break of 1.4510 minor resistance will suggest that the corrective fall from 1.5111 has completed and bring stronger rebound back to 55 D EMA (now at 1.4601) and above.

However, sustained decisive break of 1.236 could trigger further downside acceleration to 61.8% retracement at 1.3724, even just as a deep corrective move.

Looking ahead

Eurozone will release Q1 GDP final in European session. US will publish jobless claims and wholesale inventories later in the day.

GBP/JPY Daily Outlook

GBP/JPY is staying in consolidation from 174.66 and intraday bias remains neutral first. Deeper pull back cannot be ruled out, but outlook will stay bullish as long as 167.82 support holds. On the upside, break of 174.66 will resume larger up trend to 100% projection of 148.93 to 172.11 from 155.33 at 178.51. Currency Markets Hold Steady, AUD and CAD Strong, JPY Eyes Yields_6

Currency Markets Hold Steady, AUD and CAD Strong, JPY Eyes Yields_6

In the bigger picture, up trend from 123.94 (2020 low) is extending. Next target will be 161.8% projection of 122.75 (2016 low) to 156.59 (2018 high) from 123.94 at 178.69. For now, medium term outlook will remain bullish as long as 165.99 resistance turned support holds, even in case of deep pull back.

Source: ActionForex.com

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Devin

Forex

We saw another cautious day for European markets yesterday with little in the way of overall direction, after China exports for May plunged by -7.5% raising concerns about the outlook for global demand, while the Bank of Canada followed the RBA in hiking interest rates by 25bps.

With the prospect of more interest rate rises on the way yields pushed higher, which in turn acted as a drag on equity markets more broadly, even as U.S. markets finished the session mixed, while Asia markets have slipped back

The Russell 2000 finished the day strongly higher, helped by the recovery in regional bank stocks, while the Nasdaq 100 fell sharply, and the S&P500 also closing lower.

With the Federal Reserve, ECB, and Bank of Japan due next week and this week's hikes pointing to further interest rate pain, bets about a Fed pause next week are being taken off the table over concern the Fed may well follow suit.

When the Fed met back in May the removal of the language that signalled that more hikes were coming led to the impression that we'd probably see a pause in June, a view that was given some encouragement a few days ago by Fed governor Philip Jefferson in a recent speech just before the central bank went into the blackout period. This still seems to be the favoured outcome; however, this week's rate hikes have muddied the waters somewhat.

Today we have weekly jobless claims which are only likely to reinforce the hawkish narrative. With ECB officials also adopting a hawkish tone we can still expect another 25bps from the ECB next week even if the Fed does stay on hold.

As for today's European session we look set for a lower open with the only data of note being the final revision of EU Q1 GDP which is expected to see a downward revision to 0% from 0.1% after the downgrade to Germany Q1 GDP at the end of last month.

EUR/USD – still trading between resistance at the 1.0780 highs of last week, and support back at the recent lows at 1.0635. We need to see a break of this range with broader resistance at the 1.0820/30 level.

GBP/USD – chopping around below resistance at the 1.2540 area and last week's highs and support at the 1.2300 level. We have trend line resistance from the 2021 highs at 1.2630. This, along with the May highs at 1.2680 is a key barrier for a move towards the 1.3000 area.

EUR/GBP – support remains at the 0.8560 level and last week's lows, just above the December 2022 lows at 0.8558. While below resistance at the 0.8660 area the bias remains for a drift lower. We also have major resistance at the 0.8720 area.

USD/JPY – currently undergoing some chop between 139.00 and the recent highs below 140.95. Is the U.S. dollar trying to carve out a top? The main resistance remains at 140.95 area. We have support at the 138.40 area which if broken could see a move back to the 137.00 area.

Source: CMC

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Alex

Forex

The dollar's renewed strength against most major currencies will not fade away anytime soon, according to FX strategists polled by Reuters, who said it would take rate cuts from the Federal Reserve to weaken the currency substantially.

The greenback has recouped all of its roughly 3% losses for the year sustained through April on safe-haven bids related to recent concerns over the U.S. debt ceiling and growing expectations of a July rate hike after a pause in June.

That, along with receding rate cut calls for 2023, will support the dollar in coming months, analysts say, even if Fed policymakers decide to skip a meeting for the first time in an aggressive tightening campaign that began in March last year.

Most major currencies were not expected to reclaim their end-April levels against the dollar at least until September, according to median forecasts from 74 market strategists polled June 1-7. That was a near-across-the-board upgrade compared with a May survey.

"The U.S. economy continues to surprise to the upside, while Europe and China have been weaker than expected...this pattern will have to abate before medium-term shallow dollar depreciation can come back into view," noted Kamakshya Trivedi, head of global FX at Goldman Sachs.

"At current pricing, 'sticking with skipping' in the midst of a buoyant risk backdrop would present some challenge to the dollar, but we suspect that downside will continue to be shallow and limited by U.S. macro performance."

Net USD short positions have eased over the past few weeks as the recent rally dampened bearish investors' mood who were hoping for a sustained weakness in the dollar following last year's multi-decade highs, according to data from the Commodity Futures Trading Commission.

That was contrary to what was predicted by most FX strategists in the May survey. Just over a half of respondents said net short dollar positioning would increase by end-May.

Despite markets expecting the European Central Bank and the Bank of England to go for at least two more rate hikes, versus one from the Fed, the euro and sterling were predicted to make only modest gains over the coming three months.

After declining more than 3% in May, the euro, currently at $1.07, was expected to gain just around 2% and trade at $1.09. Sterling was forecast to change hands at $1.24, broadly unchanged from the current level.

Mostly all major currencies were predicted to trade below their respective 2022 highs against the dollar - which were largely before the Fed began its tightening cycle - in one year from now.

A majority of respondents who answered an additional question said a rate cut by the Fed, which economists do not expect to come until next year, or a pause in its tightening cycle could lead to a sustained weaker dollar.

But a majority of economists in a separate Reuters survey predicted the Fed would pause in June for the first time in more than a year and keep its key interest rate at 5.00%-5.25% then and for the rest of the year.

A growing minority, however, expected at least one more hike between the June and July meetings.

"As the U.S. economy continues to demonstrate resilience in the face of higher rates, the rates market is pricing out rate cuts and could yet contemplate the idea that a June Fed pause, or skip, could be followed by another jump," said Kit Juckes, chief FX strategist at Societe Generale.

"The FX market is tracking short-term rates more closely than ever in the face of wider uncertainty, and with positioning still short USD, the current uptrend can continue for a while longer."

Source: U.S. News

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Warren Takunda

Traders' Opinions

In a surprising turn of events, the latest data from the Energy Information Administration (EIA) Petroleum Status Report revealed a significant decline in US crude oil inventories. The unexpected drop comes amidst market expectations of an increase in supplies, potentially impacting the energy markets. Additionally, distillate stockpiles, including diesel and heating oil, experienced a substantial surge, raising concerns about the future trajectory of the industry.

According to the EIA report, US crude oil inventories recorded a decrease of 0.451 million barrels during the week ending June 2, 2023. This decline caught analysts off guard, as they had anticipated an injection of 1.022 million barrels into stockpiles. The unanticipated reduction in crude oil inventories could potentially influence oil prices and disrupt the equilibrium of global energy markets.

US Crude Inventories Experience Unexpected Decline, Distillate Stockpiles Soar: EIA_1

Meanwhile, crude stocks at the Cushing, Oklahoma delivery hub saw an increase of 1.721 million barrels. This rise followed a previous week's growth of 1.628 million barrels, further contributing to the unexpected shift in inventory dynamics. The Cushing hub serves as a vital delivery point for various crude oil contracts, making this increase a crucial development to monitor in the coming weeks.

Gasoline inventories, another significant component of the petroleum market, experienced a substantial increase of 2.746 million barrels. This figure exceeded market expectations of a more modest 0.88 million barrel rise. The surge in gasoline inventories could potentially indicate either a decrease in demand or an oversupply situation, potentially influencing consumer prices and the overall economy.

The most striking observation from the EIA report, however, is the significant surge in distillate stockpiles. The data revealed a staggering increase of 5.075 million barrels, the highest since early December. This surge surpassed market consensus, which had predicted a rise of 1.328 million barrels. Such a notable upswing in distillate stockpiles could have wide-ranging implications for industries dependent on diesel and heating oil, such as transportation, agriculture, and manufacturing.

Analysts and industry experts will closely scrutinize these inventory changes, as they could impact various facets of the global economy. The unexpected decline in US crude inventories could potentially stimulate upward pressure on oil prices, affecting the profitability of oil producers while simultaneously impacting consumer prices at the pump. Moreover, the surge in distillate stockpiles raises concerns about potential oversupply and demand trends, warranting attention from market participants and policymakers alike.

As market participants digest this unexpected data, it remains to be seen how these inventory dynamics will shape future energy prices and industry dynamics. The outcomes could have far-reaching consequences for the energy market's equilibrium and potentially influence the wider economy, warranting continued monitoring and analysis by investors, economists, and industry stakeholders in the coming weeks.

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Thomas

Central Bank

Malaysia's inflation currently isn't misbehaving, giving the central bank room to keep up its "conditional pause", according to a senior official.

"If it's food prices and all the supply shocks, we have a history of seeing through those shocks," Bank Negara Malaysia (BNM) assistant governor Fraziali Ismail said in an interview with Bloomberg Television's Haslinda Amin on Thursday (June 8). "What matters is how it stokes demand. At this juncture, again, we don't see inflation misbehaving in Malaysia."

When asked if there is a case to continue hiking rates, Fraziali said "that depends on how inflation behaves". Fraziali, who's worked at the central bank for almost three decades, reiterated the central bank's 2023 average inflation forecast of between 2.8% and 3.8% in the interview in Kuala Lumpur.

"What we have seen so far, as I've mentioned earlier, inflation is a function of both supply and demand," Fraziali said. "We have seen, for example, demand-driven inflation staying quite strong at this juncture. We don't have an inflation problem."

Easing inflation will give BNM the scope to ease monetary policy should the economy lose momentum. Consumer prices rose 3.3% in April from a year earlier, the slowest pace in 11 months.

While inflation has mostly moderated, boosting market bets that borrowing costs in the region have peaked, price growth is still proving persistent in some places. Canada delivered a surprise interest-rate hike on Wednesday, and earlier this week Australia unexpectedly increased its key rate for a second straight meeting and kept the door open for more hikes.

Malaysia's central bank has delivered five rate increases in the past year, with a surprise hike early last month bringing borrowing costs back to pre-pandemic levels. Policymakers warned then that inflation may flare up again, with commodity prices and an adjustment to subsidies among the factors to watch.

"Many central banks have taken the step, us included, to have an intermittent pause, to reevaluate what has been the effects of our measures on the economy," said Fraziali, who also sits on BNM's Monetary Policy Committee. "In a way, when we do a conditional pause, let me stress it is a conditional pause — it depends on incoming data as well."

A policy pause in Malaysia will offer the economy some relief, as analysts predict that the pace of expansion will slow to 4.2% this year, from 8.7% in 2022. Traders think the rate-hike cycle has ended, with ringgit one-year, one-day swaps reflecting bets that BNM will stand pat over the next 12 months.

Still, an impending reduction in subsidies may rekindle price pressures, and Fraziali noted that inflation depends on subsidy timing. Moody's Investors Service has warned that a heatwave could translate into faster food inflation and another interest-rate hike.

Source: Bloomberg

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Warren Takunda

Traders' Opinions

In the face of impending inflation data and the highly anticipated Federal Reserve decision next week, the US dollar index (DXY) demonstrated resilience, maintaining a stable position around 104. Market sentiment remains cautious as investors carefully assess the potential impact of consumer inflation figures for May, projected to reflect a 0.3% price increase. The outcome of this data release could significantly influence the Fed's decision-making process. Additionally, market participants are closely monitoring the unwinding of long dollar bets, which were initially taken as a hedge before the US government raised the debt ceiling. Let's explore the factors shaping the currency market and the implications for investors.

Fed's Monetary Policy

The Federal Reserve is widely expected to keep interest rates unchanged this month. However, market speculations indicate a growing probability of a rate hike in July. Investors will be scrutinizing the Fed's decision closely, seeking insights into the central bank's stance on inflation and its potential monetary tightening measures. A cautious approach by the Fed could bolster the dollar's position in the short term, as investors seek stability amid uncertain market conditions.

Inflation Concerns

The release of May's consumer inflation data holds considerable significance, as it will play a crucial role in shaping the Fed's decision-making process. With projections pointing towards a 0.3% increase in prices, any deviation from these expectations could trigger market volatility. A higher-than-anticipated inflation reading may raise concerns about the Fed's transitory inflation narrative, potentially prompting a more hawkish response from the central bank. Such a development might strengthen the case for an earlier interest rate hike and potentially lend support to the US dollar.

US Treasury Issuance and Potential Demand Concerns

Investor attention is also focused on the US Treasury's increased issuance of Treasury bills, which aims to rebuild the government's cash balance. Any potential demand problems arising from this strategy could have repercussions in the market. If there is insufficient demand for the increased issuance, it could create headwinds for the US dollar, possibly leading to a depreciation. Therefore, market participants will closely monitor the Treasury's actions and assess their impact on overall market sentiment.

Trade Deficit and International Factors

Recent data revealed a widening US trade deficit in April, driven by increased imports and decreased exports. Furthermore, the recent rate hikes by the Bank of Canada and the Reserve Bank of Australia have attracted investors away from the dollar. These international developments, along with the evolving global economic landscape, contribute to the overall sentiment towards the US dollar. As global central banks adjust their policies, investors reassess their positions, resulting in potential shifts in capital flows that may impact the dollar's strength.

The US dollar index (DXY) has maintained stability around the 104 level, reflecting cautious sentiment among investors ahead of crucial events in the coming weeks. The release of May's inflation data and the Federal Reserve's decision will likely determine the short-term trajectory of the dollar. With markets pricing in the potential for a rate hike in July, any surprises in the inflation figures could have significant implications for the Fed's monetary policy. Moreover, investors will continue to monitor the US Treasury's issuance of Treasury bills, ensuring that demand remains adequate. As international factors, including rate hikes by other central banks, shape the currency market, investors must remain vigilant to potential shifts in capital flows.

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