USDCAD: A case of a deadlock between the bulls and the bears

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Summary:

The Loonie pair has been consolidating over the previous year from a higher timeframe viewpoint, without offering any real trading opportunities.

The impact of the conflict in Ukraine has been felt all throughout the world, from increased gas prices to rising food and housing costs. The fact that analysts are now predicting a recession has raised concerns about this.

Given that Canada is one of the top oil-producing countries in the world, the crisis in Ukraine has undoubtedly had a negative impact on the CAD currency.

The monthly timeframe study shows that the crude struggled for long with the $112 per barrel supply zone before falling to $90. This should inevitably make the USDCAD to appreciate but this isn't so.

USDCAD: A case of a deadlock between the bulls and the bears_1

Why? Simply because of the part the US currency is also playing.

Naturally, you would want a strong currency to counter a weak one when the US dollar is experiencing a significant decrease; however this isn't the situation right now for the US dollar to Canadian dollar exchange rate.

This has caused the loonie to trade in a long-term sideways manner, but now that a bearish hammer candle pattern has formed on the monthly, we should expect a drop. Only time will truly tell if this would be the case.

USDCAD: A case of a deadlock between the bulls and the bears_2

The failure of the higher lows pattern, which typically would imply strength in the pair, is revealed by analysis on the daily timeframe.

USDCAD: A case of a deadlock between the bulls and the bears_3

It has oscillated between 1.2 Support and 1.3 Resistance for the past year, with repeated taps on the 1.3 Resistance yielding no results because the Sellers have maintained a strong presence.

USDCAD: A case of a deadlock between the bulls and the bears_4

In conclusion, it's advisable to trade other instruments until there is more clarity, unless you are scalping, as the USDCAD pair has historically been difficult to read.

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Owen Li

Unemployment rate stays at 2.9% in July, in line with market consensus

Despite the recent re-emergence of Covid-19 cases, the impact on people's mobility and consumption activity appears to be very limited. Labour market conditions have remained relatively healthy, benefiting from the reopening of the economy. Meanwhile, the labour participation rate stood at 64.1% for the second month, returning to the pre-pandemic level. Therefore, we believe that additional advances in labour participation should be limited from now on.

Korea's Jobless Rate Remained Low in July, Showing Signs of Economic Resilience_1

By industry, manufacturing added jobs for the second month while construction shed jobs the most in August probably due to the temporary suspension of a large-scale housing construction site. Among the services sector, hotels/restaurants continued to add jobs, but the recreation and transportation sectors lost jobs unexpectedly despite the holiday season. By employment type, the number of regular workers (with a contract of 12 months or longer) increased significantly, while that of daily workers (with a contract of less than one month) decreased. As such, we believe employment stability improved in July. Korea's Jobless Rate Remained Low in July, Showing Signs of Economic Resilience_2

Korea's Jobless Rate Remained Low in July, Showing Signs of Economic Resilience_2

Bank of Korea is expected to deliver 25bp hike in August

Today's labour market report shows that the economy remains resilient amid growing concerns at home and abroad. However, the recovery of consumption is expected to weaken and employment in major service sectors declined slightly amid a cloudy outlook. Therefore, we expect the Bank of Korea to return to its usual 25bp hike mode in August.

However, the main risk factor notable to our current BoK outlook is the price of fresh food. With recent bad weather and the full-moon holiday in September, fresh food inflation is likely to rise more than expected in the coming months. If August CPI inflation rises above the current 6.3% year-on-year rate (August ING forecast: 6.1%), we could consider a further 25bp increase in November or a 50bp increase in October.

Source: ING

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Jason

USD: CPI to cement the cycle

It has been a trendless week for the dollar so far, with very little follow-through from Friday's jobs-inspired rally. Today sees the biggest data event risk of the week – and probably of the month. US July CPI is expected to soften a little on a headline basis but nudge up on a core basis to just above 6% year-on-year.

Stubbornly high core inflation should support the Federal Reserve's position that its work is far from done. It should also support pricing in the US money market curve that sees the policy rate taken around 125bp higher in this cycle. Barring a massive upside surprise that can demand an extra 25-50bp or so priced into the back end of the curve (and sending the dollar a leg higher), we expect the inflation data to cement current tightening expectations and keep the dollar bid near the high.

Yet it is a long time until the next FOMC meeting on 21 September and barring any shocks, we feel that the dollar holding gains against the low yielders such as the euro and yen should not preclude a little more interest in some emerging high yield currencies.

105.70-107.00 are now the short-term parameters for DXY.

EUR: Too many challenges

EUR/USD continues to languish near the lows and there does not seem a compelling case to buy it. As we discussed recently, medium valuation considerations do not show it as particularly undervalued. And the larger geopolitical event risks leave Europe more exposed than North America.

There is no European data of note today and EUR/USD will therefore be bounced around by the US CPI print. Declining levels of implied volatility suggest investors may be in no mood to chase EUR/USD out of a 1.0100-1.0300 range near term.

CEE: The European gas story has reached the next level

Yesterday's news about the halt of gas supplies from Russia to Central and Eastern Europe has not caused much damage so far. Of course, further developments, especially the length of the supply stoppage, will be key. Purely in terms of energy dependence, Hungary is the most exposed to problems with supplies from Russia, followed by the Czech Republic. At the same time, the statistics on gas in storage are negative for Hungary. For the time being, both countries report that they have enough gas in reserve to last several weeks and keep the economy running as normal. However, no one will want to test what the reality is.

In the FX market, so far, the only visible reaction within CEE has been in the Hungarian forint, which we previously identified as the most vulnerable. Of course, in the coming days, this story will be in focus and drive the direction of FX markets. We see strong potential here to trigger difficult times for the region.

CZK: Tricky inflation print to test CNB pain threshold

After Poland and Hungary, July inflation will be published today in the Czech Republic, and we think it will be the trickiest reading so far this year. July will bring a third round of energy price hikes and this time, the month-on-month jump should be a record. However, the problem is the uncertain ratio of fix/float contracts and the approach of the statistical office to such a massive jump in energy suppliers' price lists. Overall, we feel comfortable on the high side of estimates and believe the market may be underestimating these price changes. Thus, we expect inflation to jump from 17.2% to 18.5% today, while the market is expecting 17.9%. The central bank expects 18.8% in its new forecast, but even a higher number cannot be ruled out at this point. For the Czech National Bank, however, we believe the pain threshold is high given that any surprise will come from energy prices, which the new board places on the cost side, thus out of the central bank's reach.

From a market perspective, just a few days ago, we would have expected the news to fuel hawkish expectations that the central bank might react anyway. However, yesterday's 20bp jump in the short end of the curve, presumably in preparation for today's inflation, and profit-taking, should limit that market reaction. On the FX front, the market remains safely away from the 24.60-24.70 level after last week's CNB meeting and for now is vainly gathering strength for another stage of attack against the central bank, which has been defending the koruna.

Source: ING

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Devin

The government will need to spend an extra £44bn over the next three years on public services to keep pace with rising inflation and avoid steep cuts, according to analysis by the Institute for Fiscal Studies.

In a review of the rising costs facing the public sector, the IFS said that without further funding, Whitehall budgets faced being overwhelmed by rising cost pressures that would force departments to cut staff and services.

The government said in its November spending review that it would increase departmental budgets by 3.3% on average above the then inflation rate. But with prices soaring since then, the tax and spending thinktank is forecasting the rise in budgets is now unlikely to be more than 1.9%.

"In other words, higher inflation is expected to wipe out more than 40% of the planned real terms increases," it said.

Most of the increase in public spending budgets last year was targeted at the health service and social care sector and paid for with the £39bn raised over three years by a 1.25% rise in national insurance contributions.

In other areas of government that were due to receive allocations above inflation, including education and defence, settlements that reversed large cuts made over several years preceding the pandemic would be less generous.

Education spending would "barely increase over the three-year spending review period", the IFS said, while "the Ministry of Defence's day-to-day budget would, on these estimates, be more than 8% lower in 2024−25 than in 2021−22".

Inflation across the public sector was forecast to be 2.3% on average over three years at last year's spending review. In March this year the figure was revised upwards to 2.8% and the real terms increase in spending dropped to 2.8%. The IFS has now increased the three-yearly inflation average to 3.7% and in response, the real terms spending increase shrank to 1.9%.

In what will be seen as a warning to the Tory candidates vying to be the next prime minister, the IFS said the Treasury will need to increase spending by more than £8bn in the financial year to April 2023 and around £18bn in each of the next two years to April 2025 to bring the average real terms increase back to 3.3%.

Ben Zaranko, a senior research economist at the IFS and author of the report, said the government's spending plans were now less generous than they were originally intended to be when set out last autumn, "while public services – most notably the NHS – are under considerable, and visible, strain".

He said: "Choosing not to compensate departments for unexpectedly high cost pressures would be one possible response to a cocktail of global economic shocks that leave us poorer as a nation, but would heighten the considerable pressures on public services heading into the winter."

Both Conservative leadership challengers have committed funds from the £30bn of financial headroom over the next four years calculated by the Office for Budget Responsibility in its March assessment to support their political and economic programmes.

However, the IFS review shows this headroom is likely to be absorbed by Whitehall departments if the government is to maintain public spending at current levels.

"It is notable that neither of the Conservative leadership contenders have said whether they intend to spend additional money to top up current spending plans or, if not, how they would manage the resulting pressures on public services," said Zaranko.

The Bank of England has forecast that the consumer prices index (CPI) will rise to 13% before the end of the year and remain high during 2023. It is predicted to fall back during 2024 and by the end of that year settle below the central bank's 2% target.

The next prime minister will have some flexibility because inflation boosts tax revenues, as the incomes and spending on which taxes are levied grow more quickly, the IFS said.

"But higher inflation also means a squeeze on public services, whose budgets are set in cash terms and therefore do not automatically increase in the face of higher-than-expected inflation."

James Jamieson, chair of the Local Government Association, said inflation, energy costs and projected increases to the "National Living Wage" will add £2.4bn in extra cost pressures to council budgets this year alone, rising to £3.6bn in 2024/25.

"[These] pressures are putting council services at risk. Budgets are having to be reset with potential cuts to the essential services people rely on, in the middle of a cost-of-living crisis," said the Conservative councillor and former leader of Central Bedfordshire council.

With inflation expected to remain high over the next year, he said the impact on our local services "could be disastrous".

He added: "This will stifle our economic recovery, entrench disadvantage, and undermine government ambitions to level up the country."

Source: The Guardian

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Damon

Chinese Foreign Minister Wang Yi pressed South Korea, Tuesday, to act independently as the United States ramps up pressure on Seoul to side with Washington amid an intensifying U.S.-Sino rivalry. China Wary of South Korea's US-Centered Policy_1

China Wary of South Korea's US-Centered Policy_1

Foreign Minister Park Jin and Wang held the talks during his first trip to China since taking office in May and the meeting was widely seen as being crucial to setting the tone for Seoul-Beijing relations under the conservative Yoon Suk-yeol administration.

"While the two countries head toward the 30th anniversary of the establishment of South Korea-China diplomatic ties, both sides should maintain independence without being affected by the outside," Wang said, adding that the two countries should consider each other's interests.

"We have to adhere to a win-win to ensure a stable and smooth supply chain," he added.

Wang's remarks came as thorny issues between the two neighboring countries are expected to hamper their bilateral relations ― although the two sides are scheduled to commemorate the 30th anniversary of the establishment of diplomatic ties two weeks later.

The Yoon Suk-yeol administration is set to join the U.S.-proposed chip alliance, also known as Chip 4 or Fab 4, believed to be a platform to counter Beijing's rising influence in global supply chains.

In addition, the Chinese government has urged the new South Korean administration to commit itself to the so-called "Three Nos" policy when it comes to the possible deployment of additional U.S. Terminal High Altitude Area Defense (THAAD) batteries on the Korean Peninsula.

Amid the strong Chinese stance on South Korea's U.S.-focused foreign policy, there is speculation that Beijing may understand Seoul's position straddling the two powerhouses, but expects South Korea to represent Beijing's interests within the partnership without leaning to heavily towards Washington's demands, according to the Global Times, China's state-run media outlet.

"There is a high chance that South Korea will eventually become a member of the alliance, but the country is very likely to become a counterforce to the U.S. within the alliance on many issues, in that it will object to many requirements raised by the U.S. to crack down on China's chip market," it said in an article Monday, citing an analyst.

It also said South Korea may raise more requirements on reducing the negative impact on its chip exports to China.

According to statistics, South Korea's semiconductor exports reached $128 billion (168 trillion won) last year, and 60 percent headed to the Chinese mainland and Hong Kong.

The article seems to mark a shift from its previous hardline stance, describing South Korea's decoupling with the Chinese market as "commercial suicide."

In response, Park said both countries should deal with new challenges such as supply chains and others based on bilateral economic relations.

"To this end, South Korea and China need to strengthen communication with each other through a strategic cooperative partnership," Park said.

In addition, Park asked China to play a role in resolving North Korea's nuclear issue.

"Marking the 30th anniversary of the establishment of South Korea-China diplomatic ties, both sides should forge cooperative ties," Park said.

"In particular, there are growing yet unprecedented threats on the peninsula and we ask China to play a constructive role in returning North Korea to the negotiating table," he added.

Source: TheKoreaTimes

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Winkelmann

Energy

Quite a bit which has changed in the oil market over the past two weeks. Two weeks ago, sentiment was fairly negative, given the continued demand concerns. This negative sentiment appears to have only intensified, with Brent last week trading to as low as US$92.78/bbl- its lowest levels since February and Russia's invasion of Ukraine. However, what is noticeably different from the flat price weakness seen in June and early July compared to early August is that previously the timespreads held up relatively well. This time around, the weakness in the flat price has been accompanied by weakness in the timespreads. While the forward curve is still in backwardation, it certainly isn't as wide as it was a month or so ago. In addition, refinery margins, whilst historically still high, have come off considerably from their highs seen in June.

On the supply side, several factors have helped. Libya appears to be seeing a recovery in supply following months of disruptions. There will be question marks around how reliable Libyan supply will be in the months ahead. In addition, there could also be a breakthrough in Iranian nuclear talks. The EU has submitted its final draft for a deal, which will need to be approved by the US and Iran. If approved, this would open the door for an increase in Iranian oil exports. This is a big "if". Negotiations have been going on for over a year, with parties failing to come to an agreement so far. In our balance sheet we are still assuming that Iranian supply will only start to edge higher from early next year. Clearly, there is a risk that this supply starts making a return to the market quicker than we are currently anticipating.

Clearly it is not all great news for the supply side at the moment. There is still plenty of uncertainty as highlighted yesterday, with oil flows along the southern section of the Druzhba pipeline coming to a halt. Russia's Transneft has blamed the stoppage on the fact that sanctions have prevented it from paying transit fees to Ukraine. The Southern leg of the Druzhba pipeline supplies Slovakia, Hungary and the Czech Republic, with flows transiting through Ukraine. This section of the pipeline supplies in the region of 250Mbbls/d of crude oil. Flows along the northern route of the pipeline, which supplies Poland and Germany, remain unaffected. The Czech pipeline operator expects that flows along the southern route will resume in the coming days, which has provided some comfort to the market. Clearly there is uncertainty over this and the market will be eagerly awaiting for confirmation of a restart in flows.

On the demand side, growing recession risk has weighed on the demand outlook. This is reflected in a number of agencies having revised lower their demand growth forecasts several times this year. The higher prices seen for much of this year would have also led to some demand destruction. EIA weekly data shows that implied gasoline demand in the US has been seasonally weak so far this summer, given the higher pump prices. The more recent weakness in prices may limit the demand destruction that some may feel is needed in order to keep the market balanced.

What is clear is that the oil market is still struggling with both supply and demand uncertainty, and as a result the market is struggling to convincingly find direction. This uncertainty, combined with the lower traded volumes over the summer months, means that prices remain fairly volatile.

Metals

Despite reports yesterday of an accident at a Chinese aluminium smelter, LME aluminium prices have come under some pressure this morning. According to Shanghai Metals Market an accident at a 200ktpa aluminium smelter in Sichuan province has disrupted about 190kt of its capacity. Meanwhile inventories continue to tighten, with LME aluminium inventories declining for a fifth straight session - total stocks fell by 3.2kt to 284.3kt as of yesterday. Stocks have dropped by around 650kt since the start of the year.

China locked down urban areas in Guixi city yesterday due to Covid. The region is a major hub for copper smelting facilities. Jiangxi Copper Co., the nation's largest copper producer is also located in Guixi. The details of the lockdown and its potential impact on copper smelting in the region are scarce for now - the uncertainty could offer some support to prices in the short term.

Source: ING

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Alex

The forex markets are somewhat in hibernation mode this week. Dollar is currently the weakest one, followed Yen. Commodity currencies are generally firm. But Swiss Franc is the strongest, thanks to buying against the weakening Euro and Sterling. But overall, with the exception of a few Yen pairs, major pairs and crosses are staying inside last week's range. Hopefully, the markets will wake up after today's U.S. CPI release.

Technically, CHF/JPY is currently the top mover for the week, up 0.86%. While it may be losing some upside momentum, further rally is expected as long as 139.97 support holds. Corrective pattern from 143.73 is tentatively seen as completed with three waves down to 137.13. Retest of 143.73 high should be seen in the near term and firm break there will resume larger up trend. Markets in Hibernation as U.S. CPI Awaited_1

Markets in Hibernation as U.S. CPI Awaited_1

Fed Bullard: Too early to claim inflation has peaked

St. Louis Fed President James Bullard said in an MNI interview, "we may see some relief in the headline CPI tomorrow but the reason we tend to track core PCE inflation is exactly because we ignore the energy price movement on the way up but also on the way down."

"I would like to see improvements across a range of indicators of inflation, not just one measure ticking down a little bit but clear and convincing evidence," he said, adding that it's going to be "much harder" to get core factors to turn around.

Bullard still wants to get interest rates to 3.75-4.00% range by the end of the year. "I think the destination is a little bit higher than what I would have thought even a couple months ago because inflation has continued to broaden out and doesn't look like it's turning the corner at least based on the evidence we have today… I think it's too early to make the claim that inflation has peaked."

S&P 500 pressing key resistance ahead of U.S. CPI

It's been a very quiet week in the markets so far, and today's U.S. consumer inflation release should bring trading back to life. Economists are expecting headline CPI to slow from 9.1% yoy to 8.7% yoy in July. But core CPI is expected to rise from 5.9% yoy to 6.1% yoy. While one data point is definitely insufficient to tell the trend, traders are still eager to get hints on whether inflation is still climbing, plateauing, or starting to reverse.

The next move in Dollar would very likely be driven by overall risk sentiment after the CPI release. The greenback tends to weaken in risk-on markets, and strengthen in risk-off markets. For now, as benchmark treasury yield is stuck in consolidation, reactions in stocks are more dollar-moving.

S&P 500 is pressing and important cluster resistance level of 4177.51, as well as 55 week EMA (now at 4182.34). Sustained trading above this 4177/82 zone will add much credence to the case that whole correction from 4818.62 has completed with three waves down to 3636.87. That would set the stage for further rally towards 4818.62 high later in the year, subject to upcoming data release of course. Nevertheless, break of last week low at 4079.891 will tentatively indicate short term topping and bring deeper pull back to 55 day EMA (now at 4012.26) in the near term.

Elsewhere

Japan PPI slowed from 9.4% yoy to 8.6% yoy in July, above expectation of 8.4% yoy. China CPI rose from 2.5% yoy to 2.7% yoy, below expectation of 2.9% yoy. PPI dropped from 6.1% yoy to 4.2% yoy, below expectation of 4.9% yoy.