XtreamForex | Daily Technical Analysis

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Riksbank to Deliver 50bp Rate Hike Today
Today’s main event will be the Riksbank’s policy rate decision at 9:30 CET, where we expect a 50 basis point hike in line with market prices. We also expect the Riksbank to announce another rate hike in June (more on this in the Nordic section).

On the data front, Swedish and Norwegian unemployment rates for March and German consumer confidence will be released this morning. This afternoon, new orders for durable goods in the U.S. will be published.

Macroeconomics: Risk appetite dominated global markets, with equities down across the board and core yields falling amid widening intra-euro area spreads. Mixed corporate earnings and concerns about First Republic Bank were the main drivers of risk-off sentiment. Poor risk sentiment continued overnight in Asian trading.

Bank turmoil: First Republic Bank’s earnings report showed a 41% deposit outflow in the first quarter to just over $100 billion and is also considering divesting part of its business, reminding markets of the significant banking turmoil in March.

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Temporary First Republic-Related Stress to Fade Further

Shares of First Republic remain on a slide, but the spillover to other markets was much less than Tuesday. The new sell-off in the stock came after CNBC reported that the U.S. government is currently unwilling to intervene on behalf of the bank. Advisors to the bank are working on a solution that includes trying to raise capital after major banks helped restore confidence in the lender (as they had previously tried to do by depositing several billion dollars with the troubled lender). The main U.S. stock indexes opened with slight gains, but only the Nasdaq managed to hold them until the closing bell (+0.5%). The main European indices lost 0.5% to 1%. Technical factors also play a role after the EuroStoxx50 hit the highs for the year and resistance around 4400. U.S. stock futures are again positively oriented after-hours this morning after the strong meta results.

Core bonds tried to build on Tuesday’s gains but threw in the towel in the U.S. session. U.S. yields rose 4.5 to 5 basis points across the curve. Changes in the German yield curve ranged from -3.5 basis points at the front end to +4 basis points at the very long end. Economic data (disappointing U.S. core consumer goods) played no role in yesterday’s trading. The dollar returned to weakness, with EUR/USD temporarily surpassing yearly highs and making a new high at 1.1095. The pair eventually closed at 1.1041. Similar technical EUR accelerations were seen and held against currencies such as AUD, NZD and CAD. The EUR/SEK move was triggered more by the Riksbank’s dovish 50 basis point rate hike.

Focus now turns to GDP and inflation numbers today and especially tomorrow. Belgian inflation kicks off the national European releases today with the focal point tomorrow at French/Spanish/German inflation figures. The US eco calendar contains US Q1 GDP data today and March PCE deflators, Q1 employment cost index and Chicago PMI tomorrow. The data won’t derail Fed plans to lift policy rates by 25 bps next week, but could make or break our base case for a 50 bps ECB hike. Apart from EMU inflation, we’ll see Q1 GDP and the ECB’s credit and lending survey as well ahead of Thursday’s policy meeting. Overall, we expect the temporary First Republic-related stress to fade further with especially European yields supported by the upcoming ECB meeting. The narrowing short term yield differential between the US and Europe should keep EUR/USD supported as well.

The US House of Representatives yesterday passed a bill to raise the government debt ceiling currently at $31.4tn. The vote passed with only a narrow majority of 217-215 and is seen as a political victory for the Republican House speaker, Kevin McCarthy. The House Bill would raise to borrowing authority by $1.5tn or being extended till March 2024, whichever comes first. However, the bill also includes spending cuts that are unacceptable for the Democratic party. So, it won’t pass in Senate or meet a veto from President Biden. The White House press Secretary already indicated that Biden won’t approve the spending cuts. As the stalemate persist, the US government is at risk of defaulting on its payments somewhere on summer (potentially end July) depending on the inflow of tax receipts.

Minutes of the previous Bank of Canada meeting showed that immediate focus of the decision was on whether to increase the policy rate or keeping it unchanged at 4.5%. As part of this discussion, the governing council also considered how long the policy rate would need to remain elevated in order to return inflation to target. Economic resilience and persistence of elevated core inflation, concern that the evolution of inflation from 3% to 2% in H2 2023 and 2024 could prove more difficult and the need to be forward looking and not wait too long to ensure that monetary policy was restrictive enough were arguments to raise rates sooner rather than later.

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RBA Board to Pause Again at its May Meeting
The Reserve Bank Board meets next week on May 2.

Following the release of the March quarter inflation report Westpac now expects the Board to extend the pause it instigated at its April meeting to the May meeting.

This decision comes despite the likelihood that the FOMC will announce its decision to raise the federal funds rate by 0.25% to 5.125% two days after the RBA meeting (see below). However, as with the RBA, we expect this decision to mark the peak of the cycle.

We have always argued that May is likely to be the peak of the tightening cycle, so we are now lowering our forecast for the peak of the policy rate from 3.85% to 3.6%.

Given the uncertainty about the current outlook and the need to contain inflation expectations, it is almost certain that the Board will maintain its clear bias toward tightening. However, as 2023 progresses, the credibility of this tendency is likely to fade.

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Slightly Easing Price Pressures
A busy week of data releases and central banks begins on a quiet note. Today we are eager to see if the US ISM manufacturing index for April reflects similar strength to previous PMIs.

Early Tuesday morning, we expect the RBA to leave monetary policy unchanged in line with market and consensus expectations. In addition, HICP data for the euro area will be released tomorrow.

On Wednesday, all eyes will be on the Fed, where we expect a final 25 basis point hike. The labour market report for April will be published on Friday.

On Thursday, there is the meeting of ECB, where we stick to our call for a 50 basis point hike, although the risks for a lower hike are rather low, especially if tomorrow’s bank lending survey disappoints.

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RBA Board Hikes the Cash Rate by 0.25%
Choosing to raise is the better policy option, even if it is not consistent with our interpretation of the implicit guidelines.

The Reserve Bank Board raised the policy rate by another 0.25% at its May meeting, bringing the policy rate to 3.85%.

The decision came as a great surprise to markets, which had priced in less than five basis points. In this tightening cycle, there have been a number of decisions that came as a surprise to markets – the decision to raise the rate by 50 basis points (instead of 25) in June and 25 basis points (instead of 50 basis points) in October .

Markets and the majority of economists, including Westpac, had difficulty following the Bank’s guidance.

In our bulletin last Friday, we stated. “We have argued over the past six months that the peak of the current cycle will be the May Board meeting. We believe the peak should be 3.85%, with the final 25 basis point increase in May based on the current situation – record low unemployment and very high inflation – rather than relying on forecasts. We continue to believe that this would be the better policy approach given the risks, but it does not seem consistent with the Board’s intentions.”

Our assessment of the Board’s intentions relied heavily on the references in the Governor’s recent speech to the importance of ensuring that the inflation path is consistent with the Bank’s forecasts. The Inflation Report for the March quarter indicates that inflation is consistent with (if not somewhat better than) this trajectory.

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Will Nonfarm Payrolls Hint at a Fed Pause in June?
The Federal Reserve delivered its tenth consecutive rate hike on Wednesday, as expected, but reset its guidance to indicate increased emphasis on incoming data. Hence, Friday’s nonfarm payrolls will be the next test for the US dollar at 12:30 GMT, with forecasts pointing to a discouraging outcome.

The Federal Open Market Committee (FOMC) decided to increase its funds rate by a quarter percentage point to the highest range in sixteen years of 5.0-5.25% for the sake of fighting inflation, despite three private banks collapsing recently. Although Powell reiterated that the banking system remains sound and resilient, he acknowledged that downside risks in the sector have grown, and a more cautious approach might be needed.

Unlike the ECB, the Fed is now more confident that a pause in monetary tightening could be around the corner but with inflation standing at 5.0% y/y – more than twice its symmetrical 2.0% target – it could not make any promises. Alternatively, it chose a safer path, adopting a less hawkish guidance to state that additional tightening could still be possible if there are signs of stronger-than-expected growth, inflation, and hiring. Previously, policymakers were focused on signs of slowing inflation to ease the pace of tightening.

Nonfarm payrolls might be the next challenge for markets

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JPY Bearish Positioning is Getting Overstretched
Better than expected US non-farm payrolls for April have failed to ignite US dollar bulls.

Two outliers; the safe haven currencies, CHF and JPY underperformed against the US dollar due to the resurgence of risk-on behavior in the US stock market.

JPY future’s bearish positioning has highlighted a risk of a short-term revival of JPY’s strength.

Last Friday, the better-than-expected US official non-farm payrolls data (labour market) for April failed to trigger a meaningful rally in the US dollar in general where the US Dollar Index ended the 5 May US session with a loss of -0.16% to close at 101.28, a whisker away from its 100.95 key medium-term support that has been tested twice so far in past four weeks.

Even the recovery in the 2-year US Treasury yield which added 12 basis points to close at 3.92% last Friday reinforced by the rosy US payrolls data that put a halt to the prior three sessions of daily losses has failed to ignite the bulls in the US dollar.

Interestingly, the major currencies that underperformed against the US dollar last Friday were the safe haven pair duo; CHF (-0.5%) and JPY (-0.4%), and the primary driver was the risk-on behaviour seen in the US stock market.

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AUD/USD Dips on Soft Retail Sales
AUD/USD ends 6-day rally
Australian retail sales decline
Fed warns that banks are tightening credit

The Australian dollar is in negative territory, ending a rally of close to 200 points. In the European session, AUD/USD is trading at 0.6760, down 0.29% on the day.

Australian retail sales decline

Australian retail sales posted a decline of 0.6% in the first quarter, following a downwardly revised reading of -0.3% in Q4 2022. The reading matched the consensus, but investors were not pleased with a second straight decline and the Aussie has lost ground today. The National Australia Bank responded to the release by warning that a “consumer recession” had arrived.

Australians are holding tight onto their wallets due to the uncertainty in economic conditions. The cost-of-living crisis, driven by high inflation and rising interest rates, has driven down household spending. The new budget may help matters a little, but inflation will have to continue moving lower before consumers increase spending.

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Euro Having Harder Time Against Both Dollar and Sterling
The University of Michigan consumer confidence for the month of May unexpectedly set the tone for last week’s trading session WS. The overall indicator fell more than expected, from 63.5 to 57.7, the lowest level since last July. However, markets focused on the prospective inflation expectations component of the report. 1-year inflation expectations fell less than hoped from 4.6% to 4.5%, while long-term (5-10 year) expectations rose from 3% to 3.2% (versus 2.9% consensus), the highest level since March 2011! Similar signs were provided by the NY Fed’s latest survey of consumer expectations (inflation expectations for 3 and 5 years rose by 0.1 percentage points) and in Europe by the ECB survey of consumer expectations.

Median expectations for 1-year and 3-year inflation EMU rose from 4.6% to 5% and from 2.4% to 2.9%, respectively. U.S. Treasuries slipped after the Michigan survey and underperformed German bunds. U.S. yields rose more than 9 basis points in the 2- to 7-year range of the curve, while longer maturities gained 5 to 8 basis points. The 2-year US yield closed just below the psychological 4% mark.

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Agreement On U.S Debt Ceiling Unlikely Before Last Minute
U.S. stocks started the week on a slightly positive note after weak economic data fueled expectations of a pause by the Federal Reserve (Fed), hopes of a resolution in the debt ceiling talks between Joe Biden and Kevin McCarthy, and Microsoft received EU approval to buy Activision.

However, the latter are all weak reasons to jump on an upward trend, because,

1. New York’s Empire State manufacturing index fell to -31.80 in May, while analysts had expected a drop to around -3.70. Minneapolis Fed head Kashkari, however, warned investors that the Fed will continue to raise interest rates. Bostic of the Atlanta Fed said the Fed should hold rates this year but definitely not cut them, while Goolsbee of the Chicago Fed wouldn’t promise a rate pause in June. He said he’s watching the data and remains ‘particularly vigilant about the impact of rate hikes on credit conditions.”

While a Fed rate hike in June is still off the table, activity in fed funds futures suggests investors see higher odds of a rate hike next month. The probability of a 25 basis point rate hike is now at 19%. But of course, the data and the progress of the debt ceiling talks will be key to what the Fed could and would do.

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