IC Markets Asia Fundamental Forecast | 9 May 2024
What happened in the US session?
Although Federal Reserve Governor Lisa Cook did not make any comments on the economy or monetary policy, she did state that US households, banks and firms are largely in solid financial shape with strong enough buffers to absorb potential shocks. However, she noted an area of concern – a rise in consumer auto and credit card delinquency rates – which reflect outsized stress among some households. Should these rates begin to rise significantly, it could also nudge the Fed closer to its first interest rate cut.
Meanwhile, Bank of Boston President Susan Collins signaled that rates will likely need to be held higher for longer than initially thought in a bid to dampen demand and temper the recent inflationary pressures. She was also concerned about the lack of progress on further disinflationary trends, echoing comments made by Fed Chair Jerome Powell last week.
The dollar index (DXY) was relatively unchanged overnight as it hovered around 105.50 after rebounding off the threshold of 105 at the beginning of the week.
What does it mean for the Asia Session?
The average cash earnings – an indicator for wage growth – slowed to 0.6% in March after increasing relatively strongly in January and February, rising 2% and 1.7%, respectively YoY. Not only did wage growth miss its estimate of 1.5%, it was also the lowest reading since last September. Weaker increases in average earnings is likely to curb the spending power of the Japanese consumer and potentially fail to ignite inflation, something that the Bank of Japan (BoJ) is attempting to achieve. This may cause the central bank to gradually raise its key policy rates this year and could keep USD/JPY elevated in the near-term; this currency pair was trading around 155.55 this morning.
The Dollar Index (DXY)
Key news events today
Unemployment Claims (12:30 pm GMT)
What can we expect from DXY today?
Not only have unemployment claims in the US trended lower over the past four weeks, they have also printed lower than their respective estimates which is a sign of a robust labour market. Should claims continue to come in lower than the estimates, it is likely to provide strong near-term tailwinds for the dollar. This week’s forecast sees claims of 212K, which is inline with the 8-week average of 211K.
Central Bank Notes:
- The Federal Funds Rate target range remained unchanged at 5.25% to 5.50% for the sixth meeting in a row.
- The Committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run and judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year.
- The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks. Inflation has eased over the past year but remains elevated and in recent months, there has been a lack of further progress toward the Committee’s 2% inflation objective.
- Recent indicators suggest that economic activity has continued to expand at a solid pace while job gains have remained strong, and the unemployment rate has remained low.
- In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.
- The Committee’s assessments will take into account a wide range of information, including readings on labour market conditions, inflation pressures and inflation expectations, and financial and international developments.
- In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities. Beginning in June, the Committee will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion.
- The Committee will maintain the monthly redemption cap on agency debt and agency mortgage-backed securities at $35 billion and will reinvest any principal payments in excess of this cap into Treasury securities.
- Next meeting runs from 11 to 12 June 2024.
Next 24 Hours Bias
Weak Bullish
Gold (XAU)
Key news events today
Unemployment Claims (12:30 pm GMT)
What can we expect from Gold today?
Not only have unemployment claims in the US trended lower over the past four weeks, they have also printed lower than their respective estimates which is a sign of a robust labour market. Should claims continue to come in lower than the estimates, it is likely to provide strong near-term tailwinds for the dollar. This week’s forecast sees claims of 212K, which is inline with the 8-week average of 211K.
Next 24 Hours Bias
Weak Bearish
The Australian Dollar (AUD)
Key news events today
No major news events.
What can we expect from AUD today?
After falling quite sharply following the RBA monetary policy press conference on Tuesday, the Aussie stabilized around 0.6560 at the beginning of the US session yesterday. AUD/USDclimbed above 0.6580 overnight before pulling back slightly this morning to trade around 0.6570. Overhead pressures remain for this currency pair and it could resume the downtrend as the day progresses.
Central Bank Notes:
- The RBA kept the cash rate target unchanged at 4.35%, marking the eighth pause out of the last nine board meetings.
- The CPI grew by 3.6% over the year to the March quarter, down from 4.1% cent over the year to December. Underlying inflation was higher than headline inflation and declined by less – this was due in large part to services inflation, which remains high and is moderating only gradually.
- The central forecasts, based on the assumption that the cash rate follows market expectations, are for inflation to return to the target range of 2 to 3% in the second half of 2025, and to the midpoint in 2026.
- In the near term, inflation is forecast to be higher because of the recent rise in domestic petrol prices, and higher than expected services price inflation, which is now forecast to decline more slowly over the rest of the year.
- Inflation is, however, expected to decline over 2025 and 2026.
- The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the Board is not ruling anything in or out.
- Next meeting is on 18 June 2024.
Next 24 Hours Bias
Weak Bullish
The Kiwi Dollar (NZD)
Key news events today
No major news events.
What can we expect from NZD today?
The Kiwi found support at around the level of 0.5980 yesterday before rising above the threshold of 0.6000 overnight. It dipped under 0.6000 as Asian markets came online but it rebounded to climb above this threshold once more. This currency pair has been exhibiting a neutral bias since the beginning of this week to range approximately between 0.5980 and 0.6025.
Central Bank Notes:
- The Monetary Policy Committee kept the OCR unchanged at 5.50% for the sixth meeting in a row.
- The Committee remains confident that the current level of the OCR is contributing to an easing in capacity pressures to ensure inflation returns to target.
- However, current consumer price inflation remains above the Committee’s 1 to 3% target range. A restrictive monetary policy stance remains necessary to further reduce capacity pressures and inflation.
- The Committee discussed upside risks to the inflation outlook: persistent services inflation remains a risk and goods price inflation remains elevated while anticipated near-term increases to local government rates, insurance, and utility costs, could also further slow the decline in headline inflation.
- The Committee discussed downside risks to the inflation outlook: ongoing restrictive monetary policy in an environment of weak global growth could lead to a more rapid decline in inflation than expected. Business and consumer confidence remain particularly weak which could lead to more unemployment and financial stress than expected while structural challenges facing the economy in China remain a concern given its importance for the global economy and for New Zealand’s trade.
- Next meeting is on 10 July 2024.
Next 24 Hours Bias
Weak Bullish
The Japanese Yen (JPY)
Key news events today
Average Cash Earnings (11:30 pm GMT 8th May)
What can we expect from JPY today?
The average cash earnings – an indicator for wage growth – slowed to 0.6% in March after increasing relatively strongly in January and February, rising 2% and 1.7%, respectively YoY. Not only did wage growth miss its estimate of 1.5%, it was also the lowest reading since last September. Weaker increases in average earnings is likely to curb the spending power of the Japanese consumer and potentially fail to ignite inflation, something that the Bank of Japan (BoJ) is attempting to achieve. This may cause the central bank to gradually raise its key policy rates this year and could keep USD/JPY elevated in the near-term; this currency pair was trading around 155.55 this morning.
Central Bank Notes:
- The Bank considers that the policy framework of Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control and the negative interest rate policy to date have fulfilled their roles. With the price stability target of 2%, it will conduct monetary policy as appropriate, guiding the short-term interest rate as a primary policy tool.
- The Bank of Japan decided on the following measures:
- The Bank will encourage the uncollateralized overnight call rate to remain at around 0 to 0.1% while continuing its JGB purchases with broadly the same amount as before.
- In addition, the Bank will discontinue purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) and will also gradually reduce the amount of purchases of CP and corporate bonds and will discontinue the purchases in about one year.
- In a quarterly outlook, the committee revised higher CPI prints for FY 2024 to 2.8% from January’s projections of 2.4%, due to the waning effects of higher import prices and fewer government support measures.
- For 2025, the board expects core inflation to hit 1.9%, slightly higher than its earlier estimates of 1.8%, reflecting a recent rise in oil prices.
- Policymakers cut their 2023 GDP growth forecast to 1.3% from 1.8% and for FY 2024, the bank also slashed its GDP outlook to 0.8% from 1.2%, mainly reflecting lower private consumption.
- Next meeting is on 14 June 2024.
Next 24 Hours Bias
Medium Bullish
The Euro (EUR)
Key news events today
No major news events.
What can we expect from EUR today?
The Euro has been ranging approximately between 1.0740 and 1.0790 since the beginning of this week to exhibit a neutral bias. This currency pair is likely to extend this trading range for most parts of today.
Central Bank Notes:
- The ECB kept the three key interest rates unchanged for a fifth consecutive meeting, keeping the main refinancing rate on hold at 4.50%.
- Inflation has continued to fall, led by lower food and goods price inflation with most measures of underlying inflation easing, wage growth is gradually moderating, and firms are absorbing part of the rise in labour costs in their profits.
- Financing conditions remain restrictive and the past interest rate increases continue to weigh on demand, which is helping to push down inflation but domestic price pressures are strong and are keeping services price inflation high.
- The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner and if the Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase its confidence that inflation is converging to the target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction.
- Next meeting is on 6 June 2024.
Next 24 Hours Bias
Weak Bearish
The Swiss Franc (CHF)
Key news events today
Ascension Day
What can we expect from CHF today?
It is a public holiday in Switzerland with banks closed for Ascension Day. The Swiss franc gained significantly versus the dollar in the first week of May as USD/CHF tumbled from 0.9226 to as low as 0.9008. This currency pair has since stabilized and retraced higher this week to reach 0.9095 yesterday – it is likely to remain lifted and could climb above the threshold of 0.9100 today.
Central Bank Notes:
- The SNB eased monetary policy by lowering its key policy rate by 25 basis points, going from 1.75% to 1.50% in March.
- For some months now, inflation has been back below 2% and thus in the range the SNB equates with price stability.
- According to the new forecast, inflation is also likely to remain in this range over the next few years.
- The forecast puts average annual inflation at 1.4% for 2024, 1.2% for 2025 and 1.1% for 2026, based on the assumption that the SNB policy rate is 1.5% over the entire forecast horizon.
- Swiss GDP growth was moderate in the fourth quarter of last year and it is likely to remain modest in the coming quarters.
- Overall, Switzerland’s GDP is likely to grow by around 1% this year.
- Next meeting is on 20 June 2024.
Next 24 Hours Bias
Weak Bullish
The Pound (GBP)
Key news events today
BoE Monetary Policy Report (11:00 am GMT)
BoE Gov Bailey Speaks (11:30 am GMT)
What can we expect from GBP today?
The Bank of England (BoE) will release its monetary policy report today where they are widely expected to keep the official bank rate on hold at 5.25% for the sixth meeting in a row. With both headline and core CPI remaining persistently sticky at 3.2% and 4.2% respectively on an annualised basis, the BoE is in no rush to cut rates. In addition, the PMI Composite readings have also rebounded strongly into expansion territory since the fourth quarter of 2023 to mark a notable improvement in overall economic output. The Cable was trading around 1.2490 this morning and could come under selling pressures should Governor Andrew Bailey lean on the ‘dovish’ side during this press conference later today.
Central Bank Notes:
- The Bank of England’s Monetary Policy Committee (MPC) voted by a majority of 8-to-1 to maintain its Official Bank Rate at 5.25% for the fifth consecutive meeting.
- One member preferred to reduce the Bank Rate by 25 basis points to 5.0%.
- Twelve-month CPI inflation fell to 3.4% in February from 4.0% in January and December while Services consumer price inflation has declined but remains elevated, at 6.1% in February.
- CPI inflation is projected to fall to slightly below the 2% target in 2024 Q2, marginally weaker than previously expected owing to the freeze in fuel duty announced in the Budget.
- In the February Report projection, CPI inflation had been expected to fall temporarily to the 2% target in 2024 Q2 before increasing again in Q3 and Q4, to around 2.75%.
- Having declined through the second half of last year, UK GDP and market sector output are expected to start growing again during the first half of this year while the fiscal measures in Spring Budget 2024 are likely to increase the level of GDP by around 0.25% over coming years.
- Next meeting is on 9 May 2024.
Next 24 Hours Bias
Weak Bearish
The Canadian Dollar (CAD)
Key news events today
BoC Gov Macklem Speaks (3:00 pm GMT)
What can we expect from CAD today?
Bank of Canada (BoC) Governor Tiff Macklem will hold a press conference about the Financial System Review in Ottawa where he could shed further insight on the outlook for future monetary policy action. With both headline and core CPI inching closer to the central bank’s target of 2%, he may hint at a potential rate cut at the June meeting. The Loonie has weakened significantly versus the dollar this week as USD/CAD surged past the threshold of 1.3700 to hit a high of 1.3762 yesterday. This currency pair pulled back towards 1.3720 overnight but it could resume the uptrend as the day progresses.
Central Bank Notes:
- The Bank of Canada held its target for the overnight rate at 5.0% for the fifth meeting in a row while continuing its policy of quantitative tightening.
- Canada’s economy stalled in the second half of last year and the economy moved into excess supply but economic growth is forecasted to pick up in 2024. Overall, the Bank forecasts GDP growth of 1.5% in 2024, 2.2% in 2025, and 1.9% in 2026.
- CPI inflation slowed to 2.8% in February, with easing in price pressures becoming more broad-based across goods and services. However, shelter price inflation is still very elevated, driven by growth in rent and mortgage interest costs.
- Core measures of inflation, which had been running around 3.5%, slowed to just over 3% in February, and 3-month annualized rates are suggesting downward momentum. The Bank expects CPI inflation to be close to 3% during the first half of this year, move below 2.5% in the second half, and reach the 2% inflation target in 2025.
- The Governing Council is particularly watching the evolution of core inflation, and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour.
- While inflation is still too high and risks remain, CPI and core inflation have eased further in recent months and the Council will be looking for evidence that this downward momentum is sustained.
- Next meeting is on 5 June 2024.
Next 24 Hours Bias
Medium Bullish
Oil
Key news events today
No major news events.
What can we expect from Oil today?
Oil prices edged higher following yesterday’s drawdown in EIA inventory levels, falling by nearly 1.4M barrels compared to the 1.1M-barrel draw, which signals stronger demand for crude in the US. WTI oil rebounded yesterday as it bounced off the $77.20-level to climb above $79.50 per barrel – it was trading around $79.65 at the beginning of the Asia session and is likely to continue its ascend today.
Next 24 Hours Bias
Weak Bullish
