Stock markets continued to slide yesterday, with weak German retail sales and slowing factory activity in the Eurozone due to high inflation, perhaps prompting some market participants to bet that the ECB must act faster than expected. Yesterday we also had a decision from the Bank of Canada, with the bank making another double hike and reiterating its willingness to act more forcefully if necessary.
Tighter expectations continue to drive markets, BoC remains bellicose
The traded higher against all but two other major currencies on Wednesday and in the Asian session on Thursday. He won the most against , , and , in that order, and the least against and . The greenback did not lose against any other major currency, but was virtually unchanged against and .
Performance in USD main currencies.
So the fact that the US Dollar has strengthened as much as the Aussie and the Lonnie, at a time when the Yen has fallen, presents a blurry picture when it comes to overall market sentiment. But the world of equities paints a clearer picture. EU and US stocks traded lower as negative investor appetite continued into today’s Asian session. Only China is trading in the green.
Performance of major global stock indices.
For the second day in a row, the market reaction confirms our view that the latest rally in equities was perhaps not meant to last long. Inflation fears and expectations for faster tightening by major central banks, particularly the ECB and the Fed, rose again after the euro zone accelerated more than expected and after Fed Governor Waller , has clearly stated that they should not stop raising rates until inflation has come down.
What may have encouraged some additional selling during the European session may have been the weakness and slowdown in factory activity in the Eurozone. This heightened concerns about an economic slowdown due to high inflation and may have prompted participants to bet more on faster and bigger rate hikes from the ECB.
Indeed, according to media reports, some analysts believe the bank will double-hike in one of its next rallies, if not July, then possibly September. Yes, faster rate hikes will weigh on the economy initially, but in our view the consequences are unlikely to be as severe as a recession triggered by extremely high inflation. With a controlled decline in inflation, consumption could accelerate again and help the engines of the economy to restart.
That said, however, we reiterate that we do not expect the ECB to rise as quickly as the Fed and BoC. Remember that the Fed should continue to double-hike, with very recent comments suggesting there may be no pause after the summer.
As for the BoC, it met yesterday. as well as a second consecutive double increase, bringing its benchmark rate to 1.5%. That said, it was largely anticipated and fully integrated. So, in our view, the most important conclusion of this gathering was that the bank reiterated its willingness “to act more forcefully if necessary”.
This may be the reason why the Canadian dollar did not lose ground against the US dollar and instead traded virtually unchanged. In our view, with the BoC alongside the Fed in terms of hawkishness, we would expect the Loonie to continue adding gains for some time to come.
Bank of Canada interest rates.
But if sentiment was hurt and stocks slid, why was the yen among the biggest losers? In our opinion, this is because speculation on the divergence of monetary policies is resurfacing. As a safe haven, the yen has recently gained ground on fears of an economic slowdown, but now the focus has shifted to central banks likely to raise interest rates more quickly. And with the BoJ pledging to remain ultra-loose, the yen came back under the interest of the sellers.
EUR/CAD – Technical Outlook
traded lower yesterday after hitting resistance in the 1.3590 area. The slide was halted by the 1.3445 barrier, slightly below the May 18-19 lows, and then the rate rebounded. However, it is still trading below the downside resistance line drawn from the May 24 high, which keeps the short-term outlook still negative.
We think the bears will soon resume their charge, perhaps near this bearish line, and push the rate back towards the 1.3445 area. A break lower would confirm an upcoming lower low and could target the key support area of 1.3390, marked by the April 29th and May 17th lows, but breaking this area could have more significant downside implications. Such a break could pave the way for declines towards the territory of 1.3255, marked by the interior high of April 24, 2015.
On the upside, we would like to see the rally extend above the 1.3590 area before we start looking at a bullish reversal. This could confirm the break above the aforementioned bearish line and could initially target the 1.3635 level or the 1.3575 barrier marked by the May 30 high. Another break above this level could lead to extensions towards the May 26 high at 1.3750. After that we have the May 24th high around 1.3805.
USD/JPY – Technical Outlook
USD/JPY has been flying since Monday, while on Tuesday it broke above the downside resistance line taken from the May 9 high. This is the result of market participants taking bets off the table that the FOMC might take a break after the summer. , which could further widen the monetary policy divergence with the BoJ.
We believe the bulls will remain in control and may soon target the 130.80 or 131.35 areas marked by the 11th and 9th May highs respectively. If they don’t stop there, they will enter territory last tested in 2002, with the next possible resistance area being perhaps the March high of that year at around 133.80.
We will re-examine the bearish case on a break below 126.55, a hurdle that halted the bears between May 24-30. This will confirm an upcoming lower low on the 4-hour and daily charts and may initially open the way to the April 14th low at 125.05. A break down could target the 124.05 or 123.45 areas, marked by the April 6th domestic swing high and the April 7th low. Another break below 123.45 could extend the slide to the April 5th low at 122.35. .
As for today’s events
We will pay particular attention to May, ahead of Friday’s official employment report. While not a major market mover and a perfect NFP indicator, it is the best we have.
The private sector is expected to add 280,000 jobs during the month after adding 247,000 in April. This is positive, and although the forecast for NFPs is a downturn, the actual number is expected at 320,000, which we believe, given the continued tightening of the US labor market, is still a decent number.