Choppy price action on PMIs, focus turns to BoC and Australian inflation

Headlines

* US bond yields fall from 16-year high pulling USD lower

* Oil and gold drop as diplomatic moves in Gaza ease tensions  

* S&P 500 holds its ground amid recent wild Treasury moves

* Busy event week kicks off with PMIs and UK jobs data, plus tech earnings

FX: USD bounced off support from the mid-October lows and some Fib levels. The minor retracement level (23.6%) of the July rally sits at 105.51. The major (38.2%) of the October 2022 decline is 105.38. The rebound pared all of the Monday weakness. This was due to hot US survey PMI data in contrast to weakness in the eurozone and UK figures earlier in the day. US manufacturing MPI unexpectedly hit a six-month high. GDP gets released on Thursday.

EUR sold off after weak PMI data. A high at 1.0694 went through the 50-day SMA before falling below 1.06. Yield differential also led the move lower. The composite PMI fell further into contractionary territory to 46.5, hitting a 35-month low. The report said the data points to another lackluster quarter with a mild recession possible in the coming months. This comes ahead of the ECB meeting on Thursday. The 1.0625/45 region could determine if we drop to 1.05 and below or can push above, following Monday’s break to the upside.

GBP fell giving back all its gains from Monday.  The PMI data was mixed while the delayed jobless number rose to 4.2% reflecting a steady easing in hiring demand. Solid support sits around 1.21. The top of the long-term bear channel is now around 1.2212.

USD/JPY once again traded in a narrow range of around 150. Two-way price action was seen on reports the BoJ is said to see little need to change its forward guidance. The bank is also considering if it should tweak its YCC bands due to US yield concerns, according to Bloomberg.

AUD was a relative outperformer after Governor Bullock said the RBA would not hesitate to raise rates if there is a material revision to the inflation outlook. We will be watching out for today’s CPI report. Lower oil prices weighed on the CAD. Soft eurozone data and optimism around the Middle East tensions saw crude tumble for a third straight day. The BoC rate decision comes later today.

Stocks: US equities moved higher with better US data supporting the indices. The benchmark S&P 500 added 0.73% to settle at 4247. That was its first gain in six sessions. The tech-laden Nasdaq finished 0.97% higher at 14,745. The Dow closed up 0.562% at 323,141, snapping a four-session losing streak. Alphabet reported earnings after the close and fell around 6%. Cloud operating income heavily disappointed coming in at $266mn versus expectations of $433mn. Microsoft rallied more than 4% in late trading on revenue beats across segments and notably, Azure and other cloud services. Meta reports after today’s US close with expected EPS per share of $3.63.

Asian futures are in the green. This comes after stocks traded mixed on Tuesday following Wall Street’s lead. Mainland China gained on reports the US and China held their first working group meeting.

Gold dipped to $1953 before buyers stepped in. Prices eased very modestly from overbought conditions on the daily RSI. The recent spike high is at $1997 with the July top just below at $1987. Safe haven buying eased as escalation fear in the Middle East cooled. US Treasury yields also stabilised consolidating recent losses.

Day Ahead – Australia CPI, Bank of Canada Meeting  

Third-quarter Australia inflation data is expected to remain at 5.3% y/y in September, unchanged after it surprisingly rose in August. The quarterly figure is forecast at 1.1%. Economists warn that there is still a reasonable share of unknowns in the data. That means a surprise is possible. This release comes out a few weeks before the next RBA meeting on 7 November. The last minutes pointed to the bank having quite a low tolerance for above-target inflation. But high inflation spikes at the end of 2022 mean we should get a sharp fall in CPI early next year.

The BoC is expected to keep rates unchanged at 5%. This was a 50/50 call only a few weeks ago. But the recent soft inflation data has cut the odds of a 25bps rate hike to below 20%. The growth outlook is clouded as GDP surprisingly contracted in the second quarter and flatlined in July. There are also growing concerns that higher rates will heap pressure on household mortgage costs. That said, the labour market remains strong, with jobs being added in Aug and Sept and the jobless rate staying low. That means the BoC will likely keep the option of a future hike on the table, with Governor Macklem stressing the importance of wage growth and inflation expectations. 

Chart of the Day – USD/CAD pushing into cycle highs

CAD has struggled recently with risk sentiment subdued and the dollar finding bullish momentum again yesterday. Crude oil prices were also down for a third straight day. The broader uptrend in USD/CAD remains intact with previous selling pressure around 1.37 easing. The October high is the first target for bulls at 1.3785. the year-to-date March top is at 1.3862. Support sits at 1.3667 which had capped the upside a few times earlier this year

(Source: vantagemarkets.com)