EUR/JPY’s rally accelerates today and break of 127.07 resistance confirms resumption of whole rise form 114.42. Next target should be long term fibonacci level of 61.8% retracement of 137.49 (2018 high) to 114.42 at 128.67.
Focus should also be on 1.2272 resistance in EUR/USD. Firm break there would affirm underlying strength in Euro. EUR/USD should then target 61.8% projection of 1.0635 to 1.2011 from 1.1602 at 1.2452. That could also bring stronger rise in Euro elsewhere.
ZEW Economic Sentiment Index for Germany experienced a significant drop in April, falling from 13 to 4.1, well below the anticipated 15.1. This suggests that a considerable improvement in the economic situation is unlikely over the next six months. Although the Current Situation Index rose from -46.5 to -32.5, surpassing the forecast of -40.0, the overall economic situation remains relatively negative.
Similarly, the Eurozone’s ZEW Economic Sentiment Index dipped from 10 to 6.4, underperforming the expected 11.2. However, the Current Situation Index increased by 14.4 points to -30.2.
ZEW President Professor Achim Wambach stated that several factors negatively affect economic expectations, including experts’ anticipation of banks being more cautious with loans and the ongoing impact of high inflation rates and restrictive international monetary policies. Nevertheless, Wambach highlighted that the risk of an acute international financial market crisis appears to have been mitigated.
Full Germany ZEW release here.
ECB Governing Council member Francois Villeroy de Galhau said yesterday, “it would be desirable to reach the right ‘terminal rate’ by next summer, but it is too early to say at what level.”
“We’ll then be ready to remain at this terminal rate as long as necessary,” Villeroy said. “The sprint of rate increases in 2022 becomes more of a long-distance race, and the duration will count at least as much as the level.”
“We need to be pragmatic and guided by observed data, including underlying inflation, without fetishism for increases that are too mechanical,” he added.
“Our forecast, and our commitment, is to bring inflation toward 2% between now and the end of 2024 to the end of 2025,” Villeroy said.
Japan Finance Minister Shunichi Suzuki said that the goals as mentioned in the joint statement with BoJ signed back in 2013 “remains important policy challenges”. He mentioned that targets like “the need to pull Japan out of deflation and achieve stable economic growth.”
But he also mentioned the possibility of revising the join statement with new BoJ Governor. “What to do with the statement is something the government must discuss with the new governor,” Suzuki told parliament. Nevertheless, it’s premature to decide whether it’s necessary for the revision as the government has yet to nominate the new BoJ head.
Separately, Tsuyoshi Takagi, the ruling Liberal Democratic Party’s parliament affairs chief for the lower house, said that the government will present its nomination for the new BoJ Governor and the two deputies on February 13. Jun Azumi, an executive of the opposition Constitutional Democratic Party of Japan said hearings would be held at the lower house on February 24.
US headline CPI accelerated to 2.5% yoy in October, up from 2.3% yoy and matched expectations. However, core CPI slowed to 2.1% yoy, down from 2.2% yoy and missed expectation of 2.2% yoy.
BLS noted that gasoline was responsible for “over one-third” of the headline advances. On the other hand, food index “decline slightly”. For core CPI, ex-food and energy, medical care, household furnishing, motor insurance, tobacco all increased. But communications, new vehicles and recreation all declined.
Richmond Fed President Thomas Barkin in a Reuters interview, “it is a straightforward call to say we ought to get rates back into better position. It does not feel to me like there is enough information to say holy cow we have to restrain the economy right now.”
Barkin added that the federal funds rate should be raised back to where it was just before the pandemic, that is, a range of 1.50-1.75%. “Pre-pandemic levels are the place to reassess. Where we were pre-pandemic was under every member of the (Federal Open Market Committee’s) assessment of where neutral was,” he said.
“Then we can look around and say do you want to then start to move into the range … where we are starting to restrain?”
Entering into US session, Yen and Swiss Franc remain the weakest ones for today and the week as stocks rebound continue. DOW futures are currently up 200 pts, cheering the deal in US Congress to avert another government shut down, with funding for 90km of bordering fencing. Dollar is following as the third weakest. US Treasurer Steven Mnuchin and USTR Robert Lighthizer arrived in Beijing today for trade talks, without any notable comments so far.
Meanwhile, Australian Dollar is the strongest one, followed by Canadian. WTI is back at 53.8 after defending 51.37 support earlier. Sterling stays mixed as UK Prime Minister delivered her Brexit update in the parliament. The most important thing to note is that if she cannot get an approvable new deal by February 26, the Commons will be given a chance to vote on a plan B on the following day.
In Europe, currently:
Earlier in Asia:
USD suffers some selling today as markets await FOMC rate hike. But NZD and AUD are performing even worse as seen in daily heatmap. On the other hand, solid UK job data, with fall in unemployment rate to 4.3%, and acceleration wage growth, keeps Sterling buoyed. Indeed, GBP is staying as the strongest one for the week ahead of tomorrow’s BoE rate decision. Canadian Dollar follows as the strongest for the day.
In between FOMC and BoE, RBNZ will also announce rate decision in the upcoming Asian session. RBNZ is widely expected to keep the Official Cash Rate OCR unchanged at 1.75%. In the prior statement, RBNZ noted that “monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly.” That’s clearly seen as easing bias by the markets. We’re not expecting any change in the OCR, nor the slightly dovish stance in tomorrow’s announcement.
Looking at the 6H action bias chart, NZD/USD is clearly in a persisting near term down move, just came out of brief consolidation.
From the D action bias chart, NZD/USD is staying to increase downside bias after taking out 0.7176 support (Feb 6). It’s likely just the start of a bigger downward move given the developments.
Asian stocks staged a strong rally today on optimism over US-China trade talks. In particular, Trump hinted that he’s willing to let the March 1 trade truce deadline slip, even though he doesn’t prefer it. Yen and Dollar are trading as the weakest ones for today because of that. Euro follows as third weakest. Australian Dollar rises across the board naturally on risk appetite. But it’s overwhelmed by New Zealand Dollar, which was boosted by less dovish than expected RBNZ statement. For now, at least RBNZ doesn’t hint at a rate cut. Focus will now turn to CPI from UK and then US.
In Asia:
Overnight:
Fed Governor Lael Brainard said in a speech that “the pandemic accelerated the migration to contactless transactions and highlighted the importance of access to safe, timely, and low-cost payments for all.”
“With technology platforms introducing digital private money into the U.S. payments system, and foreign authorities exploring the potential for central bank digital currencies (CBDCs) in cross-border payments,” she added, “the Federal Reserve is stepping up its research and public engagement on CBDCs.”
ECB President Christine Lagarde told the International Monetary and Financial Committee, “in the euro area, incoming economic data, particularly recent survey results, have started to show unprecedented falls, pointing to a large contraction in output in the euro area, as well as to rapidly deteriorating labour markets.”
She added that the central bank is fully prepared to increase the size of its asset purchase programmes and adjust their composition, “by as much as necessary and for as long as needed. It will explore all options and all contingencies to support the economy through this shock” of coronavirus pandemic.
Separately, Executive Board member Isabel Schnabel said the central bank should do more to avoid financial fragmentation in the zone. And ECB “stands ready to adjust all of its instruments as needed … to avoid fragmentation that may hamper the smooth transition of our monetary policy,”
Governing Council member Gabriel Makhlouf said, “from the ECB’s perspective, as our actions have shown, we stand ready to support the citizens and economies of Europe if events show that we need to do more”. “Our focus has to be on supporting the public health response. But we also need to think about how we recover from the economic shock, and how the financial system supports the recovery, when it comes,” he added.
In a statement today, ECB Governing Council member Peter Kazimir highlighted his preference delivering the first rate cut in June. Emphasizing the persistent nature of upside inflation risks, Kazimir pointed to factors such as workers’ pay, energy prices, fiscal policy, and the green transition as ongoing concerns that necessitate caution.
Kazimir’s stance is clear: “Rushing isn’t smart and beneficial,” he remarked, underlining the jeopardy to ECB’s credibility from a hasty policy adjustment.
According to him, “Only in June, with new forecast at hand, will the level of confidence reach the threshold.”
Also, he advocates for a “smooth and steady cycle of policy easing,” suggesting that the decision-making process should be grounded in comprehensive and up-to-date economic forecasts.
“Upside inflation risks are alive and kicking,” he asserted, emphasizing the need for vigilance. “The current picture clearly favors staying calm for the coming weeks and delivering the first-rate cut in summer,” he said. “The slowdown in inflation remains fragile — we can’t take it for granted.”
In a speech overnight, Fed Governor Lisa Cook articulated her stance on waiting for more definitive signs of inflation moving towards 2% target before considering any policy rate reductions.
“I would like to have greater confidence that inflation is converging to 2% before beginning to cut the policy rate,” she said.
Further, Cook shared an optimistic view on the inflation outlook, suggesting that a forecast showing 12-month PCE inflation moving towards target over time remains a “reasonable” baseline scenario.
However, Cook also advocated for a measured and data-driven approach to policy decisions. “We should continue to move carefully as we receive more data,” she advised, stressing the importance of maintaining the current level of policy restriction to achieve “sustainable” price stability.
Australia CPI rose 0.8% in Q2, slightly above expectation of 0.7% qoq. Annual rate accelerated to 3.8% yoy, up from 1.1% yoy, matched expectations. RBA trimmed mean CPI came in at 0.5% qoq, 1.6% yoy. RBA weighted mean CPI was at 0.5% qoq, 1.7% yoy.
Head of Prices Statistics at the ABS, Michelle Marquardt said: “Rising fuel prices accounted for much of the increase in the June quarter CPI, with prices surpassing pre-pandemic levels”.
“The annual CPI movement was significantly influenced by COVID-19 related price changes from this time last year… These ‘base effects’ led to a sharp increase in the annual CPI movement”, she added. “In situations such as this, it is useful to consider underlying inflation measures such as the trimmed mean, which are designed to remove large, one-off price impacts”.
Germany GDP grew only 1.8% qoq in Q3, below expectation of 2.2% qoq. Overall GDP was still -1.1% lower (price-, seasonally and calendar-adjusted) than in the fourth quarter of 2019, the quarter before the coronavirus crisis began.
The outcome of the first high-level economic talks in eight years between China and Japan appeared to be positive. Japanese Foreign Affairs Minister Taro Kono and Chinese State Councillor Wang Yi met in Tokyo on Sunday. Both agreed to work on strengthening the relationship with more high level visits ahead.
Wang said that “I hope we can begin at a fresh starting point and discuss a new future, while promoting a new cooperative relationship. I want to have in-depth discussions on economic policies, cooperation on the belt and road initiative and further integration of East Asian countries.”
Kono also said that “I hope to hold active discussions about regional and global economic issues. I would also like to take this opportunity to further strengthen economic relations between Japan and China.”
Also more high-level visits were agreed, with Chinese Premier Li Keqiang go to Japan for a Japan-China-South Korea summit. And then Japan Prime Minister Shinzo Abe will visit China while Chinese President Xi Jinping will also visit Japan.
Separately, Abe will meet with US President Donald Trump at the latter’s Mar-a Lago resort for two days this week starting Tuesday.
AUD/CAD is a pair worth watching today, after having sluggish response to RBA minutes. But Canada retail sales featured today could trigger some volatility. There is prospect of major bottoming at 0.8969 considering bullish convergence condition in daily MACD. Also, it’s so far staying above 55 day EMA, which is a positive sign.
However, AUD/CAD will need to firmly take out 0.9335 resistance to indicate completion of the fall from 0.9991 high. Other wise, another fall would remain mildly in favor. On the downside, break of 0.9087 minor support will bring deeper fall to retest 0.8969 low. Break will resume the fall from 0.9991 to 61.8% retracement of 0.8058 to 0.9991 at 0.8796.
US Treasury Secretary Steven Mnuchin tried to sound optimistic in a Fox New Sunday interview, and predicted a rebound in the economy is Q3. He said, “I think as we begin to reopen the economy in May and June, you’re going to see the economy really bounce back in July, August, September.”
“And we are putting in an unprecedented amount of fiscal relief into the economy,” he added. “You’re seeing trillions of dollars that’s making its way into the economy and I think this is going to have a significant impact.” “As businesses begin to open, you’re going to see demand side of the economy rebound.”
Separately, New York Governor Andrew Cuomo outlined the phased-in reopening plan of the state in details on Sunday. Construction and manufacturing upstate, which are seen as being low risk, will begin reopening in the first phase starting may 15. After at least two weeks, phase two could begin involving evaluation businesses on a case-by-case basis, on how essential they are. The reopening of the more “problematic” downstate New York City, Nassau, Suffolk, Westchester, “they all have to be coordinated”, Cuomo said.
Minneapolis Fed President Neel Kashkari told CBS that the only way to have a “real robust economic recovery” is through “clamping back down” the coronavirus cases to keep things under control, or “getting a vaccine or a robust therapy”. Otherwise, “we’re going to have flare ups, lockdowns and a very halting recovery with many more job losses and many more bankruptcies for an extended period of time unfortunately. ”
“If we were to lockdown hard for a month or six weeks, we could get the case count down so that our testing and our contact tracing was actually enough to control it,” Kashkari added. “If we don’t do that, and we just have this raging virus spread throughout the country with flare-ups and local lockdowns for the next year or two, which is entirely possible, we’re going to see many, many more business bankruptcies.”
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Gold extending decline towards 1817
Gold’s near term decline resumed overnight and broke through 1850.18 support. Near term outlook now stays bearish as long as 1909.57 resistance holds. Next target is 100% projection of 2070.06 to 1889.79 from 1998.23 at 1817.86. The whole fall from 2070.06 is seen as the third leg of the consolidation pattern from 2074.84 (2020 high). Firm break of 1817.86 could prompt more downside acceleration towards 1682.60 to finally finish the pattern.