CAD and GBP Shrug Strong CPI, USD Awaits Powell

Risk aversion seems to back in indecisive markets today, with major European indexes and US futures trading down. Yen and Swiss Franc are trading mildly higher, followed by Dollar. Sterling and Canadian receive little support from strong consumer inflation reading. But Aussie and Kiwi are the worse performers while Euro is mixed. Focus will turn to Fed Chair Jerome Powell’s testimony.

Technically, Aussie bears seem to be making some progresses. EUR/AUD is now pressing 1.5277 resistance and break will put 1.5354 support turned resistance in focus. Sustained break there will be a sign of larger bullish reversal and could prompt further buying. At the same time, AUD/USD might extend lower to take on 0.6828 low. Firm break there will also resume larger down trend to 0.6756/60 cluster support.

In Europe, at the time of writing, FTSE is down -1.31%. DAX is down -2.02%. CAC is down -1.84%. Germany 10-year yield is down -0.167 at 1.609. Earlier in Asia, Nikkei dropped -0.37%. Hong Kong HSI dropped -2.56%. China Shanghai SSE dropped -1.20%. Singapore Strait Times dropped -0.78%. Japan 10-year JGB yield rose 0.0049 to 0.241.

Canada CPI rose to 7.7% yoy in May, highest since 1983

Canada CPI accelerated from 7.7% yoy to 6.8% yoy in May, above expectation of 7.5% yoy. That’s the highest reading since January 1983. The monthly rise 1.4% mom was the fastest since introduction of the series in 1992. Excluding gasoline, CPI rose 6.3% yoy, up from April’s 5.8% yoy.

CPI common rose from 3.5% yoy to 3.9% yoy, above expectation of 3.4% yoy. CPI median rose from 4.6% yoy to 4.9% yoy, above expectation of 4.7% yoy. CPI trimmed rose from 5.2% yoy to 5.4% yoy, matched expectations.

ECB de Guindos: Fragmentation instruments should not interfere with monetary policy approach

ECB Vice-President Luis de Guindos said today “fragmentation is a significant worry.” The central bank is ” speeding up process to ready a tool against fragmentation,” but the governing council has “still not discussed the details yet”.

But he emphasized, “fragmentation instruments should not interfere with the overall monetary policy approach, which should be focused on fighting inflation.” Also, the new tool should be different to previous PEPP, APP or OMT programs as “circumstances are not the same.

UK CPI rose to 9.1% yoy in May, another 40-yr high

UK CPI accelerated further from 9.0% yoy to 9.1% yoy in May, matched expectations. That’s another record high since the series began in 1997. Also, based on indicate model, it’s the highest since around 1982, which was at nearly 11% yoy. CPI core, on the other hand, slowed from 6.2% yoy to 5.9% yoy, below expectation of 6.0% yoy.

ONS said: “Rising prices for food and non-alcoholic beverages, compared with falls a year ago, resulted in the largest upward contribution to the change in both the CPIH and CPI 12-month inflation rates between April and May 2022 (0.17 percentage points for CPIH). The largest offsetting downward contributions to change in the rates were from recreation and culture (0.10 percentage points for CPIH) and clothing and footwear (0.08 percentage points for CPIH).

Also released PPI input came in at 2.1% mom, 22.1% yoy in May. PPI output was at 1.6% mom, 15.7% yoy. PPI output core was at 1.50% mom, 14.8% yoy.

BoJ firm on maintaining ultra-loose monetary policy

In the minutes of April 27-28 meeting of BoJ indicated that while the board was concerned with fluctuation in Yen’s exchanger rate, it remained firm on the stance to continue with ultra-loose monetary policy.

One board member noted that Japan’s economy was “still on its way to recovery”. As a “commodity importer”, the rise in commodity prices would “lead to an outflow of income from Japan and thus exert downward pressure on the economy.” Hence, it’s “necessary” to “continue with the current powerful monetary easing and thereby firmly support the economy.”

Another member noted that “the challenge of monetary policy in Japan was not to curb inflation, as in the case of the United States and Europe, but to overcome inflation that was still too low”. A different member commented that,” with the addition of Russia’s invasion of Ukraine to the existing downside risks to the economy, the situation had further changed significantly; against this backdrop, it was not appropriate for the Bank to make any big changes to its monetary policy stance.”

Regarding Yen’s depreciation, “a few members said excessive fluctuations in the foreign exchange market over a short period of time, such as those observed recently, would raise uncertainties about the future and make it more difficult for firms to formulate their business plans”.

Some member noted, “it was necessary for the Bank to clearly communicate to the public that the aim of monetary policy conduct was to fulfill its mandate of achieving price stability, rather than to control foreign exchange rates.”

Australia Westpac leading index dropped to 0.58 in May

Australia Westpac leading index dropped form 1.09% to 0.58% in May, still indicating above trend growth for 2022. Westpac said, “the components of the Index are indicating an important emerging theme around Australia’s growth prospects – a significant shock to consumer confidence.”

On RBA policy, Westpac expects the central bank to hike a further 50bps in July. It assessed that at 1.35% after the hike, interest rate is still below the neutral setting. Given the tight labor market and rising inflation, further monetary tightening can be expected through 2022.

New Zealand goods exports rose 18% yoy in May, imports rose 24% yoy

New Zealand goods exports rose 18% yoy or NZD 1.1B to NZD 7.0B in May. Goods imports rose 24% yoy or NZD 1.3B to NZD 6.7B. Monthly trade surplus narrowed from NZD 440m to NZD 263m, smaller than expectation of NZD 580m.

Exports to all top destinations rose except to China: China (down -3.8%), Australia (up 49%), US (up 18%), EU (up 23%), Japan (up 0.7%).

Imports from most partners rose except from the US: China (up 25%), EU (up 12%), Australia (up 18%), US (down -5.5%), Japan (up 41%).

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.2241; (P) 1.2282; (R1) 1.2323; More…

Intraday bias in GBP/USD remains neutral and outlook is unchanged. Outlook stays bearish as long as 1.2666 resistance holds. On the downside, break of 1.1932 will resume larger down trend from 1.4248. However, firm break of 1.2666 will suggest medium term bottoming and bring stronger rebound back towards 1.3158 support turned resistance.

In the bigger picture, fall from 1.4248 (2018 high) could be a leg inside the pattern from 1.1409 (2020 low), or resuming the longer term down trend. Deeper decline is expected as long as 1.2666 resistance holds. Next target is 1.1409 low. However, firm break of 1.2666 will bring stronger rise back to 55 week EMA (now at 1.3175).

Economic Indicators Update