Euro Firm as Supported By ECB Hawks, CPI Watched

Euro is staying as the strongest one for the week, as supported by a chorus of ECB hawks. Markets are starting to price in a 75bps rate hike by ECB next week. For now, the strength in Euro is most apparently only against Sterling, Swiss Franc and Yen. It’s kept well in range against Dollar. The next move in Euro would very much depend on August CPI flash to be released today. The greenback is also trying to extend recent rally, but momentum is not too convincing so far. ADP job data today might give Dollar a lift, but the key stays on Friday’s non-farm payrolls.

Technically, there are some levels to watch in Euro crosses to gauge if it’s truly staging a bullish reversal. The levels include 0.8720 resistance in EUR/GBP (which is still quite far), and 1.4712 resistance in EUR/AUD (which is closer). Also, EUR/CAD is starting to build some momentum to challenge 1.3271 resistance. Considering bullish convergence condition in daily MACD, firm break of 1.3271 will be a strong signal of near term reversal, as least for a sustainable corrective rally towards 1.3713. But of course, rejection by 1.3271 will maintain medium term bearishness.

In Asia, at the time of writing, Nikkei is down -0.51%. Hong Kong HSI is down -0.33%. China Shanghai SSE is down -1.00%. Singapore Strait Times is down -0.53%. Japan 10-year JGB yield is down -0.0005 to 0.227. Overnight, DOW dropped -0.96%. S&P 500 dropped -1.10%. NASDAQ dropped -1.12%. 10-year yield closed flat at 3.110.

ECB Nagel: Larger rate hike reduces risks of de-anchoring inflation expectations

Bundesbank chief Joachim Nagel said yesterday that, “monetary policy must react decisively in order to preserve the credibility of the inflation target. Data from a number of countries shows that frontloading or bringing interest rate increases forward, reduces the risk of a painful economic downturn.”

“In my view, a larger interest rate hike reduces the risk of inflation expectations becoming de-anchored,” Nagel said. “We should not delay further rate hikes for fear of a possible recession. Inflation rates will not return to the central bank’s inflation target on their own.”

However, Governing Council member Yannis Stournaras said yesterday that there is “no need to take very large steps” on rate hike. “Gradual normalization will be appropriate.”

“In my view, this year, we will see the peak of inflation and a steady deceleration thereafter, inflation will gradually decline in 2023 and converge towards the target in 2024,” Stournaras added.

BoJ Nakagawa: laid out three reasons for continuing powerful monetary easing

BoJ board member Junko Nakagawa said in a speech that it’s “necessary for the Bank of Japan to persistently continue with the current powerful monetary easing,” and she laid out three reasons for that.

Firstly, Japan is “still on its way to recovery” from the pandemic. “As demand remains insufficient compared with supply capacity, a shift in the direction of monetary policy toward tightening would likely drag down the economy and put significant downward pressure on the economic activity of firms and households.”

Secondly, current inflation in Japan “differ considerably in terms of degree and the number of items” comparing to those in the US and Europe. The difference is “likely due to the disparity in wage inflation”.

Thirdly, the 2% inflation target “needs to be achieved in a sustainable and stable manner”. “Even if the higher price of some items pushes up the overall price level to 2 percent, unless household disposable income increases, spending on products and services will decline due to budget constraints.” Japan is only “halfway to achieve the price stability target.

Japan industrial production rose 1.0% mom in Jul, auto jumped 12%

Japan industrial production grew 1.0% mom in July, way better than expectation of -0.5% mom decline. The Ministry of Economy, Trade and Industry maintained its output assessment, “fluctuates indecisively” reflecting the ups and downs in production in recent months.

Six of the 15 industries reported output increases while eight declined. The auto industry saw the biggest increase by sector, by 12.0% mom.

Based on a poll of manufacturers, the ministry expects industrial output to grow 5.5 percent in August and rise 0.8 percent in September.

Also released, retail trade rose 2.4% yoy in July, above expectation of 1.9% yoy. Housing starts dropped -5.4% yoy in July, worse than expectation of -3.4% yoy. Consumer confidence improved from 30.2 to 32.5 in August.

NZ ANZ business confidence improved to -47.8 in Aug

New Zealand ANZ Business Confidence rose from -56.7 to -47.8 in August. Own Activity Outlook rose from -8.7 to -4.0. Export intentions rose from -2.7 to 3.9. Investment intentions rose from -2.6 to -2.0. Employment intentions rose from 1.1 to 3.4. Pricing intentions dropped from 74.0 to 70.1. Cost expectations dropped from 91.3 to 90.9. Inflation expectations dropped slightly from 6.23 to 6.13.

ANZ said: “It would make sense that with inflation and wage inflation running so high, the neutral Official Cash Rate is creeping higher, meaning the sting of a given interest rate wears off. Risks are tilted towards the RBNZ having to continue on with OCR hikes next year to cool the economy sufficiently to feel comfortable they’re getting on top of the inflation problem.

China PMI manufacturing rose to 49.4 in Aug, contraction continued

China’s official PMI Manufacturing rose slightly from 49.0 to 49.4 in August, above expectation of 49.2. New orders ticked up from 48.5 to 49.2. Production was flat at 49.8. PMI Non-Manufacturing dropped from 53.8 to 52.6, above expectation of 52.2. PMI Composite dropped from 52.5 to 51.7.

The data showed manufacturing activity contracted for the second straight month. Also, the sector has been in contraction for five out of the past six months, briefly hitting 50.2 in June.

Looking ahead

Eurozone CPI flash will be the main focus in European session. Germany unemployment and import prices, France GDP revision, and Swiss Credit Suisse economic expectations will also be featured.

Later in the day, US will release ADP employment and Chicago PMI. Canada will publish GDP GDP.

EUR/JPY Daily Outlook

Daily Pivots: (S1) 138.45; (P) 138.83; (R1) 139.41; More….

EUR//JPY’s rally from 133.38 is still in progress. Intraday bias stays on the upside for 100% projection of 133.38 to 138.38 from 135.50 at 140.50. Decisive break there will indicate upside acceleration, and raise the chance of up trend resumption through 144.26 high. On the downside, below 137.66 minor support will turn intraday bias neutral again.

In the bigger picture, up trend from 114.42 (2020 low) is seen as the third leg of the pattern from 109.30 (2016 low). Further rally is in favor as long as 134.11 resistance turned support holds, even in case of deep pull back. Next target is 149.76 (2015 high). However, sustained break of 134.11 will be a sign of medium term bearish reversal and turn focus to 124.37 support for confirmation.

Economic Indicators Update