IC Markets Asia Fundamental Forecast | 6 June 2024
What happened in the U.S. session?
Not only did the ADP Employment Report miss the market estimate of 173K for the month of May, the figure of 152K was also lower than the previous month’s reading due to a steep decline in the manufacturing sector while leisure and hospitality also showed signs of weaker hiring. In addition, April’s job gains were revised lower from 192K down to 188K. The slower pace of hiring is beginning to highlight potential cooling in the U.S. labour market. Nela Richardson, chief economist at ADP, made the following statements “Job gains and pay growth are slowing going into the second half of the year. The labour market is solid, but we’re monitoring notable pockets of weakness tied to both producers and consumers”.
Meanwhile, the ISM Services PMI rebounded from 49.4 in April back into expansion with a solid reading of 53.8 – the 12-month average is 52.5 – as components such as new export orders, business activity and new orders led the surge in economic activity for this sector. The prices component dropped slightly from 59.2 down to 58.1 but it still remains at elevated levels and has now expanded for 84 consecutive months. The dollar index (DXY) experienced a rollercoaster of a session as a soft ADP report followed by a robust ISM Services PMI reading causing it to swing wildly from 104.37 to as low as 104.14 before reversing sharply to briefly surge past 104.45 and then pulling back once again towards 104.20.
What does it mean for the Asia Session?
As Asian markets digest the latest U.S. macroeconomic data, the DXY dipped under 104.20 and continued to slide lower while spot prices for gold remained lifted and were hovering above $2,350/oz. Crude oil stabilized overnight with WTI oil finding support around $72.90 per barrel before edging higher to climb towards the $75-mark.
The Dollar Index (DXY)
Key news events today
Unemployment Claims (12:30 pm GMT)
What can we expect from DXY today?
Unemployment claims unexpectedly rose last week with a reading of 219K and the estimate for this week sits at 220K which is slightly below the 4-week average of 222K. Claims appear to be trending higher once again this year and another round of higher-than-anticipated figures will likely place the dollar under further selling pressures.
Central Bank Notes:
- The Federal Funds Rate target range remained unchanged at 5.25% to 5.50% for the sixth meeting in a row.
- The Committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run and judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year.
- The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks. Inflation has eased over the past year but remains elevated and in recent months, there has been a lack of further progress toward the Committee’s 2% inflation objective.
- Recent indicators suggest that economic activity has continued to expand at a solid pace while job gains have remained strong, and the unemployment rate has remained low.
- In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.
- The Committee’s assessments will take into account a wide range of information, including readings on labour market conditions, inflation pressures and inflation expectations, and financial and international developments.
- In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities. Beginning in June, the Committee will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion.
- The Committee will maintain the monthly redemption cap on agency debt and agency mortgage-backed securities at $35 billion and will reinvest any principal payments in excess of this cap into Treasury securities.
- Next meeting runs from 11 to 12 June 2024.
Next 24 Hours Bias
Weak Bearish
Gold (XAU)
Key news events today
Unemployment Claims (12:30 pm GMT)
What can we expect from Gold today?
Unemployment claims unexpectedly rose last week with a reading of 219K and the estimate for this week sits at 220K which is slightly below the 4-week average of 222K. Claims appear to be trending higher once again this year and another round of higher-than-anticipated figures will likely place the dollar under further selling pressures and continue to lift gold.
Next 24 Hours Bias
Weak Bullish
The Australian Dollar (AUD)
Key news events today
No major news events.
What can we expect from AUD today?
The Aussie hit a low of 0.6626 overnight before reversing to rise strongly. The bullish momentum continued as Asian markets came online with the Aussie surging towards 0.6690 – these are the support and resistance levels for today.
Support: 0.6630
Resistance: 0.6700
Central Bank Notes:
- The RBA kept the cash rate target unchanged at 4.35%, marking the eighth pause out of the last nine board meetings.
- The CPI grew by 3.6% over the year to the March quarter, down from 4.1% cent over the year to December. Underlying inflation was higher than headline inflation and declined by less – this was due in large part to services inflation, which remains high and is moderating only gradually.
- The central forecasts, based on the assumption that the cash rate follows market expectations, are for inflation to return to the target range of 2 to 3% in the second half of 2025, and to the midpoint in 2026.
- In the near term, inflation is forecast to be higher because of the recent rise in domestic petrol prices, and higher than expected services price inflation, which is now forecast to decline more slowly over the rest of the year.
- Inflation is, however, expected to decline over 2025 and 2026.
- The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the Board is not ruling anything in or out.
- Next meeting is on 18 June 2024.
Next 24 Hours Bias
Medium Bullish
The Kiwi Dollar (NZD)
Key news events today
No major news events.
What can we expect from NZD today?
The Kiwi pulled back to 0.6170 overnight before staging a rebound. This currency pair bounced strongly and it raced past the threshold of 0.6200 at the beginning of the Asia session – these are the support and resistance levels for today.
Support: 0.6190
Resistance: 0.6220
Central Bank Notes:
- The Monetary Policy Committee kept the OCR unchanged at 5.50% for the seventh meeting in a row and agreed that interest rates need to remain at a restrictive level for a sustained period to ensure annual headline CPI inflation returns to the 1 to 3% target range.
- Restrictive monetary policy is contributing to an easing in capacity pressures while headline inflation, core inflation, and most measures of inflation expectations are continuing to decline. However, domestic inflation has fallen more slowly than expected and headline CPI inflation remains above the Committee’s target band.
- Higher dwelling rents, insurance costs, council rates, and other domestic services price inflation have resulted in a slow decline in domestic inflation, posing a risk to inflation expectations.
- GDP declined by 0.1% in the December 2023 quarter with economic growth having now been negative for four of the past five quarters. High interest rates have reduced household spending, as well as residential and business investment, despite very strong population growth. Recent indicators of economic activity have been weak, as expected.
- Next meeting is on 10 July 2024.
Next 24 Hours Bias
Medium Bullish
The Japanese Yen (JPY)
Key news events today
No major news events.
What can we expect from JPY today?
The yen lost ground as USD/JPY hit 156.48 during the U.S. session before pulling back slightly towards 156. This currency pair slid lower and was trading around 155.50 as Asian markets came online – these are the support and resistance levels for today.
Support: 154.70
Resistance: 156.60
Central Bank Notes:
- The Bank considers that the policy framework of Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control and the negative interest rate policy to date have fulfilled their roles. With the price stability target of 2%, it will conduct monetary policy as appropriate, guiding the short-term interest rate as a primary policy tool.
- The Bank of Japan decided on the following measures:
- The Bank will encourage the uncollateralized overnight call rate to remain at around 0 to 0.1% while continuing its JGB purchases with broadly the same amount as before.
- In addition, the Bank will discontinue purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) and will also gradually reduce the amount of purchases of CP and corporate bonds and will discontinue the purchases in about one year.
- In a quarterly outlook, the committee revised higher CPI prints for FY 2024 to 2.8% from January’s projections of 2.4%, due to the waning effects of higher import prices and fewer government support measures.
- For 2025, the board expects core inflation to hit 1.9%, slightly higher than its earlier estimates of 1.8%, reflecting a recent rise in oil prices.
- Policymakers cut their 2023 GDP growth forecast to 1.3% from 1.8% and for FY 2024, the bank also slashed its GDP outlook to 0.8% from 1.2%, mainly reflecting lower private consumption.
- Next meeting is on 14 June 2024.
Next 24 Hours Bias
Weak Bearish
The Euro (EUR)
Key news events today
ECB Monetary Policy Statement (12:15 pm GMT)
ECB Press Conference (12:45 pm GMT)
What can we expect from EUR today?
Despite the flash CPI highlighting a re-acceleration of inflationary pressures in the Euro Area for the month of May last Friday, the ECB is anticipated to cut its main refinancing rate by 25 basis points, bringing it down from 4.50% to 4.25%. Should the ECB follow through with this rate cut, it will likely trigger a sell-off in the Euro later today. The press conference by President Christine Lagarde will provide further insights into the decision-making process of the ECB for the current meeting as well as the outlook for future monetary policy action and will have a major impact on the direction of the Euro for the rest of the day.
Central Bank Notes:
- The ECB kept the three key interest rates unchanged for a fifth consecutive meeting, keeping the main refinancing rate on hold at 4.50%.
- Inflation has continued to fall, led by lower food and goods price inflation with most measures of underlying inflation easing, wage growth is gradually moderating, and firms are absorbing part of the rise in labour costs in their profits.
- Financing conditions remain restrictive and the past interest rate increases continue to weigh on demand, which is helping to push down inflation but domestic price pressures are strong and are keeping services price inflation high.
- The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner and if the Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase its confidence that inflation is converging to the target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction.
- Next meeting is on 6 June 2024.
Next 24 Hours Bias
Weak Bullish
The Swiss Franc (CHF)
Key news events today
No major news events.
What can we expect from CHF today?
The franc continues to experience strong demand causing USD/CHF to tumble as low as 0.8885 overnight before retracing slightly higher by the end of the U.S. session. This currency pair resumed the downtrend at the beginning of the Asia session and was trading around 0.8900 – these are the support and resistance levels for today.
Support: 0.8880
Resistance: 0.8950
Central Bank Notes:
- The SNB eased monetary policy by lowering its key policy rate by 25 basis points, going from 1.75% to 1.50% in March.
- For some months now, inflation has been back below 2% and thus in the range the SNB equates with price stability.
- According to the new forecast, inflation is also likely to remain in this range over the next few years.
- The forecast puts average annual inflation at 1.4% for 2024, 1.2% for 2025 and 1.1% for 2026, based on the assumption that the SNB policy rate is 1.5% over the entire forecast horizon.
- Swiss GDP growth was moderate in the fourth quarter of last year and it is likely to remain modest in the coming quarters.
- Overall, Switzerland’s GDP is likely to grow by around 1% this year.
- Next meeting is on 20 June 2024.
Next 24 Hours Bias
Weak Bearish
The Pound (GBP)
Key news events today
S&P Global Construction PMI (8:30 am GMT)
What can we expect from GBP today?
The estimate of 52.5 points to another month of higher output for the construction sector in the month of May. This would mark the third consecutive month of expansion as solid growth in the commercial and civil engineering sectors led the gains in April while the outlook for the near future remains optimistic. Cable will likely remain elevated should the construction sector post another strong month of activity.
Central Bank Notes:
- The Bank of England’s Monetary Policy Committee (MPC) voted by a majority of 7-to-2 to maintain its Official Bank Rate at 5.25% for the sixth consecutive meeting.
- Two members preferred to reduce the Bank Rate by 25 basis points to 5%, an increase of one from the previous meeting.
- Twelve-month CPI inflation fell to 3.2% in March from 3.4% in February and is expected to return to close to the 2% target in the near term, but increase slightly in the second half of this year to around 2.5% owing to the unwinding of energy-related base effects.
- CPI inflation is projected to be 1.9% in two years’ time and 1.6% in three years in the May Report. With respect to indicators of inflation persistence, services consumer price inflation has declined but remains elevated at 6% in March.
- Following modest weakness last year, UK GDP is expected to have risen by 0.4% in 2024 Q1 and to grow by 0.2% in Q2, stronger than expected in the February Report. Despite picking up during the forecast period, demand growth is expected to remain weaker than potential supply growth throughout most of that period.
- The MPC remains prepared to adjust monetary policy as warranted by economic data to return inflation to the 2% target sustainably and will therefore continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole, including a range of measures of the underlying tightness of labour market conditions, wage growth and services price inflation.
- Next meeting is on 20 June 2024.
Next 24 Hours Bias
Weak Bullish
The Canadian Dollar (CAD)
Key news events today
Ivey PMI (2:00 pm GMT)
What can we expect from CAD today?
The Bank of Canada (BoC) cut its overnight rate by 25 basis points as anticipated, bringing it down from 5% to 4.75% while signalling that further rate cuts will be delivered should inflation continue to ease as per their forecast. The BoC noted that it now has stronger confidence that inflation is converging towards its target of 2%. This rate cut created high volatility for the Loonie as USD/CAD initially spiked from 1.3670 to 1.3742 before reversing sharply as a soft ADP reading caused the U.S. dollar to come under pressure.
Central Bank Notes:
- The Bank of Canada reduced its target for the overnight rate by 25 basis points to 4.75% while continuing its policy of balance sheet normalization.
- Canada’s economic growth resumed in the first quarter of 2024 after stalling in the second half of last year. At 1.7%, first-quarter GDP growth was slower than forecast in the MPR but consumption growth was solid at about 3%, and business investment and housing activity also increased.
- Inflation remains above the 2% target and shelter price inflation is high but total CPI inflation has declined consistently over the course of this year, and indicators of underlying inflation increasingly point to a sustained easing.
- CPI inflation has eased from 3.4% in December to 2.7% in April while the preferred measures of core inflation have come down from about 3.5% last December to about 2.75% in April and the 3-month rate of core inflation slowed from about 3.5% in December to under 2% in March and April.
- In the labour market, businesses are continuing to hire workers as employment has been growing, but at a slower pace than the working-age population while elevated wage pressures look to be moderating gradually.
- The Governing Council is closely watching the evolution of core inflation and remains particularly focused on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour.
- Recent data has increased the council’s confidence that inflation will continue to move towards the 2% target. Nonetheless, risks to the inflation outlook remain.
- Next meeting is on 24 July 2024.
Next 24 Hours Bias
Weak Bearish
Oil
Key news events today
No major news events.
What can we expect from Oil today?
Despite the EIA inventories registering a surprise build of 1.2M versus the estimate of 2.1M drawdown, oil prices staged a minor rebound overnight as a soft ADP employment report strengthened expectations of a potential rate cut by the Federal Reserve. WTI oil found support around $72.90 per barrel before edging higher to climb towards the $75-mark as Asian markets came online.
Next 24 Hours Bias
Weak Bullish
