Chinese disinflation
Consumer inflation in China fell to 0.7% YoY in March from 1.0% in the previous month. Last month's producer price index was 2.5% lower than a year earlier, accelerating its decline from 1.4% in February.
The hypothesis that China's move away from a 0-covid policy is driving down prices rather than pushing them up, as has been the case in the developed world, remains valid. In this case, we are seeing a normalisation of the economy, which in turn is normalising prices after the spike of previous years.
Consumer inflation in China fell to 0.7% YoY in March from 1.0% in the previous month. Last month's producer price index was 2.5% lower than a year earlier, accelerating its decline from 1.4% in February.
The hypothesis that China's move away from a 0-covid policy is driving down prices rather than pushing them up, as has been the case in the developed world, remains valid. In this case, we are seeing a normalisation of the economy, which in turn is normalising prices after the spike of previous years.
The stabilisation of supply chains is also evident in the stabilisation of container prices, which have returned to the region of $1,500 (the norm, at least from October 2016 to April 2020) after spiking above $10,000 in the last quarter of 2021.
The normalisation of logistics complements the fall in producer prices, taking inflationary pressure off the developed world. And this is good news for risk demand, as it will allow the world's biggest central banks to stop tightening policy more quickly.
However, falling producer prices may also signal a sharp contraction in demand in the developed world. Although it signals the end of the interest rate hike cycle in Europe and America, it promises more negativity. In this case, things will get worse before they get better.
The normalisation of logistics complements the fall in producer prices, taking inflationary pressure off the developed world. And this is good news for risk demand, as it will allow the world's biggest central banks to stop tightening policy more quickly.
However, falling producer prices may also signal a sharp contraction in demand in the developed world. Although it signals the end of the interest rate hike cycle in Europe and America, it promises more negativity. In this case, things will get worse before they get better.
Japan is recovering, but what about the Yen?
After last year's shock, Japan's economic indicators are slowly returning to normal. But conditions are still unsuitable for raising interest rates for the Bank of Japan. This is not good news for the Yen. The interest rate differential, which has risen sharply over the past year, creates the conditions for carry trade. The only obstacle to an active interest rate differential play is the uncertainty surrounding monetary policy due to the change in the central bank governor.
The balance of payments rebounded from last month's record deficit as the February trade deficit fell to its lowest level in 11 months. The balance of payments appears to have turned around. This is supported by lifting China's export restrictions and falling container prices, which should boost demand for goods from Japan.
After last year's shock, Japan's economic indicators are slowly returning to normal. But conditions are still unsuitable for raising interest rates for the Bank of Japan. This is not good news for the Yen. The interest rate differential, which has risen sharply over the past year, creates the conditions for carry trade. The only obstacle to an active interest rate differential play is the uncertainty surrounding monetary policy due to the change in the central bank governor.
The balance of payments rebounded from last month's record deficit as the February trade deficit fell to its lowest level in 11 months. The balance of payments appears to have turned around. This is supported by lifting China's export restrictions and falling container prices, which should boost demand for goods from Japan.
In addition, consumer optimism is on the rise. Household consumer confidence has risen every month since November, from 31.3 to 33.9 in March, the highest level since May last year.
The "economic watchers" survey also returned to last year's highs in current conditions and was at its highest level since October 2021 in terms of forecasts.
A key driver of the Yen's appreciation in recent months has been speculation about a change in monetary policy. Expectations have grown that Kuroda's resignation as governor of the Bank of Japan would trigger a tightening of monetary policy. But so far, there has been no real change or even a hint in that direction from the new BoJ governor, who formally took office on 9 April. His latest speech signalled that he would continue to ease policy.
He has not been seen as a proponent of tightening policy, but a confirmation after his inauguration could potentially trigger a new wave of pressure on the Japanese currency.
The "economic watchers" survey also returned to last year's highs in current conditions and was at its highest level since October 2021 in terms of forecasts.
A key driver of the Yen's appreciation in recent months has been speculation about a change in monetary policy. Expectations have grown that Kuroda's resignation as governor of the Bank of Japan would trigger a tightening of monetary policy. But so far, there has been no real change or even a hint in that direction from the new BoJ governor, who formally took office on 9 April. His latest speech signalled that he would continue to ease policy.
He has not been seen as a proponent of tightening policy, but a confirmation after his inauguration could potentially trigger a new wave of pressure on the Japanese currency.
The #USDJPY jumped more than 1% on Monday, taking advantage of the dollar's general bullishness. Today, however, the Yen is in no hurry to regain its losses, as the Pound and Euro are doing. And this may not be the end of the samurai path.
Lower inflation eases the pressure on the BoJ to raise interest rates. The USDJPY's pullback from 151 to 127 corrected 50% of the rally on the monetary policy change and stopped the pair's uncontrolled rise. Technically, the path to the upside for the pair is now clear, but it is difficult to identify a clear technical target for this path. The 140 level could be a medium-term target.
Much more helpful is the dynamics of interest rate expectations. The fundamental pressure on the Yen may continue as long as the spread between the Yen's government bond yields and those of its major rivals widens.
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Lower inflation eases the pressure on the BoJ to raise interest rates. The USDJPY's pullback from 151 to 127 corrected 50% of the rally on the monetary policy change and stopped the pair's uncontrolled rise. Technically, the path to the upside for the pair is now clear, but it is difficult to identify a clear technical target for this path. The 140 level could be a medium-term target.
Much more helpful is the dynamics of interest rate expectations. The fundamental pressure on the Yen may continue as long as the spread between the Yen's government bond yields and those of its major rivals widens.
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The Sentix investor confidence index rose from -11.1 to -8.7 in April. This is roughly where the index was in February. However, it has been in negative territory for 13 months and has shown no positive trend in the last three months.
Eurostat reported that retail sales fell by 0.8% in February, after the same increase in the previous month. On a yearly basis, sales are down by 3%. The retail sales index has been downward since November 2021, breaking the long-term upward trend that began around ten years ago.
Melting retail sales and investor pessimism cast doubt on whether the ECB still needs to raise interest rates. However, everything is relative in the currency market, and expectations are now much higher that the Fed will end its hikes sooner and be the first to start easing, supporting the euro's rise against the dollar.
Eurostat reported that retail sales fell by 0.8% in February, after the same increase in the previous month. On a yearly basis, sales are down by 3%. The retail sales index has been downward since November 2021, breaking the long-term upward trend that began around ten years ago.
Melting retail sales and investor pessimism cast doubt on whether the ECB still needs to raise interest rates. However, everything is relative in the currency market, and expectations are now much higher that the Fed will end its hikes sooner and be the first to start easing, supporting the euro's rise against the dollar.
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#WaveAnalysis
#AUDNZD reversed from support level 1.0625
• Likely to rise to resistance level 1.0780
AUDNZD currency pair recently reversed up from the key support level 1.0625 (which has been reversing the price from last December).
The upward reversal from the support level 1.0625 created the two consecutive upward reversal candlesticks patterns Bullish Engulfing – signalling the strength of this support level.
AUDNZD can then be expected to rise further toward the next resistance level 1.0780 (which stopped the previous waves 4 and (B)).
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#AUDNZD reversed from support level 1.0625
• Likely to rise to resistance level 1.0780
AUDNZD currency pair recently reversed up from the key support level 1.0625 (which has been reversing the price from last December).
The upward reversal from the support level 1.0625 created the two consecutive upward reversal candlesticks patterns Bullish Engulfing – signalling the strength of this support level.
AUDNZD can then be expected to rise further toward the next resistance level 1.0780 (which stopped the previous waves 4 and (B)).
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#WaveAnalysis
#USDCHF reversed from resistance level 0.9095
• Likely to fall to support level 0.9000
USDCHF currency pair recently reversed down from the key resistance level 0.9095 (former powerful support which has been reversing the price from the middle of January).
The downward reversal from the resistance level 0.9095 continues the active short-term impulse wave (iii) – which belongs to the impulse waves 3 and (3).
Given the long-term downtrend, USDCHF can then be expected to fall further toward the next round support level 0.9000 (low of the earlier Hammer from the start of this month).
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#USDCHF reversed from resistance level 0.9095
• Likely to fall to support level 0.9000
USDCHF currency pair recently reversed down from the key resistance level 0.9095 (former powerful support which has been reversing the price from the middle of January).
The downward reversal from the resistance level 0.9095 continues the active short-term impulse wave (iii) – which belongs to the impulse waves 3 and (3).
Given the long-term downtrend, USDCHF can then be expected to fall further toward the next round support level 0.9000 (low of the earlier Hammer from the start of this month).
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#Bitcoin hit a 10-month high above $30,500 on Tuesday. However, two attempts by the bulls to build a sustained rally were not supported by the market. On Wednesday morning, the price pulled back below $30K, losing 0.4% over the past 24 hours.
The crypto market has lost more than 1.2% over the same period to $1.22 trillion. Traders are rushing to lock in profits from the recent rally amid concerns about volatility ahead of today's US inflation figures.
According to CoinShares, investments in cryptocurrencies rose by $57M last week, the third consecutive week of inflows. Bitcoin investments increased by $56M, Ethereum by $0.6M, Uniswap by $0.5M and Polkadot by $0.4M.
Despite the positive investor sentiment, trading volumes for the week were low at $970M. The same trend was seen in the global BTC exchange market, where trading volumes for the week were only 25% of the average since the beginning of the year, Coinshares noted.
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The crypto market has lost more than 1.2% over the same period to $1.22 trillion. Traders are rushing to lock in profits from the recent rally amid concerns about volatility ahead of today's US inflation figures.
According to CoinShares, investments in cryptocurrencies rose by $57M last week, the third consecutive week of inflows. Bitcoin investments increased by $56M, Ethereum by $0.6M, Uniswap by $0.5M and Polkadot by $0.4M.
Despite the positive investor sentiment, trading volumes for the week were low at $970M. The same trend was seen in the global BTC exchange market, where trading volumes for the week were only 25% of the average since the beginning of the year, Coinshares noted.
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What to expect from US inflation
The currency market has moved little over the past week, waiting for significant drivers. The Easter lull is likely to end today, as inflation data and the Fed's March meeting minutes are expected to be released.
US inflation reports have moved markets more than NFP in recent months and have often been a bellwether for the Dollar in the coming weeks as they have influenced interest rate expectations.
On average, market analysts are forecasting a 0.2% rise in prices for March and a slowdown in annual inflation to 5.1% from 6.0% the previous month and a peak of 9.1% in June last year.
However, economists expect core inflation to rise from 5.5% to 5.6% YoY, reversing the downward trend that has been in place since September.
The currency market has moved little over the past week, waiting for significant drivers. The Easter lull is likely to end today, as inflation data and the Fed's March meeting minutes are expected to be released.
US inflation reports have moved markets more than NFP in recent months and have often been a bellwether for the Dollar in the coming weeks as they have influenced interest rate expectations.
On average, market analysts are forecasting a 0.2% rise in prices for March and a slowdown in annual inflation to 5.1% from 6.0% the previous month and a peak of 9.1% in June last year.
However, economists expect core inflation to rise from 5.5% to 5.6% YoY, reversing the downward trend that has been in place since September.
In our view, a deeper slowdown in headline inflation, as we saw in China earlier this week, cannot be ruled out. Moreover, we should not be surprised if the rate of increase in prices, excluding energy and food, also falls short of expectations. A recovery in supply chains and a slowdown in wage growth are working against inflation.
A weaker-than-expected reading or other reliable signs of waning inflation could unleash a wave of pressure on the Dollar, reducing the chances of another Fed rate hike. Weaker inflation data is also good for demand for equities and commodities, as markets will reinforce expectations that inflation has peaked. The Dollar would then stand a good chance of rallying off this year's lows.
On the other hand, if prices rise significantly more than expected, this will push the Dollar higher. Technically, the DXY could form a double bottom with lows in early February and April. Equities and commodities could go down.
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A weaker-than-expected reading or other reliable signs of waning inflation could unleash a wave of pressure on the Dollar, reducing the chances of another Fed rate hike. Weaker inflation data is also good for demand for equities and commodities, as markets will reinforce expectations that inflation has peaked. The Dollar would then stand a good chance of rallying off this year's lows.
On the other hand, if prices rise significantly more than expected, this will push the Dollar higher. Technically, the DXY could form a double bottom with lows in early February and April. Equities and commodities could go down.
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Gold in demand
Despite its proximity to historical highs, the short-term momentum suggests that buying will intensify even on minor pullbacks. A week earlier, gold made a local high of $2030 and then corrected by 2.25%. The intraday chart on Monday afternoon clearly shows a bullish trend. The intermittent spikes in the Asian session were not sustained, but this trendline remained in force.
It appears more like a large buyer building up its long position than speculating on the news. This mini-trend will be challenged if it falls below $2008. The final break of this trend will come when it falls below the previous local lows of around $2002.
But it is worth taking a step back and looking at the more fundamental trends. The amplitude of gold's move on March 20-21 created a broad and rising range in which gold has been trading. The lower boundary is now $1965, and the upper edge is $2040.
Despite its proximity to historical highs, the short-term momentum suggests that buying will intensify even on minor pullbacks. A week earlier, gold made a local high of $2030 and then corrected by 2.25%. The intraday chart on Monday afternoon clearly shows a bullish trend. The intermittent spikes in the Asian session were not sustained, but this trendline remained in force.
It appears more like a large buyer building up its long position than speculating on the news. This mini-trend will be challenged if it falls below $2008. The final break of this trend will come when it falls below the previous local lows of around $2002.
But it is worth taking a step back and looking at the more fundamental trends. The amplitude of gold's move on March 20-21 created a broad and rising range in which gold has been trading. The lower boundary is now $1965, and the upper edge is $2040.
A further step back in time suggests that gold is now in bullish momentum, having completed an almost canonical Fibonacci retracement after rallying from the September-November lows to the February peak. The final target for this pattern is the $2170 area, which is nearly $100 above the historical highs.
If gold does rewrite the highs, it will be in an even longer-term growth cycle with a potential target of $2650. This is no longer a target for this quarter but for next year.
If gold does rewrite the highs, it will be in an even longer-term growth cycle with a potential target of $2650. This is no longer a target for this quarter but for next year.
The most exciting thing is that the big buyers in the last few quarters could be the central banks of the big emerging markets, such as China and Saudi Arabia. In this case, gold is an alternative to dollar-denominated government bonds, which look politically unpalatable in the short term, whereas gold is politically neutral.
Nevertheless, it is worth recognising that, contrary to the long-term bullish picture for gold. The blow could be pretty painful for short-term buyers. Gold remains in a long-term bullish trend as long as it trades above $1950-1960. A pullback here could become a reality in the event of high inflation data or continued hawkish Fed rhetoric in the coming weeks, seriously punishing the most desperate bulls.
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Nevertheless, it is worth recognising that, contrary to the long-term bullish picture for gold. The blow could be pretty painful for short-term buyers. Gold remains in a long-term bullish trend as long as it trades above $1950-1960. A pullback here could become a reality in the event of high inflation data or continued hawkish Fed rhetoric in the coming weeks, seriously punishing the most desperate bulls.
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#WaveAnalysis
#EURJPY broke resistance area
• Likely to rise to resistance level 147.00
EURJPY recently broke the resistance area located at the intersection of the resistance level 145.40 (former monthly high from March) and the resistance trendline of the wide down channel from October.
The breakout of the resistance area accelerated the active short-term impulse wave 3 of the intermediate impulse wave (C) from January.
EURJPY can then be expected to rise further toward the next resistance level 147.00 (target for the completion of the active impulse wave 3).
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#EURJPY broke resistance area
• Likely to rise to resistance level 147.00
EURJPY recently broke the resistance area located at the intersection of the resistance level 145.40 (former monthly high from March) and the resistance trendline of the wide down channel from October.
The breakout of the resistance area accelerated the active short-term impulse wave 3 of the intermediate impulse wave (C) from January.
EURJPY can then be expected to rise further toward the next resistance level 147.00 (target for the completion of the active impulse wave 3).
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#WaveAnalysis
#EURUSD under bullish pressure
• Likely to rise to resistance level 1.1035
EURUSD currency pair under the bullish pressure after the earlier breakout of the resistance level 1.0950 (former top of the previous impulse wave (1) from the end of March).
The breakout of the resistance level continues the active medium-term impulse wave (3) from the start of April.
Given the strong daily uptrend, EURUSD can then be expected to rise further toward the next resistance level 1.1035 (former multi-month high from February).
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#EURUSD under bullish pressure
• Likely to rise to resistance level 1.1035
EURUSD currency pair under the bullish pressure after the earlier breakout of the resistance level 1.0950 (former top of the previous impulse wave (1) from the end of March).
The breakout of the resistance level continues the active medium-term impulse wave (3) from the start of April.
Given the strong daily uptrend, EURUSD can then be expected to rise further toward the next resistance level 1.1035 (former multi-month high from February).
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Bitcoin is consolidating around the $30K mark for the third day, moving in a tight $20.7-30.3K range. Yesterday's news from the US had a moderately negative impact on the price but did not cause any sustained pressure.
The $30,000 mark was significant for Bitcoin in 2021 and the first half of 2022, acting as a market mode switch. Last year, bitcoin consolidated around this price for about five weeks before plunging sharply. There is a greater chance of a mirror dynamic, with the bulls taking a long time to gather their strength before making a decisive move higher.
The entire cryptocurrency market could follow a similar dynamic to the flagship cryptocurrency.
Bank of America noted that there had been a substantial outflow of bitcoins from cryptocurrency exchanges to users' wallets. This occurs when investors intend to hold BTC for the long term, suggesting that the pressure from sellers may be easing.
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The $30,000 mark was significant for Bitcoin in 2021 and the first half of 2022, acting as a market mode switch. Last year, bitcoin consolidated around this price for about five weeks before plunging sharply. There is a greater chance of a mirror dynamic, with the bulls taking a long time to gather their strength before making a decisive move higher.
The entire cryptocurrency market could follow a similar dynamic to the flagship cryptocurrency.
Bank of America noted that there had been a substantial outflow of bitcoins from cryptocurrency exchanges to users' wallets. This occurs when investors intend to hold BTC for the long term, suggesting that the pressure from sellers may be easing.
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US inflation weighs on the dollar
Last month, US inflation fell more than expected due to cheaper energy and food. The CPI rose 5%, down from 6% the previous month and just below the expected 5.1%. We had warned of this possibility.
However, it is challenging to see this as a surprise game-changer in the coming weeks. Moreover, core inflation - the real enemy of the Fed - accelerated from 5.5% to 5.6%. This is 1 point below the September peak, but it is further evidence that reversing this trend will take work.
Although trading robots reflecting the headlines have triggered a rally in equities and a sell-off in the dollar, only the latter has proved resilient. The bond markets, or "smart money", shifted their expectations for the Fed's next move slightly, putting the probability of a quarter-point hike at 68%, down from 72% the day before.
Last month, US inflation fell more than expected due to cheaper energy and food. The CPI rose 5%, down from 6% the previous month and just below the expected 5.1%. We had warned of this possibility.
However, it is challenging to see this as a surprise game-changer in the coming weeks. Moreover, core inflation - the real enemy of the Fed - accelerated from 5.5% to 5.6%. This is 1 point below the September peak, but it is further evidence that reversing this trend will take work.
Although trading robots reflecting the headlines have triggered a rally in equities and a sell-off in the dollar, only the latter has proved resilient. The bond markets, or "smart money", shifted their expectations for the Fed's next move slightly, putting the probability of a quarter-point hike at 68%, down from 72% the day before.
The USD's reaction was much more pronounced. The Dollar Index has lost 0.85% from its pre-release level and is back at 101.0, close to the lows seen in early February. The technical picture is now more supportive of the USD bears. EURUSD and GBPUSD are testing their 10- and 12-month highs, respectively. This dynamic leads us to view the February pullback in these pairs as a correction, which they overcame by mid-April.
The following key levels on the way up are at 1.13 for the euro and 1.30 for the pound, both of which seem relatively distant targets given the accumulated fatigue from last month's rally.
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The following key levels on the way up are at 1.13 for the euro and 1.30 for the pound, both of which seem relatively distant targets given the accumulated fatigue from last month's rally.
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