European equities traded in the green, while Wall Street finished its session nearly unchanged. That said, market sentiment deteriorated during the Asian session today, perhaps as the acceleration in Australia's underlying inflation metrics raised concerns that interest rates around the globe may rise faster than previously thought.
As for today, the main event on the agenda may be the Bank of Canada (BoC) decision, while tonight, it will be the turn of the Bank of Japan (BoJ) to decide on monetary policy.
Asian Shares Slide as AU Underlying Inflation Accelerates More Than Anticipated
The US dollar traded mixed against the other major currencies on Tuesday and during the Asian session Wednesday. It gained versus CAD and NZD, while it underperformed against CHF, AUD, and GBP. The greenback was found virtually unchanged against EUR and JPY.
The weakening of the Kiwi and the Loonie, combined with the strengthening of the franc, suggests a risk-off trading activity. However, the strengthening of the Aussie and the pound points otherwise. Therefore, with the performance in the FX world painting a blurry picture with regards to the broader market sentiment, we prefer to turn our gaze to the equity world.
There, major EU indices were a sea of green, with Wall Street later trading virtually unchanged. Risk appetite deteriorated even further during the Asian session today, with all indices under our radar entering negative waters.
In our view, the change in investors' morale during the Asian trading may have resulted from the more-than-expected acceleration in Australia's trimmed mean and weighted mean CPI rates during Q3.
Although the headline rate slowed to +3.0% YoY from +3.8%, both the trimmed mean and weighted mean rates jumped to +2.1% YoY, entering the Reserve Bank of Australia's (RBA) target range 2-3% for the first time since 2016.
The Aussie spiked up at the time of the release, perhaps as market participants got more convinced that the RBA could alter its narrative on interest rates soon.
Until the latest gathering, the RBA has repeatedly noted that interest rates are unlikely to start rising before 2024. Still, recently, investors have been anticipating that to happen some time in the middle of next year, and the inflation numbers may have added more credence to their view.
So, how did the Australian CPIs affect the broader market sentiment? Maybe the fact that the RBA could start lifting rates much sooner than previously thought triggered speculation that other, more hawkish central banks could proceed with even more aggressive and faster tightening.
Another Chinese property developer, Modern Land (HK:1107), defaulted on a bond payment, and the latest announcement on real estate taxes may have also weighed on sentiment.
AUD/USD – Technical Outlook
AUD/USD traded higher yesterday, staying above the upside support line drawn from the low of Sept. 29 and getting closer to the peak of Oct. 21, at 0.7545.
In our view, as long as the pair continues to print higher highs and higher lows above the pre-mentioned upside line, we would consider the short-term picture to be positive.
A clear and decisive break above 0.7545 would confirm a forthcoming higher high and may see scope for advances towards the peak of July 6, at 0.7600.
If the bulls are unwilling to stop there, then a higher break may extend the trend towards the 0.76500 territories, near the inside swing low of June 3.
The move that would make us abandon the bullish case is a dip below 0.7440, a support level marked by the inside swing high of Oct. 15.
This could initially pave the way towards the low of Oct 18, at 0.7380. if it breaks through, the pair could head towards the 0.7330 zone, which provided support on Oct. 12 and 13.
BoC and BoJ to Decision on Monetary Policy Due
Today, the main item on the agenda may be the Bank of Canada (BoC) interest rate decision. At its prior gathering, the bank left the door for further tapering wide open, despite some participants expecting a delay mainly due to the economic contraction in Q2.
Even Governor Tiff Macklem said that he and his colleagues are moving closer to a time when continuing to add stimulus through QE won't be necessary, adding more credence to the view that more policy withdrawal could be delivered at this gathering.
Since then, Canadian data have been coming in on the bright side, with the BoC's Business Outlook Survey revealing that business sentiment hit a new record, the employment returning close to pre-crisis levels, and inflation accelerating even further in September.
In our view, this makes a case for another tapering move today nearly inevitable and suggests a relatively sanguine language in the statement accompanying the decision.
With the QE tapering process was expected to be over in December, anything suggesting that interest rates could start rising early next year could further support the Canadian dollar, which the recently fueled rally in oil prices.
Let's not forget that Canada is the world's fifth-largest oil-producing nation, while it holds fourth place in exports.
As for tonight, during the Asian session Thursday, we have another central bank deciding on monetary policy, the Bank of Japan (BoJ).
However, with Japanese inflation near zero, well below the bank's target of 2%, we don't expect any material changes, neither to the actual policy measures nor the language in the accompanying statement.
Once again, the yen may not react to the outcome and stay driven by the yield differentials between Japan and other major nations.
With the global surge in inflation triggering a rally in global government bond yields and the BoJ maintaining a ceiling to its yields, we do see the case for the Japanese currency to continue underperforming its other major peers.
CAD/JPY – Technical Outlook
CAD/JPY traded somewhat lower yesterday after it hit resistance at 92.50. However, the slide paused near the tentative upside support line drawn from the low of Sept. 21.
This means that the latest uptrend is still intact, but given the rate's proximity to the upside line, we prefer to take the sidelines for now.
To start examining a trend resumption, we would like to see a clear break above the 93.00 zones, marked by the high of Oct. 21. This will confirm a forthcoming higher high on the daily chart and take the rate into territories last seen back in August 2015.
The next stop may be the 94.00 zones, marked by the inside swing low of Aug. 4, 2015, where another break may encourage advances towards the psychological zone of 95.00.
We will start examining the bearish case as soon as we see a decisive dip below 91.65, a zone supporting the action since Friday. This will confirm a forthcoming lower low and the break below the aforementioned tentative upside support line.
The next stop may be the low of Oct. 13, at 90.90, or the low of the day before at 90.50. If neither level can provide support, we could see a test near the psychological zone of 90.00, where another break could extend the fall towards the 89.25 area, marked by an intraday swing high formed on Oct. 8.
As for the Rest of Today's Events
From the US, we get durable goods orders for September. Headline orders are forecast to slide 1.1% MoM after increasing 1.8% in August, but the core rate could tick up to +0.4% MoM from +0.3%.
The Energy Information Administration (EIA) report on crude oil inventories for last week is also coming out. The forecast points to a 1.914mn barrels increase following a 0.431mn decline the week before.
However, bearing in mind that the American Petroleum Institute (API) reported a 2.318mn inventory build, we would consider the risks surrounding the EIA forecast as tilted to the upside.