Forex Fundamental News Facts for 29th April, 2024
- U.S. PCE data is lower than expected, rate cuts not likely to occur until Sep.
2. The Bank of Japan keeps its policy rate unchanged at 0-0.1%.
3. Another regional bank collapses in the United States.
4. U.S. campus protests against the war in Gaza continue.
5. Israel approves the plan to attack Rafah.
6. Yuan Devaluation Debate Surfaces As Traders Weigh Next FX Shock.
7. Dollar A Tad Softer As Markets Wait For Fed.
8. Speculators Dump Oil.
9. AUD Retail sales news on the line.
The U.S. Personal Consumption Expenditures (PCE) price index recorded an annual rate of 2.7% in March, while the core PCE index rose 2.8% year-on-year.
Both headline and core PCE data increased by 0.3% from the previous month.
Economists had expected slightly lower rates for both headline and core PCE.
U.S. one-year ahead inflation expectations reached 3.2% in April, marking the highest level since November 2023.
U.S. interest-rate futures traders anticipate the Federal Reserve’s first interest-rate cut in September 1.
Bank of Japan’s Decision:
The Bank of Japan (BOJ) kept its benchmark policy rate unchanged at 0-0.1%.
BOJ lowered its median forecasts for core CPI for FY2024 and FY2025.
The wording about purchasing the same amount of government bonds was removed.
BOJ Governor Kazuo Ueda emphasized that interest rates may rise if inflation trends upward.
There is uncertainty about the timing of future rate hikes and when to reduce government bond purchases.
The Japanese yen has significantly depreciated, surpassing the thresholds previously set by Japan, leading to speculation about when and why the authorities have not yet intervened to stabilize it. The yen hit a 34-year low against the dollar after the Bank of Japan (BOJ) signaled that it would maintain relaxed financial conditions, causing the currency’s value to drop rapidly.
Finance Minister Shunichi Suzuki has warned against rapid depreciation and assured that the government will respond accordingly to changes in foreign exchange rates. He has also expressed concerns about the yen’s decline to US Treasury Secretary Janet Yellen, which market observers interpret as a precursor to possible intervention.
The BOJ’s decision to maintain its stance has led to further concerns about the yen. Despite this, some believe that intervention may not be effective due to the significant difference in interest rates driving the yen’s decline.
Goldman Sachs strategists suggest that the global macroeconomic environment could lead to further weakening of the yen, making intervention difficult. However, they also note that the risk of intervention could increase significantly if the yen continues to underperform other assets.
Despite the yen’s decline, Deutsche Bank’s George Saravelos suggests that a weaker yen may not necessarily be detrimental to Japan as it does not cause inflation and increases the value of overseas assets held by Japanese investors.
In the trading strategy, traders appear to be betting against a successful intervention by Japan. Despite the risks, bearish speculators are likely to buy dollar-yen at lower levels if officials intervene. This situation reflects the high level of uncertainty and volatility in the currency market.
Collapse of Republic First Bank in the U.S.:
The Republic First Bank collapsed, becoming the first U.S. bank failure this year.
The bank, formerly known as Republic Bank, was headquartered in Philadelphia.
Pennsylvania’s banking and securities regulator ordered its closure and designated it to be taken over by the U.S. Federal Deposit Insurance Corporation (FDIC).
To safeguard depositors, the FDIC signed an agreement with Fulton Bank in the same region to take on all deposits and purchase all assets of Republic First Bank.
U.S. Campus Protests on Gaza Conflict:
Pro-Palestinian protests have spread to more U.S. college campuses.
Authorities are running out of patience, and police are pushing back forcefully.
Rubber bullets and tear gas were used to disperse student protesters at Emory University, resulting in arrests.
Tents in support of Gaza residents have been erected in at least 50 universities across the United States, and hundreds of protesters have been arrested.
Israel’s Approval for Rafah Attack:
IDF Chief Herzi Halevi approved battle plans for an imminent Israeli offensive against the southern Gaza Strip city of Rafah.
The plan was reportedly approved ahead of an imminent attack.
The IDF attended the assessment and approval of plans for the continuation of the war.
Yuan(CNY) Devaluation Debate Surfaces As Traders Weigh Next FX Shock:
There is growing speculation that China may need to take drastic measures to bolster its struggling economy, including a significant devaluation of the yuan. Proponents argue that this would boost exports and allow the central bank to reduce interest rates. Critics, however, believe it could trigger a cycle of capital outflows and further depreciation of the yuan, potentially destabilizing the global currency market.
This controversial option, which has not been used since the unexpected devaluation in 2015, is gaining attention as China explores various ways to stimulate its economy and attract investors. Bob Elliott, CEO of Unlimited Funds Inc., suggests that a one-time significant devaluation could be an effective strategy, potentially leading to a 10% to 20% drop in the yuan’s value.
The People’s Bank of China (PBOC) faces a dilemma as it tries to balance economic recovery and currency stability. The yuan is under pressure due to a rising US dollar, capital outflows, and concerns about another trade war between the world’s two largest economies. The yuan is currently near its weakest level against the dollar, which could lead to trading issues in the spot market.
The question arises whether the PBOC should prioritize growth over currency stability. Brad Bechtel, Global Head of Foreign Exchange at Jefferies Financial Group Inc., believes they should, but doubts they will due to the potential consequences. A significantly weaker yuan could undermine investor confidence, trigger a stock market sell-off, increase capital outflows, and raise financing costs for local companies with foreign-currency debt.
A substantial depreciation of the yuan could also lead to a “true currency war,” according to Bechtel. A 5% to 10% drop in the yuan could cause a 3% to 7% fall in the currencies of regional export countries, possibly leading to coordinated intervention by nations including Japan, Korea, and Indonesia.
Despite these risks, the PBOC is likely to resist any large depreciation, even in the event of escalating trade tensions with the US, according to Goldman Sachs Group Inc. Meanwhile, some investors are moving to safer assets in anticipation of a potential shock in the yuan. Macro trader Edouard de Langlade is betting that China’s defense of the currency will not be sustainable.
Despite the uncertainty, there is a growing consensus that the yuan’s value will continue to decline. Major Wall Street banks predict that the currency will weaken by the end of the second quarter due to fragile confidence. Elliott believes that a devaluation could align the yuan more closely with market fundamentals and strengthen its position as an international currency.
Over the past four decades, China’s economy has become less energy-intensive as industries have modernized and shifted towards the service sector. However, in the last five years, energy intensity has remained constant, making it challenging to replace coal with renewables and achieve the government’s emissions cap goal.
In 2023, China converted one tonne of standard coal or its equivalent into a GDP worth 21,000 yuan. This conversion efficiency has not improved since 2018, according to the National Bureau of Statistics (NBS). Energy consumption has generally followed economic growth, unlike other major economies where it has declined relative to output.
China has been at the forefront of deploying large amounts of wind and solar energy in recent years. In 2022, hydro, wind, solar, and nuclear energy accounted for 17.5% of total energy consumption, up from 13.6% in 2017. Most of these gains have been at the expense of coal, which supplied 56% of total energy consumption, down from 61% in 2017. However, due to rapid economic growth and energy consumption, a smaller share has resulted in more absolute use.
Before 2018, China made significant annual reductions in energy intensity as heavy industries modernized and the economy shifted from energy-intensive manufacturing to less energy-intensive services. However, since 2018, there has been no further shift away from manufacturing towards the services sector. This stagnation is likely due to the impact of the coronavirus pandemic and the resulting movement restrictions.
The government has focused on stimulating manufacturing to offset weakness in other parts of the economy and reduce dependence on imports from the United States and its allies. This has resulted in the economy becoming more energy-intensive, counteracting any underlying efficiency improvements.
Some of these changes may be temporary, particularly those associated with the pandemic, while others may be permanent, such as the focus on new industries and reducing reliance on imported technology. If the economy resumes its gradual shift towards services, energy intensity will likely decrease, and apparent efficiency will increase in the coming years. However, the focus on building new industries and reducing reliance on imported technology has resulted in higher energy consumption and delayed the timeline for reducing coal consumption and emissions.
China’s Bond Market Performance:
China’s benchmark 10-year yield has dropped by approximately 23 basis points this year.
In contrast, U.S. Treasury yields for similar maturities have increased by 78 basis points.
China’s outperformance is driven by its different economic cycle:
The Chinese central bank aims to ease policy to support growth.
Policymakers in other parts of the world maintain elevated interest rates to combat inflation.
Despite tempting U.S. Treasury yields, some foreign managers find China’s bond market attractive due to market volatility and China’s structural slowdown.
Factors Supporting China’s Bonds:
Recent rally in Chinese bonds: Stuttering economic growth and the threat of deflation have fueled bets on further policy easing.
Haven demand due to a selloff in local stocks has increased the appeal of fixed-income assets.
Divergence from global peers: China’s bonds have historically been detached from global counterparts.
The current divergence, based on the spread between U.S. and Chinese 10-year yields (over 230 basis points), is the widest in two decades.
Reduced correlation with global peers: Overseas investors are exiting the Chinese bond market due to fears of geopolitical tensions.
Foreign ownership of China’s government debt declined to 7.5% by the end of March, nearing the lowest level since 2018.
Some investors find Chinese bonds less attractive now: Yields have fallen significantly compared to overseas counterparts.
Reallocating to U.S. Treasuries or other Asian rates markets is being considered.
Goldman Sachs’ View: While acknowledging the central bank’s impact, Goldman Sachs expects yields to remain relatively low over the longer term.
The People’s Bank of China (PBOC) may guide bond yields higher gradually, but a shift to tightening mode is unlikely.
Long-term interest rates are expected to stay low due to weak credit demand and efforts to address local government debt risks.
To our concern, there is a high chance that CNY manufacturing PMI data will be less than previous value. If that happens, after the news release, USD will act much stronger and it may directly reflect on USD demand and commodity supply. (BEARISH Gold).
Alternatively, if the value rises than the previous, then USD will act much weaker and it may directly reflect on USD supply and commodity demands (Bullish Gold).
Dollar A Tad Softer As Markets Wait For Fed:
The US dollar softened slightly in early trading on Monday, with the yen, euro, and sterling remaining near their lowest levels from Friday’s volatile session. This was due to a holiday in Japan, which saw the yen rise to 158.05 per dollar, a nearly 0.2% increase. The yen had fluctuated significantly on Friday, moving nearly 3.5 yen between 158.445 and 154.97, as traders expressed their disappointment following the Bank of Japan’s decision to maintain its policy settings and provide little insight into reducing its Japanese government bond purchases.
The primary focus for markets this week is the Federal Reserve’s May 1 policy review. Investors are already expecting a delay in rate cuts due to persistent US inflation and statements from officials, including Chair Jerome Powell, emphasizing that these plans are data-dependent. Vishnu Varathan, head of Asia economics and strategy at Mizuho Bank in Singapore, anticipates more two-way action for the dollar-yen pair until the Federal Open Market Committee meeting.
The Fed is expected to keep its benchmark interest rate steady at 5.25% to 5.5% at the April 30-May 1 meeting. Investors are currently anticipating possibly only one cut this year, expected by November, according to the CME’s FedWatch tool. Markets are also vigilant for any intervention by Japanese authorities to manage the yen’s nearly 11% decline this year. Despite the yen’s largest drop in six months on Friday, it also briefly surged to 154.97 to the dollar, sparking speculation of potential intervention by Japanese authorities. The cause of this move was not immediately clear. The sterling was at $1.2509, up 0.15%, but still far from Friday’s $1.2541 highs.
The US labor market is undergoing significant changes influenced by intersecting trends.
Generative AI and Job Automation:
Generative artificial intelligence (AI) is set to automate nearly a quarter of jobs across all industries.
Sectors like information services are expected to lead in AI adoption.
While some jobs (e.g., logo design, copywriting, translation) may be displaced by AI tools, new job categories may also emerge.
Recruiting and Staffing Transformation:
Generative AI can enhance recruiter efficiency by improving tasks like job descriptions, resume formatting, candidate ranking, and initial interviews.
Online job marketplaces can offer private-label AI services for tasks such as logo design, translation, and voice-over work.
Labor Market Reorientation:
The US labor participation rate has declined steadily since 2000, influenced by factors like baby boomer retirements, economic crises, and increased college enrollments.
Labor churn (job changes) has risen, with gig work becoming more common.
Companies are turning to freelancers, gig workers, and temps to supplement or replace full-time employees.
Temp Staffing and Employment Cycle:
Temp staffing trends often precede broader labor market shifts.
Currently, temp penetration is declining.
Hiring freezes and downsizing are expected to soften labor demand and increase labor supply.
Job Posting Trends:
Total job postings have declined significantly in blue-collar and clerical sectors (e.g., construction, manufacturing, retail).
White-collar and highly skilled sectors (e.g., software development, finance) show signs of stability.
Overall, job postings are below pre-Covid levels.
The US labor market is in its mid-to-late cyclical stages.
Unemployment is expected to rise, and non-farm employment may decline over the next four quarters.
Speculators Dump Oil:
The oil market has experienced fluctuations recently. While geopolitical risks have eased, there are signs of tightening in the physical market. The Brent Jun/Jul spread strengthened, reflecting a deep deficit in oil balance for Q2. However, the outlook for H2 remains uncertain and depends on OPEC+ policy. Speculators reduced their net long positions in ICE Brent and NYMEX WTI. In contrast, middle distillate fundamentals appear bearish due to rising inventories. Copper hit $10,000/t due to global demand recovery and supply constraints, but weak short-term demand and US Fed policy uncertainty may limit further upside. In agriculture, money managers reduced bearish bets in CBOT wheat, corn, and soybeans.
The Federation of Korean Industries (FKI) has reported that the Q4 CPI inflation rate could potentially rise to 4.98% if oil prices surge due to the recent instability in the Middle East. Global crude oil prices have seen an increase of around 20% since June 2023, with Brent crude, Dubai crude, and WTI crude all experiencing significant rises.
The ongoing conflict between Israel and Iran has raised concerns about a potential surge in oil prices, particularly if the situation escalates to full-scale war. Such a scenario could lead to a steep rise in prices, especially if it results in the Strait of Hormuz being blocked.Oil prices feared to rise to $109-157 a barrel if war breaks out between Israel and Iran
As Korea is heavily reliant on crude imports, a sharp increase in oil prices would not only affect producer prices but also distribution costs and energy bills, thereby increasing consumer prices. The FKI has emphasized the need for comprehensive measures to manage inflation, especially as domestic inflation is already exceeding the central bank’s inflation goal.
The FKI has analyzed four potential scenarios for oil price changes following a full-scale conflict between Israel and Iran and has forecasted the CPI inflation rate for 2024Q4 for each scenario. If tensions and oil prices remain at current levels, the domestic CPI inflation rate is expected to be 3.01% for 2024Q4. However, if the Middle East conflict escalates and global oil prices rise, the 2024Q4 CPI inflation rate could increase to 3.37% or even 4.97%, depending on the severity of the conflict.
Sang-ho Lee, vice president of the FKI’s Economic and Industrial Research Department, has expressed concerns about the potential increase in oil prices due to increased geopolitical risks in the Middle East. He emphasized the need for proactive measures to ensure a stable oil supply, such as diversifying the oil supply, increasing stockpiles, and implementing price hedges to prevent oil price increases from causing price instability.
AUD Retail sales news on the line:
In the first quarter, Australia’s consumer price inflation decelerated at a slower pace than anticipated due to persistent service cost pressures. This unexpected outcome led to a shift in market expectations, with hopes for rate cuts this year being abandoned. Consequently, the Australian dollar rose by 0.6% to $0.6522, and three-year bond futures fell to their lowest point this year.
Markets have started to factor in a small probability of a rate hike by August, while the likelihood of a rate cut this year has been virtually ruled out. The total expected easing for this year has been reduced to 3 basis points, a significant decrease from the previous 17 basis points.
According to data from the Australian Bureau of Statistics, the consumer price index (CPI) increased by 1% in the first quarter, surpassing market predictions of 0.8%. Although the annual CPI inflation rate slowed to 3.6% from 4.1% due to base effects, it was still higher than the anticipated 3.5%. In March alone, the CPI increased by 3.5% compared to the same month last year.
The trimmed mean, a key measure of core inflation, also rose by 1% in the first quarter, exceeding forecasts of 0.8%. The annual rate slowed to 4%, down from 4.2%.
Economist Madeline Dunk from ANZ expressed concern over these figures, stating that they were higher than what was expected by both the market and the Reserve Bank of Australia (RBA). She suggested that if the numbers for services and non-tradables do not decrease in Q2, there is a possibility that rate cuts could be postponed to next year.
Westpac has also adjusted its forecast for the first rate cut to November, citing slower disinflation progress and a robust labour market. The RBA has maintained interest rates at 4.35% for three consecutive meetings, with the expectation that inflation will return to the target range of 2-3% by late 2025.
However, policymakers have been cautious about making any policy changes due to the tight labour market. Since May 2022, the central bank has increased rates by 425 basis points to control inflation.
The March quarter report highlighted several significant increases, including education fees, rents, and insurance costs, which rose at the fastest rates since 2012, 15 years, and 23 years, respectively. There was a noticeable divergence between tradables and non-tradables, with prices for non-tradable goods remaining high at 5.0%, while tradables increased by just 0.9% from a year ago.
Sean Langcake, head of macroeconomic forecasting for Oxford Economics Australia, noted that the strength in underlying inflation suggests that further disinflation will be slow. He added that the chances of a rate cut in 2024 have decreased.
Globally, investors have reduced rate cut expectations as it becomes apparent that bringing inflation back to target may be challenging. In the U.S., markets are now expecting less than two rate cuts from the Federal Reserve by the end of the year, a significant change from the five reductions expected at the start of the year.
To our concern, there is a high chance that AUD retail sales data will be less than previous value. If that happens, after the news release, AUD will act much weaker and it may directly reflect on AUD supply (BEARISH AUDUSD).
Alternatively, if the value rises than the previous, then AUD will act much stronger and it may directly reflect on AUD demands (Bullish AUDUSD).
➖➖➖➖➖➖➖➖➖
🔥News releases on This WEEK :
29/04 Mon All Day JPY Bank Holiday
29/04 Mon All Day EUR German Prelim CPI m/m
30/04 Tue 7:00am NZD ANZ Business Confidence
30/04 Tue 7:30am AUD Retail Sales m/m
30/04 Tue 7:30am CNY Manufacturing PMI
30/04 Tue 6:30pm CAD GDP m/m
30/04 Tue 6:30pm USD Employment Cost Index q/q
30/04 Tue 8:00pm USD CB Consumer Confidence
01/05 Wed 3:00am NZD RBNZ Financial Stability Report
01/05 Wed 4:45am NZD Employment Change q/q
01/05 Wed All Day CNY, CHF, EUR (french,german,italian) Bank Holiday
01/05 Wed 7:00am NZD RBNZ Gov Orr Speaks
01/05 Wed 6:15pm USD ADP Non-Farm Employment Change
01/05 Wed 7:45pm USD Final Manufacturing PMI
01/05 Wed 8:00pm USD ISM Manufacturing PMI & JOLTS Job Openings
02/05 Thu 12:00am USD Federal Funds Rate & FOMC
02/05 Thu 12:30am USD FOMC Press Conference
02/05 Thu 2:15am CAD BOC Gov Macklem Speaks
02/05 Thu 12:30pm CHF CPI m/m
02/05 Thu 6:30pm CAD Trade Balance
02/05 Thu 6:30pm USD Unemployment Claims
02/05 Thu 6:45pm CAD BOC Gov Macklem Speaks
03/05 Fri All Day JPY & CNY Bank Holiday
03/05 Fri 6:30pm USD Average Hourly Earnings m/m & Non-Farm Employment Change
03/05 Fri 7:45pm USD Final Services PMI
03/05 Fri 8:00pm USD ISM Services PMI
N.B. Time mentioned here is on Gmt +6
➖➖➖➖➖➖➖➖➖
Sources :
– CNBC, Bloomberg, Reuters, Fastbull, Yahoo Finance, CNN, ForexFactory News, Myfxbook News etc
Prepared to you by “Akif Matin“
Join our FWE telegram, Facebook Page & Group
Add a Comment
You must be logged in to post a comment