Week ahead

Dollar rise again

The recent financial markets have been driven by sentiments, particularly revolving around the United States debt ceiling issue. Treasury Secretary Janet Yellen has raised concerns about a potential default in June if Congress fails to extend it. President Joe Biden and senior Congress members are actively negotiating to resolve the matter, which mainly centers around spending levels. Opposition Republicans have indicated a willingness to raise the debt ceiling if the Government accepts spending cuts.

Market expectations of a Fed rate hike rose to 65% after positive macroeconomic data and higher inflation figures were reported. According to the CME FedWatch Tool, the Fed is projected to hike at the 13th meeting, with interest rates predicted to rise by 0.25 percent on June 14.

Overall sentiment has turned more hawkish on the Fed, and if the debt ceiling crisis is resolved favorably and next Friday’s NFP prints more than expected, a rate hike in June seems more likely.

The next round of US employment data (NFP) on Friday is very important.

Forecasts for the US non-farm payrolls report added 180,000 jobs in May, which was less than the previous month, but still a significant figure. The unemployment rate is expected to rise to 3.5 percent, but wage growth will pick up slightly over the year.
This week, Investors will be watching the payrolls and UNEMPLOYMENT RATE. the result is Fed’s next moves, as any unexpected changes in policy could lead to significant market volatility. In the meantime, traders are positioning themselves for a potential rate hike, with many betting on a stronger dollar and higher bond yields in the coming months.

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Interest rate expectations rice due to the UK inflation

UK inflation rate has hit single digits anew, though it has not attained the number foreseen by economists. The United Kingdom’s net inflation growth has surged to the same level as ten years ago.

Expectations are high for a Bank of England interest rate hike soon; from 4.5% to a minimum of 5%, and possibly even as high as 5.5% to curb inflation’s swift expansion, according to financial market predictions.

Inflation figures have impacted the British bond market leading to heightened interest rate expectations, resulting in government bond yields rising to a multi-month high and investors anticipating increased bond yields.

We don’t have any important calendar for GBP this week, but the US economic calendar is busy with the full US employment report or NFP on Friday. Continued strong growth in the US labor market will increase the interest rate of the Federal Reserve, favoring the US dollar and harming the GBPUSD currency pair. The US government and parliament are close to a debt agreement, with a deadline of June 1st, and delays will harm the US economy.

Eurozone and failure to grow

Euro had an uneventful week. Euro remained feeble versus USD and struggled against GBP. It has slumped against USD uninterruptedly for four weeks.

ECB officials continue to favor interest rate increases, yet this stance hasn’t visibly impacted the euro. This may be due to the fact that the ECB’s rate hikes have translated into higher prices, rendering the official’s hawkish outlook ineffective in shaping interest rate forecasts.

Next week, Eurozone will release inflation data, but the forecast suggests that significant deviation from expectations in the inflation data of the euro area is unlikely.

The main driver of the EURUSD currency pair is again the US dollar and the news related to the negotiations on the debt ceiling of the US federal government. In the meantime, the US NFP employment report will be very important for the market.

Release of data from China, Canada, and Australia

On Wednesday, the newest purchasing managers’ index (PMI) figures will be disclosed in China. As China’s economy has recently lost strength with the fading of the reopening boom, the results of these surveys will display if the disquieting trend persisted in May. In case it did, the currencies of countries such as Australia and New Zealand, which rely on Chinese demand for their exports, may undergo additional decline.

The fundamental bias of AUD and NZD is Bearish and the forecast is Bearish too.

The release of the latest purchasing managers’ index (PMI) figures in China on Wednesday will be closely watched by investors and analysts alike. With the country’s economy experiencing a slowdown in recent months, the PMI results will reveal whether the trend continued into May. If so, this could have detrimental effects on the currencies of countries heavily reliant on Chinese demand for their exports, such as Australia and New Zealand. As such, many will be keeping a keen eye on the figures to gauge the health of China’s economy and the potential knock-on effects on the global market.

Economic calendar

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Week ahead

Everything involved in FED decisions

🇺🇸 More than 82% of market participants do not expect an interest rate hike by the Federal Reserve in the June 14 meeting. (The current interest rate ceiling is 5.25%.)

As it is known, market participants do not only expect interest rates to increase but also to decrease it. But it should be noted that if the stickiness of inflation is high, the Federal Reserve will probably increase the interest rate again, and because the market has predicted a decrease in the interest rate, this issue can put heavy pressure on stocks and indices. be risk-averse. Of course, this analysis is based on the assumption that the US labor market is strong and the unemployment rate is low. If the unemployment rate increases, the Federal Reserve will have to adopt an expansionary policy, and Congress will urgently increase the debt ceiling of the US government.

The US dollar is the foundation of all financial markets. Always one side of the price of commodities (like crude oil, Silver, and gold) or cryptocurrencies like Bitcoin and even the stock market is the US dollar! The US dollar is the main driver of all financial markets in the world. The US economy is the largest economy and the US dollar is the most common currency in the world. This is why all traders of all markets are confused in their decisions. Because the ability to predict the decisions of the Federal Reserve at this point in time has become difficult.

Why is the dollar strong even with the risk of rate hikes ending?

The US dollar index strengthened against most major currencies last week. In fact, the US dollar index has grown by almost 2% over the past two weeks. This is the best 10-day gain in the US dollar index since mid-September. But what happened that the US dollar index strengthened and is it possible to continue the growth of the US dollar?

The US dollar has grown as has the yield on US Treasuries. This means that the interest rate expectations of the market are retreating from the interest rate cut. Since the beginning of the US credit crisis, interest rate expectations quickly moved from interest rate increases to interest rate decreases. The market was worried that with the onset of the credit crisis, the central bank would be forced to lower interest rates to prevent recession and economic crisis. For this reason, traders buy the dollar as a safe asset

Interest rate increase or decrease?

While the market’s interest rate expectations were moving away from a rate cut, the chairman of the US Federal Reserve gave a speech saying that there is no need to raise interest rates. The market is preparing for another rate hike, but the Federal Reserve has not made a decision. This means federal uncertainty and that everything depends on the performance of economic indicators. The performance of the US economic data will determine whether the Federal Reserve will move towards raising interest rates or not.

Traders are focused on the net PCE inflation index.
April’s expectation for this index is 4.6%. This is not a good figure for the central bank. This means that the Federal Reserve may try to raise interest rates to lower it.

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🇪🇺 Even though there has been no change in the possibility of interest rate hikes for the European Central Bank, a batch of recent worrying data for Germany, along with the recovery of the US dollar, have caused the Euro to fall, and as a result, the single currency has reached several levels. Lost a key.

The EURUSD currency pair now trades in a key area of 1.0800. And the reason for that is the fear of recession and global financial problems and the growth of the dollar last week. But at these low levels, can you think of buying Euros?
A key driver of the euro’s attractiveness against the dollar recently has been the perception that the Federal Reserve has reached its interest rate peak while the European Central Bank still has a way to go for contractionary policies. Although the European Central Bank will still be on the path of contractionary policies, markets are already re-betting on an interest rate hike by the US Federal Reserve after Logan’s speech.

COT report of Euro and US dollar

Ziwox Terminal (COT report)

You should note that the US debt ceiling problems and the purchase of the EURUSD currency pair were the biggest transactions among the G10 currencies, and since recent developments have ended positively for the dollar, we will probably see a Long Squeeze in this currency pair. According to the COT report, 7667 Long net positions Increased in EUR, and 5933 Long net positions Increased in the last week and these close positions by these holders can be a Long Squeeze situation. There is plenty of room to reprice the hawkish Fed expectations, so finding a floor for the EURUSD pair is risky right now.

The PMI indicators that will be published on Tuesday can play a very important role in stopping the fall of the euro or, as we mentioned above in the (Long Squeeze), fuel a sharp and further fall. The forecasts do not indicate much change in the economic outlook of the Eurozone. The manufacturing sector is expected to contract again, with growth fueled by service industries.

RBNZ, Hike interest rates again?

🇳🇿 The Reserve Bank of New Zealand is holding a policy meeting this week. It is expected to raise interest rates by 0.25% on Wednesday. If it does, it would be the 12th consecutive increase since the contractionary cycle began in October last year and would take interest rates to 5.50 percent, the highest among advanced economies.

The Bank of New Zealand will release updated forecasts in its quarterly monetary policy statement on Wednesday, so the New Zealand dollar could rise if policymakers raise their terminal rate to meet or exceed market expectations.

Next, in this week’s economic calendar, we will have Australia’s preliminary PMI indicators. For Canada, April wage growth will be released on Thursday. And for Japan, we’ll have machinery orders, the manufacturing PMI, and a preview of May inflation with the Tokyo CPI.

Economic calendar

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Week ahead

End of interest rate hikes by FED

🇺🇸 For the US dollar, the CPI index for April, due out on Wednesday, will be on everyone’s radar. The core CPI data is expected to change from 5.0% to 5.2% year-on-year, while the core CPI rate is expected to be unchanged at 5.6% year-on-year, indicating that the increase in the cost of factory goods accelerated during the month.

Also, the U.S. Nonfarm Payrolls data and last week’s US jobless claims released rose by the most in six weeks, a sign that the US labor market may be weakening. For this reason, this week’s inflation can be very important because the reduction of inflation along with the pressured job market can provide peace of mind for the Federal Reserve.

Note that investors also expect interest rates to fall by more than 0.75% by the end of the year.

Specifying the policies of banks turn by turn, Now for BOE

🇬🇧 After a turbulent week for the European Central Bank and the Federal Reserve, it is the Bank of England’s turn.

In its last meeting in March, the Bank of England increased the interest rate by 0.25% this time after increasing it 10 times.
BOE officials downplayed the surprise rise in inflation in February and focused on their next steps, saying more accommodative policy would be needed if there was evidence of sustained price pressures. The view that European banks, including the UK, are better supervised than US banks appears to have been partly supportive of European currencies. This raises the expectation of traders and analysts to predict interest rate hikes several more times for the BOE.
Since then, data has shown that inflation has eased less than expected and the core inflation rate has remained marginally above 10 percent year-on-year, allowing investors to see around 0.6 percent more rate hikes by the end of this year. price For next week’s session, investors are roughly 85% likely to see interest rates rise by 0.25%, with the remaining 15% likely to hold interest rates unchanged.

Therefore, the market has well-priced the pound’s currency strength with a 0.25% hike, so what causes more rapid growth is a surprise greater than 0.25%.

What could further dampen the bullish outlook for the pound could be a bigger-than-expected decline in Britain’s first estimate of first-quarter gross domestic product (GDP), which is due to be released on Friday alongside the country’s trade data for March.

China, Australia, and New Zealand

🇦🇺 🇳🇿 🇨🇳

Trade data from the world’s second-largest economy and Australia and New Zealand’s main trading partner (China) is due on Tuesday and may be of interest to traders for the New Zealand dollar and the Australian dollar.

After China’s PMI data disappointed traders last week, the release of weak trade data this week could indicate that China has yet to return to its previous decline after declaring the end of the Coronavirus in the world.

China’s Consumer Price Index (CPI) and Producer Price Index (PPI) will be released on Thursday.

Economic calendar

Important news/events for this week are:

Thu May 9:


Wed May 10:



Thu May 11:




Fri May 12:

🇬🇧 GDP index

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China manufacturing

China’s GDP for 1Q23 is better than expected

1Q23 GDP grew 4.5%YoY, much faster than the 2.9%YoY recorded for 4Q22. This is a better-than-expected data report. We expect that the government will hold back extra stimulus plans and the yuan should strengthen

GDP grew faster than expected in the first quarter of 2023 with consumption the main growth engine

China’s GDP increased 4.5%YoY in 1Q23, which was better than our forecast of 3.8%YoY, and stronger than the previous quarter’s 2.9%YoY.

The main reason for the faster-than-expected growth was much stronger growth in retail sales, which accelerated to 10.6%YoY in March and 5.8%YoY for 1Q23 after 3.5%YoY growth in January to February. Such rapid retail sales growth has not been seen since June 2021, when it grew 12.1%YoY. The growth in retail sales was mainly boosted by catering.

In contrast, we did not expect infrastructure investment growth to slow to 8.8%YoY for 1Q23, compared to 9%YoY growth in the first two months of the year though infrastructure investment still increased at a speed faster than overall fixed asset investment growth of 5.1%YoY in 1Q23 (5.5%YoY YTD in February).

Even with slower growth in March, we still believe infrastructure should grow faster from 2Q23 after the strong loan growth in March, much of which was for infrastructure projects.

Industrial production grew only at 3.9%YoY in March and 3.0%YoY in 1Q23 and was only slightly faster than the 2.4%YoY growth in the previous quarter. We see fairly modest growth in industrial production as a result of the drag imposed by weakening external demand in the US and Europe. By categories, most electronic production recorded contraction in 1Q23. Micro-computers, integrated circuits and smart devices fell 22.5%YoY, 14.8%YoY and 7%YoY in 1Q23, respectively, and reflecting the burden of US export bans.

China’s retail sales jumped, led by catering

China’s investment is led by infrastructure

Property investment is gradually recovering

Investment by the property sector contracted 5.8%YoY in the first quarter which is slightly worse than the 5.7%YoY contraction in the first two months of 2023. This could be due to the large housing inventories in the market even though property developers that have not defaulted on their bonds and loans should be able to get financing to continue their existing construction. 

On the other hand, residential property sales increase 7.1%YoY YTD in 1Q23 compared to 3.5% in 4Q22. This is quite encouraging as it suggests that some home buyers are regaining confidence in property developers. If pre-sold housing is digested by the market, property developers should be able to get fresh cash flow from home sales in 2024.

What is the implication of this GDP report?

With consumption as high as 10%YoY in March, there is no immediate need for fiscal stimulus to support consumers.

But the government will probably keep its plan of infrastructure investment as a supplementary growth engine as we expect the external market to deteriorate further in 2023.

In short, with this GDP report, we believe there is no immediate need for the government to put massive stimulus into the economy.

Yuan should be supported by this GDP report

USDCNY and USDCNH should strengthen on the back of this report. When comparing the fundamentals of the US and China, China’s economy is strengthening and will get stronger over the rest of the year. In contrast, the US economy will likely continue to slow. This should support the yuan against the dollar from the second quarter. Our forecast on USDCNY and USDCNH is 6.5 by the end of 2023.

source: ING

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CNY leading of China

China’s very strong loan growth in March signals more investment

China’s loan growth was stronger than the market expected. This should move the market tomorrow when China’s stock market opens. CNY and CNH should strengthen

Very strong loan growth in March

New yuan loans rose by CNY3890 billion in March from CNY1810 billion in February. Including loan growth, all credit channels experienced very strong growth, which totalled CNY5380 billion. 

For the first quarter, new yuan loans rose by CNY10.7 trillion and overall credits rose by CNY14.53 trillion. This is a quarter of exceptionally strong credit growth. Most of the growth came from infrastructure and corporate investment needs. If we look at the details, government bond net issuance, which includes local government bonds increased by CNY1.83 trillion. This means credit growth from the government contributed more than 12.5% of total credit growth in the first quarter, and this does not include bank loans for infrastructure investment.

Why is this market moving?

We think that this exceptionally strong loan growth in March could be market-moving for several reasons.

  1. It is not usual for loan growth to be so strong in March. Loan growth is usually strong in January and February but softer in March as most loans are booked in the first two months. This year’s strong loan growth in March should support more investment for the rest of the year compared to previous years.
  2. This may not be a completely good signal for the market, depending on how it is interpreted. This very strong loan growth indicates that banks could be under window guidance to grow more loans to support the economic recovery. This might be the case as we see less aggressive credit growth in corporate bond issuance and stock market IPOs from this set of data. This could signal that genuine demand for loans is lower as corporates can deposit the loans back to banks when they do not need them. 
  3. But at least corporates did borrow more from banks, which means they also envision the recovery to be strong in the latter part of the year. 

So, we believe that the market should open higher tomorrow but could be calmer after market participants digest the data. The same should apply to USD/CNY and USD/CNH, with the yuan strengthening at the beginning of China’s market open before stabilising for the day. 

We are looking forward to seeing the investment data on 18 April

To confirm our view, we need to wait a bit longer. Activity data and the first quarter GDP report will be released on 18 April. We expect a pickup in infrastructure investment from the strong loan growth. How fast could these loans turn into investment activity? This should be clearer if the fixed asset investment grows faster than February’s rate and faster than the pre-Covid growth rate. We also expect that some loans were taken out by real estate developers. If this is the case, we should see faster property investment in March. 

source: ING

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What we expect from China’s first-quarter GDP report

With the Services PMI beating estimates, we’re expecting strong retail activity data for March. But weaker export demand should drag on GDP. The government could provide stimulus to the economy after the release of the first quarter GDP data on 18 April

Services is becoming a growth engine for the Chinese economy

The Caixin service PMI was 57.8 for March, up from 55.0 the previous month. This is the highest level in more than two years, since November 2020. The rise can be attributed to the subindices of employment, which is also at its highest level since December 2020, and robust new orders that led to tightness in capacity. 

With the faster recovery, there is rising price pressure seen in input prices but that has not been completely passed through to the selling price due to intensive competition.

Retail sales in March should grow faster

From what we have seen in the official non-manufacturing PMI and Caixin services PMI, retail sales in March should grow faster on a monthly basis. We should see a broad-based recovery of retail sales, except for automobiles, which should suffer from the end of subsidies for electric vehicles. 

That should lead to around 5% year-on-year growth of retail sales in March after 3.5%YoY year-to-date growth in February. If we are correct on this forecast, then retail sales in the first quarter should grow 4%YoY.

While this is still lagging behind the 5% GDP growth target set by the government in the Two Sessions meeting in March, we need to remind ourselves that China is at the beginning stage of its recovery. The speed of recovery of retail sales, representing the growth of the domestic market, should pick up faster in the second quarter. 

GDP lagging behind

GDP for the first quarter should lag behind the 5% growth target for the whole of 2023. We expect GDP to only grow 3.8%YoY in the first quarter of this year.

This is because of the slowing growth of external demand that should hurt exports and manufacturing activities. The removal of subsidies for electric vehicles has also led to the slowing production of automobiles compared to the same period last year. 

China GDP and new home price forecast

Stimulus is likely to follow the GDP report

We expect stimulus to follow quickly after the release of the GDP report for the first quarter.

1. Infrastructure

To keep the 5% growth target for 2023, the government needs to push forward infrastructure investments, most of which should be building metro lines and increasing the number of 5G towers as these are already in the plan for this year. 

2. Consumption

An extra stimulus could be resuming subsidies for electric vehicles after the sharp fall in automobile sales when the subsidies ended at the end of 2022. If the government believes that it has spare fiscal strength, it could also provide subsidies for consumer electronic goods. This could support the sales of domestic semiconductor companies.

The improving service sector should provide a stable wage for the labour force. The stimulus should further stabilise labour demand in the manufacturing sector. These are the foundation of the increasing appetite for buying homes again in the economy. As such, we expect a moderate increase in new home prices in 2023, which should induce retail sales further via the wealth effect.

We, therefore, expect GDP to grow faster at 6.0%YoY in the second quarter. We keep the full-year GDP forecast at 5% as external demand should be a concern for the year.

source: ING

China CNY

China’s central bank pumps more liquidity into market

The People’s Bank of China has already cut its Required Reserve Ratio and has continued to pump liquidity into the money market over the past few days. Is this about global market volatility or is it more about the domestic economy?

What’s behind the large liquidity injection by the PBoC?

China’s central bank, the PBoC, has injected significant liquidity into the market since 21 March. From the 21st to the 29th of the month, the central bank injected more than CNY850 billion of net liquidity into the financial system. This includes CNY352bn injected through daily open market operations and CNY500bn by lowering the Required Reserve Ratio (RRR) which took effect on 27 March.

We believe that there are at least two considerations behind these liquidity injections. 

These operations are occurring at the end of the first quarter. In China, loan growth for the year is usually booked in the first three months. This is a seasonal phenomenon and pushes up interbank interest rates at the end of the first quarter. As the chart shows, the overnight SHIBOR touched 2.5% on 20 March. Therefore, we think that loan growth should continue to be very strong in March compared to 2022, even after the rapid growth in the first two months. If this is the main reason for the PBoC’s big liquidity injection, this should be seen as a positive sign for economic growth.

The volatility in global financial markets is not over; there may be some ups and downs ahead. China has a more open capital account than in the past and global events may have some impact on the Chinese market. As such, the PBoC may be cushioning any potential volatility. This is more of a precautionary measure and should not be over-interpreted.

The market is discussing a rate cut, but we don’t agree

The market is actively discussing that the PBoC will cut the 7D policy rate and the medium-term lending facility (MLF) rate, which are currently at 2.0% and 2.75%, respectively. The discussion has intensified, especially after the PBoC announced a cut in the RRR this month.

We do not see the need for China to lower interest rates. The economy is recovering at this time, although not as fast as the market expected though this is due more to the market’s overestimation of the speed of the rebound. External markets are weakening and export activity will be dampened. But China’s interest rate cuts will not help exports. Moreover, an excessively accommodative monetary policy may attract some unnecessary investments. As the economy recovers more quickly in the second half of the year, interest rate cuts could pose a risk of economic overheating.

source: ING

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