Weekly data: inflation around the world

Cyclical instruments including shares have generally made gains since last week after weaker American inflation in line with the consensus. Participants in markets are now expecting significantly less hawkishness from the Fed over the next few months. This preview of weekly data looks at EURCAD and AUDJPY ahead of important CPI data from various countries this week.

There wasn’t any significant news from central banks last week, but the decline of American annual inflation to 6.5% has significantly boosted the case for only a single hike by the Fed on 1 February. Around 94% of participants expect this outcome according to CME FedWatch Tool.

This week’s main meetings are the Bank of Japan and the Norges Bank. The BoJ is very unlikely to call for a change to its key policy rate, but its statement and press conference are important for possible clues on further interventions in Japan’s bond market. Norway’s central bank is expected to hike its key policy rate to 3% on Thursday.

Annual inflation for December is to be announced this week for Canada, the UK, the eurozone and Japan. These releases are likely to have direct effects on central banks’ policies over the next few weeks, perhaps most importantly the Bank of Canada next week. Traders are also looking ahead to the Australian job report early on Thursday morning.

Euro-Canadian dollar, daily

The euro has continued to make gains against most other major currencies in January so far as inflationary pressures in the eurozone remain high and the ECB seems committed to continuing to hike rates. According to the results of a Bloomberg poll released on 16 January, participants generally expect the ECB’s deposit rate to peak at 3.25% towards the end of the second quarter of the year, while core inflation in the eurozone might reach a high this quarter.

Meanwhile the bank of Canada reached 4.25% last month and seems likely to call for another single hike next week. Inflation in Canada isn’t at the same crisis area as in the EU and seems to be dropping more quickly as well, so it might be that the end of this cycle of tightening is near.

On the chart, there seems to be limited scope for the euro to continue upward in the immediate future. The price is close to the 61.8% monthly Fibonacci retracement while the slow stochastic signals overbought and ATR is close to recent lows. The 50% Fibo retracement combined with the 50 SMA around $1.43 seems to be a strong support, though, so further strength might be expected if the price retreats there.

Although comments from various national central banks in the EU suggest that headline inflation doesn’t matter for rates while the core figure hasn’t peaked, traders are still watching Wednesday’s release for a possible surprise. The main event this week remains Canadian inflation on Tuesday afternoon.

Australian dollar-yen, daily

The yen has recovered significantly in recent weeks against all other major currencies as the Bank of Japan continues to intervene in bond markets by amending its controls on yields. Expectations are generally holding that inflation will increase in Japan over the next few months, so with most other major central banks slowing down hiking or at least thinking about slowing down, there seems to be scope fundamentally for the yen’s recovery to continue.

However, the Australian dollar has held fairly well against the yen relative to USDJPY or GBPJPY because AUD has been supported by generally high prices for industrial commodities and China’s reopening. The main intrigue at the moment is whether the Reserve Bank of Australia will deliver another hike at its next meeting on 7 February. Currently the cash rate is 3.1% with analysts mostly expecting another three steps this year to 3.85%.

Based on TA, it seems favorable that a range might be established over the next couple of weeks, since there have been strong reactions from recent tests of both ¥91 and ¥88. With the slow stochastic neutral, a strong movement this week to break the range is unlikely unless there’s a significant surprise from Thursday’s job data. In the medium term, the bias would probably be to the upside, considering the double bottom and the apparent strength of the 100 SMA on the weekly chart, but for now the 50-day SMA from Bands will probably remain an important area of resistance.

Although AUDJPY was traditionally one of the prime candidates for carry traders before Covid, the RBA’s relative caution with hiking rates last year has meant that the fallout from the BoJ’s recent interventions has mainly affected USDJPY. That doesn’t mean the BoJ isn’t important for this symbol, just that the focus is probably more on Australian job data this week.