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Aussie Jumps on Larger than Expected RBA Rate Hike, Yen Selloff Continues

Australian Dollar rises broadly after RBA surprised the markets by a larger than expected 50bps rate hike. It’s now overpowering the strong Canadian and US Dollars. On the other hand, Yen’s weakness persists on rising benchmark treasury yields in the US and Europe. Sterling is turning soft after Prime Minister Boris Johnson won the confidence vote while Swiss Franc is also weak. Euro, on the other hand, is rather resilient, awaiting ECB later in the week.

Technically, Aussie is displaying clear strength in the upside breakouts in AUD/JPY and AUD/NZD. But it’s still a bit sluggish against others. To be specific, AUD/USD will need to break through 0.7282 temporary top to resume the rebound from 0.6828. Also, AUD/USD will need to break through 0.9144 temporary top to resume the rebound from 0.8916. Otherwise, it just one of the strongest at best, not the strongest.

In Asia, the time of writing, Nikkei is up 0.50%. Hong Kong HSI is down -0.12%. China Shanghai SSE is up 0.48%. Singapore Strait Times is down -0.22%. Japan 10-year JGB yield is up 0.0008 at 0.246. Overnight, DOW rose 0.05%. S&P 500 rose 0.31%. NASDAQ rose 0.40%. 10-year yield rose 0.081 to 3.035.

RBA hikes by 50bps to 0.85%, more normalization over the months ahead

RBA raises cash rate target by 50bps to 0.85% today, larger than expectation of 40bps. Interest rate on exchange settlement balances is also lifted by 50bps to 75bps. The central bank also maintains tightening bias, as “the Board expects to take further steps in the process of normalizing monetary conditions in Australia over the months ahead.”

In the accompanying statement, RBA said inflation in Australia has “increased significantly”, and is “expected to increase further”, before declining back towards the 2-3% target range next year. The economy is “resilient” while labour market is “strong”.

One source of uncertainty is “how household spending evolves”, given the “increasing pressure” from higher inflation, and interest rates. The central scenario is for strong household consumption growth this year, but RBA will pay close attention to various influences on consumption.

Australia AiG services dropped to 49.2, back in mild contraction

Australia AiG Performance and Services Index dropped sharply from 57.8 to 49.2 in May, indicating mild contraction. Sales dropped -13.0 pts to 50.7. Employment dropped -10.4 to 47.4. New orders dropped -3.3 to 49.7. Input prices dropped -9.1 o 68.7. Selling prices dropped -3.6 to 61.9. Average wages dropped -9.8 to 57.4.

Innes Willox, Chief Executive of Ai Group, said: “The Australian services sector contracted mildly in May after a period of healthy expansion in the earlier months of 2022. Performance was mixed across the sector with strong growth in logistics, retail trade and personal, recreational & other services offset by sharp declines in business & property services and health & education services.”

CAD/JPY targeting 2014 high as Yen selloff deepens

BoJ Governor Haruhiko Kuroda said that a weak Yen is “beneficial” for Japan’s economy if the moves are “not too sharp”. He emphasized again that the moves in currency markets should reflect “fundamentals”, and the central bank is “carefully watching” the impact.

The comments came as Yen was sold off broadly, triggered by US 10-year yield reclaimed 3% handle overnight. Germany 10-year bund yield also jumped to fix at 1.323. USD/JPY hit the highest level in over two-decades while CAD/JPY is also getting close to 2014 high at 106.48.

For now, near term outlook in CAD/JPY will stay bullish as long as 103.60 support holds, targeting 61.8% projection of 89.21 to 102.93 from 97.78 at 106.25, which is close to above mentioned 106.48. Sustained break there will pave the way to 100% projection of 68.38 to 106.48 from 73.80 at 111.90. That is the key hurdle for CAD/JPY to overcome in the medium term.

Looking ahead

Germany factor orders, Swiss foreign currency reserves, Eurozone Sentix investor confidence, and UK PMI services final will be released in European session. Later in the day, US will release trade balance. Canada will release trade balance and Ivey PMI.

AUD/USD Daily Report

Daily Pivots: (S1) 0.7177; (P) 0.7204; (R1) 0.7222; More…

AUD/USD recovers today but stays below 0.7282 temporary top. Intraday bias remains neutral first. Further rise will remain in favor as long as 0.7034 support holds. Current development raised the chance that whole fall corrective fall from 0.8005 has completed at 0.6828. Above 0.7282 will extend the rebound to 0.7660 resistance for confirmation. However, break of 0.7034 will dampen this bullish view and bring retest of 0.6828 low instead.

In the bigger picture, price actions from 0.8006 are seen as a corrective pattern to rise from 0.5506 (2020 low). Deeper fall could be seen to 50% retracement of 0.5506 to 0.8006 at 0.6756. This coincides with 100% projection of 0.8006 to 0.7105 from 0.7660 at 0.6760. Strong support is expected from 0.6756/60 cluster to contain downside to complete the correction. Meanwhile, firm break of 0.7660 resistance will confirm that such corrective pattern has completed, and larger up trend is ready to resume.

Economic Indicators Update

GMT Ccy Events Actual Forecast Previous Revised
22:30 AUD AiG Performance of Services Index May 49.2 57.8
23:01 GBP BRC Like-For-Like Retail Sales Y/Y May -1.50% -1.70%
23:30 JPY Labor Cash Earnings Y/Y Apr 1.70% 1.50% 1.20%
23:30 JPY Overall Household Spending Y/Y Apr -1.70% -1.00% -2.30%
04:30 AUD RBA Interest Rate Decision 0.85% 0.75% 0.35%
05:00 JPY Leading Economic Index Apr P 102.3 100.8
06:00 EUR Germany Factory Orders M/M Apr -0.50% -4.70%
07:00 CHF Foreign Currency Reserves (CHF) May 926B
08:30 EUR Eurozone Sentix Investor Confidence Jun -20 -22.6
08:30 GBP Services PMI May F 51.8 51.8
12:30 USD Trade Balance (USD) Apr -89.3B -109.8B
12:30 CAD Trade Balance (CAD) Apr 1.9B 2.5B
14:00 CAD Ivey PMI May 64.3 66.3

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