EUR/USD continues its recovery

Macroeconomic overview:

• The EUR/USD continues its rise today, getting a boost from Tuesday's upbeat German economic data. Germany's seasonally adjusted GDP rose by 0.8% on the quarter, beating market forecast of 0.6%.

• Yesterday's data showed U.S. producer prices rose more than expected in October, driven by a surge in the cost of services, leading to the biggest annual increase in wholesale inflation in more than 5-and-a-half years.

• Tuesday's report from the Labor Department also showed steady gains in underlying producer prices, which supported expectations of a gradual increase in inflation and keep the Federal Reserve on track to raise interest rates in December.

• The producer price index for final demand increased 0.4% last month after a similar gain in September. That lifted the year-on-year increase in the PPI to 2.8%, the largest rise since February 2012, from 2.6% in September. Firming inflation at the factory gate is likely to be welcomed by Fed officials who have long argued that price pressures were being held back by transitory factors.

• The FX market will be closely watching the release of the US CPI where failure to show any acceleration would be perceived as market neutral, leaving rate-hike expectations in December currently unchanged. That said, we expect the USD to remain on offer today, as speculative shorts have been cleaned-out and US retail sales (released alongside the US CPI) are likely to have decelerated sharply in October after the strong increase in September. On balance, US data releases are thus expected to allow EUR-USD more room to extend gains above 1.18, with the pair already having recovered back above levels preceding the sell-off on 26 October when the ECB announced its "QE downsize".

Technical analysis and trading signals:

• The EUR/USD breaks into the daily cloud which should fuel the bulls further. 1.1877 is the top of the daily cloud and a near term target. The rally has left slow stochs heavily overbought and we think that any corrective actions should be used as fresh opportunities to join the bull trend. We stay long for 1.1960.

USD/JPY: Japanese economy grows above expectations as exports outperform

Macroeconomic overview:

• Japan's economy grew faster than expected in the third quarter due to strong exports, posting the longest period of uninterrupted growth in more than a decade.

• The economy expanded at a 1.4% annualised rate in July-September, slightly above the median estimate for annualised growth of 1.3%, Cabinet Office data showed on Wednesday. That followed revised annualised growth of 2.6% in April-June. GDP grew 0.3% compared to the previous quarter, which matched the median estimate and followed a 0.6% quarter-on-quarter expansion in April-June.

• Consumer spending fell for the first time in seven quarters but this is expected to be temporary because the economy is near full employment, which should bolster domestic consumption in the future.

• External demand - or exports minus imports - was the biggest reason for expansion, adding 0.5 percentage points to growth. In comparison, negative external demand subtracted a revised 0.2 percentage point from GDP growth in April-June.

• Private consumption, which accounts for about two-thirds of GDP, fell 0.5% from the previous quarter, more than the median estimate of a 0.3% contraction to mark the first decline since October-December 2015.

• "There's no change to our view the economy is recovering moderately as a trend," Japanese Economy Minister Toshimitsu Motegi said. "We need to make the recovery a durable one, so we'll proceed with reforms to boost Japan's productivity." Japan's government is due to announce a package of economic measures by year-end aimed at increasing investment in skills training and raising productivity.

• Capital expenditure rose 0.2% in July-September from the previous quarter, less than the median estimate for a 0.3% increase but still up for the fourth straight quarter.

• In our opinion available data suggested that economic activity continued to expand in the current quarter, noting household incomes maintained solid growth and external demand was holding up. However, the economy is running into capacity constraints which suggests that growth will start to slow next year.

• This long run of growth should encourage the Bank of Japan to stick with the current monetary easing framework, given its argument that inflationary pressure will percolate through the economy as long as growth is on track.

Technical analysis and trading signals:

• USD/JPY bears are seeking a daily close below 112.98, 23.6% fibo of the 107.33-114.73 rise, which would open the way to the next fibo level at 111.90. The 7-day exponential moving average crossed below 14-day ema, which is an important bearish signal.

• We have placed a sell order at 113.10 with the target at 111.00.

 

AUD/USD weakens on Australian wages data

Macroeconomic overview:

• Wednesday's figures from the Australian Bureau of Statistics showed its wage price index rose 0.5% in the third quarter, from the second quarter, missing market forecasts of a 0.7% increase. Annual wage growth quickened to 2.0%, from a record low of 1.9%, but again was short of the 2.2% forecasted and only just above inflation at 1.8%.

• And that tiny pick-up owed much to a relatively generous 3.3% hike in the minimum wage which was forced on reluctant employers by the government regulator.

• The low pace of wage rises is a major reason the Reserve Bank of Australia recently forecast core inflation would not reach the floor of its 2 to 3% target band until early 2019, a year later than previously hoped.

• As a result household incomes have been lagging debt, sapping spending power and slugging the retail sector where sales suffered a rare contraction in the third quarter.

• Consumers remained cautious with a Westpac survey out on Wednesday showing pessimists again outnumbered optimists in November as its sentiment index dropped 1.7%.

• Businesses seem to be doing well enough out of it. A well regarded survey of firms from NAB out on Tuesday showed profits spiking to their highest in two decades even as labour costs grew well below their long-run average.

• The conservative government of Prime Minister Malcolm Turnbull has proposed addressing the wages problem by slashing corporate taxes, apparently in the hope firms would pass on some of the cash to workers.

• The Australian dollar skidded to a four-month trough today as a surprisingly weak reading on wages threatened to keep interest rates lower for even longer than currently priced in.

Technical analysis and trading signals:

• A new low is set to keep the broader bear trend intact. The pair broke below 0.7632, 61.8% fibo of May-September rise. The nearest support level is July 5 low at 0.7573.

• A break below the 0.7632 opens the way to stronger drop, even to full retracement of the above-mentioned move to 0.7328. But we stay sideways on this pair, as we expect the broad USD recovery to be over.