Eye-watering CPI could force 75-100 bps hike from BOC, DXY mean reverts

Matt Simpson financial analyst
By :  ,  Market Analyst

Wednesday US cash market close:

  • The Dow Jones Industrial rose 249.59 points (0.71%) to close at 35,160.79
  • The S&P 500 index rose -2.76 points (2.51%) to close at 34,058.75
  • The Nasdaq 100 index fell -211.727 points (-1.49%) to close at 13,998.53

Asian futures:

  • Australia's ASX 200 futures are up 27 points (0.36%), the cash market is currently estimated to open at 7,596.20
  • Japan's Nikkei 225 futures are up 40 points (0.15%), the cash market is currently estimated to open at 27,257.85
  • Hong Kong's Hang Seng futures are down -150 points (-0.72%), the cash market is currently estimated to open at 20,794.67
  • China's A50 Index futures are up 18 points (0.13%), the cash market is currently estimated to open at 13,570.71

 

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US indices diverged today which saw the S&P 500 post a minor gain yet the Nasdaq selloff, after Netflix (NFLX) posted their first subscription drop in a decade. The stock fell as much as -38.4% overnight to eventually close down by around -30% during its worst day in nearly -decades.

Europe was higher and the DAX broke out in line with our bias and reached our initial target at 14,360. This reaffirms our suspicions that the corrective low was seen at 13,887 and 14,600 now comes into focus for bulls.

 

Volatility subsides in the commodity space

Silver was effectively flat and closed on its 20-day eMA, whilst gold printed a small bullish candle and closed just above its 20-day eMA. Whilst our core bias for gold is for a break above 2000, our near-term bias remains bearish below 1965 and for a run down to 1925. An immediate break above 1965 invalidates that near-term bias. WTI effectively tracked silver with a flat close and Doji on the daily timeframe after finding support at $100.

 

Inflation keeps doing its thing

And by that, we mean inflating. New Zealand’s annual CPI rose to a 32-year high of 6.9% (and up 1.8% q/q). Yet the New Zealand dollar was off around -0.5% as it missed expectations, even though these punchy numbers do mean that the RBNZ may hike another 50-bps at their next meeting.

As for the BOC, some are speculating a 75-100 bps hike in June following their ripper of an inflation report. There are several headline prints within the Canadian inflation report, most of which accelerated to a multi-decade high, none of which came in softer. CPI rose to a 31-year high of 6.7% and beat estimates of 6.1%. The BOC inflation rate hit a record high of 5.5%, and all three preferred inflation gauges for BOC rose in tandem. (Median CPI reached a 31-year high, trimmed a 3-year high, common a 13-year high).

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Given that the BOC raised their concerns that high inflation will become “entrenched”, these eye-watering CPI prints not only cements a 50-bps hike at their next meeting but also increases the odds of a 75-bps or 100-bps hike in June. Interestingly it has been confirmed that Statistics Canada will add used vehicles to their inflation print from next month whilst likely means we’ll see even higher inflation going forward. The Canadian dollar was initially higher against the board but made notable gains against USD, CHF and GBP.

 

USD dollar falters around 101

Weak housing data weighed on the US dollar and bond yields overnight, allowing commodity currencies to exhibit some mean reversion. It was the worst session in over three-weeks for DXY and now looks set to retest 100 within the next 24 hours. This also saw USD/JPY do something peculiar and print a down-day. Markets now see the ‘line in the sand’ for the yen at 130 and we suspect markets want to at least test it but yields likely need to also rise for that to happen sooner than later. USD/CAD suffered its worst session since August 2021 and AUD/USD closed firmly above 0.7400 in line with our bullish bias outlined in Tuesday’s report.

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Taking a closer look at DXY suggest it may have more room to mean revert. Tuesday’s high coincided with RSI hitting oversold and close outside the upper Keltner band. This is also where the monthly and weekly R2 pivots reside, and today’s bearish outside candle helps to mark a swing high and begin its pullback. Whilst support was found at the 10-day eMA, we think it can now move its way back down to 100 or even the 20-day eMA (and weekly S1) at 99.80. Should evidence of a swing low materialise then we’d consider switching back to a bullish bias. Bond yields will be a key market to watch to see how deep any pullback will be for the dollar form here.

 

Up Next in Asia (Times in AEST)

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