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Could Bank of Canada follow the RBA and hike rates?

European markets managed to eke out a positive session yesterday, despite some disappointing economic numbers, and an unexpected rate hike from the RBA, which could be the first of a series of rate hikes from other central banks over the course of the next few days.

Financials helped drive the move higher, in the same fashion as we saw in US trading which also saw a positive close, and the S&P500 close at its highest levels this year. What was especially notable about yesterday’s move higher was it was led by the Russell 2000 which closed at 3-month highs despite short-term yields pushing higher on the day.

The rise in short term yields appears to suggest that markets are not only pricing in further rate hikes, but also the likelihood that rates are likely to stay at current levels for longer.

For the time being this doesn’t appear to be affecting sentiment around equities but that could change if economic data continues to disappoint, which in some cases it has been.

Looking towards today’s European open, Asia markets have had to digest the latest trade numbers for May from China at a time when there are real concerns that the recovery there is running on fumes.  

While the relaxation in covid restrictions at the end of last year prompted a solid rebound in economic activity, the last two months have seen this pickup in economic activity run into some trouble in the aftermath of Chinese New Year.

China trade in March saw the elements of a pickup in economic activity, with a strong surge in exports of 14.8%, while imports improved as well, although they were still negative. This rebound in economic activity is slowing already if recent inflation and consumption data is any guide.

Factory gate prices have been deflating for the last 6 months and look set to get worse later this week.

There was no improvement in the April import numbers as they got worse with a sharp decline of -7.9%, although some of that may be down to lower prices in some areas, rather than lower volumes. Export growth slowed in April to 8.5%, while recent manufacturing and services PMI numbers have also pointed to an economy that is seeing evidence of a slowdown in economic activity.

With concerns about a slowdown in the Chinese economy growing, today’s trade numbers have served to reinforce those concerns, with imports coming in at -4.5% and exports plunging by -7.5%, a one year low. 

While the imports numbers were better than expected the plunge in exports into negative territory for the first time in 3 months is a real concern suggesting that while domestic demand is starting to turn higher, global demand is starting to falter, and that the Chinese government may need to do more to boost the local economy.

Having seen the RBA surprise the markets with another 25bps rate hike yesterday, today it’ s the turn of the Bank of Canada, who in April signalled that they would keep rates on hold at 4.5% as policymakers looked to assess the impact recent rate hikes have had on the Canadian economy.

Since then, the Canadian economy has shown that it is holding up well, while inflation appears to be edging up again. April CPI saw headline CPI nudge up to 4.4% year on year, while core prices also came in firmer. With the labour market remaining solid, after positive jobs reports in March and April, and a slide in the unemployment rate to 5%, and wages at 5.2% the prospect of another rate hike remains high. The consensus is for no change however we could see the Bank of Canada follow the RBA with a 25bps hike of their own, pushing the headline rate to 4.75%.

EUR/USD – currently trading between resistance at the 1.0780 highs of last week, and support back at the recent lows at 1.0635. We need to see a break of this range with broader resistance at the 1.0820/30 level.

GBP/USD – currently trading between resistance at the 1.2540 area and last week’s highs and support at the 1.2300 level. Still in the uptrend from the March lows, while we have trend line resistance from the 2021 highs at 1.2630. This, along with the May highs at 1.2680 is a key barrier for a move towards the 1.3000 area. 

EUR/GBP – support remains at the 0.8560 level and last week’s lows, just above the December 2022 lows at 0.8558. Currently have resistance at the 0.8660 area. We also have major resistance at the 0.8720 area.

USD/JPY – yesterday’s rebound is currently struggling to make it above the 140.00 area. Is the US dollar trying to carve out a top? The main resistance remains at 140.95 area. We have support at the 138.40 area which if broken could see a move back to the 137.00.

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