The procession of central banks hiking rates in an attempt to see off inflation continued over the last 24 hours. The Bank of Canada hiked by 0.50% overnight, and the Bank of Korea sprung a surprise 0.25% hike this morning.
The Monetary Authority of Singapore also tightened policy by re-centering the S$NEER to present levels and increasing the slope of appreciation. The MAS uses the currency to adjust monetary policy.
Readers should research this interesting and unique method of adjusting monetary policy, but be warned, wrap a cold towel around your head before starting as your brain temperature will rise.
The Reserve Bank of India didn’t hike recently, but adjusted some of the mechanics and language to set the scene for tightening going forward. The Reserve Bank of Australia also adjusted its statement language to set the scene for the same.
The Reserve Bank of New Zealand did a hawkishly dovish 0.50% hike yesterday, although the New Zealand dollar was punished overnight as the RBNZ left its terminal rate guidance unchanged.
Overnight, the United Kingdom posted 30-year high inflation numbers, with the PPI, especially the Input data, rising to suborbital levels that would give Elon Musk a cold sweat. Markets were pricing in a 0.25% hike from the Bank of England in early May.
Today, we have the European Central Bank policy decision. The ECB’s position was complicated by being on the frontlines of the economic war on Russia. As such, I expected them to leave policy rates unchanged but reiterate the scheduled reduction of the Asset Purchase Program (APP).
It will all be about the statement and the press conference and whether the ECB signaled that supporting the economy through the Ukraine conflict took priority over rising inflation pressures, or whether the stage was being set for rate hikes later this year.
The former should see EUR/USD hold at present levels; the latter could set off a decent euro short-squeeze into the weekend.
With much of the world on holiday tomorrow, even here in Indonesia, today was a technical Friday for markets, so I was expecting a noisy session anyway. The US dollar retreated overnight, led by rallies by the Canadian dollar, euro, and sterling.
Most of this could be laid at the feet of the BOC rate hike and anticipated hikes by the BOE and ECB, as well as short-covering into the Easter holiday break. In the euro’s case, France’s Macron increased his lead over Le Pen in the presidential runoff, reducing another bearish headwind for the single currency.
Part of the US dollar retreat, which was very, very uneven I might add, could be that a lot of tightening was priced into US futures markets, while other major currencies may have been starting to play a catch-up rally.
Notably, Asian currencies, the Japanese Yen, and Swiss franc did not move notably overnight, and the New Zealand Dollar was hammered. So, there were some noisy disconnects in the market. If we saw the Bank of Korea hike start to be repeated across Asia though, the US dollar rally may slow.
Much will depend on whether the hikes US markets have priced in were the worst it will get. That’s a big if. And for Asia, China looked set to cut its RRR shortly; the USD/CNH and USD/CNY were approaching resistance levels, and yesterday’s trade data showed a collapse in China's imports.
The last thing the rest of Asia wanted was an easing China leading to a weaker yuan, aka the USD/JPY, while the rest of the region was forced into rate hikes to fend off inflation and appreciate their currencies. My guess was they would rather let inflation run hot if the yuan weakens, which I believed it will.
Things are going to get very messy in the Asian currency space over the next few months.
The disconnects continued elsewhere as well. Despite weak results and a grim outlook from the JP Morgan Q1 results, a risk factor to this earnings season I have been telegraphing for some time, the perpetually bullish FOMO gnomes of the stock market stayed laser-focused on peak-US inflation.
Everyone remained desperate to pick the absolute bottom of the stock market.
Meanwhile, gold continued to rally because it was an inflation hedge. I could just as easily have said it was dragged higher by the platinum group metal rally. US yields dropped slightly overnight on the peak inflation theme as well.
Meanwhile, oil prices staged another very healthy rally overnight, again ignored by equity markets in New York and Asia today. Brent crude rallied 9.0% in two days, but nobody seemed to be noticing.
And the Ukraine war part two was about to start. With the street picking excuses out of thin air to desperately justify their prices actions, someone was going to be horribly wrong. Either gold was about to plummet, or stock markets were.
All of this was a good reason to stay on the sidelines now as I could hear the whip-saw blades being sharpened as we speak. Most of the world would be on holiday tomorrow, a good chunk of it also on Monday.
An ECB policy decision today, US Retail Sales and Michigan Consumer Sentiment tonight, combined with four days of headline-driven event risk, meant holding heavy risk positioning tonight was for the brave, or the stupid, or the stupidly brave.
New York rally lifts Asian equities
Wall Street ignored weak JP Morgan Q1 results and instead continued to focus on the peak US inflation theme overnight, sending US equities sharply higher. The S&P 500 rose 1.12%, the NASDAQ leapt 2.03% higher, and the Dow Jones climbed by 1.05%.
In Asia, futures on all three indexes booked solid gains. S&P 500 and Dow futures rising by 0.20%, while NASDAQ futures rose by 0.45%.
That led to a broad rally in Asia ahead of the Easter holidays, led by the North Asia heavyweights. Japan’s Nikkei 225 was 1.15% higher, but South Korea’s KOSPI only gained 0.10% after the Bank of Korea unexpectedly lifted interest rates.
China markets were also having a good day after spending this week mysteriously rallying in the afternoon, which I put down to buying from China’s “national team.” Markets there were expecting an imminent RRR cut which was overshadowing the Omicron challenges for now. The Shanghai Composite rose by 0.70%, the CSI 300 by 0.75%, and the Hang Seng by 0.45%.
In regional markets, Singapore climbed by just 0.15% after the MAS tightened monetary policy, while Taipei was down 0.10% as Taiwan companies faced production challenges on Mainland China due to virus restrictions.
Kuala Lumpur was 0.25% higher, Jakarta was down 0.20%, while it was a market holiday in Bangkok and Manila. Australian markets were also higher today, helped by the strong Wall Street session and higher oil prices. Activity was slightly muted as it entered a four-day break. The ASX 200 and All Ordinaries climbed by 0.70%.
European markets faced a challenging session with plenty of two-way risk around the ECB policy meeting. Parts of Europe were already on holiday today, and with the Easter break ahead, activity was likely to fall after the ECB results were out. European traders, facing a multi-day break with plenty of event risk, were unlikely to load up on risk.
US dollar in peak inflation hopes
Rallies by the euro and sterling pushed the US dollar lower overnight as markets New York continued to price in peak inflation expectations and assumed that all the Fed tightening was now priced into US markets.
The dollar index fell sharply by 0.46% to 99.85 after touching my initial target of 100.50 earlier in the day. The selloff continued in Asia with euro and sterling leading the way, with the yen also rallying after some official noise from Tokyo around exchange movements. The dollar index fell by 0.24% to 99.60.
The dollar index was approaching support around 99.45, and there appeared to be some pre-holiday long covering in the market as investors reduced long US dollar exposure and booked profits.
Several tightening moves by central banks this week, as well as hawkish risk around the ECB, are also prompting a rebalancing. Failure of 99.45 could see losses extend to 97.70 next week, but the US dollar remained in an uptrend if longer-term support at 96.50 held.
EUR/USD jumped 0.60% overnight to 1.0890, adding another 0.23% to 1.0915 in Asian trading. A widening lead in the election polls by France’s President Macron lifted euro sentiment, and investors bought back shorts ahead of the ECB policy meeting today.
Given the hawkish moves by central banks over the last week, that was a sensible strategy ahead of the Easter holiday, despite Ukraine risks. A hawkish tilt by the ECB could set off a large, short squeeze that could extend to the 1.1200 to 1.1300 region where the longer-term resistance line comes in.
On the downside, the 1.0800 region was crucial longer-term support. The support line extended back to 2017 and then, if your charts were long enough, all the way back to 1985. A time when I was putting my Air Force application in and had pastel colored tee-shirts and a flat-top haircut. A daily and weekly close below 1.0800 will be a major bearish signal for EUR/USD.
Sterling jumped by 0.90% to 1.3117 overnight as UK inflation climbed to 30-year highs. That saw tightening by the Bank of England quickly priced into the UK yield curve, starting with 0.25% next month. GBP/USD climbed another 0.20% in Asia to 1.3140 as shorts were unwound ahead of Easter. A hawkish ECB today should allow sterling to coattail the expected euro rally and could extend gains to 1.3250.
With US yields edging lower overnight, USD/JPY remained steady once again at 125.40 before easing to 125.30 in Asia. USD/JPY was just below its multi-year highs at 125.80 and despite some more official noise from Tokyo today, it still looked likely to test higher next week.
The cross remained entirely at the mercy of the US/Japan rate differential, and if US yields fall once again tonight, a short-term below 125.00 was entirely possible. Any drop to 124.00 and 123.50 should find plenty of keen dip buyers. Only a very sharp fall by US yields changes the bullish outlook.
Asian currencies held steady overnight once again, with lower US yields and a weaker US dollar versus the majors being offset by higher oil prices and ongoing China concerns.
Asian currencies booked only minor gains overnight and remained steady in Asia today. The only mover of note was USD/SGD, which fell by 0.75% to 1.3520 after the MAS tightened monetary policy via the S$NEER today and maintained a hawkish outlook.
USD/CNY and USD/CNH were almost unchanged overnight as any US dollar weakness was offset by euro strength in the CFETs basket and the expectation of an imminent RRR rate cut.
Both USD/CNY and USD/CNH were approaching one-year trendline resistance levels at 6.3770 and 6.3950, respectively. Daily closes above would signal another leg of yuan weakness and limit gains versus the greenback by other Asian currencies.
Oil prices rally again overnight
Oil prices ignored the peak inflation noise from equity and currency markets, posting another day of sharp increases as concerns around tight supplies globally persisted and China COVID restrictions were eased in Shanghai.
The difference in perceptions between the various asset classes could not be starker now. What gave the oil rally overnight more credibility was that US official Crude Inventories leapt by an enormous 9.40 million barrels, yet oil prices continued to rally aggressively.
Brent crude leapt higher by 3.75% to $108.80 a barrel, a near 9.50% gain over the last two sessions. WTI rallied by 3.25% to $104.25 a barrel. Asian buyers were absent today, with volumes potentially curbed by the long weekend across most of Asia, Europe, and North America.
That allowed some long covering by fast money traders to dominate, pushing Brent crude down 0.90% to $107.80, and WTI down 0.50% to $103.70 a barrel.
That impact may be waning now as OPEC refused to increase production, and the situation in Eastern Europe continued to darken. The fact that oil continued to rally after such a large jump in US Crude Inventories and that China concerns have suddenly been forgotten, was a serious warning signal to those pricing in the top of oil markets.
There was also plenty of possible headline risk over the holiday period. I expect Brent to remain in a choppy $100.00 to $120.00 range, with WTI in a $95.00 to $115.00 range. Brent crude has further support at $96.00, and WTI at $93.00 a barrel. The risks, however, have skewed back to the topside.
Gold’s rally continues
Gold’s rally continued overnight, helped along by a US dollar that corrected lower as markets priced more aggressive hikes around the world while assuming all the Federal Reserves were now priced in.
That somewhat conflicts with the inflation-hedging narrative that I was hearing surrounding gold’s rally this week and either the equity market, or the precious metal market, was heading for a harsh dose of reality.
What must be respected was that gold was rallying when the US dollar rises, and when it was also falling, suggesting underlying strength. Gold closed 0.57% higher at $1977.80 an ounce overnight, before retreating slightly to $1972.50 an ounce in Asia.
Given that Asian traders didn’t seem to be hedging long weekend risk via gold purchases today, the price action this morning tempered my expectations of a test of $2000.00 shortly.
Gold had initial resistance at $1980.00, which held on a closing basis for two sessions in a row. After that, a test of $2000.00 was entirely possible, although I believed option-related selling there will be a strong initial barrier. If that was cleared, gold could gap higher to $2020.00 an ounce quite quickly.
A retreat through $1940.00 will signal a whipsaw move lower, chopping out the short-term money. Failure of $1915.00 will signal a retest of important support at $1880.00 and possibly $1800.00 an ounce. I could honestly say I don’t know which scenario will be the winner at this moment.