A wave of profit-taking swept markets overnights as US bond yields gave back some recent gains. That prompted traders to trim long US dollar positions, with the Dollar Index and USD/JPY having a tough day at the office. I had noted this week that both were overextended on a short-term technical basis, so the correction itself wasn’t much of a surprise. Notably, neither oil, gold, or Asian FX showed much reaction. In fact, the price action by the Chinese yuan screamed the opposite.
US equity markets moved lower after the bonfire of Netflix’s (NASDAQ:NFLX) share price spread to other companies exposed to the streaming sector. But equity markets are a FOMO law unto themselves, and I don’t believe that was what prompted the reversals elsewhere. Tesla (NASDAQ:TSLA) blew its Q1 results out of the water after the markets closed, sending its share price 5.0% higher, and that will likely underpin equities in Asia today. It also triggered another $23 billion of awards into Elon Musk’s bank account apparently, so I guess he can tweet that “50% of funding is achieved” vis-à-vis his Twitter (NYSE:TWTR) bid.
More likely it was a combination of factors that prompted the US bond, and US dollar reversal. The US 10-year bond auction got away at 3.095%, and the strong bid-to-cover ratio hinted that 3.0% was a magic number for institutional investors to start slurping up US yield. (in bond markets, yields fall when prices go up) The Fed’s Daly repeated the 2.50% terminal Fed Funds mantra, further mollifying the Bullard ultra-hawkish nerves previously. US Existing Home Sales also fell once again on a monthly basis, and it will be interesting to see the data from the New Home and Pending Home Sales next week. Finally, the Fed Beige Book suggested that wage pressures could be easing. In totality, it added up, at least temporarily, to a few decent reasons to pause for breath.
In Asia, regional markets are likely to take a wait-and-see approach, to see if the corrections overnight in US markets are a one-day wonder or will extend for some days yet. The Fed uber-hawk, James Bullard, speaks again later today and he may continue to be a bull in a monetary China shop. The final runoff for the French presidency this weekend is likely to limit any gains by European markets, currency, or equities, as will the progress of Russia’s new offensive in Ukraine.
Asia-Pacific data is thin on the ground today. New Zealand inflation hit 6.90% YoY; levels not seen since 1990 when I was a fresh-faced young currency trader in Wellington. Ironically, the British bank I worked for had a higher credit rating than the New Zealand government in those days. (It doesn’t now.) The New Zealand dollar is 0.40% lower today as the markets price the ever-deeper hole the Reserve Bank of New Zealand has dug itself, and the shrinking options it has to extricate itself. Most of them lead to a hard landing I believe.
South Korean March PPI rose 1.30% MoM and rose to 8.80% YoY. Unsurprisingly, energy prices were the main culprit, something that all of Asia will continue grappling with this year. Japan’s Foreign Bond Investment also fell with Foreign Stock investment easing to yen 407 billion. Headlines are dominated by the Bank of Japan placing another unlimited 10-year JGB bid at 0.25% to cap yields again today, the main reason why I believe the USD/JPY dip will be temporary. Far more market reaction should come from its release of the Jibun Bank PMIs tomorrow, and its core and headline inflation rates. Core inflation is expected to rise to an eye-watering 0.80% YoY. (by Japanese standards) Expect QE forever to be as intact tomorrow in Japan, as it is today.
The rest of the day’s calendar is nondescript in Asia, leaving markets vulnerable to headline-driven volatility, especially as China’s PBOC set a neutral USD/CNY fix today, after the weaker one yesterday. China’s President Xi Jinping speaks today, but I can’t imagine he will signal a rollback of COVID-zero. Eurozone inflation later today has upside risks and a print above 7.50% could see euro selling emerge again as ECB officials stay dovish, and with a war on its Eastern border. In addition to James Bullard, Fed Chairman Jerome Powell has two speaking engagements today. An “on message” Powell should cancel out any hawkish Bullard comments and could see the correction lower by US yields and the US dollar continue.
Asian equities get a Tesla fast charge
With the exception, once again, of China, Asian markets are tracking higher today after Tesla announced impressive results after the New York markets closed. In New York overnight, the meltdown of the Netflix stock price had spread to other companies associated with the streaming sector. That led to a mixed close in New York as the tech-heavy NASDAQ took a beating. The S&P 500 fell by 0.06%, the NASDAQ tumbled by 1.22%. That prompted a growth to value safety move sending the Dow Jones 0.72% higher.
Tesla’s impressive results saw earnings per share rise to $3.22 versus $2.26 expected. Revenue rose to $18.76 billion versus $17.80 billion expected. That was enough to send Tesla’s stock 5.0% higher in after-hours trading and has reversed the negative tone on US markets and has had a positive knock-on effect in Asia. S&P 500 futures are 0.50% higher, NASDAQ futures are 0.75% higher, while Dow futures have risen by 0.35%.
In Asia, Japan’s Nikkei 225 has risen by 1.15%, helped by the Bank of Japan conducting rate capping operations in the JGB market. South Korea’s KOSPI is 0.60% higher, but Taipei has only managed a 0.15% gain, likely due to weak Mainland China equity markets today. Singapore has risen by 0.50%, Kuala Lumpur by 0.15%, Jakarta by 0.70%, Bangkok by 0.30%, and Manila is unchanged. Australia’s All Ordinaries has risen by 0.30%, and the ASX 200 by 0.40%.
China’s markets continue to underperform, weighed down by growth fears and the COVID-zero policy on the mainland, while US delisting fears on dual-listed equities continue to hamstring Hong Kong markets as well. The Shanghai Composite has fallen by 0.95%, the CSI 300 is 0.70% lower, and the Hang Seng has slumped by 1.15%. Any signs of an easing of COVID-zero policies in President Xi’s speech today could provide a welcome bounce.
European markets managed to rally yesterday after an ECB official signaled, he remained dovish on rate hikes. With the Ukraine conflict entering its next phase, a French presidential election this weekend, and potentially ugly inflation data tomorrow, any sustained rally by European equities is unlikely.
US dollar falls overnight
A retreat by US yields overnight set off an uneven long-covering move in currency markets, pushing the Dollar Index sharply lower by 0.65% to 100.34. Having held resistance at 101.00, and with the relative strength index (RSI) at very overbought levels, the Dollar Index was vulnerable to a pullback. In Asia, the index has clawed back some of its losses, rising 0.19% to 100.53. Support is at 100 and then between 99.40 and 99.55, with initial resistance still at 101.00.
A suitably not-to-hawkish Jerome Powell later today could give room for more easing of US yields and see the US dollar correction continue for a few more days. Notably, the US dollar pullback was mostly limited to the DM space with EM in some cases, continuing to fall versus the greenback.
The euro and sterling both gained on US dollar weakness overnight. EUR/USD rose 0.62% to 1.0855, reclaiming the long-term support line around 1.0800. It has eased to 1.0832 in Asia. GBP/USD rose 0.53% to 1.3068 before retreating to 1.3050 in Asia. EUR/USD still risks a close below 1.0800 on a weekly basis which would be a very negative technical development. Only a close above 1.0950 eases that risk. Likewise, GBP/USD needs to close above 1.3100 to ease downside pressure. The price action in Asia makes an unconvincing case in this respect.
USD/JPY tumbled by 0.80% to 127.85 overnight, as US yields fell and with the BOJ standing in the market to cap JGB yields at 0.25%. US 10-year futures have headed lower in Asia, narrowing the rate differential, and it speaks volumes that USD/JPY has quickly by 0.45% to 128.40 in Asia this morning. That further reinforces the theory that this is a temporary US dollar correction. The RSI remains very overbought, and a deeper correction is possible. Support remains at 127.00 and 126.00, with resistance at 129.50 and 130.00.
AUD/USD and NZD/USD booked just 1.00% plus gains overnight, rising to 0.7450 and 0.6808. Both are retreating in Asia though with AUD/USD falling 0.37% to 0.7425, and NZD/USD falling 0.43% to 0.6780. AUD/USD continues holding hold above critical support at 0.7320 and looks the more constructive of the two, thanks in no small part, to firm coal and other resource prices. NZD/USD remains well below its breakout line, today at 0.6840 and remains in danger of retesting 0.6700 as inflation hits 32-year highs, with the RBNZ perceived as well behind the inflation fight.
In a stark warning to US dollar bears, the Chinese yuan sell-off accelerated overnight and has continued in Asia today. USD/CNY and USD/CNH rose 0.40% to 6.41900 and 6.4450, adding another 0.35% to 6.4410 and 6.4650 today. That is despite the PBOC setting a neutral USD/CNY fixing this morning. Since both onshore and offshore USD/yuan pairs broke through one-year resistance lines this week, the selloff has accelerated. Negativity around China’s COVID-zero policy is partly responsible, but it appears the PBOC is quite happy to nudge the trend along. A weaker currency appears preferable to wider domestic stimulus it seems now. We could well see 6.5000 by next week.
The sharp fall by the yuan over the last 24 hours has set off a wave of Asian FX selling today. USD/KRW has risen by 0.30%, USD/SGD, USD/THB, USD/TWD, and USD/MYR are all around 0.20% higher. It is also a warning that USD/JPY sellers should not get to wedded to their positions. If China is now embarking on a Yuan weakening path in a rear-guard action to support growth, Asian regional currencies now face even more challenges as their monetary policies diverge from the United States. More weakness lies ahead.
Oil markets surprisingly quiet
Oil markets traded sideways overnight, with China's growth fears offsetting a large drop in official US crude inventories overnight. With the geopolitical news ticker fairly quiet, oil markets contented themselves with consolidating the previous day's gains. Brief forays to the downside were quickly reversed leaving Brent crude almost unchanged at $107.30 a barrel, and WTI at $102.40 a barrel.
In Asia, the lack of volatility overnight has left local traders in a calmer frame of mind, reducing the inclination to chase prices higher. Brent crude is just 0.40% higher at $107.70, and WTI is 0.60% higher at $103.00 a barrel. It seems that regional buyers are happy to wait for pullbacks and a quiet session appears likely for Asia.
I continue to expect that Brent will 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. A potential European oil embargo on Russia next week after this weekend’s French elections, could see a move towards the top of the range.
Gold steady overnight
Gold prices remained steady overnight, but notably, it failed to rally as US yields and the US dollar both retreated. Gold booked a modest 0.40% gain to $1957.50 an ounce, which it has mostly unwound in Asia as the US dollar rebounds. Gold has fallen by 0.30% to $1951.80 an ounce in Asia.
Gold still looks vulnerable and failure of $1940.00 could see more speculative long positions getting culled and gold falling to $1915.00 an ounce. However, gold’s price action of the past few weeks has been quietly signaling those risks, be they inflation or geopolitical, have been increasing. Nothing I can see has changed that fact, and thus, the deeper correction lower could be an opportunity to load up again at much better levels.
As for the technical picture, gold still has resistance at $2000.00 an ounce, and I believe option-related selling there will be a strong initial barrier. However, if $2000.00 is cleared, gold could quickly gap higher to $2020.00 an ounce quickly, and potentially, retest of $2080.00 an ounce. Failure of $1915.00 and $1880.00 could see a deeper loss to $1800.00 an ounce.