Midweek Macro Overview: it's all about reopening angst and lower oil prices are providing a powerful headwind for EM currencies
Lower oil prices are providing a more powerful headwind for EM currencies than the fallout of the replacement of Turkey’s central bank governor over the weekend. Oil-exporting currencies are underperforming. Front-month Brent prices are down 13.4% over the past week, encompassing a 5.7% fall over the past 24 hours, triggered by concerns of longer lockdowns in the Eurozone. Germany’s government extended current lockdown measures until April 18, with a harder shutdown slated for 5 days over the long Easter weekend.
For oil prices and FX, lower prices in 2011, 2014, 2016, and 2020 were consistent with a stronger USD. Wednesday’s Eurozone flash PMIs for March could bring downside risks to oil demand into focus. Although manufacturing PMIs across the region have risen sharply well into expansionary above-50 territory (57.9), services are lagging (45.7) with a recovery that now looks set to be delayed further.
The February-March 2020 downdraft in oil prices was particularly negative for the RUB, MXN, COP, BRL, ZAR, and IDR in EM. Adding the impact of US fiscal stimulus and resulting higher yields beyond this week’s global rates rally is an unbalancing combination for EM.
However, the gloom should not be overdone. Much-improved current account balances in these economies point to a greater balance of payments resilience if portfolio flows turn outward. Away from high-yielding or commodity-driven currencies, the recovery in recently-released trade data for North Asia reveals the strength of recovery that the rest of the world could see soon as the vaccine roll-out continues. Indeed, Korea’s 20-day exports held up very well in March and Taiwan export orders rose 48.5% y/y in February suggesting that DM markets are hardly closed despite the EU being stuck under the lockdown cosh at that time.
New Zealand Government Bonds (NZGBs) are leading a G10 rates rally,. The RBNZ wasn’t able to buy the full quota on bonds it wanted in its QE operations today (NZD 152mn/NZD 250mn), suggesting investors are keen to hold onto fixed-income assets for now. NZDUSD is underperforming its G10 peers. These moves also follow the government’s Tuesday announcements to unlock more housing supply and extend the minimum holding period to 10 years for residential property that is subject to capital gains.
Asia Open: Overnight de-risking has mercifully stalled as the market could be taking comfort in the fact at least there are no new negative headlines
Overnight de-risking has mercifully stalled as the market could be taking comfort in the fact at least there are no new negative headlines for the bears to sink their teeth in.
But its hardly a green light signal as concerns regarding the strength of the post-pandemic recovery with cases remaining elevated in many jurisdictions and fresh mobility restrictions continue to rock the boat.
Oil has possibly found some dip buying as the post lockdown event risk play book suggests. However, I'm thinking more short covering than anything with US lockdown concerns still simmering on the backburner. But for or now, expect broad risk sentiment to remain in the driving seat.
EURUSD played catch-up with the move initiated elsewhere with dovish comments from ECB's lane on Tuesday's open, assisting the slide from the highs of around 1.1931 to eventually take out the 200-day moving average into 1.1863 and extending to as low as 1.1842.
Gold hovers at its 20-day moving average after coming under pressure from the US dollar. Watch support at $1700 while the short-term resistance stands at the $1752 Fibonacci level. Positioning is far from crowded at the moment and with the US yields softer, we could be primed for a safe haven bounce.
The market continues to focus on rates and Fed communication while COVID-19 cases, bond yields and the prospect of inflation remain important.
WGC reported last week that Indian official imports hit a 21-month high, the local market premium strengthened as lower domestic gold price and festive season purchases boosted retail demand.
MARKETS
US equities were weaker Tuesday, S&P down 0.8%. US 10-year yields fell 7bps to 1.62%, and oil prices fell back 6.2% due to a sudden and hugely unexpected pullback on growth optimism after what was thought to be well in the rear-view mirror, COVID-19 and lockdown fears reared their ugly heads again.
For the oil markets, the sum of Q1 and reopening fears have been realized this week due to the resurgence of COVID as worries of new virus variants start to wreak havoc with investors' psyche.
Little new news from the Congressional Thunderdome where neither Powell nor Yellen's joint congressional testimony overnight might have acted as a positive catalyst, so investors were left scrambling for life jackets as it seems we are back navigating the stormy sea of the coronavirus pandemic again, sending investor seeking safe harbor under the umbrella of US bonds and the "safe-haven "greenback."
And as sentiment plummets to rock bottom, some good news—or at least a few days of no negative news—is needed for a lift in sentiment.
OIL MARKETS
Germany extended lockdown measures through April 18, a resurgence in COVID in India and health care alerts in the US have dealt a cruel blow to oil markets.
And when it rains, it pours: oil investors go salt rubbed in their eyes as prices continued to slide after the API reported a most untimely US crude inventory build, which came in much larger than consensus.
Brent was still holding on by a thread above the psychological $60 per barrel at the Asia open with investors on the fence deciding whether this is the dip to buy or not after getting no joy stepping in front of the oil slide throughout the NY session.
Past patterns, in general, has been for the markets to pare back on initial lockdown announcements but then to recover. However, there are more worries at the moment about a lagged rise in US COVID cases to follow in Europe's footsteps due to Spring Break festive proclivities. So, there is still a chance there could be more pain to come.
The thought of the US shuffling back into the COVID lockdown abyss, even a soft shuffle, is having a seismic effect through oil markets overnight.
Similarly, India could be paying the COVID piper as a vast gathering of devotees for a Hindu festival have likely caused the spike there.
And while the stronger US dollar and higher US interest rates are not helping matters, the drop in oil is mainly a function of concern that a third COVID-19 wave will extend lockdowns and delay the return to normal demand levels necessary to stabilize at a reasonable level. Indeed, this is one reason why so many oil traders have not bought into the 'super cycle' argument, at least in the near/medium-term, because underlying demand, though improving, remains well below the level that would typically support oil in the USD60s and bullish sentiment has been dealt a ferocious reality check.
Oil Weakness and Bearing On OPEC Meeting
It is perhaps too early to start speculating about the outcome of next week's OPEC meeting. Still, the weakness in oil this week seems to have validated the cautious view expressed by Saudi Arabia at the last meeting. It increases the probability of yet another rollover of current production levels.
FOREX
The USD is stronger this morning despite lower US yields as greenback safe-haven appeal endures, perhaps taking its cue from weaker equities.
Euro
The narrative about Europe's outlook is grim: the vaccine roll-out is failing, lockdowns are tightened amid a third wave, and policy is descending into chaos, ranging from last week's panic over vaccine safety to this week's threat over vaccine exports.
Again, the EUR fell under selling pressure given COVID-19 headlines and the contrast in the US's fiscal trajectory. Germany's Chancellor Merkel announced a 5-day "hard lockdown" over Easter to try and short-circuit COVID-19's renewed spread.
Risk Betas
Most "risk-on" currencies are weaker overnight, but the NZD has been particularly hard hit by new government policies to temper the local housing market.
Despite the Bank of Canada announcing a taper that caused a knee jerk strengthening of the Loonie, the CAD is back, looking at 1.2600 in the near-term viewfinder.
The Malaysian Ringgit
The ringgit dived into the plunge pool along with oil prices overnight. With COVID -19 rearing its ugly head at various hot spots worldwide, investors ran for the cover of US bonds and the US dollar for a safe harbour to ride this 3rd wave COVID storm out.
GOLD MARKETS
Gold weakened as the USD rallied amidst positive comments from J Powell and Janet Yellen; however, lower yields may support and even firm bullion over the short term once the US dollar safe-haven appeal ebbs.
Gold took a knock as US trading got underway as it was unable to ward off a rallying USD. Gold fell as the USD DXY tipped above yesterday's highs. Both speakers to Congress had previously released their prepared remarks, which supported the long US dollar view.