Back and forth

By Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA,

US ISM Services and ADP Employment data came in slightly softer than expected overnight, taking the froth of equity markets which seem to be struggling for momentum at these lofty heights, especially technology. US yields spiked early on a US Treasury debt ceiling scare before retreating as the session wore on. That also served to take the wind out of the sails of the US Dollar. Oil fell after the official US Crude Inventories data despite a massive drop in the headline number. It may have been a buy the rumour, sell the fact moment after the fall was telegraphed by the API data yesterday. A weaker US Dollar and a reversal of the bond yield spike duly saw gold book some modest gains. In the crypto-space, the mania continued, with dip-buying notable on Bitcoin. Business as usual then. Various Fed Governors and Treasury Secretary Yellen spent the evening soothing investors' nerves after Ms Yellen's tightening comments spooked markets. It appears to be mission achieved at this stage, and this story is quickly slipping from the news. Nobody can complain about a lack of volatility this week, with decent ranges in most asset classes. One thing is apparent, though, despite the noise, there is a decided lack of directional momentum and uncertainty. That has led to very choppy, but ultimately, back and forth ranging markets. Friday's Non-Farm Payrolls should resolve that state of affairs. However, the 1.0 million-plus expectation becoming very crowded as the week goes on. Inflationistas and bond vigilantes like myself may not get the result we expected, even if the numbers come in at 1.10 million. The US Dollar could fall along with US yields and woe betide us if the Non-Farms "only add" 900,000 jobs. Equities and precious metals should be the winners in this scenario. Meanwhile, China and Japan have returned from holidays today, with Japanese markets notably hitting the buy button as soon as they walked through the door. Early equity trading in China is more subdued after the PBOC withdrew CNY 40 billion of holiday liquidity via the repo market. Geopolitical tensions may also be hanging over the Mainland, with the G-7 meeting unusually united and forceful in condemning China's alleged repression of the Uighurs and the US supporting Taiwan entry to the WTO. The upcoming US tariff review on Chinese goods is increasingly looking unlikely to be changed materially, not that it has mattered when one looks back at China's export performance over the past year. Looking ahead in Asia, Bank Negara Malaysia (BNM) announces its latest rate decision this afternoon. The street, including the author, is expecting the reference rate to remain unchanged at 1.75%. However, BNM is about the only ASEAN central bank with any monetary gas left in the tank, and a sneaky 0.25% cut is not beyond the realms of possibility, particularly with Asian nerves frayed over the resurgence of Covid-19. That would be positive for local equities and bearish for the Ringgit in the short-term. The Bank of England (BOE) also announces its latest policy decision today. Again, the only threat to an unchanged reference rate and QE target would be some tinkering with tapering. Unlikely but possible. Sterling is resting at 1.3900 this morning, and GBP/USD has formidable resistance at 1.4000. A future tapering indication hint likely sees 1.4000 taken out tout suite and another bout of Sterling strength in the days ahead. US Initial Jobless Claims will be of passing interest, with new claims expected to fall to around 530,000. In all likelihood, it will spur more of the tail-chasing short-term volatility we have seen this week, with investors tying themselves up in deeper knots. This week is all about the Non-Farm Payrolls, and as I have stated, I am nervous that more and more pundits are joining me in the 1.0 million-plus club. Equities show another mixed day for Asia The return of China and Japan from holiday has seen a mixed start to the day, after Wall Street finished inconclusively, with its early tech rally petering out into modest cyclical rotation. The S&P 500 closed just 0.07% higher, while the Nasdaq retreated 0.37% at the expense of the Dow Jones, which rose 0.28%. Futures on all three has edged ever so slightly into the red in Asia after early gains. US markets also appear to be banking on a bumper Non-Farm Payrolls number, leading to recovery trade rotation on a modest scale. In Asia, the Nikkei 225 has leapt nearly 2.0% higher as investors returned from holiday. With Covid-19 concerns still apparent, the rally is surprising. I can see no other explanation other than retail mania expecting robust US data tomorrow night. The Kospi has also rallied 0.70%, and Taiwan has rallied by 1.10%. Mainland China's return has been altogether more muted, with the PBOC withdrawing liquidity and G-7 statement and Australian political temperatures on the rise once again. The Shanghai Composite has edged 0.10% higher, while the CSI 300 has edged 0.10% lower. Hong Kong has given up early gains in sympathy and is now unchanged for the day. Singapore has risen 0.56% today as its community Covid-19 situation appears to be stabilising, with the new social restrictions taken quickly in their stride. More likely, though, is that dip-buyers have appeared after a few negative sessions, boosted by an 18% rise in profits from UOB. Across ASEAN, Malaysia has fallen 1.10% which Jakarta has risen 0.45%. By contrast, Australian markets are in retreat. The China lease of the Darwin port saga is escalating as Reuters reports a China state planner says to suspend indefinitely all activities under the China-Australia strategic economic dialogue mechanism. Both equities and the Australian Dollar have fallen on this news, with Sino-Australia relations a definite sell on rallies. The All Ordinaries has declined 0.40%, while the ASX 200 is lower by 0.55%. The lack of uniformity in Asia Pacific's price action suggests that regional markets are positioning themselves for the US Non-Farm data tomorrow night, leading to certain randomness in the price action. The last-minute jockeying is likely to extend into tomorrows session. Australian Dollar takes a China hit The US Dollar had another noisy but neutral session overnight, the US dollar index finishing almost unchanged at 91.26. The index has firmed to 91.35 this morning after a weaker China USD/CNY fixing but is still stuck in a broader 90.50 to 91.50 range. Given the propensity of several asset classes to test and fail at range extremes this week, a wait-and-see attitude is the best one from here, unless you like being whipsawed. EUR/USD continues to flirt with support at 1.2000 but lacks directional momentum either way, as are GBP/USD and USD/JPY at 1.3900 and 109.35, respectively. The US Non-Farm Payrolls tomorrow night should resolve the near-term direction. However, with a 1 million + print now the consensus, I would not be at all surprised if the US Dollar now displayed surprising weakness afterwards and that US long bond yields fell. The Australian Dollar has tumbled by 0.40% to 0.7720, dragging the NZD/USD with it, after the Reuters story shows Sino-Australia relations taking another turn for the worse. Given China's behaviour toward specific Australian export segments to punish Australia, those fears are well-founded. Similarly, admonishing comments from the New Zealand Government while China was on holiday weighs on the Kiwi, which jas fallen in sympathy with the AUD/USD to 0.7190. I would argue that retaliation on New Zealand will have a much more significant impact on the NZD/USD than has been the case with AUD/USD. AUD/USD has support between 0.7690 and 0.7710, its 100-day moving average. A loss could extend the decline to 0.7500. NZD/USD has 0.7150, signaling a test of 0.7100 and possibly as far as 0.7000. Pushback from China will make the latter almost certain, with New Zealand's soft commodity exports more easily replaceable by China. As we say in New Zealand, you don't bring a sheep to a gunfight. The PBOC set the USD/CNY higher at 6.4895 today, 150 points higher than Friday's fix. That has led to a bout of US Dollar strength versus regional Asian currencies this morning. At this stage, though, the reaction looks like a knee-jerk one, and I doubt we will see a directional bout of US Dollar strength ahead of the US data tomorrow night. Oil rises in Asia after an overnight hit Although official US Crude Inventories fell by a much larger 8 million barrels overnight, the US API data seems to have telegraphed the move. As such, it appears to have been priced in, and with gasoline stocks not falling by as much as expected, long positions were squeezed out. That sent Brent crude 1.35% lower to $68.50 a barrel, with WTI falling 1.30% to 65.25 a barrel. Prices have abruptly reversed in Asia, and it seems that the return of China and Japan from holiday has seen buyers in both countries sending prices higher. Brent crude has added 0.80% to $69.05 a barrel, and WTI has added 0.45% to $65.70 a barrel. Despite the Asian buying, both contracts are marking time, albeit with a bias to the upside. Choppy range trading has been the week's theme, and we are likely to continue until the US data tomorrow. Brent crude remains comfortably above support at $68.00 a barrel with resistance at $70.00 and $71.00 a barrel. WTI has support at $63.00 a barrel with resistance at $66.50 a barrel. It remains comfortably in its rising parallel channel that extends back to the start of April. The price action suggests that oil is a buy on dips, with both contracts consolidating at the top of their weekly ranges. A strong print from the Non-Farm Payrolls should be enough to restore the recovery narrative after a few US data wobbles this week. Gold continues to range trade Gold has highlighted the dangers of getting bullish at the top, and bearish at the bottom this week. It's clearly denoted support at $1760.00 an ounce and resistance at $1800.00 prove impervious to directional breaks. Gold rose to $1787.00 an ounce overnight, advancing to $1788.50 an ounce in tepid Asian trading. Nevertheless, the support and resistance levels must be respected as this week's price action has unceremoniously highlighted. Gold will likely stage a breakout one way or the other post the US Non-Farm Payrolls. The topside is more likely to capitulate as predictions of a one million-plus jobs added has become a very crowded trade. An on expectation release could see both US yields and the US Dollar head lower, lifting gold through $1800.00 an ounce.

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