By Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA,
Some of the week’s froth has come out of the markets in Asia today, with equities edging lower, along with energy and precious metals and our good friends, the cryptocurrency space, while the US Dollar edged higher after an impressive rally overnight. All the financial markets space, the price action looks corrective, rather than a structural turn, as short-term momentum ran out of the “inflation is dead, buy everything” that has swept markets this week.
The weight of short-term positioning in the buy everything trade is perhaps made more evident by a couple of notable facts. Oil prices fell overnight even as US crude and gasoline inventories fell by more than expected. US yields awoke from their slumber and edged modestly higher, which sparked a 0.43% jump in the dollar index, so the street was definitely short US Dollars. That was on a day when no US data was released to provoke the inflationistas. In fact, the overnight 2-year and 5-year note auctions went out at yields lower than forecast by the street.
Gold has sharply reversed its foray above $1900.00 an ounce at the first sign of US yields turning higher, although I mentioned Tuesday that the technical picture was overbought; that is still the case. Bitcoin appears to be tracing out a bearish symmetrical triangle. I won’t launch into a rant about crypto’s at this point; readers can reread previous notes for their “voice of reason” fix. A clean break of $37,000 of US fiat currency – because its Bitcoin, let’s call a clean break $36,000 – targets a move lower to $22,000. Fire up that Twitter account Elon, your disciples may need you.
Inflation is a story that just won’t go away, especially when the markets are positioned heavily against it. My argument is that it will continue rising, but that we just don’t know yet whether the supply-chain disruption, re-opening consumption spike is a transitory impact on annual CPI’s or an Eagle’s-like comeback after a 20-year vacation. I am erring to the transitory side as more people remain out of work than it is pre-pandemic. Additionally, the world was heading for a slowdown anyway before the pandemic struck. Still, I cannot see how US GDP growth of 6.50 to 7.0% is consistent with US 10-year yields at 1.60%.
Next week’s Non-Farm Payrolls may help answer that question one way or the other; with the storm-in-a-teacup buy everything trade likely to be a big winner if we get another low-ball print. Little old New Zealand seems to have subtly provoked the reversal yesterday, though, with the Reserve Bank of New Zealand surprising markets by forecasting rate increases to commence in the second half of 2022. There are many ifs and buts in that forecast, with enough Teflon to make a politician jealous. Nevertheless, New Zealand now joins Canada and Norway in a small club that is starting to talk about tapering and hiking.
On that note, the mighty New Zealand Dollar rose over 1.0% yesterday on that statement bombshell. What will the reaction in markets be when the Federal Reserve starts talking about the same thing after they and the ECB have spent the last 13 years feeding the world’s addiction to unlimited zero per cent finance? There is a whole generation of new finance industry gnomes who think that this is normal. Think about that.
One central bank that isn’t joining that club yet is South Korea. The Bank of Korea, like Bank Indonesia, earlier this week left rates and guidance unchanged this morning. With domestic consumption recovering slowly in Asia, a slow vaccine rollout, and with new Covid-19 waves popping up across the region, the BoK decision is of no surprise. Most of Asia is likely to wait for the Federal Reserve to move first unless surging US bond yields and a massive strengthening of the US Dollar forces their hand. That, though, is but one scenario of many that could come to be.
China’s Industrial Profits (YTD) YoY for April grew by an impressive 106.10% this morning. The headline is flattered by the base effects of the pandemic lockdowns last year, and markets will want to see if a higher Yuan and the tech clampdown take the heat out of China’s recovery. Mainland markets focused more on the constructive and candid conversations between China’s Vice Premier Liu He and US Trade Representative Katherine Tai via phone this morning. With Sino-US relations, anything less than acrimony is a reason for hope from the market’s perspective.
Today’s calendar is quiet across the rest of Asia and into Europe. Things get more exciting this evening with US Durable Goods, Initial Jobless Claims, PCE Prices and 2nd est. GDP Growth Rate for Q2. We are likely to see more risk being taken off the board into that data dump. With the street suddenly on edge again, indicators of potentially higher inflation will see the sell-off accelerate. At the same time, a benign data set should get us back to the week’s business as usual.
China equities rise on positive US-China comms
Overnight, Wall Street limped to a modestly positive finish with the S&P 500 rising 0.19%, the Nasdaq outperforming, increasing 0.59%, and the Dow Jones finishing unchanged. Futures on all three fell as profit-taking set in, in early Asia, but have since retraced most of those losses, being down around 0.10%.
Much the same occurred across Asia, with equities markets edging lower as investors unwound some of the precious days’ gains ahead of US Data this evening. The seemingly positive phone call between the US and China trade representatives has swung sentiment in Asia back into the green, as much of the region returned from a holiday yesterday.
The Nikkei 225 is down just 0.25%, while the Kospi is 0.10% lower. Elsewhere, the picture is more upbeat, with Mainland China’s Shanghai Composite and CSI 300 reversing early losses to be up 0.10%. Hong Kong is flat for the day despite a further clampdown on China-tech financial operations. Singapore is 0.35% higher, with Kuala Lumpur up 0.15%, Taiwan lower by 0.50%, and Jakarta leaping 1.20% higher.
Australian markets have shrugged off a new week-long Covid-19 lockdown in the State of Victoria after private CAPEX data leapt by 6.50%. The All Ordinaries has climbed 0.35%, while the ASX 200 has risen 0.20%.
Europe will open on a cautionary note after the early price action in Asia suggested bullish investors are nervous ahead of US data. However, the positive reaction of Asia to even a hint of thawing relations between China and the US indicates any fallout in Europe will be limited.
The US Dollar stages a surprising rally
The US Dollar staged a surprising rally overnight on no particular news, after being on the back door for the past few sessions. The dollar index rose 0.43% to 90.04, where it remains in Asia after probing the topside earlier. However, the dollar index’s rally overnight only moves it back to the upper end of its one-week 89.50 to 90.20 trading range.
Although US yields moved higher at the long-end overnight, supporting the US Dollar, a combination of extended fast-money speculative shorts and the reaction of the New Zealand Dollar to the RBNZ’s rate hike timetable sparked some reflection in markets. That, in turn, saw a rush for the door to reduce exposure. If NZD/USD can move 1.0% on the RBNZ, bringing its rate hike window forward to H2 2022, what will happen when the Federal Reserve drops the word taper into its statement, was probably the logic.
USD/JPY climbed 40 points back above 109.00 to 109.10 overnight, highlighting the sensitivity if the pair to US/Japan yield differentials. It remains stranded in a broader 108.50 to 109.50 range, though. Euro and Sterling also retreated, but both remain comfortably clear of support that would signal a reversal.
The Chinese Yuan ignored US Dollar strength and powered higher, USD/CNY falling to 6.3850 this morning. The Yuan strength produced mixed results among Asian currencies, with the Korean Won and Indian Rupee tracking higher. At the same time, the Singapore Dollar and Malaysian Ringgit remained under some pressure, likely due to their Covid-19 situation.
The fall of USD/CNY through 6.4000 seems to have catalysed a bout of pent-up CNY buying, notably from international investors who have been busy in China stocks this week. It also comes simultaneously as the noise from China’s government about commodity prices ratcheted up sharply. A higher Yuan is an easy fix for higher commodity prices but comes at the cost of higher export prices down the line. It is only a temporary fix, and if the US Dollar continues to strengthen this evening, the retreat of USD/CNY will run out of steam.
Although the DM and EM space diverged overnight, it appears the street is a little nervous being short US Dollars into tonight’s US data dump. The US Dollar’s next directional move for the sessions ahead should be decided this evening.
Oil markets pause for breath
Brent crude and WTI were almost unchanged at $68.25 and $66.15 respectively overnight, despite ostensibly bullish US official crude inventories data. The risk-exposure reduction seen elsewhere was evident in Asia, though, both contracts falling 0.50% to $68.40 and $65.80 a barrel.
Oil markets will likely use the throwaway excuse of the day, Iranian oil or US inflation to explain away the fall. However, given oil has retreated in Asia after bullish US inventory data, I believe the real reason is simply that speculative longs are trimming positions ahead of the US data dump tonight. When one considers the last week’s price action, it is easy to conclude that the speculative longs that were culled last week have quickly gotten back in again. They are now slightly nervous, given the pace of the price recovery.
Some further trimming of long positions will probably occur into the US data series this evening, but oil’s price fundamentals remain strong, even if momentum has wavered. Oil should be a buy on dips into the end of the week.
Gold investors book profits on long positions
The falling momentum elsewhere, and the rise in US yields, saw golds rally through $1913.00 to $191000 an ounce run out of steam overnight. Gold retreated, finishing 0.13% lower at $1897.00 an ounce for the session. In Asia, activity has been muted, with gold meandering slightly higher to $1898.00 an ounce.
Gold remains vulnerable to a deeper pullback from these levels as its Relative Strength Index (RSI) remains in overbought territory, a risk signally by me earlier in the week. The RSI usually signals either a period of sideways consolidation or a sharp correction to the underlying trend.
Gold has support at $1875.00, limiting any pullback. I cannot entirely rule out a short and sharp fall to the key $1845.00 an ounce support zone. Unless the US data surprises tonight one way or the other on the inflation expectations front, gold should consolidate in a $1875.00 to $1910.00 range for the rest of the week.