By Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA,
New Zealand is grabbing the headlines in Asia today, but for all the wrong reasons. It reported its first community case in Auckland yesterday that has risen to seven and counting this morning. The government placed the entire country in lockdown overnight, sending the New Zealand Dollar tumbling by over 1.0%.
That made the Reserve Bank of New Zealand’s policy decision this morning all the more interesting as a 0.25% rate hike had been penciled in by the entire world. As it turned out, the RBNZ blinked and left rates unchanged at 0.25%, sending the Kiwi another 0.50% lower to 0.6870.
However, the RBNZ signalled that it still intended to raise rates, and we saw the flightless bird whipsaw markets, and it is now 0.45% higher on the day at 0.6950. Monetary policy appears to have achieved her immunity with vaccines, it seems. Cases are almost certain to rise, perhaps precipitously inside fortress New Zealand, and today’s bounce could be the best we see of the New Zealand Dollar rally for a while.
Elsewhere, risk aversion was the theme of the night in New York. US Retail Sales disappointed while markets completely ignored better industrial production. Home Depot’s shares fell after quarterly earnings came up short, continuing a trend of severe punishment for companies who don’t meet earnings expectations against a background of pimped-up valuations.
What we can take out of the overnight session is that fears are increasing of a slowing global economic recovery that was K-shaped anyway, especially after China data disappointed earlier in the week. Behind it all, is the ever-present threat of the Covid-19 delta-variant, and markets finally succumbed to those nerves overnight.
The US Dollar soared even as the US yield curve remained unchanged. Haven buying is evident in gold, which is also getting an Afghanistan boost. Oil prices sank while even fellow haven currencies, the Swiss Franc and Japanese Yen, bowed before the US Dollar while even the digital Dutch tulip, Bitcoin, retreated by 2.70%.
My charts suggest a break below $44,000 of US taxpayer revenue backed fiat currency, not dodgy US Dollar “backed” unstable coins, could be in for a much deeper retreat. Before all the crypto-massive reach for their social media and email phasers to zap me, the greater uptrend remains intact as long as the 50 and 100-day moving averages, both near $38,000.00, remain intact, with a target of around $52,000.00.
I know that isn’t $23,567,945,843.22, but work with me; the fiat currency zombie apocalypse might happen. Now go back to your formula one racing car computational workstation seats and stack of empty pizza boxes and leave me alone.
If the mood was sombre overnight, that doesn’t seem to be the case in Asia today. True, Asian currencies remain under pressure as the US Dollar surges, but equity markets have rebounded strongly today.
Looking for drivers to explain the rally, China’s Covid-19 cases fell today, admittedly from a low base. Japan’s trade surplus exploded higher, although looking below the bonnet, exports fell, but imports fell a lot more, flattering the headline and implying supply chain challenges remain and domestic consumption is fragile.
This morning, the PBOC set the USD/CNY fixing at 6.4915, the weakest CNY mid-point for six weeks. That may be lifting sentiment in Mainland equities.
This afternoon, the Eurozone, and the United Kingdom both release inflation data. However, barring a huge upside surprise, I expect neither to have much market impact.
Investors will be eyeing the nut and bolts of the FOMC Minutes later this evening for signs that a majority of members are swinging behind a taper sooner rather than later. That could boost the US Dollar once again. Minneapolis Federal Reserve President Neel Kashkari, an FOMC dove, was anything but in comments early this morning, signalling a Fed tapering either side of the year-end was a reasonable possibility. He also said cryptocurrency is 95% fraud, hype, noise, and confusion. He is my favourite Fed President.
However, none of those releases is first-tier, and I expect growth and delta fears to continue to dominate markets. It will just be a matter of whether the overnight fall by stocks on Wall Street is a dip to buy or the start of a minor correction. Fortune favours the former.
Asian equities stage a surprise rally
Asian equities are higher across the board this morning, despite a sombre finish by Wall Street. Growth fears and delta-variants finally saw Wall Street’s multi-day run higher, come to an end overnight. The S&P 500 fell by 0.70%, the Nasdaq slumped by 0.93%, and the Dow Jones retreated by 0.79% as a wave of risk aversion swept equity markets and other asset classes. Aftermarket futures on all three have risen modestly, with Asia today, climbing by around 0.10%.
Asian markets are mostly rallying today, though, in contrast to Wall Street. As I have stated, the drivers for the rallies across the region are not clear.
An on-hold RBNZ, falling virus cases in China, a weak CNY fixing, bargain hunting after a few negative days or weaker Asian currencies, or a FOMO buy the dip could all be combining to drive the rally. Without looking under the bonnet regionally, much of the buying could also be in more defensive stocks, pushing up the headline indexes.
Either way, Asia is enjoying a good day with the Nikkei 225 0.73% higher and the Kospi jumping by 0.95%. China’s Shanghai Composite, CSI 300 and Hang Seng are all 0.70% higher. Singapore has jumped by 0.90%, while Taipei is up 0.20%, and Bangkok and Jakarta are 0.30%.
Kuala Lumpur lags the region, the KLCI unchanged on the day as Malaysia’s political chaos weighs on investor sentiment. Australian markets are labouring under virus concerns still with the ASX 200 and All Ordinaries climbing just 0.10% today, while Ne Zealand receives an RBNZ boost on its way to a 0.55% gain.
The key will be whether today’s rally has legs or not or is merely a FOMO buy-the-dip one-off. We should know more tomorrow. The price action by Asia and the US futures should be enough to alleviate virus nerves temporarily in Europe, which I expect to open modestly higher today as a result.
The US Dollar soars on risk aversion
The US Dollar soared overnight after retail sales missed estimates, adding to investor concerns that the delta-variant is sapping the momentum of the global recovery. Although US bond yields were unchanged, the US Dollar benefited from haven buying flows, sending the dollar index 0.56% higher to 93.13. That leaves the dollar index just shy of triple-top resistance at 93.20. A rise through 93.20 signals more US Dollar strength targeting 83.50 and then 94.30. Support at 92.50 now looks like a line in the sand, and the greenback’s outlook remains positive as long as it holds.
Although the FOMC Minutes will likely be a non-event tonight, yet another Fed President suggested tapering is much nearer, and notably, Mr Kashkari is a dove. Jackson Hole assumes greater importance, as does the September FOMC meeting.
I do not expect a move at the meeting. Still, they may signal a December tapering start which will boost the US Dollar once again, especially at the expense of Asian currencies whose monetary policy is not aligned. I am therefore expecting the US Dollar to move higher through Q4.
Both the Euro and Sterling fell overnight to 1.1715 and 1.3740. EUR/USD looks to be eroding support near 1.1700 and could fall to 1.1600. However, Sterling looks more vulnerable, having tumbled 0.73% overnight and closing below its 200-day moving average (DMA) at 1.3785, which now becomes technical resistance. More US Dollar strength could see Sterling testing support at 1.3570 in the days ahead, signalling a material retreat lower.
Asia was dominated by New Zealand Dollar volatility after the arrival of Covid-19 in Auckland yesterday saw it plunge by 1.45% to 0.6920. After the RBNZ held rates unchanged, NZD/USD fell another 0.50% to 0.6870 before sharply reversing as the central bank signalled the virus had only delayed its hiking trajectory.
NZD/USD rallied as high at 0.6950 before settling at 0.6930. New Zealand will likely face an extended lockdown of more than a week, looking at the movements of the original case. Therefore, resistance at 0.6950 should hold rallies, and after the short-squeeze has run its course, I expect Kiwi to resume its drift lower.
The Australian Dollar has been dragged around like their national rugby team by the All Blacks; I mean the New Zealand Dollar. Falling and rising in sympathy yesterday and today. Overall, it continues to struggle as a proxy for markets negative risk-sentiment globally.
The technical picture looks poor, despite Kiwi’s moves after breaking out of an ascending wedge 0.7350 last week. AUD/USD is trading at 0.7260 and should find resistance at 0.7320. Failure of support at 0.7220 will signal a deeper fall targeting 0.7000.
Asian currencies continued to struggle overnight as the US Dollar rallied and investors get more nervous about the delta-variant virus. The threat of a stalling global recovery would hit Asia very hard.
One of the most notable losers has been the Korean Won, with USD/KRW climbing to 1.05% to 1179.00 overnight. However, the Bank of Korea signalled they were watching the Won’s fall “closely” today and fearing intervention, USD/KRS quickly retreated to 1169.00 this morning. USD/MYR continues to test resistance at 4.2400 as its political situation remains as unstable as ever. A close above 4.2400 will signal more losses to 4.3000 in the session ahead unless either the political or virus situation turns quickly to the better.
Overall, growth fears and the possibility of Federal Reserve tapering will continue to weigh on Asian currencies. I expect more interventions to slow the descents, but in the bigger picture, Asian FX faces a challenging landscape into Q4.
Oil continues to suffer recovery nerves
The weaker than expected US Retail Sales data and ensuing US Dollar strength weighed further on oil prices overnight. Confidence is being weakened anyway by softer China data earlier in the week and ratcheting fears that the Covid-19 delta-variant will erode the pace of the global recovery, and thus, future oil demand. US API Crude Inventories dropped by 1.163 million barrels overnight, but that seemed only to stem the negative tide, not turn it. Nor has OPEC+’s refusal to head President Biden’s call to pump more to lower prices proved supportive.
Brent crude eased 0.66% lower to $69.10 a barrel overnight, while WTI retreated by 1.25% to $66.55 a barrel. Oil prices are steady this morning in Asia, being almost unchanged from overnight. Notably, both contracts remained below their 100-day moving averages (DMAs), while the relative strength indexes (RSIs) remain neutral, bearish technical developments.
Brent crude has resistance at $70.00 and then the 100-DMA at $70.50 a barrel. That is followed by $71.35 and $72.00 a barrel. It has support nearby at the overnight low of $68.85, followed by $68.20 and then $67.50 a barrel. Failure opens a test of triple bottom support at $64.60 a barrel.
WTI has resistance at the overnight high at $67.75, closely followed by the 100-DMA, located at $67.80 a barrel. We then have $69.60 and $70.00 a barrel. Support is nearby at the overnight low of $66.35, followed by $65.75, and then the more critical double bottom at $65.10 a barrel. Failure opens a chasm that could target $62.00 a barrel in the sessions ahead.
Both contracts rallied intra-session overnight, only to fail ahead of their respective 100-DMAs, reinforcing their near-term importance. Both contracts appear to be tracing out bearish pennant formations, suggesting prices could fall substantially from here. I will await tonight’s official US crude inventory data and the FOMC minutes before finalising my thoughts on that tomorrow.
Gold shows haven resilience
Gold appears to be finally trading off something that doesn’t resemble a mechanic inverse relationship to the US Dollar. Despite the greenback recording substantial gains overnight, gold held onto all of its gains of the past few sessions, finishing only 0.06% lower at $1786.00 an ounce.
It looks like, for now, the safe-haven bid is back. Increasing nerves about the delta variant’s impact on the global recovery is finally starting to weigh on equity markets, with at least some of those funds parked in the yellow metal. At the periphery, concerns about the transition of power in Afghanistan and its implications for regional stability may also be strengthening gold’s hand. Weaker than expected, recent China data and the impact of partial port shutdowns there on global supply chains are another tailwind.
Nevertheless, gold will face more challenges to its rally if the US Dollar keeps strengthening. More importantly, if US long-dated bond yields start to rise, I doubt gold’s upward momentum will be maintained.
Some risk aversion buying is evident in Asia today, as gold firms by 0.16% to $1789.00 an ounce. However, from a technical perspective, gold faces a series of formidable resistance levels from here on up. Gold has initial resistance at the overnight highs at $1797.00, which is also the 50-DMA. That is followed by $1800.00 an ounce and then the 100-DMA at $1807.50 an ounce, ahead of the 200-DMA at $1813.20 an ounce. After that comes before a series of daily highs, each side of $1834.00 an ounce.
Support resides at the overnight lows around $1780.00, followed by $1770.00 and then the important pivot region at $1750.00 an ounce. Failure of $1750.00 implies a deeper retreat to $1700.00 an ounce.
Although gold has maintained its risk-aversion bid overnight, the technical picture suggests it has a lot of wood to chop on the upside to sustain the rally’s momentum. I, therefore, maintain a cautious stance on further gold strength at these levels if the US Dollar remains as firm as it is at the moment.