Hold on a Minutes

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

The overnight release of the FOMC Minutes provided some drama, with the committee members mostly lining up behind a tapering of quantitative easing sooner rather than later. Although caution was expressed about the potential impact of the Covid-19 delta-variant on the recovery, most of the discussion appears to be around timing. Views were split over starting into the end of the year or early next. That seems to be rather splitting hairs to me as to whether tapering commences in late Q4 or early Q1, which makes little difference; the fact is, Fed tapering looks likely to start in a few months. The procession of Fed officials making up the FOMC who have made hawkish comments since the FOMC meeting, especially after the blockbuster Non-Farm Payrolls released at the start of August, would appear to swing the likelihood of tapering in December. Next week's Jackson Hole Symposium may give markets more visibility on the Fed's current thinking, and if not, the September FOMC meeting certainly will. Of course, this does not mean that US interest rate hikes will also be arriving sooner than later. But the start of divergence of monetary policy between the United States and most of the rest of the world, notably Europe and Asia, will have implications, especially in the currency space. The US Dollar continued its rally in Asia today, spiking higher in early trading. Most likely, that was because EUR/USD fell through 1.1700, triggering stop losses, but its strength is broad-based across the G-10 and DM space. With Europe and Japan on hold and QE-ing forever, both will be vulnerable in the medium to longer term. ASEAN will interest rates at rock bottom, and with no room to think about tightening as delta rips through the region, will also face challenges. Monetary policy running on empty across the region. However, going into Q4, if the US Dollar keeps rising and the US bond market finally starts reacting to that new reality, moving US yields higher, much of Asia may find itself in a monetary bind. Although bulging with foreign currency reserves, it will be a tough choice by either running down those reserves intervening to protect their currencies or facing imported inflation. I believe that option two will win, with a bit of option one deployed tactically, aka South Korea, to keep everybody honest. Thus, I expect Asian currencies to weaken through Q4. The first regional central bank to face that conundrum, and one that perpetually does, is Indonesia. Bank Indonesia releases its latest interest rate policy decision this afternoon. Indonesia's recovery has taken and continues to take a massive hit from the wave of Covid-19 sweeping the archipelago. Don't take the falling cases at face value; the pandemic has moved out of Java and Bali, and testing numbers have tanked. Although further monetary policy transmission via rate cuts likely has a declining marginal utility at these record low levels, BI will have one eye on the value of the Rupiah. (IDR) They said as much themselves at the last meeting, and I expect them to hold at 3.50% today and be on hold for the foreseeable future. BI will probably encourage local banks to get out there and lend. But as usual, the universe of credit-worthy opportunities at scale is somewhat limited. BI may provide some incentives to encourage banks to offset their rate bind. USD/IDR should continue bubbling under 14,500.00, but if it rises to BI's line in the sand near 15,000.00 in the coming weeks, things will start getting interesting for the BI. Australian Unemployment has just been released and given the scale of lockdowns across the country now, the data was surprisingly positive. 2,200 jobs were added in July, an excellent result in the circumstances. The Unemployment Rate fell to 4.60% versus 5.0% expected, a great result. Labour force participation remained steady at 66.0%, slightly lower than last month's 66.2%. I'll need to wrap a cold towel around my head to figure out how almost no change in jobs and steady labour force participation led to a 0.40% drop in unemployment. I'll get back to you. The reaction to the data has been muted as local equities, and AUD/USD react to US Dollar strength and spiralling Covid-19 cases in New South Wales and a disturbing increase in Victoria. The data calendar is quiet today in Asia, Bank Indonesia aside, and pretty flat globally. Norway's central bank could beat New Zealand to the finish tape and start rate hikes today; the market seems indecisive on this one. US Initial Jobless Claims, should they fall markedly from last week's 375,000, could provoke more US Dollar buying and equity sellers given the post-FOMC taper minutes mood. One other thing that caught my eye in the last 24 hours was yesterday's comments from China's President Xi. President Xi outlined thoughts on what is described as "common prosperity" and what can only be described as redistributing wealth. Against the background of China's regulatory interventions and Chinese company's rocky IPO environment at the moment, this will be another dark cloud for China equity prices. The bottom fishing evident across equity markets yesterday in Asia has run out of steam quickly today, with Asia back to following the US lead. I will reiterate; eventually, Chinese equity prices will fall to levels that offset the multitude of governmental risks they now face. That process has not finished yet. On one final note, it is Mrs Halley's birthday next week. Our last attempt at exploring the island of Sumba was rudely interrupted by both of us catching Covid-19 (despite being vaccinated). It won't be Sumba tomorrow, but we shall be heading to another more famous island (within Indonesia) tomorrow to support their economy, as she will not be denied her birthday. Like MacArthur, I shall return; on Monday, August 30th. Asia markets turn South As it diverged from New York's lead, the bottom fishing across Asia we saw yesterday has vanished today, with most of Asia in the red. President Xi's wealth redistribution remarks and a taper-heavy FOMC minutes combining to push regional markets lower today. Overnight, Wall Street ended on a sour note post the minutes release. The S&P 500 and Dow Jones fell by 1.07%, while the Nasdaq retreated by 0.89%. Futures on all three indexes have continued easing this morning, lower by around 0.10%. The Nikkei 225 starts the day 0.70% lower, while the Kospi has fallen by 1.0%. In China, the Shanghai Composite is down by 1.10%, with the CSI 300 slipping by 0.60%, and Hong Kong has lost 1.70%. Singapore is 1.05% lower, with Taipei falling 1.20%, Kuala Lumpur by 0.40%, Manilla by 0.35% and Jakarta by 0.85%. Australian markets are also lower, with the ASX 200 falling 0.50% while the All Ordinaries is 0.45% lower. Perhaps more ironic than today being Afghanistan's official Independence Day, New Zealand's NZX has leapt 1.50% higher despite the country being set for an extended national lockdown. I attribute to the near 2.50% fall by the New Zealand Dollar this week. The close lower on Wall Street, and negative performance in Asia, will see Europe also assessing tapering implications and opening lower this afternoon. However, I expect European equities to remain relatively unscathed for now, as a lower Euro, now and into the future, will be positive for export performance. The rest of the week is likely to be dominated by the implications of a Fed taper being much closer to reality than even a month ago. The US Dollar jumps in Asia on EUR/USD stops The US Dollar edged higher overnight as the FOMC Minutes outlined an increasingly likely start to tapering, commencing around the end of the year. That follows on from a number of Fed officials making comments with a decidedly hawkish tone over the past two weeks, even previous doves. The dollar index was slightly higher at 93.15. In Asia, though, currency markets have been rather enthusiastic for a change. The dollar index has leapt higher by 0.30% to 93.43, with the catalyst appearing to be stop-loss selling in EUR/USD as it sank through 1.1700. Although equities retreated in New York, the US Dollar and US bonds hardly reacted to the Fed minutes, Asia appears to have taken rather more seriously, with potential divergence in monetary policy having heavy implications for the region. The dollar index is now just shy of resistance at 95.50, which in turn opens the door to further rallies targeting 94.30 and 94.75. Only a fall through 93.00 temporarily upsets the bullish narrative. EUR/USD has fallen 0.34% to 1.1670 today, triggering stops as it passed through 1.1700. That becomes immediate resistance, with the single currency potentially falling to 1.1600. GBP/USD has fallen 0.30% to 1.3717, well below its 200-day moving average (DMA) at 1.3786, with no support evident until 1.3580. Similarly, USD/JPY has jumped 0.37% to 110.17, just below its 50-DMA with no resistance apparent until 110.80. AUD/USD and NZD/USD have been under the pump this morning as Covid-19 cases spiral in NSW and rise in Auckland against a general backdrop globally of risk aversion. AUD/USD has fallen 0.45% to 0.7200, my initial target for the technical breakout below 0.7360 last week. AUD/USD could now extend losses to 0.7000 next week. The post-RBNZ short-squeeze was short-lived for NZD/USD, which has fallen another 0.50% to 0.6850 today. Down nearly 2.50% for the week, Kiwi still looks like it has more to go with resistance at 0.6900, but no technical support evident until some congestion around 0.6600. The reality of the delta-variant breaching fortress New Zealand's gates is now hitting home to investors, especially when you dig into the movement while infectious data. It is not good reading. An extended lockdown looms. Asian currencies are also in a general retreat today, with USD/CNH climbing 0.20% to 4.4970 and USD/CNY in danger of breaching resistance on a daily basis at 6.4900, having risen to 6.4925 this morning. President Xi's comments yesterday are likely further spooking investors against a background of general US Dollar strength. USD/THB USD/KRW, USD/SGD are around 0.30% higher, with central bank action possible from South Korea if USD/KRW climbs through 1180.00. USD/MYR is steady at 4.2380 as a political resolution edges forwards, shepherded by the Malaysian King. USD/IDR is steady at 14,380.00 ahead of the BI rate decision today, but IDR may weaken after this afternoon's announcement, especially if BI makes dovish noises. It is clear that Asia is giving more weight to the FOMC Minutes than US markets did, with the FOMC members seemingly aligned about a start to tapering starting late Q4 or early Q1 2022. The move will have clear implications for USD/ASEAN and USD/JPY, a purely US/Japan rate differential play these days. The technical breaks by Euro and Sterling are worthy of note with the ECB's QE forever policies likely to lead to a longer-term weakening of the single currency if monetary policy with the US diverges in the new year. Pop in the ever-present fears surrounding global growth due to the delta-variant, prevailing in markets now, and there aren't a lot of reasons to be short US Dollars right now. Oil sinks further on growth concerns Both Brent crude and WTI endured a tough day at the office yesterday as global growth concerns and a strong post-minute's US Dollar saw both contracts post significant losses. The US official crude inventories fell by more than expected, as did distillates, but traders chose to focus on the unexpected rise in gasoline stocks. Oil markets usually tend to cherry-pick the data they want to fit their preferred narrative with official crude inventories. The fact that they focused on rising gasoline stocks underlines the growth/recovery fears and emphasises it as the prevailing sentiment in the market. Brent crude fell by 2.35% to $67.45 a barrel, adding ten cents to $67.55 in the Asia session. WTI plummeted by 2.95% to $64.60 a barrel, where it remains in Asia. Brent crude managed to close on support at this level overnight, but the technical picture now signals that further losses to the triple bottom support at $64.50 a barrel could occur. Resistance is distant at $70.00, and the $70.35 a barrel, its 100-DMA. WTI fell through important double bottom support at $65.10 a barrel overnight, which becomes short-term resistance. That is followed by $67.50 and $67.80 a barrel; it's 100-DMA. WTI has no technical support of note until $61.50 and then the 200-DMA at 60.60 a barrel. It is hard to see the negative sentiment surrounding growth fears, a tapering Federal Reserve and increasing production from OPEC+ miraculously turning about-face overnight. With that in mind, the downside remains the weaker side for oil prices which are in danger of seeing another capitulation sell-off. Gold falls in Asia Gold remained on the side-lines overnight thanks to a New York session where US yields and the US Dollar barely move post-FOMC Minutes. Gold contented itself with trading in a narrow $1777.00 to $1793.00 range before closing almost unchanged at $1787.30 an ounce. Things have changed in Asia as markets have seen a bout of US Dollar strength sweep currency markets this morning. That has caused gold to fall by 0.50% to $1778.80 an ounce. Having traced out a series of lower daily highs this week, failing multiple times ahead of $1800.00 an ounce. Gold may be signalling that last week's frenzied FOMO upward momentum is waning, especially as the US Dollar strength seems to have some strong momentum now. Gold has immediate resistance at $1787.00 and then $1800.00 an ounce. That is followed by a formidable region containing the 100-DMA at $1808.20 and the 200-DMA at $1812.70 and a series of daily highs, each side of $1834.00 an ounce. Gold has a lot of wood to chop to maintain its rally. Failure $1770.00 is likely to spark a flurry of hot money sellers cutting long positions, pushing it lower to the next support at $1750.00 an ounce. If that fails, gold will be vulnerable to a deeper retracement targeting the $1700.00 an ounce area.

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