More pirouettes than the Bolshoi Ballet

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

If financial markets were a ballet, it would surely be regarded as one of history’s most complex. No Sleeping Beauty’s or Swan Lakes here; instead, the markets engage in a seemingly impossible series of pirouettes, leaps (of faith), and changes of direction that would test the toes of any prima ballerina.

Overnight, a series of Federal Reserve Officials made their way to the orchestral pit and played the transitory inflation arrangement. Last week, what was ignored wasn’t in last night’s performance, as the dip-buying buy-everything ensemble freed themselves of constraints and got back to business as usual. Energy prices took a standing ovation and the bunches of flowers.

Stocks rallied, notably technology as US long-dated yields headed South as the US Dollar was sold, notably against Asian currencies, and our dear friends in the crypto-space powered higher. The Bitcoin boost was helped along by Elon Musk, who tweeted something about mining, as good a reason to indulge in a crypto feeding frenzy as any, I guess. I may have to revise my “peak Elon” outlook.

Gold has held steady overnight because who wants gold when the world is saved? It has started retreating in Asia, and I suspect that some weekend trading crypto-hedging is being unwound. The Chinese Yuan rallied to near two-year highs versus the Dollar as its currency basket moved higher against the greenback. Some corners of the market will suggest that a stronger Yuan is an easy way for China to take the heat out of commodity prices, but that would be at the cost of more expensive exports.

If nothing else, the buy everything rally, which is spilling into Asian markets this morning, naturally, highlights just how much money is waiting on the side-lines in a zero per cent world to buy any dip. Even Fed Governor’s long treatise on a digital US Dollar overnight couldn’t keep Bitcoin or US Dollar un-Stable coins down. It should.

Admittedly, although prices have been rising worldwide, there have been enough speed bumps in the data along the way, notably in the US recently, to leave financial markets with nagging doubts. The Federal Reserve is determined to keep it that way, likely with a taper-tantrum in mind. A Mike Tyson punch-in-the-face inflationary knockout blow has yet to be delivered, leading to a seemingly endless cycle of flip-flop behaviour of late. Hopefully, the Non-Farm Payrolls data will clarify the situation at the end of next week, one way or the other.

In the meantime, don’t take of your ballet shoes and be prepared to keep pirouetting.

In Asia, the data, although second-tier, has been upbeat today. South Korean Consumer Confidence rose again but won’t move the Bank of Korea this week. Singapore final GDP Q1 expanded by 3.1% QoQ, and Thailand’s Balance of Trade for April slightly outperformed, rising by $0.18 billion. Lunar New Year effects impacted the Thailand numbers, but today’s overall data picture is of a modest recovery continuing.

None of the data will have any impact as each of the countries mentioned, plus most of Asia ex-China is struggling to deal with waves of Covid-19 infections. Most concerning is Malaysia, with India semi-priced in by markets that will only be focusing on the fall in daily cases to a number slightly less gigantic than previously. Malaysia’s weak government has prevented it from entering a decisive lockdown. The danger is that the having-your-cake-and-eating-it approach, which has failed unceremoniously everywhere else globally, leads to a double-dip recession in Malaysia.

Finally, readers should keep an eye on the Turkish Lire today. Turkey has announced the sacking of one of four of its deputy central bank governors. Working for the central bank is a hazardous occupation under Erdogan, and previous sackings have been met with bouts of Turkish Lire (TRY) weakness. USD/TRY is unchanged at 8.3900 for now, but not far away from recent highs at 8.5700. That may change as Europe arrives, with Mr Erdogan intent on TRY-ing investor patience, rather than TRY-ing harder to manage the economy properly.

Asian equities leap higher following Wall Street

The buy-everything trade is in full swing in Asia today after Wall Street decided overnight that inflation wasn’t a concern and did the same. The S&P 500 climbed 0.99%, with the tech-heavy Nasdaq leaping 1.41% and the Dow Jones rising 0.56%. Futures on all three have continued 0.20% higher in Asia.

The Nikkei 225 has climbed 0.55%, with the Kospi moving 0.70% higher, but China stocks are leading the charge higher. The Shanghai Composite has leapt 1.60% higher while the CSI has charged 2.0% higher, with Hong Kong rising 1.30%. A few factors appear to have woken China markets from their recent slumber. A bullish report on China equities from Morgan Stanley, rumours that the PBOC is buying USD/CNY at 6.4000, capping Yuan strength, and another China official body reiterating they will address “abnormal fluctuations” in commodities.

The picture is equally green across the rest of Asia. Singapore is 0.50% higher, Bangkok 0.85%, Manilla 0.60%, with Taiwan rallying 1.0%, trailing Jakarta, which has leapt 1.20%. Only Kuala Lumpur is trailing, flat on the day as the economic fallout of its new wave of Covid-19 dampens its recovery outlook. Australian markets are ignoring new Covid-19 community cases in Victoria, with both the ASX 200 and All Ordinaries rising by 0.60%.

With markets content to hitch their wagons to Wall Street now, Europe’s return from vacation should see bourses there open higher this afternoon. As I mentioned yesterday, Wall Street’s mood swings are a complete turkey shoot at the moment, and I will wait to see if today becomes a “let’s get worried about inflation again” session, or not.

The US fades as risk appetite rebounds

The US Dollar fell against major currencies overnight as New York decided to have a lower inflation-risk session, which saw risk appetite rebound, leading to a rotation out of haven US Dollars. The dollar index fell 0.20% to 89.84, edging lower again to 89.77 in Asia. Overall, the dollar index remains within its recent 89.60 to 90.30 range, with its next directional move signalled by a break of one of those levels.

The story is much the same amongst the majors. EUR/USD and GBP/USD have risen to 1.2225 and 1.4180 respectively in Asia, with resistance nearby at 1.2250 and 1.4245. Both continue to trace higher daily lows, and it will probably take a sudden deterioration in the global recovery story to delay further rallies ahead.

Things are getting more interesting in the Asian currency space today, with USD/CNY falling to near two-year lows overnight. USD/CNY fell again to 6.4050 in Asia, before recovering to 6.4120 after rumours swept the market that state banks were on the bid at 6.4000 for the PBOC, capping Yuan gains. Interestingly, the offshore (and more freely trading) USD/CNH fell as far as 6.4005 before bouncing to 6.4060. First the first time in a while, USD/CNH has diverged from USD/CNY, showing more Yuan strength.

A fall through 6.4000 by the onshore Yuan would be a strong signal of more strength ahead, and by default, more gains in the Asia FX space versus the US Dollar in general. That will need the inflation is slain or transitory narrative to continue, no sure thing right now with plenty of whipsaw price action occurring.

Oil prices rocket higher

It seems that the speculative longs who were culled last week can’t leave the oil trade alone, with Brent crude and WTI enjoying the second day of explosive rallies. Brent crude 2.60% higher to $68.40 a barrel. Meanwhile, WTI rocketed 3.40% higher to $66.05 a barrel. Both remain unchanged in Asia, with importers reluctant to chase markets higher.

A weaker US Dollar helped the rally along at the periphery. Still, New York markets seem to have convinced themselves that the threat of Iranian oil returning to global markets isn’t such a concern anymore, and that a recovering global economy will slurp up the extra supplies. Oil markets may also be watching falling Covid-19 cases counts from terrible numbers to lower terrible numbers, making a recovery connection and pushing the buy button.

The whole rally of the past 48 hours is starting to look like the speculative herd-like behaviour sweeping the crypto-space. Unlike cryptos, energy is backed by real fundamentals, but the pace of the recovery looks like hot money looking for a home, and oil may spend the next couple of session consolidating these gains.

Brent crude has resistance at $70.00, followed by $72.00 a barrel, with support at $66.50 and $64.50 a barrel. The latter being a critical chart point that held beautifully last week. WTI has resistance at $67.50 and $68.00 a barrel, with support around $64.00 and $62.00 a barrel.

Gold may correct lower

Gold’s rally petered out last night, with prices almost unchanged $1881.00 an ounce. Once again, an attempt at the $1890.00 an ounce resistance level faded, and this morning, gold retreated 0.30% to $1875.00 an ounce.

What is concerning for the gold rally is that both US longer-dated yields and the US Dollar fell quite noticeably overnight. Both should have been strongly supportive factors for pricing. Looking at the strong rallies in the crypto-space yesterday, I can’t help but wonder if some weekend trading hedges are being reversed, pushing gold lower. There does appear to be some inverse correlation of late; how ironic.

A Bitcoin bath aside, gold’s relative strength index (RSI) has moved into overbought territory on Friday and is usually a good indicator a corrective reversal is on the way. As such, gold may continue to unwind some recent gains, but its rally remains intact as long as the 200-day moving average (DMA) at $1845.00 an ounce remains intact.

In the bigger picture, gold traced out a long-term structural low at $1680.00 an ounce, and the longer-term uptrend remains in play as long as support at $1800.00 holds. Resistance remains at $1890.00 an ounce, after which I expect $1900.00 to give way quite quickly on option and algo buy-stops, rising to $1920.00 an ounce.

$1850.00 to $1890.00 an ounce is likely to cover gold’s price action for the rest of the week.