No dotty moves from the Fed

As expected, the FOMC held to its previous guidance of no imminent rate hikes or tapering while reiterating its views on supporting the economy to help rebuild employment. Although it upgraded its growth assessments for the US this year to 6.50%, it maintained that higher inflation was transitory. The dot plots of future rate hike expectations remained firmly anchored in 2024, with only two governors joining the previous five in moving forward to 2023.

US yields had spiked ahead of the meeting, and immediately fell afterwards, although I note that the 10 and 30 year yields still finished higher on the day. But with no sign of the Federal Reserve blinking, markets took that as a green light to get straight back to the buy-everything trade. Equities reversed losses; the US Dollar fell, EM rallied and once again, gold recorded a positive day, more ion that below.

One central bank that may have trouble not blinking will be the Reserve Bank of Australia. Australia released a king-hit set of employment data today, reinforcing that the lucky country’s recovery is running at full throttle. Headline employment rose by 88,700 jobs, with full-time employment accounting for all of it, and some, part-time falling slightly. Fulltime employment will have a much more significant multiplier effect on domestic consumption, and Australian 10-year Commonwealth Bond yields have risen ten basis points today. Great for banks, less so for property, and Australian equity markets are bucking the trend this morning by being slightly in the red.

A steady FOMC will be a sigh of relief for EM central banks as well. Brazil hiked by 75 basis points this morning, the Central Bank of Brazil citing inflation risks. Some things never do change. Turkey, and perhaps Russia, could follow suit this evening. But otherwise, EM is off the hook for now. But in Asia, Indonesia and Taiwan can comfortably leave rates unchanged today, especially as the US Dollar has fallen overnight. The Bank of Japan tomorrow will also remain unmoved, able to now comfortably retreat into their multi-year “watching closely” happy space.

I am unsure whether financial markets are telling themselves they are now suddenly “more comfortable” with the prospect of higher inflation. No one does pick and choose the bits that suit our positioning and desired narrative than the financial markets. I do note that the long-end US yields are higher today than yesterday, despite the Fed. I have serious doubts that large parts of the buy-everything trade will still look as appealing when US 10-years are yielding 2.0%. But the short-term momentum must be respected, and with that, I shall not argue. Maybe, just maybe, it might be time to lock in that longer-term fixed-rate mortgage, though.

This afternoon’s Bank of England will also stay unchanged, but central banks aside, the Asian and European data calendars are threadbare. US Initial Jobless Claims could dip under 700,000 this evening, giving another dose of sugar to equity markets. Watch Canadian ADP Employment as well; after plummeting by 231,000 jobs in January. It is set for a potentially 200,000+ rebound tonight. With Canadian Inflation data benign overnight, the Canadian Dollar has strongly rallied this week, leading its Australian and New Zealand commodity-kin. A decent ADP number could spur another big wave of commodity/recovery buying for the Loonie.

US and China officials meet in sunny Alaska today, the first official engagement between the two since President Biden came to power. President Biden shows every sign of being as tough on China as his predecessor, and China, for its part, shows no sign of retreating from stop messing with our internal affairs position. Although it’s always good to talk, I expect nothing market moving to emerge from the meeting.

Today’s Asian session, though, will be dominated by bullish sentiment basking in the warm afterglow of a Federal Reserve doing nothing dotty with their dot plots.

Equity markets move higher post-Fed

Asian markets are mostly higher after a suitably dovish FOMC lifted US equities to a positive close. Overnight the S&P rose by0.29%, the Nasdaq by 0.40%, and the Dow Jones by 0.59%, reversing earlier session losses. Aftermarket futures rose initially in Asia but have since given back most of those early gains.

That has taken the edge of the initial Asia rallies but still leaves most markets in the green today. The Nikkei 225 is 0.80% higher, with the Kospi up 0.90%. The Shanghai Composite and CSI 300 have rallied by 0.50%, with IPO fever boosting Hong Kong by 1.40%. Singapore is 1.20% higher, Manila by 1.25%, with Jakarta climbing 0.85% and Kuala Lumpur up 0.45%. Cyclical markets, once again, showing resilience.

Today’s blowout employment numbers in Australia have seen a spike in government bond yields, notably in the liquid 10-year tenor. That has taken the edge of Australian markets, which are increasingly concerned that the RBA will have to withdraw some part of its easy monetary policy sooner rather than later. That has pushed the ASX 200 0.70% lower, with the All Ordinaries edging down by 0.30%.

Although the initial post-FOMC exuberance has ebbed, something I note with interest, the momentum has still been enough to see Asia to a positive day. It should also be enough to ensure that Europe also opens higher, especially as cyclical markets are doing well in Asia today. However, the price action suggests that equity markets have not yet shaken off their higher yield hoodoo. Wall Street could be vulnerable to another move higher on the yield front this evening.

The US retreats post-Fed

The US Dollar quickly unwound all this week’s gains after the FOMC remained consistent in its dovishness. The dollar index fell by 0.46% to 91.44, levels last seen at the end of last week. Interestingly, as the stock market rally has ebbed, the index has climbed back to 91.51 in Asia as US 10-year futures fall by 0.20%, suggesting the mechanical linkage remains as strong as ever.

Notably, USD/JPY remained anchored around the 109.00 level, but both EUR/USD and GBP/USD managed to lift themselves well clear of technical danger zones. EUR/USD at 1.1960 is well above its 200-day moving average at 1.1840. GBP/USD has risen to 1.3940, climbing back into its multi-month rising channel.

Commodity currencies were unsurprising winner overnight. Both the Australian and New Zealand Dollars rose by 0.65% to 0.7795 and 0.7240, respectively. The Australian Dollar has risen another 0.30% to 0.7820 today after the employment data, and both Antipodeans are testing resistance at these levels today, following recent downside breaks. Strong energy and commodity prices have moved the Canadian Dollar back into a bull market in no uncertain terms. USD/CAD tested long-term resistance around 1.2700 early in March but has since fallen to 1.2410. With the Loonie bull market resuming, USD/CAD should fall to 1.2250 and then 1.2000 in the weeks ahead.

Asian currencies all booked strong gains overnight. In the Korean Won’s case, it was enough to stir some belligerent “watching closely” type comments from the Bank of Korea this morning. Asian central banks are more likely to be concerned about the pace and not the size of the local currency appreciation. Much of that will be because although the Chinese Yuan has moved higher, its gains have been modest, with the PBOC seemingly comfortable with USD/CNY around 6.5000. Indonesia will be relieved that USD/IDR has fallen to 14,400.00. Still, elsewhere, any regional currency diverging higher to quickly from the CNY event horizon is likely to run into central bank “smoothing.”

Although the US Dollar fell overnight across the board, it has only unwound this week’s gains, with the USD/CAD a notable exception. The small mover lower by US 10-year futures in Asia has provoked an immediate bout of modest US Dollar strength today. That suggests that currency markets remain in thrall to developments in the US bond market.

Oil markets ease

Oil bucked the post-Fed buy everything trend overnight, with high levels of speculative long positioning, a modest rise in US crude inventories, and persistent third-wave European fears combining to push prices lower. Brent crude fell by 1.05% to $67.75 a barrel, and WTI fell by 0.65% to $64.40 a barrel.

In Asia, oil has continued to ease as local buyers hold out for lower prices and the US Dollar firms slightly. Brent easing to $67.55 barrel, and WTI to $64.20 a barrel.

Brent crude has support at $66.40 a barrel, and resistance at $70.00 a barrel. WTI has support at $63.20 a barrel, and resistance at $66.40 a barrel. With both contracts drifting towards the lower end of their recent trading ranges, the odds of a washout in speculative long positioning is increasing. Failure of support by either should result in another $2.0+ move lower on stop-loss selling. However, as stated previously, any sharp dip is likely to be met by an eager wall of physical buyers and will likely be short-lived.

Gold is forming a potentially significant low

Gold once again shrugged higher US bond yields and powered by a weaker US Dollar; it rallied vigorously to $1745.00 an ounce overnight. That has continued in Asia, even as the US Dollar firms, gold climbing 0.20% to $1749.25 an ounce.

Gold continues to show impressive strength, even in the face of previously bearish factors in the shape of US yields and dollar strength. The longer-term charts highlight that gold has formed a bottoming pattern in the 50.0% to 61.80 Fibonacci retracement box of 2020’s rally to $2075.00 an ounce. A weekly close above the 50.0% retracement at $1760.00 an ounce will confirm that the downward correction has completed, setting up gold to return to the $2000.00 an ounce area in the months ahead. Perhaps this time, the dawn is not false, and that gold’s inflation-hedging mojo is returning.

That massive call aside, golds bear-term support is $1724.00 an ounce, followed by $1700.00 an ounce. Resistance is at today’s $1755.00 high, followed by $1760.00 and $1780.00 an ounce.