Some Culling of the Herd Ahead of FOMC Decision

It is clear from the price action across financial markets overnight, that investors are collectively taking a short pause for breath from the global recovery rally. With the FOMC rate decision and press conference due early tomorrow morning Asian time, it was as good an excuse as any to book some profits and move to the side-lines ahead of the event risk.


Regarding the FOMC, we fully expect that the Fed will be as dovish as necessary to avoid a mini “taper-tantrum,” keeping the peak-virus trade nicely on track. That said, a deeper correction to the bull market run, notably on equities and oil cannot be ruled out. That though is simply due to the sheer weight of bullish positioning out there. Indeed, bullish open positioning on the S&P 500 is allegedly at record highs.


One warning sign is the Australian Dollar, the go-to currency market proxy of late for the global recovery trade. AUD/USD traded in a near 150-point range overnight, failing to close above 0.7000 for the third day in a row. In fact, after testing 0.7050 yesterday, AUD/USD fell to close at 0.6960, tracing out a bearish outside reversal day in the process.


Having unlocked the Pandora’s Box of seemingly backstopping any form of investor loss in credit and equity markets since mid-March, they will not crash the entire edifice tomorrow morning. Asset markets may well have a few days cleaning out come-lately bullish positioning, but we can rest easy that the Fed and its central bank brethren have got out backs.


Equities are mixed in Asia after Wall Street catches its breath.


Wall Street took some profits off the table overnight ahead of today’s FOMC, with both the S&P 500 and Dow Jones finishing 1.0% lower. Notable losers were the recent “recovery” plays such as airlines. The Warren Buffet quote about investing in airlines that a capitalist would have done investors a massive favour by shooting Orville Wright down at Kittyhawk does come to mind.


If investors were taking risk off the table in tenuous recovery plays, they seem unwilling to disengage from equities completely. The NASDAQ finished higher by 0.30% as money flowed into big-tech. Apple and Microsoft touching record highs amongst others. It seems, for now, that big tech is the equity investors new safe-haven.


US stock index futures have crept higher in Asia, which seems to have mollified the region’s investors and limited the fall-out from Wall Street’s retreat overnight. Asian stock markets are mixed with the Nikkei 225 and Kospi flat. The Shanghai Composite and CSI 300 have edged slightly lower with the Hang Seng up 0.30%, boosted by Cathay Pacific after yesterday’s government bailout. Singapore and Australia exchanges are around 0.30% higher.


Supported by US index futures, Asia appears to have moved into wait-and-see mode today, although one feels that it would not take much to spark a temporary rush for the exit door from the fast-money mob.


The US Dollar continues to drift lower.


The US Dollar continued drifting lower against the major currencies overnight, although the fall by commodity and emerging market currencies hinted that haven flows were to the forefront. We also note the US 30-year Treasury yields fell overnight, implying further that risk was being taken off the table ahead of the FOMC. The Euro, Swiss Franc and Japanese Yen were notable outperformers. EUR/USD’s chart suggests that the single currency will test 1.1400 sooner rather than later, from its present 1.1340 level.


The global recovery trade bellwether, the Australian Dollar, traced out a bearish outside reversal pattern overnight. That suggests that momentum is ebbing, for now, for the recovery trades into a commodity and emerging markets. AUD/USD rose to 0.7040 overnight, before falling to 0.6900 and then recovering to 0.6960. It is a measure of the scale of the recent bull market though, that AUD/USD could correct all the way to the 0.6650 to 0.6700 regions, and still be nicely in an uptrend pattern.


The US Dollar may find a few friends temporarily in the next few days as a downside correction to the peak-virus trade mildly infects markets. In the bigger picture, thanks to the Fed amongst others, the overall US downtrend remains sound.


Crude Inventories and nervous longs test oil’s resolve.


With equity markets edging lower, and a vast amount of good news baked into oil prices at these levels, it was no surprise that the oil market’s confidence wavered slightly overnight. That was not helped by a blowout rise in US API Crude Inventories to 8 million barrels.


Brent crude, in particular, came perilously close to tracing out its own bearish outside reversal day on the daily charts, but held its nerve, finishing almost flat at $40.80 a barrel. WTI also narrowly avoided an outside reversal day, closing 0.40% higher $38.40 a barrel. Both contracts have eased slightly in Asia, with Brent currently at $40.60 and WTI at $38.20 a barrel.


While the solidity of oil prices will be a sigh of relief to bullish positioning, the bearish technical near-miss by both overnight cannot be entirely ignored. It hints that momentum has waned for now, with Brent in particular, unable to fill is chart gap to $45.00 a barrel a disappointing outcome. Further losses seem likely as bullish positioning is reduced into the FOMC.


A cleanout of late-to-the-party long positioning could we continue into the end of the week with Brent crudes 100-day moving average at $39.10 a barrel, critical support. A close below that level signals a deeper correction is imminent, although only below $36.00 a barrel would make the author question the meaning of life at this stage.


Gold remains Teflon coated as it dodges more bearish bullets.


The wavering of bullish sentiment elsewhere, saw haven flows into gold send the precious metal up 1.0% overnight, to $1715.00 an ounce. The $16.0 an ounce rally though, was driven more investors parking money to wait out the FOMC, than a structural change of sentiment.


Gold traced out a double top at $1721.50 an ounce overnight, which is now the first barrier to further rallies. Having broken its descending trend-line resistance at $1702.00 an ounce overnight, this now becomes initial support.


A further rotation to safety could continue to support gold prices today into the FOMC and beyond. Most especially if the culling of long positioning elsewhere continues into the week’s end. Although the hoped-for downside correction has eluded me for now, I take some comfort that gold remains ensconced is it’s now three-month $1660.00 to $1760.00 an ounce trading range. I am now inclined to enjoy reading a good book until we have a daily close above or below those longer-term levels. If the book is excellent, I may choose to wait for a weekly close.


This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley is OANDA’s senior market analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV, Channel News Asia as well as in leading print publications including the New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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