US dollar edges higher
Some of the week’s froth has come out of the markets in Asia today, with equities edging lower, along with energy and precious metals and our good friends, the cryptocurrency space, while the US dollar edged higher after an impressive rally overnight. All the financial markets space, the price action looks corrective, rather than a structural turn, as short-term momentum ran out of the “inflation is dead, buy everything” that has swept markets this week.
The weight of short-term positioning in the buy everything trade is perhaps made more evident by a couple of notable facts. Oil prices fell overnight even as US crude and gasoline inventories fell by more than expected. US yields awoke from their slumber and edged modestly higher, which sparked a 0.43% jump in the dollar index, so the street was definitely short US dollars. That was on a day when no US data was released to provoke the inflationistas. In fact, the overnight 2-year and 5-year note auctions went out at yields lower than forecast by the street.
Gold has sharply reversed its foray above USD1900.00 an ounce at the first sign of US yields turning higher, although I mentioned Tuesday that the technical picture was overbought; that is still the case. Bitcoin appears to be tracing out a bearish symmetrical triangle. I won’t launch into a rant about cryptos at this point; readers can reread previous notes for their “voice of reason” fix. A clean break of USD37,000 of US fiat currency – because it’s bitcoin, let’s call a clean break USD36,000 – targets a move lower to USD22,000. Fire up that Twitter account Elon, your disciples may need you.
Inflation is a story that just won’t go away, especially when the markets are positioned heavily against it. My argument is that it will continue rising, but that we just don’t know yet whether the supply-chain disruption, re-opening consumption spike is a transitory impact on annual CPI’s or an Eagle’s-like comeback after a 20-year vacation. I am erring to the transitory side as more people remain out of work than it is pre-pandemic. Additionally, the world was heading for a slowdown anyway before the pandemic struck. Still, I cannot see how US GDP growth of 6.50 to 7.0% is consistent with US 10-year yields at 1.60%.
Next week’s Non-Farm Payrolls may help answer that question one way or the other; with the storm-in-a-teacup buy everything trade likely to be a big winner if we get another low-ball print. Little old New Zealand seems to have subtly provoked the reversal yesterday, though, with the Reserve Bank of New Zealand surprising markets by forecasting rate increases to commence in the second half of 2022. There are many ifs and buts in that forecast, with enough Teflon to make a politician jealous. Nevertheless, New Zealand now joins Canada and Norway in a small club that is starting to talk about tapering and hiking.
On that note, the mighty New Zealand Dollar rose over 1.0% yesterday on that statement bombshell. What will the reaction in markets be when the Federal Reserve starts talking about the same thing after they and the ECB have spent the last 13 years feeding the world’s addiction to unlimited zero per cent finance? There is a whole generation of new finance industry gnomes who think that this is normal. Think about that.
One central bank that isn’t joining that club yet is South Korea. The Bank of Korea, like Bank Indonesia, earlier this week left rates and guidance unchanged this morning. With domestic consumption recovering slowly in Asia, a slow vaccine rollout, and with new Covid-19 waves popping up across the region, the BoK decision is of no surprise. Most of Asia is likely to wait for the Federal Reserve to move first unless surging US bond yields and a massive strengthening of the US Dollar forces their hand. That, though, is but one scenario of many that could come to be.
China’s Industrial Profits (YTD) YoY for April grew by an impressive 106.10% this morning. The headline is flattered by the base effects of the pandemic lockdowns last year, and markets will want to see if a higher Yuan and the tech clampdown take the heat out of China’s recovery. Mainland markets focused more on the constructive and candid conversations between China’s Vice Premier Liu He and US Trade Representative Katherine Tai via phone this morning. With Sino-US relations, anything less than acrimony is a reason for hope from the market’s perspective.
Today’s calendar is quiet across the rest of Asia and into Europe. Things get more exciting this evening with US Durable Goods, Initial Jobless Claims, PCE Prices and 2nd est. GDP Growth Rate for Q2. We are likely to see more risk being taken off the board into that data dump. With the street suddenly on edge again, indicators of potentially higher inflation will see the sell-off accelerate. At the same time, a benign data set should get us back to the week’s business as usual.
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