Chasing tails

It was another messy session overnight with energy, equities, precious metals and currencies trading in wide choppy ranges, diverging in price direction, with no unifying sense of theme emerging. Markets are trying to make sense of a hawkish FOMC that announced a dovish rate hike and believes it can tighten aggressively while maintaining growth. Not helping was a lack of clarity from the Ukraine-Russia talks, on what so much of the market’s recent asset class price action has been built on. Rhetoric from the Kremlin wasn’t positive, Ukraine blindsided Western powers with security guarantees, Russian missiles kept falling, and Presidents Biden and Putin engaged in a war of words. Finally, the IEA made stark warnings about an oil supply crisis thanks to Russian production disruptions.


In the end, most asset classes seemed to throw their hands up and go with whatever suited their narrative. The perpetually bullish gnomes of the equity market marked stocks higher after the US Philly Fed Manufacturing, and official US Industrial and Manufacturing all exceeded forecasts, and Initial Jobless Claims fell. That was despite long-dated US yields rising overnight. With less chance of an inverted yield curve than the day before, you could say it was bullish equities. But I am reaching on that one.


Despite a hawkish FOMC, the US dollar continued a messy correction lower, led by a higher euro. Odd as FOMC/ECB policy is clearly diverging and there has been zero positive news coming from Eastern Europe, and oil prices spiked higher overnight. I’ll try not to overthink it though and I’ll put it down to ongoing trimming of Ukraine-Russia reactionary haven positioning. Perhaps the street is getting more comfortable or complacent about the war in Eastern Europe. We know how that story usually ends.


Oil spiked higher on the IEA oil supply warning although Asian buyers for the last couple of previous sessions had enthusiastically bought the dips under USD 100.00 a barrel. A weaker US dollar was also a tailwind, and it was the main reason that gold also continued rallying overnight.


Interspersed were a couple of surprises from central banks. Taiwan hiked rates by 0.25% which surprised markets. Taiwan normally hikes in 0.125% increments, so this was aggressive for them. They quoted inflation concerns. Bank Indonesia did what I expect most of Asia to do, leaving rates unchanged to support growth. It was an easier call for Indonesia than most, as inflationary pressures, for now, remain contained. It will be a much tougher call elsewhere in the region, including India. The Bank of England gave us a dovish rate hike, lifting rates by 0.25% but with a dovish outlook thanks to Ukraine risks. The sterling fell initially but recovered its losses on a weaker US dollar.


The Bank of Japan has, surprise, surprise, left its policy rates at -0.10%, with its 10-year JGB target also unchanged at 0.00% with no changes to its QE easing policy. The BOJ downgraded its economic outlook, thanks to the ructions around the world and it is business as usual after 25 years. I’m not sure what they would do if their 2.0% CPI target was ever achieved. Notably, USD/JPY remains rock sold at 118.75, and although the US dollar is weaker elsewhere, USD/JPY now has 120.00 written all over it. USD/JPY’s rally should give readers an insight into my views on Asian currencies this year.


Finally, China’s mother of all stock market rallies, following the mother of all stock market falls this week, looks to be pausing for breath today. With China having effectively said they will backstop the stock market; markets probably want to see the colour of their money through action now. China announces its 1 and 5-year Loan Prime Rate decisions on Monday, and the 1-year should be a prime candidate for a trim, short of sneaky RRR cut. Shenzhen appears to be reopening after its covid lockdown, but the news is just coming out that authorities are recommending people in Shanghai work from home. How that story develops over the weekend might have a bigger bearing on the mainland markets on Monday than a rate cut.


So, markets are all over the place chasing their tails, and if anyone can discern a central theme out of this mess, I’d love to hear it. Being Friday, and with weekend risk potential high for obvious reasons, watching the great game from the side-lines wouldn’t be a silly strategy today. And speaking of great games, my highlight will be the Six Nations Rugby decider in Paris between the “Les Ros Boeufs” (roast beef, the English), and Les Bleus. As a Kiwi, I should be an interested, but neutral observer. But who am I kidding? Allez Vous Les Bleus!!

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