Hawks fill the skies

The procession of central banks hiking rates in an attempt to see off inflation has continued over the last 24 hours. The Bank of Canada hiked by 0.50% overnight, and the Bank of Korea sprung a surprise 0.25% hike this morning. The Monetary Authority of Singapore also tightened policy by recentring the S$NEER to present levels and increasing the slope of appreciation. The MAS uses the currency to adjust monetary policy. Readers should research this interesting and unique method of adjusting monetary policy, but be warned, wrap a cold towel around your head before starting as your brain temperature will rise.

The Reserve Bank of India didn’t hike recently but adjusted some of the mechanics and language to set the scene for tightening going forward. The Reserve Bank of Australia also adjusted its statement language to set the scene for the same. The Reserve Bank of New Zealand did a hawkishly dovish 0.50% hike yesterday, although the New Zealand dollar was punished overnight as the RBNZ left its terminal rate guidance unchanged.

Overnight, the United Kingdom posted 30-year high inflation numbers, with the PPI, especially the Input data, rising to suborbital levels that would give Elon Musk a cold sweat. Markets are now pricing in a 0.25% hike from the Bank of England in early May.

ECB meeting eyed

Today, we have the European Central Bank policy decision. The ECB’s position is complicated by being on the frontlines of the economic war on Russia. As such, I expect them to leave policy rates unchanged but reiterate the scheduled reduction of the Asset Purchase Programme (APP). It will all be about the statement and the press conference and whether the ECB signals that supporting the economy through the Ukraine conflict takes priority over rising inflation pressures, or whether the stage is being set for rate hikes later this year. The former should see EUR/USD hold at present levels; the latter could set off a decent euro short-squeeze into the weekend.

With much of the world on holiday tomorrow, even here in Indonesia, today is a technical Friday for markets, so I am expecting a noisy session anyway. The US dollar retreated overnight, led by rallies by the Canadian dollar, euro, and sterling. Most of this can be laid at the feet of the BOC rate hike and anticipated hikes by the BOE and ECB, as well as short-covering into the Easter holiday break. In the Euro’s case, France’s Macron has increased his lead over Le Pen in the presidential runoff, reducing another bearish headwind for the single currency.

Part of the US dollar retreat, which was very very uneven I might add, could be that a lot of tightening is now priced into US futures markets, while other major currencies may now be starting to play a catch-up rally. Notably, Asian currencies, the Japanese yen and  Swiss franc did not move notably overnight, and the New Zealand dollar was hammered. So, there are some noisy disconnects in the market. If we see the Bank of Korea hike start to be repeated across Asia though, the US dollar rally may slow.

Much will depend on whether the hikes US markets have priced in are the worst it will get. That’s a big if. And for Asia, China looks set to cut its RRR shortly; the USD/CNH and USD/CNY are approaching resistance levels, and yesterday’s trade data showed a collapse in China’s imports. The last thing the rest of Asia will want is an easing China leading to a weaker yuan, aka the USD/JPY, while the rest of the region is forced into rate hikes to fend off inflation and appreciate their currencies. My guess is they would rather let inflation run hot if the yuan weakens, which I believe it will. Things are going to get very messy in the Asian currency space over the next few months.

The disconnects continue elsewhere as well. Despite weak results and a grim outlook from the JP Morgan Q1 results, a risk factor to this earnings season I have been telegraphing for some time, the perpetually bullish FOMO gnomes of the stock market stayed laser-focused on peak-US inflation. Everyone remains desperate to pick the absolute bottom of the stock market. Meanwhile, gold continues to rally because it is an inflation hedge. I could just as easily say it has been dragged higher by the platinum group metal rally. US yields dropped slightly overnight on the peak inflation theme as well. Meanwhile, oil prices staged another very healthy rally overnight, again ignored by equity markets in New York and Asia today. Brent crude has rallied 9.0% in two days, but nobody seems to be noticing. And the Ukraine war part two is about to start. With the street picking excuses out of thin air to desperately justify their prices actions, someone is going to be horribly wrong. Either gold is about to plummet, or stock markets are.

All of this is a good reason to stay on the sidelines now as I can hear the whip-saw blades being sharpened as we speak. Most of the world is on holiday tomorrow, a good chunk of it also on Monday. An ECB policy decision today, US Retail Sales and Michigan Consumer Sentiment tonight, combined with four days of headline-driven event risk, means holding heavy risk positioning tonight is for the brave or the stupid or the stupidly brave.

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Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific, from 2016 to August 2022
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley was 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 and Channel News Asia as well as in leading print publications such as 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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