A bullard in a China shop

The who can be the most hawkish Federal Reserve President continued overnight as James Bullard came out swinging, suggesting that Fed Funds may need to rise to a “neutral” rate of 3.50%, and suggesting a 0.75% rate hike along the way wasn’t out of the question. The impact of the statements was minimal in the end as it likely doesn’t reflect the views of the FOMC, yet. US bond and equity markets gyrated around unchanged in a noisy session, but ultimately didn’t move that much. Upbeat results by Bank of America being balanced out by the Bullard comments. One exception was currency markets where the US dollar rose again, notably bulldozing the perpetually low-yield Japanese yen.

The Bullard comments really encapsulate the quandary that many of the world’s central banks have found themselves in. Having completely missed the ball around transitory versus embedded inflation, there are no palatable solutions. Luckily, they have plenty of excuses in the shape of the pandemic and the Ukraine war. Central banks can now play catchup, hike aggressively and run the risk of recessions, something they have weaned the world of since the GFC via monetary policy. Getting the pain over and done may be the least worst option.

Alternatively, they can keep the lights on by letting inflation run hot, hoping that the asset price inflation and erosion of their citizens’ spending power doesn’t cause social unrest. The US and other Anglo-Saxon countries are probably looking at option one, while Europe and Asia seem to be erring towards option two. Naturally, the poor countries that lie in between will suffer the most.

Australia is an outlier in this respect, with the RBA minutes today suggesting the policy remains accommodative, which in central bank speak, is an understatement. They did note, however, that the data suggested that the timing of a first rate hike will be brought forward.

Similarly, the Bank of Indonesia will likely be in a similar position today as core inflation and headline inflation measures creep higher. Ask anyone here trying to buy cooking oil at the moment. Bank Indonesia should hold rates steady today but may indicate that the first rate hikes are now very close. Thankfully, Indonesia is running commodity-export-driven record surpluses now, sheltering the rupiah from rate differential pressures. If that changes, BI will need to rapidly reassess its cautious position. That is a story much of Asia will face this year if USD/JPY is anything to go by.

The day’s data calendar is fairly quiet except for the Bank Indonesia rate decision. Japan will release February Industrial Production and Capacity Utilisation. The data will only partly capture the impact of the Russian invasion of Ukraine, and thus the expected slight improvements to the numbers will be old news. Far more attention is now focused on the collapse of the Japanese yen in the face of a soaring interest rate differential.

US Housing Starts and Building Permits this evening for March carry some downside risks as mortgage rates soar in the US. Weak data will have the recession word bandied around but could be good for equities and bad for the US dollar as the street pulls in FOMC hiking expectations. Conversely, a strong number will have the opposite effect. We have some more Fed talking heads, but equity markets will likely be closely watching results from Netflix this evening.

Europe and the UK return to work today and are likely to be in a sombre mood as Ukraine’s President Zelensky announced overnight that Russia’s eastern offensive had begun. If correct, that will probably introduce some more geopolitical risk into financial markets again and with Europe on the frontlines, equities and the euro may suffer.

Gold could be a winner, as it spiked to USD 1998.50 an ounce after the initial headline, before beating a sharp retreat to unchanged. Gold has quietly ground its way higher over the past week, ignoring a strong US dollar and higher US yields, so it’s definitely been telling us something. It likely faces some heavy option-related selling interest at $USD 2000.00. Russian tanks rolling en masse across the plains of eastern Ukraine could be enough to finally overcome that barrier.

In the same vein, Bitcoin has a frisky 5.0%+ range overnight, dropping towards USD 38,000.00 before jumping to near USD 41,000.00 after the Zelensky headlines. It is too soon to say Bitcoin’s geopolitical risk-hedge time has finally come. At various stages it has been a hedge against inflation, deflation, dollar debasement, political risk, geopolitical risk, Elon Musk risk, European energy restrictions shutting tanning salons prompting resignations at the ECB, trans fats and processed sugar. My support/resistance levels are USD 36,650.00 and USD 47,250.00. The wedge is narrowing, but until one of those sides breaks, I will ignore the noise, the empty pizza boxes next to computer monitors, and the HODL gnomes.

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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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