Waiting for The Fed

Markets are trading sideways in Asia, a continuation of the price action seen in New York, as the entire world awaits the outcome of the FOMC rate decision this evening. Asian turnover is being further muted by a long week of holidays this week. Mainland China, Japan, Malaysia, Indonesia, and Thailand are on closed today.

Fed expected to hike by a half-point

Whether the Fed hikes by 0.50% or not has been analysed to death. The crux will be the statement and the Fed’s forward guidance on the path of interest rates. Markets, perhaps like the Fed, are clinging to the hope that the terminal Fed Funds rate is mostly priced into the market now. There remain definite upside risks to that point of view, as there are across much of the Anglo-Saxon world. Perhaps the only mitigating factor will be the start of quantitative tightening by the Fed. That may have more of an impact than Fed Fund hikes if it starts pushing the US yield curve higher once again.

Overnight US Jolts Job Openings for March hit 11.549 million with 4.536 million workers resigning to move jobs. Last Friday’s Employment Cost Index exceeded expectations, and US Factory Orders for March overnight jumped by 2.20% (1.1% exp). Although price stresses continue, as they do in much of the world, there are no conclusive signs yet that the US economy is slowing down materially.

The surprise 0.25% rate hike by the Reserve Bank of Australia yesterday suggests that even the most recalcitrant doves in the central bank world are starting to blink. Both the Singapore Prime Minister and the Governor of the Reserve Bank of New Zealand have said the risks are rising of a recession, and for once, I find myself aligned with the RBNZ. New Zealand remains my top pick for a developed market hard landing this year, thanks to the incompetence of the RBNZ. Europe follows close behind but that is due to Russian risk, and we can’t blame the ECB, who face real least-worse choices, for that. Make no mistake, the downstream impact of Russia and Ukraine’s exclusion from the world economy are still be felt, and there are substantial upside risks in Russia’s behaviour in the months ahead. The US dollar rally has plenty of juice left in it.

In Asia today, South Korean FX Reserves fell by USD 8.50 billion in April, perhaps the first hint that a major Asian central bank is starting to spend them to offset weakening domestic currencies as US yields and the US dollar power higher. Yesterday’s inflation print at 4.80% YoY was a 14-year high and we can expect the Bank of Korea to continue hiking rates at its next few policy meetings. That probably won’t offset a series of 0.50% hikes from the Fed, and South Korea’s quandary will be reflected in Asia ex-China. Japan and the USD/JPY is a prime example. If Asia chooses to tolerate inflation to keep economic slowdowns off the agenda, we can expect a lot more Asian currency weakness in the months ahead.

In China, restrictions are tightening in Beijing to nip Covid-19 cases in the bud. Shanghai and other mainland cities remain under restrictions as well as China’s Covid-zero policy becomes a greater millstone around its neck by the day. Fitch downgraded China’s GDP forecasts overnight. After a three-day break, China returns tomorrow, but unless the FOMC springs a dovish surprise, I am not expecting a post-holiday rally among mainland equities.

Australian data today showed the lucky country remains lucky. Home loans rebounded to 0.90% in March, with Retail Sales gaining 1.60% Mom in March. Investment lending for houses also jumped by 2.90%, while S&P Global Services PMI for April rose to 56.10. None of that will alleviate the rate hike expectations built into the Australian yield curve. Like elsewhere, those risks remain tilted to the upside as markets cling to the belief in Australia as well that the worst is priced in. The Australian dollar has given back half of its gains after the RBA hiked yesterday by 0.25%; more than the 0.15% expected. A softening China economy and rising risk aversion sentiment globally is likely to offset any increased hiking sentiment domestically.

We have a raft of European Services PMIs released today, as well as Germany’s Trade Balance, as well US ADP Employment, Balance of Trade and ISM Non-Manufacturing PMI. All of it will be subsumed by the FOMC policy decision, due out at 0200 SGT tomorrow morning.

The week remains a tasty one for data releases. China releases Caixin Services PMI tomorrow, and Singapore releases Retail Sales. Both could show domestic confidence eroding as covid-zero and inflation nerves rise respectively. Australia releases its Trade Balance, and a sub AUD 7.0 billion print will have alarm bells ringing on AUD/USD. Tomorrow we also get the Bank of England’s policy decision, with the street pricing in a hike of 0.25%. The BOE is one of the cautious hold-outs, but anything less than 0.25% from them is likely to see sterling get seriously punished once again.

Lost in the noise this week, as if it couldn’t be busier, the US announces Non-Farm Payrolls data this Friday. The street is at 400,000 jobs at the moment, in line with last month. As ever, a large deviation will trigger tail-chasing volatility across asset classes. More often than not, ending up roughly where they started with the daily P&L a smoking heap. Perversely, markets will get the most bang for their buck if the payroll data collapses. That should spark a downward correction in the US dollar, a rally in EM, US equities and US bonds as the street goes into peak-Fed mode.

Finally, keep an eye on Bitcoin tonight if the FOMC hikes by 0.50% or higher and the statement is hawkish. Bitcoin is trading at USD 38,000.00 and has quietly drifted down towards if January support line, today at around USD 37,400.00. A hawkish FOMC could see support fail, signalling a correction lower to USD 33,000.00. Failure of USD 33,000.00 signals an uglier sell-off which has a target of sub-USD 20,000.00.

Before all the HODL-er haters come out of the woodwork and throw rotten tokens at me, I am just following the multi-month triangle pattern on the charts that I have been mentioning for the past month or so. Although you are correct, I do believe cryptos and their opaque show-me-the-action-US-dollars-dude stable coins are the single biggest example of financial market lunacy I have seen in my long career.

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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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