Markets like their rate hikes rare

Wall Street up, US dollar down after Fed’s 0.75% hike

Unless you were living on Mars, and even there they probably heard the news, the FOMC hiked the Fed Funds rate by 0.75% overnight to a target range of 1.50%-1.75%, as anticipated by the market. The Fed downgraded its US growth forecasts for 2022 and 2023 but remained adamant there would be no recession. I’m not so sure on this one given their track record over the last couple of years. The Fed’s dot plot was also moved higher with year-end rates expected to be 3.40% from 2.80% previously. That implies another 1.75% of hiking is still to come in 2022. The accompanying statement also inserted the words “strongly committed to returning inflation to its 2.0% objective.”

All nice and hawkish you say. Indeed, it was but the result was actually an intraday buy everything rally as sentiment rebounded. US bond yields recorded 20+ bps falls, stocks shot higher, while the US dollar fell and gold and cryptos rallied. The reason was that Fed Chairman Powell said that the overnight 75-basis-point hike was unusually large and that he didn’t expect such moves to be common. Hopes that the Fed would hike at a less angry pace over the rest of the year was enough for the downtrodden buy-the-dippers to flock back into the market. Markets like their large rate hikes to be rare and not well done.

That said, the buy everything rally was somewhat uneven. The rise in US stock markets overnight came nowhere near unwinding the five-day selloff preceding the FOMC meeting. US bond yields across the curve remain well north of 3.0% despite falling overnight. In the currency space, the rebound versus the US dollar was decidedly uneven. USD/JPY traded in a 200-point range overnight and finished 1.20% lower at 133.80, while AUD/USD leapt nearly 2.0% higher, with even a bombed-out sterling gaining 1.45%. But in the EM space, Asian currencies booked only modest gains and as the reality of a widening interest differential and a slowing US economy dawns, those gains are being reversed this morning. Bitcoin managed a dead-cat bounce of USD 20,000.00 but cryptos remain in the naughty corner, while gold remains in an induced coma.

Most interesting was EUR/USD which managed to close just 30 pips to 1.0445 overnight, an attempted rally towards 1.0500 being repelled with ease. There is drama in Europe anyway, with the general rise in government bond yields across the globe presenting itself in an undesirably way in Europe. While Northern Europe yields have moved higher, the southern Club Med countries, led by Italy, have seen outsized rises, with Italian BTPs climbing to 4.20%, sending alarms ringing. That led to an “ad hoc” meeting by the ECB council yesterday to address the “fragmentation” problem. The ECB said it would accelerate the development of an anti-fragmentation monetary tool and would tinker with rollovers of its stock of QE-don’t call it QE-bonds. We can read that as they will let Northern Europe holdings mature, while rolling over Club-Med holding, just don’t call it selective QE forever, ok?

Italian BTP yields duly fell back to 3.80%, but the rapidity of European bond market fragmentation, and the unusual urgency of the ECB to address it, have revealed the soft underbelly of Europe and the euro that has never gone away since its creation. The prospect of ECB intervention to bolster the Italian government balance sheet forever has rightly capped gains in the single currency. On top of that, reduced flows of natural gas from Russia have sent European gas prices spiralling, and with a war on its eastern frontier, creating a bullish case for the euro requires a fertile imagination.

In Asia today, we have also received a slew of data. The New Zealand dollar was another underperformer overnight, and today’s GDP shows that the bubble created by the Reserve Bank of New Zealand and the New Zealand government over the pandemic is deflating rapidly. GDP Growth QoQ for Q1 fell by 0.20% against an expected increase of 0.60%. The YoY Q1 print rose only 1.20%. The Reserve Bank, in particular, has left New Zealand with Norwegian prices and Nigerian wages and this data doesn’t even encompass catch-up RBNZ tightening and mortgage rate resets to come. Little wonder the NZD is setting the world on fire and New Zealand remains top of my list for a hard landing this year.

South Korean Export and Import prices rose 23.50% and 36.30% respectively in May YoY, a slight increase from April. That will keep the pressure up on the Bank of Korea to hike again in July, it’s just by how much. Japan’s Balance of Trade was negative again in May at -JPY 2,385 billion. Exports rose by 15.80%, but Imports leapt higher by 48.90%. Both numbers can be laid at the door of the weaker yen and the Bank of Japan meeting tomorrow will be the subject of intense focus. Markets are clamouring for the 10-year JGB 0.25% yield cap to be lifted. An unchanged BOJ likely sees the USD/JPY rally resume, but if they surprise and do adjust the corridor, we could see a very violent correction lower by USD/JPY.

The juice is back on the Reserve Bank of Australia today as well after mighty Australian employment data. Although the unemployment rate edged higher by 0.10% to 3.90%, full-time employment in May blew expectations out of the water, adding 69,400 jobs (-40k exp!). The participation rate rose to 66.70% while part-time employment lost only 9,000 jobs. With labour demand so robust, even as inflation continues to rise, the RBA may need to do more outsized rate hikes in the months ahead.

Taiwan should also hike rates in response to the FOMC’s move today. A hike of 0.25% is baked in and with the inflation backdrop benign in Taiwan, more than that would be a surprise. With USD/NTD remaining near 2022 highs, we can’t rule out the central bank’s surprising markets though, as Asian currencies in general today, have already started reversing their overnight gains.

We also have the Bank of England policy decision this afternoon. Soaring energy prices, robust labour demand, cost of living increases, and a central bank that raised the white flag on imported inflation some time ago, have torpedoed the British pound. The BOE has quietly gone about its business with a series of 0.25% hikes these past months and I don’t expect that to change today. A potential trade conflict with the EU over the unilateral rewriting of the Northern Ireland Protocol is another headwind the BOE doesn’t need, given the already poor growth outlook. It is another reason to not consider a 0.50% rate hike. That should mean that sterling’s overnight rally versus the US dollar will be temporary.

Given the potential Brexit conflict and trade repercussions between the United Kingdom and Europe right now, the prize for the irony of the week goes to ECB President Christine Lagarde and the London School of Economics. Ms Lagarde travelled from Europe to the United Kingdom yesterday to give a speech and receive an honorary degree from the London School of Economics.


I don’t write about cryptos too much as long-time readers will know, I can’t stand the HODL-er hate mail I get, and my opinion on the entire sector can be summed up by reading The Emperor’s New Clothes, and NFTs are very expensive password-locked JPEGs. I would rather not write about it than give the entire circus legitimacy by errr, writing about it.

Still, every now and then, I will post something on the technical picture for bitcoin, as I acknowledge that cryptos can be interpreted as a tradeable asset, even if they’re not an investible asset class. A similar result can be achieved by taking your life savings and going to the casino and placing it all on black 13.

The bitcoin chart is fairly simple at the moment, much like myself. Rumours of a Singapore-based crypto-lender-DeFi-hedge fund trying to “work it out with clients” failing sent bitcoin and ether plummeting yesterday. The market is also awash with rumours that USD 20,000.00 is margin-call Armageddon. I don’t know if that is true, but I know there is never just one cockroach and when someone says, “this time it’s different,” it never is.

Bitcoin managed to mysteriously bottom around USD 20,100.00 yesterday, so I won’t argue with USD 20,000.00 as support. Failure suggests USD 16,000.00 as its next technical bullseye, followed by USD 12,000.00. What is very clear from the charts is that bitcoin needs to recover above USD 28,000.00 to move it out of the danger zone and call USD 20,100.00 the bottom of a Top Gun-like hard deck. “Break it, and you are gone Maverick DeFi NFT Token.”

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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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