Based in Singapore, Jeffrey has over 25 years experience in the financial markets, having traded currencies, options, precious metals and futures. Jeffrey started his career at Barclays Bank in New Zealand. However he has spent most of it in London and Asia.Jeffrey focuses on the Asia time zone across asset classes. A regular commentator on business news TV and Radio, he is originally from New Zealand and holds an MBA from Cass Business School, London
Asia Session: Noisy Pre-FOMC Consolidation; Dollar Dips, Oil Ranges
The sell-everything trade has mostly paused for breath over the last 24 hours, with US equities finding their feet overnight, Asian equities rallying today, and the US dollar giving back some of its recent gains. Bond markets remain the exception. The Bank of Japan is buying JGBs furiously to maintain the yield cap, while US bond yields continued to rise leaving the yield curve almost flat and dangerously close to inversion.
Given bond markets saw no love overnight, I am inclined to believe that clawing back losses elsewhere is merely a consolidation ahead of today's FOMC policy decision. The market has priced in at almost 100%, an FOMC hike of 75bps this afternoon. My two cents worth is that the Fed will not go 100bps, as that would further erode their credibility on the forward guidance front, which is already ragged. They may, however, decide to upgrade their forward guidance to an even more hawkish tilt. I suspect 75bps is already built into prices now, and if the guidance is more modest in scope, I am sure the buy-the-dippers will be out in force for the rest of the week.
I remain concerned that the Bank of Japan policy meeting is an underrated risk point this week, perhaps even more so than the FOMC outcome itself. A 100bps hike tonight, and/or a very hawkish outlook, will lift USD/JPY once again and may force the BOJ into lifting the 10-year JGB yield cap slightly, despite their actions in the bond market this week. That could, in turn, prompt a very ugly, somewhat short-term correction lower by USD/JPY that could reach 130.00. Expect GBP/JPY, AUD/JPY, and NZD/JPY to get a pasting as well.
The Bank of England rate decision tomorrow will become murkier as well if the FOMC is uber-hawkish tonight. The BOE most likely intends to hike by 0.25%, but with sterling under some serious pressure right now, its hand may be forced even though it has admitted it has only limited means to manage imported inflation from here. One positive note is that unemployment remains very low in the UK, giving the BOE a decent starting point to inflict monetary pain.
We should be keeping an eye on energy prices over the next few days as well, most notably, European natural gas prices. Nord Stream 1 gas flows from Russia to Germany have been severely reduced as it undergoes summer maintenance. The culprit is a compressor turbine, sent for maintenance in Canada, which now won’t return it as Canada widens sanctions on Russia. Of course, I am sure Russia isn’t using this as an excuse to squeeze Europe, cough, cough. European and UK natural gas prices spiked yesterday, and I have said before that the moment Russia starts messing with European gas supplies, the euro is heading south. You can put the sterling in that basket as well.
Looking at the data releases we have had so far today in Asia, it has been mostly positive. Australian Consumer Confidence improved slightly to -4.50% from -5.60%. Rising living costs and mortgage rates leave consumer confidence in a dire spot still. South Korean Unemployment ticked higher to 2.80% in May from 2.70% in April, however, workforce participation rose strongly, dulling the headline numbers impact. Far more importantly, the truckers' strike has ended today, allowing goods to flow to ports and removing a potential growth roadblock.
Japan’s Reuters Tankan Index for June improve to 9.0 from 5.0, as business confidence edges higher. A weaker yen is a boon for manufacturers and was likely the main reason for the jump. A similar impact can be seen in Japan’s April Machinery Orders, which outperformed, rising 10.80% MoM. We can expect a similar impact in May and June. The Nikkei 225 gained no benefit, with both it and the KOSPI content to track NASDAQ underperformance overnight as the world press fills its pages with tech-layoff headlines.
China has left its one-year MTF rate unchanged at 2.85% but rolled over the entire CNY 200 billion of maturities. Disappointing at the periphery for those of us waiting for a more comprehensive stimulus from China. Offsetting that, were notable improvements in May Retail Sales, Industrial Production, and Fixed Asset Investment. Retail Sales fell by 6.70%, less-worse than expected. Industrial Production and FAI outperformed, rising by 0.70% and 6.20% YoY respectively. All of that can be laid at the door of the reopening of Shanghai and Beijing and the Shanghai Port.
I must reiterate a word of caution on China though. Markets have leapt into thinking that it would be “one-and-done” for China with COVID-zero lockdowns. Bitter experience from around the world shows that this is a naïve point of view, especially regarding Omicron. I see a high possibility that China will still endure repeated omicron lockdowns this year unless it changes its COVID-zero policy. Thus, China’s growth outlook remains challenging to say the least, even more so if key export markets shift to slowing growth as tighter monetary policy bites.
Indonesia releases its Balance of Trade for May shortly, with the surplus expected to fall from $7.56 billion in April, to $3.83 billion in May. The palm oil export ban will have impacted the headline number, and Indonesia’s commodity exports have bolstered the trade balance this year and supported the Indonesian rupiah. I wouldn’t normally comment on this data point, but the rupiah has weakened sharply this past week. If the trade surplus is lower than expected this afternoon, the rupiah selling may gain more momentum and have a knock-on impact across neighboring ASEAN currencies. I’m fairly sure a number of Asia’s central banks have been busy this week quietly selling US dollars, including Indonesia. That smoothing may have to accelerate, especially if the FOMC is very hawkish tonight.
India’s Balance of Trade this afternoon should also make for interesting reading as its imported energy bill soars. A May deficit higher than $20.00 billion could increase pressure on the rupee as well, which remains near record lows. US Retail Sales will be of passing interest before the main event tonight, especially if the headline and core numbers are soft, with a market on edge about growth stalling in the US.
Otherwise, I believe today will be a "hurry up and wait" messy session as the world awaits the FOMC meeting outcome. I have thrown my two cents in, and I will leave it at that, it has been analysis-paralysis-ed to death elsewhere for those who require more information overload. Today is likely to be the eye of the hurricane, so we should enjoy the temporary peace and quiet.
Asian equities are mixed
US markets were mixed but relatively calm overnight, as Wall Street consolidated after brutal previous sessions. The S&P 500 finished 0.37% lower, while the NASDAQ climbed by 0.18%, with the Dow Jones fell by 0.47%. In Asia, US index futures are seeing some decent pre-FOMC short-covering. S&P 500 futures are 0.40% higher, NASDAQ futures gaining 0.55%, with Dow futures adding 0.25%.
Asia has responded unevenly, despite today’s data releases erring to the positive side. Mainland China markets are outperforming once again, but Japan’s Nikkei 225 has fallen by 0,85%, with South Korea’s KOSPI losing 1.55%, and Taipei edging 0.25% lower.
Mainland China is rallying strongly after improving data this morning. The Shanghai Composite has climbed 1.40% higher, with the CSI 300 jumping by 1.85%. Mainland markets staged a mysterious comeback yesterday afternoon and given that three small banks have frozen deposits in China, the rally is even more surprising. Unlike the hapless depositors protesting outside the banks, I suspect that Chinese authorities have turned China’s “national team” health apps “green,” instructing them to go forth and buy. Not to be outdone, Hong Kong’s Hang Seng has also risen by 1.25% today.
Elsewhere, Singapore has risen by 0.60%, but Kuala Lumpur has fallen by 1.50%, along with Jakarta, down 1.0% today. Bangkok has lost 0.50%, with Manila losing 0.60%. Australia is also in the red, the All Ordinaries and ASX 200 both falling by 0.75%.
Except for China, is it interesting that the rest of Asia is completely ignoring the rally by US index futures today, even Australia. That suggests to me that Asian investors are overweighting on cash ahead of the FOMC tonight. It wouldn’t surprise me in the least if early Europe follows the same wise course and lightens positioning as well.
US dollar consolidates pre-FOMC
Currency markets had a choppy but ultimately range trading session overnight, as higher US yields once again supported the US dollar modestly, while pre-FOMC caution limited its gains. The Asian session is being marked by similar price action, the US dollar easing today as investors lighten their exposure. The Dollar Index fell towards 104.50 initially but rallied to close 0.26% higher at 105.47, before easing 0.20% to 105.27 in Asia. The dollar index has support at 104.60 and then 104.00, with resistance at 105.70 and 108.00.
EUR/USD finished lower overnight after running out of steam ahead of 1.0500 as European natural gas prices surged and US yields marched higher. EUR/USD closed almost unchanged at 1.0415, gaining 0.19% to 1.0435 in Asia. EUR/USD has traced out support at 1.0400 and 1.0350, with resistance now ahead of 1.0500 and then 1.0650.
Sterling was an underperformer overnight as natural gas prices surged, the Northern Ireland Protocol continues to vex, the Scottish First Minister signalled she wants to hold a new independence referendum, and the street still errs towards just a 0.25% hike by the Bank of England tomorrow. GBP/USD fell 1.20% to 1.1995, trading in a nearly 300-point range and trading as low as 1.1935 intraday. In Asia, it has struggled to a 0.20% gain to 1.2015. Support is at the overnight low at 1.1935, with resistance at 1.2200.
USD/JPY rose by 0.77% to 135.45 overnight, as the BOJ intervened to cap JGB yields, while US yields moved higher once again. It has fallen back to 135.10 in Asia as US bond futures rally. (yields lower) A 134.00 to 136.00 range should cover USD/JPY into the FOMC.
AUD/USD and NZD/USD fell around 0.75% overnight but have recovered some of those losses in Asia as position squaring dominates the session. AUD/USD has risen 0.40% to 0.6895, with support at 0.6850 and resistance at 0.6970. NZD/USD has risen by 0.15% to 0.6225. It has support nearby at 0.6200, and resistance at 0.6300.
USD/Asia has been noisy if ultimately sideways overnight and today in Asia. USD/KRW, and USD/TWD fell overnight, but reversed higher in Asia after a weaker PBOC CNY fix, leaving them almost unchanged over the last 48 hours. Conversely, USD/CNH and USD/CNY have fallen today to 6.7335 and 6.7200, with 6.7800 and 6.7600 continuing to cap gains this week respectively. USD/INR has fallen back to 77.950, but INR remains near record lows. Meanwhile, USD/MYR and USD/IDR remain at recent highs.
All-in-all, the price action remains quite messy in the G-20 space, with the US dollar maintaining most of its gains. The price action in the USD/Asia space is even messier, very choppy but ultimately consolidative for the US dollar. With such a mish-mash of price action in USD/Asia, watching from the FOMC side-lines is probably the most sensible strategy.
Oil is noisy but sideways
Oil prices traded in a very wide range overnight, but like currency markets, once the histrionics passed and the dust settled, didn’t do a lot, remaining near to recent highs. Brent crude ranged between $119.00 and $125.00 before finishing just 1.05% lower at $120.85 a barrel. WTI traded between $116.70 and $123.70 before closing 1.75% lower at $119.00 a barrel.
The histrionics seen overnight are indicative of a market tying itself up in knots over the next big move for energy. Overnight, rumors circulated that President Biden would release more oil from the SPR, that Washington DC was considering a windfall tax on oil companies, that Federal fuel tax would be cut, and it was announced the President would visit Saudi Arabia. All of that was likely enough for the hit money to sell oil, but offsetting that is the chronic refinery capacity limits holding up diesel and gasoline prices globally, news that OPEC was missing its production targets by 176,000 bpd, and a spike in European natural gas prices. Overall, the supply/demand situation remains supply-constrained, and I can’t see that reality changing until the world economy slows sharply.
In Asia, prices are barely moved, no surprise when one looks at the overnight ranges. Brent is trading at $121.25, and WTI is trading at 119.05 a barrel. Unless you are a day trader with deep pockets and nerves of steel, getting involved ahead of the FOMC is likely a fool’s errand. The overnight low/highs for Brent crude at $119.00 and $125.00 are now immediate support/resistance. WTI’s range of $116.70 to $123.70 a barrel also marks support/resistance.
Gold continues to underperform
Gold eased lower once again overnight as the US dollar maintained strength and US yields moved higher. Gold finished 0.60% lower at $1808.50 an ounce as the tears of gold bugs washes away its one-month gains. In Asia, a slightly lower US dollar and rallying US bond futures have lifted the yellow metal slightly higher, gold gaining 0.30% to $1813.80 an ounce. Like everything else, its next directional move is going to be dictated by the FOMC meeting and statement tonight, and we can expect messy trading until then.
That said, the inverse correlation to the US dollar has proved as strong as ever it seems and the technical picture for gold has turned murky. Only a sharp US dollar correction lower is likely to alleviate selling pressure on gold. But a very hawkish FOMC tonight likely sees gold wave goodbye to its $1800 handle.
Gold has resistance at $1840.00 and $1880.00, the latter appearing an insurmountable obstacle for now. Support is nearby at $1805.00 and then $1780.00 an ounce. Failure of the latter sets in motion a much deeper correction.