By Jeffrey Halley
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 Thursday morning.
The Monetary Authority of Singapore also tightened policy by recentering the Singapore dollar nominal effective exchange rate (S$NEER) to current levels and increasing the slope of appreciation.
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 on Wednesday, although the kiwi NZD was punished overnight as the RBNZ left its terminal rate guidance unchanged.
Overnight, the U.K. 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.
On Thursday, we have the European Central Bank policy decision, whose 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.
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.
China eyes rate cut
In Asia, China looks set to cut its RRR shortly; the USD/CNH and USD/CNY are approaching resistance levels, and Thursday’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.
Despite weak results and a grim outlook from the JP Morgan Q1 results, 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.
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 on Thursday.
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 as I can hear the whip-saw blades being sharpened as we speak. Most of the world is on holiday on Friday, a good chunk of it also on Monday.
An ECB policy decision later Thursday, US Retail Sales and Michigan Consumer Sentiment Thursday night, 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.
Oil prices rally again overnight
Oil prices ignored the peak inflation noise from equity and currency markets, posting another day of sharp increases as concerns around tight supplies globally persist and China Covid restrictions were eased in Shanghai.
What gives the oil rally overnight more credibility is that US official Crude Inventories leapt by an enormous 9.40 million barrels, yet oil prices continued to rally aggressively.
Brent crude leapt higher by 3.75% to $108.80 a barrel, a near 9.50% gain over the last two sessions. WTI rallied by 3.25% to $104.25 a barrel.
That impact may be waning now as OPEC refuses to increase production, and the situation in eastern Europe continues to darken.
The fact that oil continued to rally after such a large jump in US Crude Inventories and that China concerns have suddenly been forgotten, is a serious warning signal to those pricing in the top of oil markets.
Expect Brent to remain in a choppy $100.00-120.00 range, with WTI at $95.00-115.00 range. Brent crude has further support at $96.00, and WTI at $93.00 a barrel.
Gold rally continues
Gold’s rally continued overnight, helped along by a US Dollar that corrected lower as markets priced more aggressive hikes around the world, while assuming all the Federal Reserves are now priced in.
That somewhat conflicts with the inflation-hedging narrative that I am hearing surrounding gold’s rally this week and either the equity market, or the precious metal market, is heading for a harsh dose of reality.
Gold is now rallying when the US Dollar rises, and when it is also falling, suggesting underlying strength.
Gold closed 0.57% higher at $1977.80 an ounce overnight, before retreating to $1972.50 in Asia.
Gold has initial resistance at $1980.00, which has held on a closing basis for two sessions in a row. After that, a test of $2000.00 is entirely possible. If that is cleared, gold could gap higher to $2020.00 an ounce quite quickly.
A retreat through $1940.00 will signal a whipsaw move lower, chopping out the short-term money. Failure of $1915.00 will signal a retest of important support at $1880.00 and possibly $1800.00. I don’t know which scenario will be the winner.
Jeffrey Halley is Senior Market Analyst, Asia Pacific at OANDA
Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.