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Waiting for the Fed

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By Jeffrey Halley 

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 Wednesday evening.

Asian turnover is muted by a long week of holidays this week as mainland China, Japan, Malaysia, Indonesia and Thailand are closed Wednesday.

Whether the Fed hikes by 0.50% or not, the crux will be the statement and the forward guidance on the path of interest rates. Markets 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. The only mitigating factor will be the start of quantitative tightening by the Fed. That may have an impact than Fed Fund hikes if it starts pushing the US yield curve higher once again.

US 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 in much of the world, there are no conclusive signs of the US economy slowing down materially.

The surprise 0.25% rate hike by the Reserve Bank of Australia on Tuesday 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.

In Asia, South Korean FX Reserves fell by $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. Tuesday’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.

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 on Thursday, but unless the FOMC springs a dovish surprise, I am not expecting a post-holiday rally among Mainland equities.

Australian data on Wednesday showed the lucky country remains lucky. Home loans rebounded to 0.90% in March, with Retail Sales gaining 1.60% m-o-m 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.

We have a raft of European Services PMIs released Wednesday, as well as Germany’s Trade Balance, US ADP Employment, Balance of Trade and ISM Non-Manufacturing PMI.

Lost in the noise this week, as if it couldn’t be busier, the US announces Non-Farm Payrolls data on 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.

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

There’s a brilliant idea in the non-fungible token (NFT) space, and I think I can make some serious fiat currency. The Bored Ape people raised $285 million of crypto by selling “land” in a virtual world it says they are still building; or is that coding? I guess that’s the crypto-equivalent of buying off-plan.

Anyway, once I’ve cleared it with Mark, I’m going to find a Tolkien family member and subdivide Minas Tirith and Rivendell into apartments and lifestyle blocks via NFTs in the metaverse. They’re not cheap mind you, but the views are worth it.

Depending on how we go, I may use some of the proceeds to urban regenerate Mordor and Moria. Unfortunately, in true California fashion, I may need to move the present residents, who are all poor, into cardboard boxes by the road. Now, where are Mark and Christopher’s numbers…

Asian oil markets trade sideways

News that OPEC compliance had reached 164%, i.e., they can’t even pump the quotas they have agreed, failed to lift oil markets in Asia. Oil prices are almost unchanged thanks to a Mainland China and Japan holiday.

Overnight, oil continued its noisy range-trading, awaiting direction from Russia/Ukraine, EU/Russia oil sanctions, or a slowdown/or not from China. Brent crude fell 1.60% to $105.80, and WTI fell by 1.35% to $103.50 a barrel. In Asia, moribund trading sees Brent crude and WTI unchanged.

Brent crude remains well supported on dips to $100.00 a barrel, with resistance at $110.00. WTI is trading in a noisy $100.00 to $108.00 range. In the bigger picture, Brent crude is still in a broader $100.00 to $120.00 range and WTI in a $95.00 to $115.00 range. Only a weekly close above or below those levels signals a new directional move.

Gold markets trade sideways

Gold traded in a $30 dollar range overnight between $1850.00 and $1880.00 an ounce, moving inversely to the US Dollar’s intra-day moves. It crept to a 0.27% gain to $1868.00 by the New York close. In Asia, holidays and the FOMC meeting are impacting volatility as well, gold edging slightly lower to $1866.00 in directionless trading.

Like everything else, the FOMC statement will determine gold’s near-term direction unless the decision is either a 0.25% or 0.75% hike.

From a technical perspective, gold still looks vulnerable and is relying on US Dollar falls tonight to steady the ship. It has been unable to regain the $1880.00 region, which is also its 100-day moving average. (DMA) Support lies at $1850.00 and then the tip of the breakout triangle at $1835.00.

 

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.