By Jeffrey Halley
The post-FOMC rally ran equities out of steam within 24 hours with Wall Street plummeting overnight once again. Even the most ardent FOMO gnome had a conviction crisis as a swath of central banks followed the Fed’s Wednesday lead and hiked policy rates.
Taiwan hiked 12.50 bps, the Bank of England hiked 25 bps and the Swiss National Bank shocked markets, hiking policy rates by 50 bps.
Federal Reserve officials agreed to a 0.75-percentage-point rate rise at their two-day policy meeting that concluded Wednesday, which will increase the Fed’s benchmark federal-funds rate to a range between 1.5% and 1.75%.
The Fed approved “the largest interest rate increase since 1994 and signalled it would continue lifting rates this year at the most rapid pace in decades as it races to slow the economy and combat inflation that is running at a 40-year high,” the Wall Street Journal reported.
It was probably the SNB that broke the camel’s back on Thursday, because if the Swiss are worried about inflation, we should all be.
Stock markets went looking for ABE (anything but stocks), and it looks like a US 10-year yield approaching 3.50% on Thursday was just too tempting. US bonds saw some impressive ranges and as money poured into the US curve, the 10-year fell from near 3.50% to close around 3.25%.
That set off a negative loop in the US Dollar which suffered heavy losses overnight. They were led by a post-SNB rally by the Swiss Franc, which spilt over into Euro and Sterling strength as well, helped along by the BOE hike.
EUR/USD rallied by 1.0% and probably would have had an even better day if EUR/CHF wasn’t getting simultaneously crushed. Falling US yields also eroded US Dollar strength as did a huge rally of the Japanese Yen.
With hiking policy rates this season’s new black for the world’s central banks, offshore markets moved to rapidly price in that the Bank of Japan would raise the 0.25% yield cap on 10-year JGBs at Friday morning’s policy meeting.
USD/JPY fell by just over 1.0% overnight helped along by falling US yields as well. Japanese markets are having none of it though, with USD/JPY rising by 0.80% already to 133.25.
Gold also rallied overnight, but that was because the US Dollar fell, with the inverse correlation as strong as ever.
The Yen gains overnight boosted Asian currencies although the KRW, THB, TWD, and CNH are moving lower with the Yen Friday morning as well.
Oil held steady overnight despite probing the downside, no amount of noise elsewhere changes the fact the world doesn’t have enough of it or that refineries can’t refine enough of it.
The underachiever overnight was the crypto space. Bitcoin ran into buyers again ahead of $20,000.00 overnight, but remains uncomfortably close to the danger zone at $20.700.00 Friday morning. The weekend session promises to be emotional.
We have Eurozone Inflation Friday afternoon, and US Industrial Production and Manufacturing in the evening.
Federal Reserve Chairman Jerome Powell is also speaking later in the day, and apart from testing every resident of Shanghai for covid-19 this weekend, China releases its 1-year and 5-year Loan Prime Rates on Monday.
Finally, there are apparently $3.40 trillion of options expiries on listed US equity markets Friday where liquidity may be reduced ahead of a US holiday on Monday. That may distort price action on Wall Street in the evening. A session to avoid.
Oil trades sideways
Oil, once again, endured big ranges overnight, only to finish not far from where it opened.
Brent crude and WTI saw some heavy selling as markets tried to price in a plethora of central bank hikes and potential recessions.
Unfortunately, none of that changes the fact that despite those risks, the world remains short of crude supply from OPEC+, and global refining capacity, squeezing gasoline and diesel prices higher in a stagflationary embrace.
Little surprise, then, that physical buyers eagerly lapped up the overnight futures selling.
Brent crude fell to $115.60 intraday, only to reverse and finish 0.20% higher at $119.05 a barrel. WTI plummeted to $112.40 intraday, only to reverse impressively to finish 1.10% higher at $117.05. In Asia, Brent eased to $118.90, and WTI to $116.65 in what looks like a nothing session.
With the battle between the physical buyers and the speculative sellers, either closing longs or turning short, set to continue, don’t rule other another crazy intraday spike lower on Friday in New York.
Brent crude has initial support is at $115.50, with resistance at $120.25. WTI has support at $112.50, with resistance at $118.00.
Gold range continues
Gold staged a decent recovery overnight as the US Dollar fell and US yields retreated.
Gold rose by 1.25% to $1857.00 an ounce, before retreating just as quickly on US Dollar strength in Asia Friday. It has fallen 0.73% to $1843.50 in regional trading.
The overnight recovery, and equally fast retreat in Asia, demonstrate that gold’s fate is not it’s own. Despite the noise of this week, it still remains anchored in the middle of its one-month range. The overnight price action shows that the inverse correlation to the US Dollar is as strong as ever.
Gold has resistance at $1860.00 and $1880.00, the latter appearing an insurmountable obstacle for now.
Support is at $1805.00 and then $1780.00 an ounce. Failure of the latter sets in motion a much deeper correction, while I would need to see a couple of daily closes above $1900.00 to get excited about the upside.
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.
