By Jeffrey Halley
Things are looking messy, especially in Forex Land where the Euro is within a hair’s breadth of trading at parity with the US Dollar Tuesday morning. Overnight, the single currency slumped by 1.45% to 1.0040 as Euro yields edged lower and markets fell over themselves to price in a European recession.
Russian energy lies at the heart of Europe’s turmoil, with news that Canada would release a specialised gas pipeline pump back to Russia to keep the petajoules flowing having no positive impact.
As of Monday, Nord Stream 1 which carries the fruits of Germany’s energy policies from Russia has entered its annual 10-day maintenance shutdown. The key question is, will the gas return after the July 21?
The slump by the Euro overnight also dragged Sterling down with it, which faces a messy leadership battle now post-Bojo. Risk sentiment indicators, the Australian and New Zealand Dollar, were also dragged down the Euro whirlpool while investors loaded up on US Dollars and a fair few US government bonds as well by the looks, as US yields fell overnight.
Gold, the forgotten asset class, is also trading one-for-one with EUR/USD Tuesday morning.
US data has thrown the cat amongst the pigeons of course, after Friday’s blockbuster Non-Farm Payrolls, which leapt higher to 372,000.
The Street is locked and loading another 75 basis points from the Fed at the end of the month. This Thursday’s US Inflation data will be the pivotal moment for financial markets. If headline inflation stays at or above 8.80% YoY, and/or the core stays at 5.70% or above, get ready for a risk-aversion sell-off.
Another risk point the Street is begrudgingly waking up to is China and covid-zero. The city of Wugang is being locked down for three days, while cases are creeping higher in other parts of the Mainland. That is weighing heavily on China’s equities with Mainlanders worried that more lockdowns, especially in Shanghai or Beijing, could occur.
Japan’s Finance Minister Suzuki has been on the wires Tuesday morning as USD/JPY approaches 138.00 saying Japan will take “necessary steps” in the forex market. He also said that they would be closely communicating with other FX authorities internationally.
This is the usual rhetoric when things don’t go to plan, and I do not believe we are imminently going to see the Ministry of Finance intervening in USD/JPY.
Tuesday afternoon sees the release of the German ZEW Economic Sentiment Index for July. It goes without saying it has serious downside risks and will be another headwind for the Euro and European equities in the afternoon.
India’s Inflation data in the evening should see YoY Inflation remaining above 7.0% as the Indian Rupee slump continues and energy prices remain firm.
The US 10-year note auction will be worth watching, with heavily US bond issuance this week. A weak bid-to-cover could give the US Dollar rally a reason to pause, while the API Crude Inventories could lift oil prices if the headline number falls sharply from last week’s 3.8 million-barrel gain.
Oil trades sideways overnight
Oil prices had another choppy session overnight, but ultimately traded sideways, booking modest losses.
Markets remain torn between recession fears in the US, Europe and China torpedoing growth and thus, oil consumption, and the still very tight supply/demand reality of the physical market.
Little hope is being assigned to Joe Biden’s visit to Saudi Arabia unlocking more production from them or the UAE. The price is likely to be very high to achieve that.
Brent crude finished 0.70% lower at $106.25 overnight, while WTI fell 1.30% to $103.35 a barrel.
News that a court in Russia has overturned the environmental ban at the Kazakh’s Black Sea terminal in Russia, has sent oil prices slightly lower in Asia. That is likely to be temporary given the Russian judicial system, and it seems that China’s lockdown fears are keeping oil prices offered in Asia. Brent crude is 0.80% lower at $105.35 a barrel, with WTI falling by 1.10% to $102.30 a barrel.
Reports that Iran is about to sell 100s of drones, some armed, to Russia could be a body blow to any nuclear deal with the west. That means that the chances of Iranian crude returning legally to international markets in greater volumes is receding and could prove supportive of prices as the day goes on.
Brent crude has resistance at $107.50 and then its 2022 trendline breakout at $108.85, followed by the 100-day moving average (DMA) at 110.75. It has traced double bottom at $103.75 and $98.60, followed by the 200- day moving average (DMA) at $96.75.
WTI has resistance at $105.00 and then its 100-DMA at $107.50. Support is at $101.00 and then $96.60.
Gold soggy in Singapore
The wholesale retreat of investor sentiment overnight saw massive inflows into the US Dollar, pressuring gold once again.
Gold fell 0.50% to $1734.00 an ounce. In Singapore, gold had a choppy $1723.00 to $1744.00 range Tuesday morning and appears to be trading tick-for-tick with movements in EUR/USD. As such, a break of parity by EUR/USD will signal a test of $1700.00 by gold.
Since breaking $1780.00, gold’s technical picture has deteriorated rapidly, and it remains at the mercy of the US Dollar’s direction. The only positive note is that its RSI is now in very oversold territory, allowing for a modest corrective rally to occur if a downward correction in the US Dollar happens.
Despite four sessions of sideways trading, gold remains anchored at the bottom of its range and only a miracle slump by the US Dollar Tuesday evening is likely to move it off the seafloor.
Gold has resistance at $1780.00, $1785.00, and $1820.00, its downward trendline. Support is at $1720.00, followed by $1675.00. Failure of longer-term support at $1675.00 sets in motion a much deeper correction, potentially reaching $1500.00 an ounce.
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.