By Jeffrey Halley
Wednesday is shaping up to be a stormy day for markets, with plenty of chances to get dumped and held under the waves for a while.
We have already had two central banks in Asia raise policy rates in the morning, with the Bank of Korea and Reserve Bank of New Zealand hiking by 0.50%, with a hawkish tone in their statements. Rather surprisingly, the Korean Won and New Zealand Dollar are both sharply unchanged, suggesting that the news was already priced in.
It will be the Bank of Canada’s turn in the evening, and markets have a chunky 0.75% rate hike pencilled in. Even the Bank of England was beating the rate hike inflation-fighting drums Tuesday night.
India’s June YoY inflation stayed stubbornly above 7.0% overnight at 7.01%. That will keep the pressure on the Reserve Bank of India to keep tightening, and on the Indian Rupee.
So, at a glance, the G-20 central banks are very much in inflation-fighting mode, unless you are China, Turkey and possibly Europe, who are in a world of stagflation pain now.
Just how much pain the Eurozone may be in inflation/stagflation-wise may be highlighted by German inflation Wednesday afternoon.
June Inflation YoY is expected to remain very high at 7.60%, modestly retreating from May’s 7.90%. French and Spanish Inflation YoY for June will be equally grim, expected at 6.50% and 10.20%, respectively.
If the gas stays off through Nord Stream 1 after the maintenance period finishes on July 21, those numbers are set to get worse, and not better. The outlook for the Euro will get worse as well, and we will be looking wistfully back at EUR/USD at 1.0000 and wishing we’d sold more.
It will be interesting to see if the ECB decides to take the Asian route through the pandemic and wear the inflation pain to keep the economic lights on.
The United Kingdom releases a chuck of tier-1 data in the afternoon as well, including GDP, Trade Balance, Manufacturing, and Industrial Production for May. All have downside risks and won’t have improved in May and in many ways, the BOE is facing the same quandary as the ECB.
Combined with an extended leadership contest to select a new Prime Minister to replace Boris Trump, pressure is likely to remain on Sterling as well.
Before that, we get China’s balance of Trade later in the day, expected to come in at $75.70 billion for June. Its market impact should be minimal, as Mainland markets fret over new potential covid-zero lockdowns, and ahead of a slew of tier-1 data releases on Friday, including GDP, retail sales and industrial production.
All roads lead to the US Inflation data Wednesday evening, which comes after a surprisingly strong Non-Farm Payroll print last Friday.
Overnight, the US NFIB small business survey was quite weak, but it will be overruled by the inflation data, especially if headline inflation remains near 9.0% for June YoY, and the core remains near 6.0% YoY. That will lock and load 0.75% from the FOMC at the end of the month with potentially larger rate hikes to come, as well as shaking the confidence of the most ardent bottom-fisher in the US equity and bond market.
Given the recent moves in the US Dollar and US equities, if the data comes in softer than forecast, we could see a decent correction lower by the greenback, relieving some of the Euro’s pain. Equities will probably rally as the FOMO gnomes pile in, and the US yield curve will move lower.
Glancing around other asset classes, the big mover overnight was oil, which plummeted after the US API Crude Inventories rose by 4.762 million barrels, the second week of huge increases.
With the Street on recession watch, we saw Brent and WTI fall by around 7.0%, with Brent crude closing under $100.00 a barrel to $99.10 overnight, while WTI collapsed to $95.60 a barrel. I remain sceptical that oil prices will move materially lower from here, however.
The forward futures remain heavily in backwardation on both Brent and WTI, indicating real-world supplies remain tighter than Elon Musk’s wallet. OPEC also forecast a supply/demand deficit from its members to persist through 2023 overnight as well.
The price action still appears to be a disconnect between the speculative world, and the real world, although I don’t discount more downside losses in the short term.
Over in Disneyland, I mean crypto-land, Bitcoin slipped back below $20.000.00 of fiat currency US Dollars to $19,500.00 Wednesday morning. A soft US inflation print should save Bitcoin’s bacon along with equities, temporarily at least.
The line in the sand to flush our more margin stop-outs, 5-minute macros and some more HODLers is probably just below the June lows at around $18,500.00.
Also hanging out for a weak US inflation number are gold bugs. Gold remains in Dire Straits, hovering near $1725.00 an ounce, strictly rhythm, it doesn’t want to cry or sing. Another bout of US Dollar strength could well see $1675.00 fail, setting of another capitulation trade.
Gold needs a low US inflation print
Gold traded in quite a wide range between $1723.00 and $1745.00 an ounce overnight, but finished 0.45% lower at $1726.50, another unimpressive close. In Asia Wednesday, it eased slightly to $1725.50 in a moribund session.
Gold desperately needs the US inflation data to come in lower than expectations, which should trigger a pullback by the US Dollar, lifting gold prices. That said, unless the US Dollar stages an extended and extensive pullback lower, gold’s technical picture remains grim. A high inflation number from the US could well see $1675.00 finally tested. The only saving grace for gold right now is an oversold RSI, suggesting that a lower US Dollar could trigger a disproportionate upside correction by gold.
Gold has resistance at $1745.00, now a double top. That is followed by $1780.00, $1785.00, and $1802.00, 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.