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Bad medicine is what I need

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By Jeffrey Halley     

Central banks have gone full Bon Jovi handing out some monetary policy bad medicine over the past 24 hours, as the fight against inflation permeates even the most ardent fence-sitters. South Korea and New Zealand hiked by 0.50% on Wednesday, with Canada weighing in with a crowd-pleaser sized 1.0% hike.

On Thursday, the Monetary Authority of Singapore weighed in with its second unscheduled tightening of the year, recentering the policy band for the currency to “prevailing rates.”

The MAS normally only announces monetary policy settings twice a year, in April and October. So far, it has reacted in January, April and now July, as core inflation surged. We can reasonably assume October will be a live meeting as well.

USD/SGD has slumped by 0.67% to 1.3905 in response. For non-Singapore readers, the MAS uses the currency to manage monetary policy because of the nature of trade flows through the city-state.

The Philippines Central Bank announced an unscheduled rate hike of 0.75% to 3.25%. To say this is an unusual move by the Bangko Sentral ng Pilipinas (BSP) is an understatement, given that they have been amongst the most dovish and reluctant hikers in Asia.

The US CPI and the MAS move, along with the relentless pressure on the Philippines Peso (PHP) have swayed BSP’s hand, underlying the pressures facing Asian central banks now. USD/PHP has fallen by 0.32% to 56.06, but the PHP remains near record lows.

With even the Bank of England sounding hawkish this week and recent rate hikes in eastern Europe and Latin America, it is clear that central banks around the world are laser-focused on fighting the entrenched inflation they helped to create, growth-be-damned. Higher rates are coming to a corner shop near you.

That brings us to the Big Kahuna, the US Federal Reserve whose FOMC policymakers meet at the end of the month. Overnight, US inflation surprised markets by surging higher to 9.10% YoY for June, with a 0.10% fall by core inflation to 5.90% cold comfort.

Futures markets raced to price in a more aggressive Fed Funds rate hike at the end of the month, approaching 1.0% overnight. At least one Fed speaker – there were many – mentioned 1.0% overnight as well.

Unsurprisingly, EUR/USD traded down to parity after the data, but after toughing 0.9998, it rallied back to 1.0040. We saw similar price action in GBP/USD, AUD/USD, NZD/USD, USD/CAD, and USD/CHF as well, although USD/JPY went directly to jail and rose to 138.00.

The surprises continued; Wall Street fell overnight, but only modestly, in the context of recent volatility. Gold and Bitcoin dropped as well, but actually finished higher on the day. Oil prices didn’t move, shrugging off a huge rise in official crude inventories as well.

The biggest head-scratcher for me was the US bond market. The US 2-year yield rose slightly, but yields fell across the rest of the curve. The US yield curve is now well and truly inverted from two years to thirty years.

On Wednesday, China’s June Trade Balance printed a monster $98.0 billion surplus, well above forecasts. Whether it is due to a clearing of export backlogs, or that things in China and the rest of the world aren’t as bad as they seem, I know not.

If we are talking about bear market rallies, a healthy set of very important data releases Friday from China could be the catalyst to give that some momentum.

Over in the lucky country, the economic temperature needle rose to overheated territory.

Australian Employment for June rose by 88,400 jobs, well above the 30,000 forecasts, and follows excellent numbers in May. Healthy gains were made in both full-time and part-time jobs.

An elevated CPI release on the July 27 will lock and load another 0.50% hike in early August by the RBA, perhaps 0.75% if the FOMC goes 1.0% a few days before.

The fact that AUD/USD remains near one-year lows is even more surprising, although the AUD is driven by international investor sentiment these days, and the slump in energy, industrial and agricultural commodity prices over the past six weeks means that Australia’s terms of trade are probably going to soften in Q3.

On the subject of agricultural commodities, Turkey and the United Nations are on the verge of brokering a deal between Russia and Ukraine allowing Ukrainian agricultural exports to partially resume from the Black Sea.

That may put downward pressure on soft commodity futures in the short-term, although any impact from Ukrainian grain exports will have a substantial time lag, and quite frankly, to say it would have implementation challenges is an understatement.

That will be of limited solace to Europe, with emerging markets being the most likely immediate beneficiaries, and rightly so. Europe watchers should circle July 21/22 on their calendars. Russian annual maintenance on the Nord Stream 1 gas pipeline to Germany finish that day, and the Canadians have given the Russians back their pipeline pump.

The question is whether the gas starts flowing again. If it doesn’t EUR/USD at 1.0000 will be but a memory and there will be no bear market rally for European asset markets.

Oil markets a bastion of calm

Despite the noise seen in other asset classes from US data and central bank moves, oil was almost unchanged overnight. The US data and moves by Canada, Singapore et al to tighten policy should have been a headwind for oil. Most especially, the huge rises in the API and official Crude Inventories this week, as well as refined products, should also have seen oil move lower.

Instead, Brent finished 0.60% higher at $99.65 a barrel, rising 0.45% to $100.10 in Asia. WTI held its 200-day moving average (DMA), and finished 0.85% higher at $96.35 overnight, gaining 0.35% to 96.70 in Asia.

The fact that oil has been steady for 36 hours suggests that the worst of the sell-off is over, for now.

Risks are rising that oil stages a corrective rally carrying both contracts back above $100.00 a barrel once again.

Brent has resistance at $101.00, and then 104.00 a barrel, followed by a now distant $106.00. It has nearby support at $98.40, followed by the much more important 200-day moving average (DMA) at $96.90.

WTI tested its 200-DMA at $94.00 a barrel overnight but managed to rally from there. ​ That forms initial support, followed by $93.00. Resistance is at $98.00, followed by 101.00.

Gold looks resilient

Gold fell quite heavily on the high US inflation data overnight but managed to recover all those losses and close higher on the day. Along with an oversold RSI technical indicator, some short-term relief may also be coming gold’s way, allowing it to rally somewhat.

Gold traded in a near-forty dollar range overnight, trading as low as $1707.00 an ounce post-US-inflation. However, it finished the session 0.55% higher at $1735.50 an ounce. In Asia, some incipient US Dollar strength sees gold ease by 0.30% to $1730.00.

Gold appears to be trying to trace out a temporary bottom at $1707.00, with $1700.00 and longer-term support at $1675.00 looking safe for now. Failure of $1675.00 still signals more pain ahead, though. Gold has resistance at $1745.00, now a double top. That is followed by $1780.00, and $1800.00, its June downward trendline.

 

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.