Swimming in Potatoes
Yesterday, in the currency section of the daily missive, I said I would either look like a genius if the US Dollar fell or be labelled a potato, Mrs Halley’s fond (I think) noun for me. Well, today I am swimming in potatoes, much to Mrs Halley’s delight, after US markets returned to work in a decidedly glum mood. So many, I am waiting for McDonald’s to call about a supply agreement. Equities rotated to the “safety” of big-tech, US yields rose, commodities fell, and, of course, the US Dollar rallied impressively.
Scratching my head to make sense of it all, it appears that US markets are concerned about the hoped-for post-pandemic recovery being somewhat less exuberant than hoped. A cold reality that places such as ASEAN and Australia have already had to accept. That K-shaped recovery becoming more k-shaped. Given the proclivity of markets to be more five-minute macro than macro these days, that sentiment could easily have swung the other way by tomorrow. A US JOLTs Job-Opening print above 10 million tonight might just do the trick.
Asia’s data calendar is a bare cupboard today, meaning that individual markets are likely to Fleetwood Mac, and go their own way. Japan’s Final (finally) GDP for Q2 outperformed, rising 1.90%. Any feel-good factor was ignored, though, given the climb was less than half of the 4.20% fall in Q1. Japan will be lucky to break even this year as the currency Covid-19 wave will almost certainly have weighed on domestic consumption. That will not worry Japanese investors, who instead remain laser-focused on their next Prime Minister opening the fiscal stimulus taps again. The story continues in much the same tone in China, where bottom-fishing and expectations that the central government will enact more stimulus continue to rule the roost.
Tonight’s Bank of Canada policy decision will have less interest than previously, with its Covid-19 wave putting further tightening to bed. The same can also be said about Bank Negara Malaysia’s policy decision tomorrow. Tomorrow evening’s European Central Bank policy meeting will be the week’s data highlight. We may get a dovish tapering announcement, which should be Euro supportive, but my view is that the doves will prevail, and the Euro-can will be kicked down the road, especially with recent US and China data disappointments.
A sub-one-percent inflation print YoY from China tomorrow will probably increase the RRR cut and stimulus noise. That will give the bottom fishers in Chinese equities another excuse to ignore the stealth nationalisation of the private sector and load up once again. Today though looks like a choppy range-trading day across asset classes in Asia.
Asian equities mixed after US retreat.
New York returned from holiday in a sombre mood overnight, as the US Non-Farm Payrolls data heightened fears that the US recovery is running out of momentum. With the US debt ceiling and the passage giant infra-structure bill to come later in the month, those concerns may be well-founded. There are plenty of potential banana skins this month, including an FOMC meeting.
US markets rotated into the perceived safety of big-tech overnight, which pushed the S&P 500 and Dow Jones lower, while the Nasdaq held steady. The S&P 500 fell 0.34%, the Nasdaq finished just 0.07% higher, and the Dow Jones retreated by 0.76%, with growth and value taking a beating. US index futures have staged a modest comeback today, rising by around 0.10%.
In Asia, the uninspiring Wall Street performance and falling commodity prices are weighing on Asian markets. The exception being Japan and China, where stimulus hopes are alive and well and keeping the music playing. That sees the Nikkei 225 rising 0.70% today, even as the Kospi falls by 0.50%. In China, the Shanghai Composite is 0.10% higher, while the CSI 300 has risen by 0.30%, with the Hang Seng flat. China markets have given back most of their early gains, so it could be that the New York malaise is having a delayed impact after China has rallied impressively this week.
Singapore has retreated by 0.70%, with Taipei 0.30% lower. Kuala Lumpur has managed to book a 0.30% gain, but Jakarta has fallen by 0.25%. A negative New York lead and lower overnight commodity prices are weighing on Australian markets. The ASX 200 and All Ordinaries are 0.30% lower.
With sentiment shifting back and forth intra-day at the moment, the noise in Asia is unlikely to weigh on European markets, which I expect to open modestly higher this afternoon, after what was, despite the noise, just a modestly corrective US session.
The US Dollar rallies impressively overnight.
I got the US Dollar direction very wrong yesterday, as US markets returned with their risk aversion hats on. That saw US yields move higher across the curve, ahead of some heavyweight auctions this week. Higher yields, and a cautious tone of equities, where recovery concerns prevailed, saw a flight to safety, pushing the US Dollar sharply higher. The dollar index leaping 0.35% to 92.52. The longevity of the US Dollar rally will now depend on whether yesterday just post-holiday blues, or about the start of deeper concerns regarding the US recovery. That makes the move higher by US yields overnight even stranger. With one eye on potential whipsaws, I will content myself to call 92.00 to 93.00 as the dollar index trading range for the rest of the week.
EUR/USD fell 0.25% to 1.1845 overnight, where it remains today. Although it failed at 1.1900 on Monday, I do not foresee the 1.1750/1.1800 region failing. A dovish taper by the ECB tomorrow should be bullish for the single currency. GBP/USD tumbled 0.37% to 1.3780, buffeted by Government tax increase announcements and a stronger greenback. GBP/USD closed below support at 1.3800 overnight, breaking through a support line at that level and its 50 and 200-day moving averages. (DMAs) Its situation looks more perilous than the Euro’s, and the charts suggest losses could extend to 1.3700 this week.
The souring of risk sentiment saw AUD/USD fall 0.70% to 0.7385, while NZD/USD fell by 0.50% to 0.7100. Both are unchanged in Asia and are sitting in short-term support zones. Further, US Dollar strength could extend losses to 0.7300 and 0.7000 in the near term, although I would prefer to see 0.7375 and 0.7080 comprehensively broken before giving up on the bullish outlook.
USD/CNY has edged higher to 6.4640 today after a neutral PBOC fixing. USD/CNY continues to give no insight or hints to the PBOC’s thinking on a daily basis, and although regional Asia FX retreated overnight, it did so only modestly. Most of the US Dollar strength being reflected in the G-10 space. The Asian FX solidity is a cautionary note for US Dollar bulls elsewhere now. Hinting that the US Dollar strength seen overnight in the G-10 space could be just a short-term sentiment swing.
We will have to wait for New York to arrive this evening to gain more clarity. That likely explains why the G-10 and regional currencies have hardly moved in Asia today. It seems that forex traders in the region agree with me and would prefer to wait and see.
Oil falls on stronger US Dollar.
It was a tough night for commodities in general overnight. Base metals fell, with aluminium giving back much of its Guinea gains. With New Yorkers concerned about US growth to start the week, leading to haven US Dollar strength, oil prices also wilted. Brent crude eased by 0.80% to $71.50, and WTI fell by 0.70% to $68.30 a barrel.
Both contracts have added 10 cents a barrel in a quiet Asia session, and in the overall context, the scale of the overnight oil price retreats was relatively modest at just over 50 cents a barrel. Oil’s short term direction will be dictated by what sort of mood New York arrives in this evening, as nothing has materially changed in the markets this week. Although admittedly, oil’s rally had looked like running low on momentum last week, even as the US Dollar sagged. The slowing of upward momentum after the US data, economic recovery doubts and US Dollar strength had raised the odds of a deeper downward price move.
Brent crude has double tops at $72.80 and $73.70 a barrel. Support is nearby at $71.25, the 100-DMA, and $70.50 a barrel. That could lead to a test of $70.00 a barrel, and failure will likely trigger stop-losses in volume. The ensuing spike lower would be, once again, a buying opportunity.
WTI closed below its 100-DMA overnight, today at $68.75, which now forms initial resistance. That is followed by $69.50 a barrel. Support lies at $67.70 and $67.00 a barrel. If WTI fails at $67.00, a deeper and more aggressive capitulation could occur. But like Brent, it is probably a dip for the brave to buy into.
Gold tumbles on US Dollar strength.
Gold has been warning for several days that its upward momentum had waned materially and that its rally was in trouble. Notably, in previous sessions, gold had been unable to rally on US Dollar weakness. Overnight, a slight rise in US yields and a severe bout of US Dollar strength set the downward correction in motion. Gold finished the overnight session 1.60% lower at $1794.00 an ounce
Gold looks highly vulnerable to further US Dollar strength this evening. Although some short-covering has lifted gold slightly higher to $1797.50 an ounce in Asia, it looks like a dead cat bounce. Should the US Dollar fall by chance tonight and gold not rally still, the outlook will become darker still.
Gold has nearby resistance at $1800.00, followed by the 100 and 200-DMAs at $1809.50 and $1815.65 an ounce. Support is at $1792.50, followed by $1780.00 an ounce. If $1780.00 fails, gold could fall to $1750.00 an ounce.