Calendar Week 19 – 2022
Last week was a howler with markets roiling in the wake of major moves and forward guidance from Central Banks. Australia went further than expected with a rise of 0.25% instead of the anticipated 0.15% to have rates sit at 0.35%. Pundits expect this cycle of rises to peak at circa 2.5%. The Brit’s also had the full backing of a rise of 0.25% to 1% with no sign of slowing their cycle down as we thought the might. The big one was the US, raising by 0.5% to 1% although the market wanted a 0.75% rise.
Fed Credibility
However, the US Fed effectively slammed the door close on any 0.75% rises this cycle, which sent the market into a tailspin. It was an odd move to make in the same breath as admitting to the fact that there is still too much uncertainty. Why close the door on any policy moves to battle the uncertainty? In that one press conference, Powell gave away all credibility the US Fed may have had left. At the opening of the presser he addressed the American people directly, a move not seen done in years – so they obviously know they have a credibility issue, and then he exacerbated it. Odd indeed. 10 year US bonds finished the week higher at 3.13% as volatility across all asset classes in the US spiked.
Economic Data
By comparison to last week, ahead of us is relatively calm but there are still some data points of interest to monitor. First up on Monday will be Chinese trade balance, which will be important to note due to their draconian lockdown blocking the world’s manufacture of any import and export activity. How much has it hurt the Chinese will be interesting.
Wednesday we will get the Chinese inflation numbers. Again with lockdown impacts but also food shortages and supply chains hurting the country this number too will be interesting and both the trade and inflation numbers will be key for commodity currencies such as the Aussie.
Later on Wednesday night we get the inflation numbers from the USA, which is expected to tick higher to 8.5%. Then on Thursday the UK release their GDP figures which economists are looking for a 6.6% growth rate.
That is the hard data this week to monitor. We will also have a number of talking heads from the Central banks of UK, EU and USA that could provide some fun moves if someone decides to go rogue against the current policy stances.
Currency Guidance
Whilst Iron Ore has dropped off a cliff thanks to the Chinese lockdowns, most other commodities remain at elevated levels or are ticking higher. The Bloomberg Commodity Index sits at 130 just a few ticks below the all-time highs off 136 which it tagged in early March and mid-April. This is being led by the soft commodities such as wheat, rice, corn and milk.
The Aussie dollar is being held up by major support at 0.7050 and the larger 0.7000 but it is under serious threat this week with the Chinese data. If it breaks under 0.7000 there is not much support for it until 0.6750 area. Not only does the Aussie face Chinese headwinds, they are well behind the curve with interest rates and facing a farcical choice of candidates to run the country in a the federal election to be held in 2 weeks time.
The Eurodollar too has found support at 1.05, a big level for it. Below it is minor support at the 2017 lows of 1.0340 before finding more support at 1.02, a price not seen since 2002. Ideally we would like to see it have a relief rally into the high 1.07’s so we can get short but with all the pressure it is against, we might not get that opportunity.
Although the BoE did raise rates, the market slammed the pound lower and it is well oversold now. With bitter factional fighting within the leading Tory party not helping the cause, the Sterling will also remain under pressure. Like the Euro though, a relief rally would be ideal to get a short on. Probably unlikely though.
Being a tiny island nation that has huge import costs, which are rising thanks to war and covid led supply shocks, the Yen is struggling. Coupled with the divergence in policy, as the BoJ remain dovish whilst global CB’s are busily raising rates we see little reason to buy Yen even as a safe haven against the backdrop of tanking stock markets. Simply put, you can get better rates of return for your money from New Zealand or USA. Borrow money from the Japanese 10yr bond at 0.23% and invest in NZ or US at 3.78% or 3.13% respectively. Known as the ‘carry trade’ it is seeing huge amounts of cash exiting Japan the last few weeks with little sign of slowing down.
