Calendar Week 21 – 2022
Well last week was a bloodbath across most asset classes. US Stocks tanked into bear market territory, albeit the S&P500 closed a few ticks above the official level. The Nasdaq and Dow were terrible. Even bond yields retraced last week as did the US dollar, which has been strong for weeks. China dropped in some stimulus on Friday but the markets largely ignored this as having little effect outside of their borders. Some commodities also came off but overall they are still at elevated levels. I am not normally a doomsayer but things are looking pretty messy and nasty out there. Home here in Australia, with a change in Government, it is not looking rosy either but I will write more on that later in another article.
Inflation
Globally real wages (i.e. disposable income) and economic growth are rapidly shrinking, almost as fast as wealth is disappearing from stock portfolio’s. Whilst normally this would be good for inflation, less spending means less price pressures. However, inflation is rising due to the lack of supply not demand. And it is the supply of basic needs such as energy and food that is causing the most concern. This supply is being hampered by logistical chains and shipping backlog hungover from COVID restrictions, to the Ukrainian food bowl being locked up due to the war, Russia denying or being denied to export, China lockdowns and climatic impacts on other major geographic food bowls from both flood and drought.
Challenges
With all these challenges facing the world, let alone the big one of climate change, one would hope that there was a strong leadership from the larger countries to both effect changes but to reassure the people that it will be OK. But thanks to the populist vote and recent regime changes we are left with buffoons and senile septuagenarians in the UK and US, whilst Putin and Xi are dealing with their own internal issues. That leaves Macron and a hamstrung Scholz, not exactly strong statesman standing up to be heard. Oh what to do.
I for one believe in humanity and that we will get through it OK. But I also believe the world needs to feel some pain economically. For 2 decades, 20 years too long, Central banks and governments have protected the masses from too much pain with their quantitative easing and cheap money. This has allowed too many business to be valued far above the real worth and also far too many business to operate beyond their real capacity. That goes from companies at the top end like Amazon to the bottom end small business being support by Jobkeeper or similar government support. There is a term for it and it is called zombie companies. It has created a sense of entitlement both here in Australia but also in the UK and USA. Help me and my business operate so we can keep someone employed, even though the business is operating at a loss! All it has done is strip middle and lower classes of all wealth and handed it to the upper classes who protect it, not by supporting the lower classes but by building more wealth for themselves. Anyway rant over. Lets move on to see how we can trade it.
Currency Guidance
For the AUD and election outcome, it avoided the worst case scenario of a hung parliament, however I think the market will largely ignore the outcome as it is being driven more by offshore events than local. I suspect the USD weakness last week to be short lived and be looking for a turning point on the Aussie around 0.7100, which is a psychological level but also a 61.8% fib retracement of the falls of May 5th to 13th.
The Euro tagged massive support level of 1.350 and bounced well, back into consolidation zone of 1.06 -1.05. Technically it might hold this zone for a while, may even push higher to 1.08 but from a fundamental view, this is unlikely. I would still be a seller of this currency, either at a swing off 1.08 or a break back below 1.05.
The Cable too I would continue to be a seller both fundamentally and technically and am looking for a swing opportunity off the 1.26 area which has fib resistance from April to May lows.
The Yen is trick but is cycling back to its moving averages. It had such a run that it is still 200 pips away from any fib or decent support level – circa 125.00, but I do not see the USD being weak enough to get there. Yen might (and usually does) benefit from safe haven flows, but I doubt it will get enough to push too much lower.
The Loonie tried to breakout of its range of 1.24 -1.29 and this battle will be interesting, the strong Greenback versus strong oil prices, making the USDCAD pair a tough one to trade and predict. Technically it looks like it could swing from here back to 1.31 area.
Like the AUD, the Kiwi is being driven more from offshore and recent bounce is more USD weakness. That said, the RBNZ this week is expected to raise rates by 50bps so we might see the NZDUSD push higher than the AUD and tag 0.66 area.
