August 2022

The British pound is in positive territory today and briefly climbed above the 1.22 line. In the European session, GBP/USD is trading at 1.2185, up 0.18% on the day. Will BoE tighten by 50bp? The Bank of England meets on Thursday, and a 50bp hike looks likely, especially after hints from Governor Bailey to that effect. In today’s business climate of high inflation and central banks aggressively raising rates, such increases are no longer viewed as ‘massive’ or ‘supersize’. Still, it should be remembered that the BoE has not raised rates by 50bp since 1995, so such a move would be significant, even if it has been priced in by the markets. This would bring the Bank Rate to 1.75%, still well below the rate levels at the Federal Reserve and many other major central banks. In June, the MPC voted 6-3 to raise rates by 25bp, suggesting that Thursday’s decision will not be unanimous either. If the majority wins six or more votes, it would send out a strong message that the BoE is prepared to continue hiking and another 50bp move would be a strong possibility in September, which would be bullish for the pound. A close 5-4… Read More »Pound edges higher, markets eye BoE

Outlook: Why did the dollar do an about-face? The comments from the Fed presidents did the trick–not the Pelosi trip, not Jolts–but even the strongest words from mere regional presidents do not usually generate this much power. As triggers go, these are not terribly impressive. We surmise that the market really was overold and wanted to square up a bit. The move was substantial, though, and that gives us our usual trend-follower’s headache–short-lived correction or return to primary trend? We get it right about half the time. We have push-me/pull-you risk factors today. The Pelosi trip has some still unknown after-effects making some folks nervous. Both Pelosi and Pres Biden have said the US will stand up for Taiwan, despite no defense treaty (or even diplomatic relations), and while we’d like to know why this statement and this trip at this time, we see no reason to think they are bluffing. Bloomberg opines that it’s Pelosi who gets the credit/blame. “Yields fell on the pivot narrative, but the move was amplified by concerns about Pelosi's trip to Taiwan. After her plane landed safely on the island, yields rose by over 20 basis points in a matter of hours, one of… Read More »Why has the dollar done an about-face?

ISM will release the July Services PMI report on Wednesday, August 3. Markets have been scaling down hawkish Fed bets since the last FOMC meeting. Inflation component of the PMI survey could impact the dollar's valuation.  The dollar has been having a difficult time finding demand amid disappointing macroeconomic data releases and the Fed’s decision to abandon rate guidance. The US Bureau of Economic Analysis’ initial estimate showed that the US economy contracted at an annualized rate of 0.9% in the second quarter and the probability of a 75 basis points (bps) Fed rate hike in September dropped below 20%. On Monday, the Institute for Supply Management (ISM) reported that the business activity in the manufacturing sector continued to expand at a moderate pace with the headline Manufacturing PMI coming in at 52.8. The Prices Paid component of the survey, however, declined to 60 from 78.5 in June, revealing a remarkable easing in price pressures. Consequently, the US Dollar Index (DXY), which tracks the greenback’s performance against a basket of six major currencies, fell to its lowest level in a month near 105.00.  DXY daily chart Dollar bears look for signs of softening inflation On Wednesday, the ISM will release… Read More »US July ISM Services PMI Preview: Inflation component holds the key

EUR/USD retreated sharply from a multi-week high set on Tuesday amid resurgent USD demand. The risk-off impulse, US-China tensions, hawkish remarks by Fed officials boosted the greenback. The downfall, however, stalls near mid-1.0100s, warranting caution for aggressive bearish traders. The EUR/USD pair witnessed a dramatic turnaround and retreated around 130 pips from the vicinity of the 1.0300 mark, or a four-week high touched on Tuesday. The US dollar made a solid comeback from its lowest level since July 5 and turned out to be a key factor that exerted heavy downward pressure on the major. Against the backdrop of growing recession fears, mounting diplomatic tensions over US House Speaker Nancy Pelosi's Taiwan visit tempered investors' appetite for perceived riskier assets. This was evident from a generally weaker tone around the equity markets, which drove some haven flows towards the greenback. The intraday USD buying picked up pace after several Fed officials hinted that more interest rate hikes are coming in the near term. In fact, San Francisco Fed President Mary Daly noted that work on inflation is nowhere near almost done and that policymakers are still resolute and completely united on achieving price stability. Separately, Chicago Fed President Charles Evans… Read More »EUR/USD Forecast: Break below 23.6% Fibo could shift the bias in favour of bearish traders

Markets Less dovish comments from Fed officials overnight snapped yields higher, with the US 10yrs rallying back to 2.75%. At the same time, more sabre rattling from China sapped some confidence from equity markets with a sea of red this morning across major global indices. As we wrote on yesterday's Asia close note, prepare for The Fed speaker pivot push-back offensive to begin. With so few people believing in the 3.25% terminal rate, who buys this duration rally? Meanwhile, the China tail risk re-emerges, Ferrari's order book confirms the burgeoning income disparities, Uber re-ignites reopening, and BP can prepare for a populist backlash after a massive beat and dividend raise. US equities whipsawed between gains and losses before ultimately finishing lower on Tuesday, as geopolitical tensions remained at the forefront. Headlines surrounding US House Speaker Nancy Pelosi's arrival in Taiwan were greeted by China announcing missile tests, keeping investors on edge, despite Pelosi maintaining that her arrival did not alter longstanding US policy in the region. China's military drill is about 12 nautical miles from Taipei and 9 nautical miles from Keelung, which is very dangerous for military escalation between China and Taiwan as UN law defines territorial sea as within… Read More »Pelosi jitters and less dovish comments from Fed officials veer markets risk off

Outlook: A little risk-off never hurt anyone and makes a regular appearance on a Tuesday. Now that the US scored some points on the geopolitical stage, it’s only respectful to suspend a slow-motion sell-off for a while. Equities down, gold up, all is right with the world or at least it seems to make some kind of sense. Unless you are bound up in a yen trade, which rolls merrily on without rhyme nor reason. We can’t wait for a break in the 10-year differential to see what happens. It may take a while. See the chart from Bloomberg depicting the BoA forecast for the 10-year–a slide to 2%. Good grief! With Fed funds expected at 3-3.5%, how can this make sense? Either the market is dead-wrong about the Fed’s resolve or wrong about how fast recession shows up. The phrase “recession deniers” has popped up, as though economic measurement is a political theme. The Economist magazine, by the way, favors the no-recession verdict of two negative quarters. Now check out the dollar/yen against the 10-year differential. The relationship is fairly clear and implies that if the dollar/yen is leading this time, the sell-off against the yen is a carry-trade… Read More »The phrase “recession deniers” has popped up, as though economic measurement is a political theme

EUR/USD – 1.0268 Although euro's erratic rise from last week's low at 1.0097 (Wed) to a 1-week high of 1.0275 in New York yesterday suggests correction from 1.0278 has ended, subsequent retreat may yield further choppy swings and below 1.0226 (New York low) would head towards 1.0206, break, 1.0165/70. On the upside, a daily close above 1.0278 is needed to extend rise from 0.9953 (July) to 1.0320/25 later. Data to be released on Tuesday: Australia building permits, RBA interest rate decision, New Zealand GDT price. U.K. Nationwide house price, Swiss consumer confidence, manufacturing PMI. U.S. redbook, JOLTS job openings, Canada S&P manufacturing PMI.  

Outlook: The week has PMI’s already out and the US to come (with services on Wednesday). The Institute for Supply Management mfg index is expected to fall to 52.1 in July from 53, with all eyes on prices paid. We have two central bank meetings, Australia and UK, on Thursday. Later in the week it’s a ton of industrial output data, including German orders. As usual, though, attention is going to center on US nonfarm payrolls on Friday, with everyone ignoring JOLTS tomorrow. About the yen–we switched to long yen against the dollar, euro and AUD without any real confidence it will last. Probably the question about to rise to the surface is intervention should this turn into a runaway train. We doubt anyone can name the area where the BoJ runs out of patience but some obvious numbers come to mind, like the previous dollar low at 126.36 from May 24. We show the weekly chart to highlight how big a deal this really is. We are inclined to think the previous low is not meaningful and the line in the sand, when it comes, will be far lower, like 115. The key idea to justify jawboning/intervention is “lack… Read More »Do the inverted yield curve and high employment this time mean an inevitable recession?

The RBA will likely increase the cash rate by 50 basis points. Australian inflation continues to rise in the second quarter of the year. AUD/USD is technically bullish and near a critical Fibonacci resistance level. The Reserve Bank of Australia will announce its monetary policy decision on Tuesday, August 2. Market participants anticipate another 50 bps cash rate hike. The central bank has accelerated the pace of tightening in June and has already hiked 125 bps this year, bringing the key rate to the current 1.35%. Australian policymakers noted in their July statement that the cash rate’s current level is “well below” what they consider a neutral one, which should be “at least” 2.5%. Nevertheless – and along with many other central banks – the RBA is juggling to contain inflation without restricting economic growth. The annual inflation rate rose by 6.1% in the second quarter of the year from 5.1% in Q1. It was slightly below-expected but still on the rise. It seems unlikely that the central bank will hike by 75 bps, but there are some chances of a 25 bps movement. Policymakers could turn cautious considering the impact higher rates may have on household spending, slowing further… Read More »Reserve Bank of Australia Preview: How aggressive can it be?

S&P (SPY) closes up over 4% on the week. Nasdaq (QQQ) closed with a gain of 4.5% versus a week ago. Dollar loses its grip on power as Yen and Euro rally. A huge week in data terms. The Fed pushed rates higher by 75 basis points and everyone cheered. Equity markets rallied sharply, a curious statement but there you go. We did note that the previous 75 basis point hike in June was met with a sharp sell-off so why the difference this time? Well as we often say the market decides what it wants to do and then shapes the narrative around that outcome. We were told the Fed had turned all dovish because the market wanted and needed to rally. That was the path of least resistance and maximum pain to investors. The Fed merely abandoned guidance it didn't really get all lovey-dovey.  US GDP then came and added to the dovishness. Again more bad news, the US is in recession, but the equity market immediately begins to rally on this so-called bad news. Why? Because it wanted to. Bond yields falling helped high-risk sectors move higher and from there the only hurdle left was earnings. But… Read More »Week Ahead on Wall Street (SPY) (QQQ): Inflation and bond market yields hold the keys to this rally