Olivia

The Reserve Bank of New Zealand is seen raising OCR by 50 bps to 2.5% in July. Hard-landing risks unlikely to dissuade the RBNZ at this policy meeting. The kiwi could see a brief correction if the central bank sticks to its hawkish stance. The Reserve Bank of New Zealand (RBNZ) is on a hat-trick, as it is set to hike the key policy rate for the third meeting in a row this Wednesday. With increasing odds of a global recession, will the central bank hint at any slowdown in its pace of tightening? What would it mean for the NZD/USD pair? RBNZ forward guidance holds the key The RBNZ’s third consecutive 50 bps rate increase on Wednesday will lift the Official Cash Rate (OCR) from 2% to 2.5%. The central bank kicked off its tightening cycle in October 2021 and since then has resorted to super-sized rate hikes to fight raging inflation. The policy announcement will not be accompanied by any updated projections or be followed by Governor Adrian Orr’s press conference. A majority of the economists forecast the RBNZ raising rates by 50 basis points to 2.50% at its July 13 meeting while expecting the OCR to reach 3.50% or… Read More »Reserve Bank of New Zealand Preview: Hitting the repeat button despite hard-landing fears

AUD/USD Current Price: 0.6756 Australian NAB’s Business Confidence unexpectedly shank to 1 in June. A temporal pause in risk aversion weighed on the greenback ahead of US inflation data. AUD/USD has corrected oversold conditions and may recover further once above 0.6790. The AUD/USD pair heads into the Asian session, trading near a daily high of 0.6778, recovering from an early low of 0.6710. The greenback has been consistently rising on the back of markets’ concerns about economic progress. Slowing growth coupled with record inflation levels spooked investors away from high-yielding assets, while central banks’ decisions to tighten their monetary policies added to the mixture. Financial markets’ turmoil paused on Tuesday as the US government cooled down speculation of a recession in the country. However, fresh data to be out on Wednesday will give clearer clues than a White House memo. The country will publish the June Consumer Price Index, foreseen at 8.8% YoY, up from the previous 8.6%. Meanwhile, Australia published June NAB’s Business Confidence, which sunk to 1 from 8 in the previous month, missing an expected improvement to 8. NAB’s Business Confidence in the same period printed at 13, better than the 9 expected but below the previous… Read More »AUD/USD Forecast: Could the recovery continue?

EUR/USD dropped closer to the parity mark for the first time since December 2002. The energy crisis in Europe continued fueling recession fears and weighed on the euro. The relentless USD rally to a two-decade high exerted additional pressure on the pair. The EUR/USD pair struggled to capitalize on Friday's modest bounce and came under aggressive selling pressure on the first day of a new week. Investors remain concerned that the energy crisis in Europe could drag the region's economy faster and deeper into recession. The Eurozone is also facing the risk of broadening fragmentation amid the recent sharp rise in borrowing costs of more indebted countries because of the European Central Bank's tightening plan. This was seen as a key factor that weighed heavily on the shared currency. This, along with the emergence of aggressive US dollar buying dragged the major to its lowest level since December 2002, closer to the parity mark. In fact, the USD Index soared to a fresh two-decade high during the Asian session on Tuesday and continued drawing support from hawkish Fed expectations. The market seems convinced that the US central bank would stick to its faster policy tightening path to combat stubbornly high… Read More »EUR/USD Forecast: Bears could pause near descending channel support, around 0.9980 area

European equities are mostly lower at the start of the week, as key themes including nerves around earnings season and concerns that the Federal Reserve will be under more pressure to hike rates after last week’s stronger than expected payrolls report from the US, dominate sentiment. The “good news is bad news” theme remains strong for now. Markets are falling at the start of a new week, after concerns mount that China will go back into lockdown. While these concerns are preoccupying sentiment, there are some fundamentals that are worth looking out for as they could determine the longer-term direction of markets after this summer madness quietens down. Below we take a look at three themes that will drive market direction in the coming days and weeks: 1, EUR/USD parity As we start a new week, the risk off theme is driving EUR/USD below the 1.01 handle and the sell off in the euro is gathering pace. The lack of upward momentum suggests a break below parity is now inevitable. But what would it actually mean? A weaker euro is surely good for the large German exporters, including the automotive industry and the large manufacturing sector? However, it’s not as… Read More »A weak start for risk sentiment as earnings season takes centre stage

European equities are mostly lower at the start of the week, as key themes including nerves around earnings season and concerns that the Federal Reserve will be under more pressure to hike rates after last week’s stronger than expected payrolls report from the US, dominate sentiment. The “good news is bad news” theme remains strong for now. Markets are falling at the start of a new week, after concerns mount that China will go back into lockdown. While these concerns are preoccupying sentiment, there are some fundamentals that are worth looking out for as they could determine the longer-term direction of markets after this summer madness quietens down. Below we take a look at three themes that will drive market direction in the coming days and weeks: 1, EUR/USD parity As we start a new week, the risk off theme is driving EUR/USD below the 1.01 handle and the sell off in the euro is gathering pace. The lack of upward momentum suggests a break below parity is now inevitable. But what would it actually mean? A weaker euro is surely good for the large German exporters, including the automotive industry and the large manufacturing sector? However, it’s not as… Read More »A weak start for risk sentiment as earnings season takes centre stage

Markets US equities were a touch softer Friday, S&P down 0.1% to be 2% higher over the week. Bonds sold off after payrolls beat, US10yr yields up 9bps to 3.08%, 2yrs up 9bps to 3.1%, leaving the curve still inverted. Over the week, 10yr yields are up 20bps as recession concerns ease. While the MSCI World rose 1.7% last week, in another attempt at a growth-led bear market rally, Chinese benchmarks were down slightly below 1%.  Covid numbers are ticking higher again; on Sunday, Shanghai reported the first case of the highly-contagious BA.5 sub-variant. The latter is creating some negative chop at the open, with China beta getting slightly tarnished but no worse for the wear as investors could be increasingly desensitized to Omicron risk in China.  In the wake of solid Payroll data, US recession risks are getting nudged into the corner. Still, this week's focus pivots back to inflation, particularly the US CPI and the inherent hawkish Fed policy implications. Given the recent developments in the Ukraine war, markets are struggling to have high conviction on the Nord Stream 1 gas flow resumption; risk could start teetering on the edge of a dumpster again, And while we are putting the June… Read More »Monday Morning Rally Capper :Shanghai reporting first case of highly-contagious BA.5 sub-variant; Markets+Oil

Markets US equities were a touch softer Friday, S&P down 0.1% to be 2% higher over the week. Bonds sold off after payrolls beat, US10yr yields up 9bps to 3.08%, 2yrs up 9bps to 3.1%, leaving the curve still inverted. Over the week, 10yr yields are up 20bps as recession concerns ease. While the MSCI World rose 1.7% last week, in another attempt at a growth-led bear market rally, Chinese benchmarks were down slightly below 1%.  Covid numbers are ticking higher again; on Sunday, Shanghai reported the first case of the highly-contagious BA.5 sub-variant. The latter is creating some negative chop at the open, with China beta getting slightly tarnished but no worse for the wear as investors could be increasingly desensitized to Omicron risk in China.  In the wake of solid Payroll data, US recession risks are getting nudged into the corner. Still, this week's focus pivots back to inflation, particularly the US CPI and the inherent hawkish Fed policy implications. Given the recent developments in the Ukraine war, markets are struggling to have high conviction on the Nord Stream 1 gas flow resumption; risk could start teetering on the edge of a dumpster again, And while we are putting the June… Read More »Monday Morning Rally Capper :Shanghai reporting first case of highly-contagious BA.5 sub-variant; Markets+Oil

The day's best news for risk was Germany confirming that the government had received a positive signal from Canada regarding delivering a turbine needed to maintain the Nord Stream 1 gas pipeline to Germany. If it is confirmed it was received, I would expect a sharper correction in EU natural gas prices, the bleeding to temporarily stop on the Euro and a general recovery in European and global risk sentiment.  Friday's solid US non-farm payroll should keep the Fed on the path of a 75bp hike. But with aggressive Fed pricing already in the books, the strong print had less of a “good was bad” vibe. Last month, good was bad for a solid non-farm payrolls number, as good data gave a green light for aggressive hikes. I think that narrative has shifted.  A 75bp hike is almost entirely priced for July, and the market is moving closer to a 50/50 split between 50bp and 75bp in September July: 72.6bp September: 57bp (50/50 split between 50bp/75bp would be 62.5bp) November: 39.4bp December: 19.3bp Even though this week's CPI is the marquee data point with expectations for it to come in hot – the disinflationary forces of late, specifically lower commodity… Read More »Week Ahead : Nord Stream Turbine, NFP effect & CPI

We got lots of trade and current account data this past week: German trade balance (Mon), the  Australia trade balance,  US trade balance (merchandise & services), Canadian merchandise trade (Thu), and Japan current account data (Fri).. Trade used to be the key for foreign exchange markets many many years ago, when financial flows were largely to finance trade. But now financial flows dominate the global economy and determine trade flows.  How does that work? Most people think of trade surpluses & deficits in the following way. The hard-working Germans who make excellent cars are the source of that country’s trade surplus (which we learned on Monday has disappeared, but never mind) while the spendthrift Americans, borrowing and spending money they don’t have, are the source of the perennial US trade deficit. This is the logic that says tariffs, market access agreements, and urging Americans to work harder and save more are the way to rectify these global imbalances.  That may have been the way the global economy worked many years ago, but not anymore. On the contrary, trade flows nowadays are the result of financial flows. Financial flows in turn are the result of political decisions to favor one group… Read More »Time to trade in the euro?

Outlook: Markets are skipping back and forth between fear of inflation and fear of recession. This results in some peculiar price actions. For what it’s worth, the Bloomberg Economics’ “probability of a recession in the next 12 months at 38%, up from zero just months ago. Morgan Stanley predicts the euro-area will slide into a recession at the end of 2022, and Citigroup analysts reckon the odds of a worldwide pullback in the next two years are about even.” We can’t resolve the issue and even if we had a perfect crystal ball, it might not tell us how to trade because the process of getting there bends and kinks some other things. Twilight Zone music. We saw it is spades yesterday–commodity prices mostly lower while the 2/10 ran to -0.04. These two things are not necessarily at odds, but certainly not “normal.”  The 2/10 spread ran up, it ran down, it ran up again. It’s slippery as a greased pole. Meanwhile, the European bond market (aka the Bund) is far steadier and on a rising trajectory, with a bump or two. This implies two things—the market in US Treasuries is wobbly and somewhat indecisive between the idea the Fed will back… Read More »Markets are skipping back and forth between fear of inflation and fear of recession