Olivia

The dollar index was sharply lower after mixed US labor data which showed hiring above expectations in October, but higher unemployment and lower wage inflation, warning that job growth may slow in coming months. Although the data suggest loosening in the labor sector’s activity that implies the Fed may also start slowing its policy tightening, the latest comments from Fed Chair Powell signal that the central bank will remain on path to continue its hawkish monetary policy stance. The dollar was down over 1.5% by the mid-US session on Friday and developing reversal signal on daily chart, as today’s strong fall has retraced nearly 61.8% of 109.35/113.02 upleg. Fresh bearish acceleration also penetrated thick daily cloud, with broken top (111.49) reverting to strong resistance and today’s close within the cloud would add to negative signals, reinforced by growing bearish momentum and south-heading stochastic emerging from overbought territory. This would  keep fresh bearish bias for possible extension through 110.75 pivot (Fibo 61.8% / 55DMA) towards psychological 110 support. Res: 111.49; 111.62; 112.16; 112.81 Sup: 111.19; 110.75; 110.22; 110.00

Oil prices are trading this Friday at their highest in nearly a month, benefiting from the looming tighter supply as an effect of market speculation around potential zero-Covid policy relief in China. In addition to the reduction in the OPEC+ production target of 2 million barrels per day for the month of November, the EU embargo and the planned cap on the price of Russian oil add to the pervasive tension in the market. In addition, the G7 member countries and Australia have agreed to set a fixed cap for the price of Russian oil rather than a variable rate in the interests of clarity, while the United Kingdom has aligned itself with the European Union by prohibiting British ships and service providers from contributing to the maritime transport of Russian oil sold above the fixed price set by the G7 and Australia. In fact, the services covered by the ban include crude oil transport insurance, a type of insurance called protection and indemnity (P&I) essential for oil tankers covering risks ranging from wars to environmental damage for amounts that can be colossal. Actually, the United Kingdom holds 60% of this market. On the other hand, the US dollar has… Read More »Is crude oil switching into bullish territory now?

China's covid policy hasn't led to a nationwide lockdown, so it's more of a metaphor to talk about “reopening”. However, the economic impact from a shift in the current zero-covid policy could be seen as a parallel to when other countries “reopened” in 2021 (and then were subject to renewed restrictions with the omicron variant). More importantly, the change in policy in China is expected to have global implications. So far, changes haven't been officially confirmed, so here are some things to keep in mind ahead of any possible changes. The latest Overnight, there were unverified twitter reports that the Chief Scientist at China's CDC Zeng Guang had said that economic development would be prioritized over covid prevention. This followed prior speculation about when China would pivot away from zero-Covid policy. Reports circulated earlier in the week that China had formed a commission to revise policy related to coronavirus, but that policy wouldn't change until March. Note that in March is when the new leaders appointed following the last CCP Congress take office. It was also reported yesterday that Chinese officials were modifying how covid restrictions were communicated in order to reduce the impact. Reportedly, officials were privately talking to… Read More »Is China “reopening”? The forex impact

Summary United States: FOMC Still Has Cover to Focus on Inflation Employers continued to add jobs at a steady clip in October, demonstrating the labor market remains tight and the FOMC will continue to tighten policy. The size of the December rate hike depends on the incoming data. October payrolls do not move the needle much toward a 75 bps hike, and they give the Fed cover to continue to focus on inflation. Next week: Small Business Optimism (Tue), CPI (Thu), Consumer Sentiment (Fri) International: Bank of England Hints at a Slowdown The Bank of England (BoE) raised its policy rate aggressively at this week’s monetary policy announcement, raising its Bank Rate by 75 bps to 3.00%. The increase matched the consensus forecast; however, there were also signals from the BoE that the pace of tightening will likely slow going forward. Next week: Brazil CPI (Thu), Mexico Rate Decision (Thu), UK GDP (Fri) Interest Rate Watch: Will the FOMC Slow the Pace of Tightening in Coming Months? For the first time in this rate hiking cycle, the FOMC said that it would take into account the cumulative amount of tightening when deciding future monetary policy moves. Does a slower pace… Read More »Weekly economic and financial commentary

There are only a handful of events next week but they will be crucial for markets. A divided Congress is the most likely outcome when Americans go to the ballots, setting the stage for two years of political deadlock. Meanwhile, the latest US inflation data will decide the pace of future Fed rate increases and by extension, the dollar’s fortunes. 

After four consecutive 75bp hikes, the Federal Reserve will likely look to slow the pace of rate hikes from December. The key US data release next week is month-on-month core CPI, which we expect to be 0.5%. Other releases of note include consumer credit and confidence data, however these are shadowed by the mid-term elections on Tuesday.. US: Mid-term elections in focus Federal Reserve chair Jerome Powell has successfully brought the market on board with the notion that while the central bank will likely look to slow the pace of rate hikes from December after four consecutive 75bp moves, the terminal interest rate will likely end up being higher than what it signalled back in September. Nonetheless, this will depend on the data flow. If inflation and job numbers continue to come in on the strong side it may be that officials end up doing a fifth 75bp. Given this uncertainty, markets are currently pricing around 58bp for the December meeting and 42bp for February, with a final 25bp hike coming at some point in the second quarter. Next week’s data will be important, but not critical in determining the path forward. The key release is the consumer price index… Read More »Key events in developed markets next week

Gold price ended up closing a volatile week in positive territory. The US Dollar lost its strength toward the end of the week despite the Fed’s hawkish stance. XAUUSD could extend its recovery in case it confirms $1,675 as support. Following Monday’s decline, Gold price gained traction and registered strong daily gains on Tuesday. Although the US Federal Reserve’s hawkish tone forced XAUUSD to lose its traction mid-week, the improving market mood and the broad-based US Dollar weakness ahead of the weekend helped the pair stage a rebound and close the week in positive territory. Next week’s Consumer Price Index (CPI) data could help Gold price determine its next short-term direction.  What happened last week? The negative shift witnessed in the risk mood at the beginning of the week helped the US Dollar (USD) stay resilient against its rivals and caused Gold price to continue to push lower. The disappointing PMI data from China, which showed that business activity contracted in October, caused investors to seek refuge. On Tuesday, Gold price reversed its direction as US Treasury bond yields declined after the Reserve Bank of Australia’s decision to hike its policy rate by only 25 basis points. In the second… Read More »Gold Price Weekly Forecast: Bulls look to retain control ahead of key US data

Going into the November meeting markets were fully expecting a 25 bps rate hike. This was despite the latest trimmed mean reading of 6.1% CPI which was on the high side, so there was always a chance of a surprise 50bps hike. In the event, the RBA hiked by only 25bps. The decision as growth revised lower Central banks around the world are trying to balance hiking interest rates to control inflation without over-tightening. The risk, for example, that many economists see is that the Fed is on the brink of over-tightening. So, the RBA has one eye on growth and one eye on inflation. Growth revised lower The RBA is concerned about slowing growth. They revised growth projections lower to 3% this year and 1.5% in 2023 and 2024. So, the RBA will not want to overreact to inflation, by going too hard on rates for too long. Inflation expected to peak this year Inflation is now forecasted to peak at 8% this year before falling to 4.7% over 2023 and just over 3% in 2024. The reaction For many central banks, and the RBA is no exception, a slower path of rate hikes is supportive for stocks. The… Read More »RBA takes a dovish stance

US payrolls rose by 239,000 in October, according to Wednesday’s report out of the Automatic Data Processing firm (ADP), beating economists’ estimates for a 178,000 increase. The main highlight of the day, however, was the Fed delivering its fourth consecutive 75-basis point rate hike. This hauled the Federal Funds Rate to a target range of 3.75% to 4.00%. Interestingly, December’s Fed Funds Futures market is now pricing in a 59% probability of only a 50bp hike at 14th December meeting. The aftermath of the release witnessed the US Dollar Index plunge 0.6%, taking the DXY back to within striking distance of 110.00. Dollar weakness was short-lived, nevertheless, pulling off session lows to within pre-announcement levels as markets staged a U-turn amid Fed Chair Powell’s Hawkish comments during his presser: ‘Rates need to move beyond the September Dot Plot forecasted (median 4.6%)’. ‘It is very premature to be thinking about pausing rates’. Essentially, his message was repricing the terminal rate higher and price out any rate cuts for next year. Major US equity indices initially rallied on the back of the release, though upside proved short-lived for the S&P 500, topping at a high of 3,894 and stepping beneath pre-announcement levels.… Read More »Fed increases federal funds rate to 3.75% – 4.00%, attention now shifts to BoE

The Reserve Bank of Australia will likely hike the cash rate by 25 bps. Mortgage rates in Australia are becoming a problem for households. AUD/USD is at risk of resuming its bearish trend and testing the 0.6300 area. The Reserve Bank of Australia (RBA) will announce its monetary policy decision on November 1, with board members stuck between a rock and a hard place. The Australian central bank hiked the cash rate in every single meeting since May but was the first to slow the pace of quantitative tightening, going for a modest 25 bps hike in October. The latter followed five-consecutive 50 bps hikes. Australian policymakers joined the global tightening train amid spiraling inflation in May, when the benchmark rate stood at 0.1%. The decision to downsize in October resulted from soaring mortgage costs. With rates going from 0.1% to 2.6%, roughly 30% of homeowners started struggling to pay their home loans, according to Finder’s consumer sentiment tracker. But if the RBA wants inflation to return to target, it would need a more restrictive rate. Australian inflation out of control According to the Australian Bureau of Statistics, the Consumer Price Index (CPI) rose by 1.8% in the third quarter… Read More »Reserve Bank of Australia Preview: Lowe and co have a tough decision to make