All eyes were on the Reserve Bank of Australia’s latest policy decision earlier today. Though the central bank held steady, in recent days, the RBA’s 0.10% yield target for the April 2024 GCB has been blown out of the water, with its yield rising to 0.80% on Friday, while the RBA yesterday, chose to buy bonds further out on the curve. With New South Wales and Victoria reopening along with international borders, and the economy seemingly firing on all cylinders, investors were waiting to see if the RBA does a massive U-turn on its previously ultra-dovish guidance. Certainly, its absence from any action as part of its yield curve control in its target April 2024 tenor suggests that a change is ultimately coming.
Like central banks all over the world now, the RBA is now caught in no man’s land taking fire from both sides. On one hand, wanting to leave monetary policy supportive to ensure the post-pandemic recovery continues, on the other, facing inflationary forces that are increasingly noisy and testing the limits of the meaning of “transitory.” Although I do not expect an unthinkable rate hike, at the very minimum, the RBA should follow Canada and New Zealand’s lead and call a halt to its AUD 4 billion per week bond-buying program.
I have no argument with leaving policy rates around the world at record lows, despite the recovery noise in the data globally, the recovery remains fragile. What needs to end is the quantitative easing, QE-forever basket cases like the Eurozone and Japan aside, which while necessary as a monetary tactical strike during the height of the pandemic, have quickly reached its use-by date. From the group-think lunacy of the crypto-space to housing prices and asset valuations in general, QE’s distortions are increasing economic and social inequality around the world. With inflation on the move everywhere, those left behind risk a double sucker punch as the spending power of what they do earn is eroded as well. For today at least, the RBA affirmed its dovish stance.
More ominous inflation signs appeared yesterday in the United States. The ISM Manufacturing PMI for October fell slightly to a still very impressive 60.80, however, it was the sub-indexes that caught my eye. ISM Manufacturing Employment rose from 50.2 to 52.0, ISM Manufacturing Orders fell to 59.8 from 66.7, still very healthy and likely reflecting the supply chain challenges we all know so well now. Finally, Manufacturing Prices rose to 85.7 from 81.2 suggesting that pricing power for goods sold remains strong, something the US earnings season has also been telling us all. None of that looks very transitory inflation to me.
As a side note, South Korean inflation hit 9-year highs this morning as well and the Bank of Korea’s policy meeting on the 22nd now looks like a live one as well, with a second rate increase on the way. The rest of Asia, emerging from the pandemic later than most, looks like one of the few economic powerhouse regions where inflation is benign, for now. The US FOMC, whose two-day policy meeting starts today, has somewhat of a quandary on its hands. Friday’s Employment Cost Index was food for thought, as was the ISM data yesterday. Having pimped up asset prices globally, made the cost of capital zero, and then back-stopped investor decisions by making sure they never lose money on anything, the window for putting that genie back in the bottle is closing rapidly.
Tomorrow should see a tapering of QE easing announced by the Fed at the FOMC. Chairman Powell will likely offset that by emphasising no rate hikes are on the horizon while continuing to beat the transitory drum. To be fair, he has some reason to do so. President Biden’s Infrastructure and Build Back Better programs remain frozen and held hostage to factions within his own party. Being a Republican opposition is the easiest job in the world at the moment, your job is being done for you.
As I have repeatedly stated though, I believe the taper trade has not been priced in by markets and there is room for the US dollar and US yields to spike higher as reality sets in. US equities may be record highs right now, but we can expect a lot more two-way price action instead of one-way traffic into the end of the year and into Q1 2022.
Elsewhere, the Bank of England faces a similar dilemma tomorrow. Although it appears that the BOE hike trade is losing steam ahead of Thursday’s meeting, with sterling underperforming overnight, having become a very crowded trade in recent weeks. Its fishing spat with France won’t be helping.
Post-RBA, Asia’s calendar is empty and with the FOMC policy decision due tomorrow night US time, along with what should be an interesting press conference, I am expecting markets to move into wait-and-see mode. Readers should watch for Australian dollar volatility post-RBA although I believe it will be mostly seen versus the yen and New Zealand dollar.
Record US highs lift Asian equities
The three main US indexes closed at record highs on Monday as Markit and ISM PMIs remained strong along with US corporate earnings. A tariff deal between the US and Europe also gave investors another reason to cheer. The S&P 500 rose by 0.18%, while theNASDAQ closed 0.63% higher, and the Dow Jones climbed by 0.26%. The usual tech exuberance aside, it did appear that Wall Street was reigning in its animal spirits ahead of the FOMC meeting, even if that event isn’t enough to spark long-covering.
In Asia, that pre-FOMC caution seems to have arrived. Futures on all three US indexes are around 0.25% lower this morning, but that cautious note has yet to spread to Asian markets which are mostly buoyant on the NASDAQ rally overnight, and news from Mainland China that both its coal supply crunch and coal prices seem to be easing. News that China has released some strategic oil reserves onto local markets has also given regional markets a tailwind.
The Nikkei 225 has fallen 0.45% after a mighty post-election rally yesterday. South Korea’s KOSPI though, has leapt by 1.40%. Meanwhile, Mainland China’s Shanghai Composite is 0.40% higher, with the CSI 300 rising by 0.25%. Hong Kong is having another rollercoaster day; after a beating yesterday, the Hang Seng has soared by 1.0% today.
ASEAN is rather more cautious, with the NASDAQ’s outperformance overnight, as usual, drawing more attention to North Asia. Singapore is unchanged, while Kuala Lumpur has risen by 0.40% after getting a government tac beating yesterday. Jakarta is down 0.25% and Bangkok has fallen by 0.45%. Australian markets are in negative territory even after the RBA policy decision. The ASX 200 and All Ordinaries have fallen by 0.60%.
RBA fun and games in Australia aside, I am expecting markets in Europe and the US to adopt a more cautious note now as we await the FOMC policy decision overnight.
US dollar retreats after Friday rally
The US dollar rolled back some of its Friday gains overnight in what looked like corrective price action after the monster Friday rally. The Dollar Index fell by 0.27% to 93.88 before recovering to 93.94 in Asia. With the transitory inflation story ringing increasingly hollow, and FOMC taper, and a potential recovery in US Nonfarm Payrolls on Friday, risks are now skewed to the topside for the US dollar. The Dollar Index could test 94.60 this week.
Having borne the brunt of US dollar strength on Friday, EUR/USD recovered somewhat overnight, rising 0.38% to 1.1605 where it remains in Asia. Support is at 1.1520, failure of which signals more losses to 1.1400. Resistance is at 1.1700. Sterling fell slightly overnight to 1.3650. It is clear that the crowded BOE hiking trade is seeing more unwinding pre-announcement. If the Bank of England is not as hawkish as hoped on Thursday, sterling could well retest the 1.3400 region later in the week. It has initial resistance at 1.3700 and 1.3750.
USD/JPY is hovering around 114.00 after the LDP win over the weekend, with a fiscal stimulus package to follow, and the Bank of Japan Minutes showing no signs of tightening monetary policy. It is likely to range ahead of the FOMC decision, having such a high beta to the US/Japan rate differential. USD/JPY has support at 113.40 while a rise through 114.70 signals more gains above 115.00. A hawkish FOMC opens a test of 116.00.
Rather surprisingly, AUD/USD is holding steady at around 0.7515. AUD/USD has resistance at 0.7550 initially and support at 0.7450.
Asian currencies are mostly unchanged today after another neutral USD/CNY fixing from the PBOC. With their high sensitivity to the direction of US interest rates, I expect the Asian currency space to be very quiet until the FOMC policy decision.
Oil faces challenges this week
Oil’s rally resumed overnight on a modest scale as physical buyers continued to appear on the dip and the US dollar weakened. Oil looks very much like it is going to range trade ahead of the OPEC+ meeting on Thursday although pre-meeting rumours will lead to some intraday volatility. Brent crude rose 1.10% to $84.50, and WTI rose 0.65% to $83.80 a barrel. In Asia, both contracts have moved another 0.50% higher to $84.90 and $84.15 a barrel.
The oil rally faces some headwinds this week and I note that Brent crude its downside breakout on Friday from a technical perspective. Although I do not believe OPEC+ will succumb to pressure and raise production quotas by more than the previously agreed 400k barrels, they have surprised markets before. If they do raise production, the kneejerk sell-off could see oil fall by up to 10%.
Brent crude has resistance at $85.10 a barrel and then $86.00 a barrel. Support is at $82.20, and fail could see it retest $80.00 a barrel. WTI looks more constructive, holding trendline support, today at $82.10 a barrel. It has resistance at $84.75 and then $85.50 a barrel. Below $82.10, $80.50 is a critical area of support, followed by $79.50.
Gold rises on weaker US dollar
Gold recouped some losses overnight thanks to a weaker US dollar. Gold rose 0.55% to $1793.00 before easing slightly to $1791.50 in Asia. With a heavy week of data and event risk ahead, the balance of probabilities has now shifted back to the downside for gold, unless the US dollar was, for some reason, to collapse this week. Time and again, gold investors have shown little to no appetite or ability to wear even the slightest pain on long positions above $1800.00 an ounce.
Gold now has resistance in the $1810.00 to $1815.00 an ounce region, with the far more formidable, and critical, $1832.00 to $1835.00 remaining far from reach for now. On the downside, gold fell through its one-month trendline support at $1787.60 on Friday, and its 100 and 200-day moving averages. The long capitulation saw gold fall to $1772.00 an ounce intra-day on Friday, and that forms initial support now. That is followed by $1760.00 and $1745.00 an ounce.