What’s Really Behind The Concerns
Ashraf Laidi | Aug 20, 2021 08:09AM ET
by Adam Button
Who said August was a slow month? FX markets showed on Thursday there's ongoing uncertainty around the Delta variant as commodity currencies and sterling plunged against the dollar and yen. While the moves haven't yet been confirmed by bond and equities, the charts paint some troubling pictures. Ashraf raises the question whether GBP/USD weekly shows a Head & Shoulder formation (when disregarding the left wick). We look at the reasons behind the unease. Canadian retail sales are due next. The snapshots below are of the WhatsApp Broadcast Group messages telling members on Monday that Cardano would settle back near $1.85 before regaining $2.0 and beyond. It did exactly that earlier this week before hitting a fresh record high of $2.55 yesterday.
It remains tough to pin down whether the latest FX freakout is covid related or something else. Fed tapering talk is certainly a factor, but how much? You could make the argument that this is the taper tantrum.
At the July 28 FOMC press conference, Powell dismissed delta worries, and less than a month later economic forecasts are being cut as an increasing number of cases break through vaccines.
One argument is that this week's episode of fear is all about vaccine booster shots. First, they say the current regiment won't work. Second, it means we'll be fighting covid indefinitely. Third, it means that less-developed countries and others with slow vaccine rollouts will be in lockdowns for much longer periods.
So there's a whole new pandemic raging and central bankers – including the RBNZ's Orr this week – who don't get it.
Then again, what would you expect them to do if they are worried? QE is running at nearly peak-pandemic levels everywhere already. The bond market clearly isn't worried about inflation.
What's left is a lingering worry that growth in 2022 and beyond will be stunted. That a Japanification looms. Friday's data underscored the dismal Japanese prospects once again as CPI was at -0.3% y/y compared to +0.6% expected. Even with energy price spikes and bottlenecks, Japan still couldn't generate positive y/y inflation.
So where will tailwinds growth come from? Perhaps the market is afraid it won't get another stimulus package from the US and that fiscal spending will tighten up elsewhere. China cut rates this month but doesn't appear to be in a rush to goose growth. On Friday, the PBOC left one-year lending rates unchanged for the 16th month, setting off more selling in risk FX. There was some speculation they may cut but at the moment, China appears to be in no rush to cushion the latest covid worries.
Get The News You Want
Whatever the combination of reasons: Covid, the Fed, fiscal policy, China – the charts are telling a compelling story. There are large head-and-shoulders patterns breaking in copper and CAD/JPY among others. AUD/USD has fallen into a technical gap. Many equity indexes are nearing critical levels.
Markets are optimistic by nature but until there is a positive catalyst like a dovish Powell or clear turn in Delta cases, it's tough to fight these moves, particularly on a Friday.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.