Forex: All Eyes On U.S. Inflation Data

Key Insights:

  • China’s inflation reports show that prices have started to cool down due to weaker economic activity. 
  • In Europe, traders will focus on inflation numbers from Germany, but it remains to be seen whether they will have a material impact on currency dynamics. 
  • The main event of the day is the release of the inflation data from the U.S. 

It will be a volatile day in currency markets as traders prepare for the release of the inflation reports from the U.S. However, the action is not limited to U.S. numbers, and traders have already had a chance to see inflation data from China.

China

China’s Inflation Rate grew by 0.5% month-over-month in July, in line with the analyst consensus. On a year-over-year basis, Inflation Rate was 2.7%, compared to the analyst consensus of 2.9%. Producer Prices increased by 4.2%.

USD/CNY was mostly unchanged after the release of the report. At this point, geopolitical issues and Covid news have more impact on the Chinese currency.  Inflation data from China is interesting for all currency traders as it shows that inflation may start to cool down due to reduced economic activity.

Europe

In Germany, traders will have a chance to take a look at the final reading of the inflation data for July. Inflation Rate is expected to increase by 0.9% month-over-month. On a year-over-year basis, Inflation Rate is projected to grow by 7.5%.

Typically, the final readings of inflation reports in the Euro Area meet analyst consensus, so the report may not have a material impact on EUR/USD dynamics. However, traders should note that the energy crisis in Europe develops at a robust pace, and it may put additional upward pressure on prices.

U.S.

The main event of the day is the release of inflation data from the U.S. Inflation Rate is expected to decline from 9.1% in June to 8.7% in July due to lower energy prices. Core Inflation Rate is expected to increase from 5.9% to 6.1%.

The report will have a major impact on currency markets. The FedWatch Tool indicates that there is a 69.5% probability of a 75 bps rate hike at the next meeting.

As we have seen in recent trading sessions, expectations of an aggressive rate hike failed to provide enough support to the American currency. However, any surprise in inflation numbers may quickly change the situation.

If prices are rising faster than expected, a major 100 bps rate hike may be on the table. At the same time, lower-than-expected inflation will likely put material pressure on the U.S. dollar. In this case, EUR/USD and GBP/USD, which have been recently consolidating, may rally to new highs.

For a look at all of today’s economic events, check out our economic calendar.

Bears raise bets on Thai baht, dim view on other Asian FX eases – Reuters poll

By Sameer Manekar

(Reuters) – Bearish bets on the Thai baht extended on risks around recession, the Chinese economy, and inflation, while short bets on most Asian currencies eased slightly but remained firmly around multi-month highs, a Reuters poll showed on Thursday.

The fortnightly poll of 13 analysts showed short bets on the Thai baht were the highest since January 2018, having steadily built up since early-March when the Ukraine war set off a series of factors and pressured the tourism-reliant, net oil importing country.

Thailand, Southeast Asia’s second-largest economy, is among the laggards on the policy normalisation bandwagon, which its peers and major central banks have hopped on since long, further elevating the risks of a negative impact from rising costs amid weak activity in top regional economy China.

The Thai currency, the most shorted among Asian units, has depreciated about 14% since the Russia-Ukraine conflict, and 10.3% so far this year, placing it at the bottom of the rung with the Indian rupee and South Korean won.

“Market players remain short on the Thai baht vs the U.S. dollar until they are really certain that the U.S. Federal Reserve will pass the peak of hawkishness,” Poon Panichpibool, a market strategist with Krung Thai Bank said.

But, he said that weakness in the dollar after the Fed meeting would encourage investors to be bullish on the baht, relying on the recent green shoots observed in tourism and the economy.

The Fed overnight delivered another 75 basis points (bps) rate hike, and reiterated its resolve against stinging inflation in the world’s biggest economy even at the risk of economic weakness and a slowing jobs market.

Analysts at Maybank, however, cautioned that although the greenback weakened after the Fed’s move, Chair Jerome Powell is “still hawkish”; that could keep the Fed on an aggressive tightening path, ultimately continuing to support the safe haven dollar.

The poll’s responses were collated before the Fed hike.

Elsewhere, sentiment for the Philippine peso improved over the past two weeks after the Bangko Sentral ng Pilipinas in mid-July raised its key interest rates by 75 bps in an off-cycle move.

Chinese yuan, seen as a safer bet among Asian currencies, was the second-least shorted currency in the region, while short positions on the Indian rupee, Indonesian rupiah, and the Malaysian ringgit moderated slightly but remained firm.

The Asian currency positioning poll is focused on what analysts and fund managers believe are the current market positions in nine Asian emerging market currencies: the Chinese yuan, South Korean won, Singapore dollar, Indonesian rupiah, Taiwan dollar, Indian rupee, Philippine peso, Malaysian ringgit and the Thai baht.

The poll uses estimates of net long or short positions on a scale of minus 3 to plus 3. A score of plus 3 indicates the market is significantly long on U.S. dollars.

The figures include positions held through non-deliverable forwards (NDFs).

The survey findings are provided below (positions in U.S. dollar versus each currency):

DATE USD/CNY USD/KRW USD/SGD USD/IDR USD/TWD USD/INR USD/MYR USD/PHP USD/THB

28-July-22 1.14 1.63 0.92 1.31 1.42 1.62 1.59 1.54 1.89

14-July-22 1.07 1.84 1.44 1.59 1.76 1.98 1.68 2.06 1.78

30-June-22 1.09 1.69 1.08 1.5 1.15 1.8 1.63 2.05 1.39

16-June-22 1.54 1.79 1.35 1.33 1.23 1.66 1.67 1.7 1.34

02-June-22 1.22 0.56 0.38 0.9 0.73 1.18 1.06 0.59 0.54

19-May-22 1.9 1.55 1.07 1.19 1.63 1.35 1.53 1.15 1.56

05-May-22 1.75 1.5 0.73 0.56 1.49 1.04 1.47 1.09 1.33

21-Apr-22 0.1 1.07 -0.17 -0.03 0.94 0.75 0.89 1 0.71

07-Apr-22 -0.41 0.99 -0.46 -0.05 0.81 0.63 0.32 0.53 0.31

24-Mar-22 -0.16 0.98 0.19 0.04 1.16 0.99 0.12 1.4 0.46

(Reporting by Sameer Manekar in Bengaluru; editing by Uttaresh.V)

The Week Ahead – Central Banks and US Inflation in Focus

On the Macro

It is a quiet week ahead on the economic calendar, with stats 39 due out through the week ending June 10. In the week prior, 77 stats were in focus.

For the Dollar:

While it is a quiet week ahead, it is an important one.

On Thursday, jobless claims will draw interest ahead of inflation figures on Friday.

With plenty of market sensitivity to inflation and Fed monetary policy, Friday’s numbers will be key.

In the week ending June 3, 2022, the Dollar Spot Index rose by 0.46% to end the week at 102.140. In the week prior, the Index slid by 1.44% to 101.668.

For the EUR:

German factory orders and industrial production figures will draw market interest on Tuesday and Wednesday.

The markets will also look for any revisions to Eurozone GDP numbers on Wednesday ahead of the ECB interest rate decision on Thursday.

With the markets expecting the ECB to leave rates unchanged, the focus will be on ECB President Christine Lagarde and the press conference.

For the week, the EUR fell by 0.15% to $1.0719. In the previous week, the EUR rallied by 1.62% to $1.0735.

For the Pound:

BRC Retail Sales Monitor numbers for May are due out on Tuesday along with finalized private sector PMIs. Any revisions to the services PMI will have the greatest impact on the Pound.

Other stats include house price data and construction PMI numbers that should have a muted impact on the Pound.

In the week, the Pound slid by 1.13% to end the week at $1.2488. The Pound rose by 1.21% to $1.2631 in the week prior.

For the Loonie:

Trade data and the Ivey PMI will be in focus on Tuesday. Expect the trade data to draw the most interest.

On Friday, employment figures for May will be the key stats of the week, however.

In the week ending June 3, the Loonie rose by 1.02 to C$1.2594 against the greenback. The Loonie rose by 0.90% to C$1.27240in the week prior.

From the Asia Pacific

For the Aussie Dollar:

It’s a particularly quiet week ahead on the economic data front, with stats limited to business confidence figures.

The NAB Business Confidence numbers for May are due out on Wednesday.

The main event, however, will be the RBA’s June monetary policy decision on Tuesday. The markets are expecting a 25-basis point hike. Anything more and a hawkish rate statement would support an Aussie Dollar breakout.

In the week, the Aussie Dollar rose by 0.63% to $0.7207. In the week prior, the Aussie Dollar increased by 1.73% to $0.7162.

For the Kiwi Dollar:

It’s also a quiet week ahead, with electronic card retail sales the only stat to consider. The markets will need to wait until Friday for the May figures, leaving the Kiwi Dollar in the hands of market risk sentiment early in the week.

The Kiwi Dollar slipped by 0.34% to end the week at $0.6510. In the previous week, the Kiwi Dollar rallied by 2.16% to $0.6532.

For the Japanese Yen:

On Tuesday, household spending will draw interest ahead of first quarter GDP numbers due out on Wednesday.

The numbers are unlikely to have a material impact on the Yen, however, with monetary policy divergence Yen negative.

The Japanese Yen slid by 2.96% to end the week at ¥130.88 against the dollar. In the week prior, the Yen ended the week up 0.59% to ¥127.12.

Out of China

Trade data will draw plenty of interest on Thursday ahead of inflation numbers on Friday.

Early in the week, the Caixin Services PMI for May will set the tone.

On Monday, the Chinese Yuan rose by 0.58% to CNY6.6603. The Yuan slipped by 0.10% to CNY6.6994 in the week prior.

Geo-Politics

Russia and Ukraine will remain the area of focus in the week ahead, along with chatter from China.

The Weekly Wrap – Nonfarm Payrolls Delivers Dollar Strength

The Stats

It was a busy week on the economic calendar for the week ending June 3, 2022.

A total of 77 stats were monitored, following 46 stats in the week prior.

Of the 77 stats, 39 beat forecasts, with 29 economic indicators falling short of forecast. Nine stats were in line with forecasts.

Looking at the numbers, 34 of the stats reflected an upward trend. Of the remaining 43 stats, 39 stats were weaker.

Out of the US

In the first half of the week, consumer confidence and manufacturing PMI numbers delivered Dollar support.

The CB Consumer Confidence Index fell from 108.6 to 106.4, while the ISM Manufacturing PMI rose from 55.4 to 56.1. Economists forecast the CB Consumer Confidence Index to fall to 103.9.

On Thursday, ADP nonfarm employment change figures disappointed ahead of the all-important NFP numbers on Friday.

Nonfarm payrolls increased by 390k in May, following a 436k jump in April. Despite the increase, the unemployment rate held steady at 3.6% due to a pickup in the participation rate from 62.2% to 62.3%.

In the week ending June 3, 2022, the Dollar Spot Index rose by 0.46% to end the week at 102.140. In the week prior, the Index slid by 1.44% to 101.668.

Out of the UK

Economic data was limited to finalized manufacturing PMI numbers for May, which had a muted impact on the Pound.

In line with prelim, the manufacturing PMI fell from 55.8 to 54.6.

In the week, the Pound slid by 1.13% to end the week at $1.2488. The Pound rose by 1.21% to $1.2631 in the week prior.

The FTSE100 ended the week down 0.69%, partially reversing a 2.65% rally from the previous week.

Out of the Eurozone

It was a particularly busy week on the Eurozone economic calendar.

Key stats included private sector PMI and inflation figures for member states and the Eurozone.

A pickup in inflationary pressure, according to prelim figures for May, delivered EUR support.

The Eurozone’s annual rate of inflation accelerated from 7.4% to 8.1%.

Private sector PMIs disappointed, however.

In May, the Eurozone’s manufacturing PMI fell from 55.5 to 54.6, with the services PMI down from 57.7 to 56.1. As a result, the composite PMI slipped from 55.8 to 54.9.

On the monetary policy front, bets of a move away from negative rates delivered EUR support, however.

For the week, the EUR slipped by 0.15% to $1.0719. In the previous week, the EUR rallied by 1.62% to $1.0735.

The EuroStoxx600 fell by 0.87%, with the CAC40 and the DAX seeing losses of 0.47% and 0.01%, respectively.

For the Loonie

GDP numbers for March and the first quarter were the key stats of the week. It was a mixed set of numbers, with the economy growing at a slower pace at the end of the quarter.

Quarter-on-quarter, the economy grew by 0.8% after expanding by 1.6% in the fourth quarter.

While the GDP numbers were Loonie negative, the Bank of Canada delivered the support with a 50-basis point rate hike.

In the week ending June 3, the Loonie rose by 1.02 to C$1.2594 against the greenback. The Loonie rose by 0.90% to C$1.27240in the week prior.

Elsewhere

It was a mixed week for the Aussie Dollar and the Kiwi Dollar.

The Aussie Dollar rose by 0.63% to $0.7207, while the Kiwi Dollar slipped by 0.34% to end the week at $0.6510.

For the Aussie Dollar

GDP, retail sales, and trade data were in focus.

It was a mixed set of numbers, with GDP and retail sales figures Aussie Dollar negative.

In the first quarter, the economy grew by 0.8%, weaker than the 3.4% growth in the fourth quarter.

Retail sales rose by 0.9% in April, following a 1.6% increase in March.

Aussie Dollar positive was a widening of the trade surplus.

In April, the trade surplus widened from A$9.314bn to A$10.459bn.

Other stats included building approvals, manufacturing sector data, company gross operating profit, and current account numbers that had a muted impact on the Aussie Dollar.

For the Kiwi Dollar

Business confidence and building consent numbers delivered little support.

In April, building consents slid by 8.5%, reversing a 6.2% rise in March.

Business confidence waned in May, with the ANZ Business Confidence Index falling from -42 to -55.

For the Japanese Yen

Industrial production and retail sales figures delivered mixed results.

According to prelim figures, industrial production fell by 1.3% in April, reversing a 0.3% increase in March. The fall affirmed the Bank of Japan’s concerns over the effect of the Ukraine war and China’s lockdown measures on the economy.

Retail sales increased by 2.9% in April year-on-year, up from 0.70% in March.

Service sector activity also improved, with the services PMI rising from 50.7 to 52.6.

The Japanese Yen slid by 2.96% to end the week at ¥130.88 against the dollar. In the week prior, the Yen ended the week up 0.59% to ¥127.12.

Out of China

Private sector PMIs drew market interest in the week.

The NBS manufacturing PMI increased from 47.4 to 49.6, with the services PMI up from 41.9 to 47.8.

The all-important Caixin manufacturing PMI rose from 46.0 to 48.1.

In the week ending June 3, the Chinese Yuan rose by 0.58% to CNY6.6603. The Yuan slipped by 0.10% to CNY6.6994 in the week prior.

The Hang Seng Index and the CSI300 ended the week up by 1.86% and by 2.21%, respectively.

Equities Start the Week Positively: a Return to Trend Growth, Not a Recession

Global Macro and Stock Markets Analysis

Equity futures start the week positively, with news of easing mobility restrictions across several districts in Beijing and Shanghai supporting risk sentiment, illustrated through strength in travel and luxury sectors.

Thoughts of a slower Fed rate hike glide path continue to send positive reverberations across global stock markets. And the resulting softer US dollar provides a tailwind for most commodity and other risk markets.

But the most significant readthrough during the past week is the markets are now pricing in return to trend growth, not a recession. While the market-implied growth rate is a long way below the pricing at this cycle’s peak in Q2 ’21, it is only a touch lower than what was being priced just before the Covid outbreak.

Today, China’s May manufacturing PMI will likely remain below the 50-mark, demarcating expansion, and contraction. However, such weakness should be shrugged off as economic recovery starts to be priced in.

Oil Fundamental Analysis

Brent breached $121/bbl overnight as Crude prices were supported by news that Covid cases are dropping in China and restrictions are being eased further. Hence the market is in the throws of pricing in some semblance of mobility normality in China’s largest cities.

Expectedly, the EU reportedly disagreed on the proposed embargo on Russian oil over the weekend, but discussions will continue today.

Oil traders view the EU agreement as a bit of red herring, given that individual member states and key corporate buyers in Europe are already phasing out purchases of Russian oil through self sanction. For instance, while Russia is still producing oil, a record amount of output from the Urals is now on the high seas looking for a home.

A unified EU deal may help the political optics. Still, significantly less Russian oil will flow to Europe over the remainder of this year, a comprehensive deal, or no deal.

FOREX Fundamental Analysis

Asia FX

A rally in US equities and waning China pessimism provided a platform for a rally in Asia FX, with the much-beleaguered ringgit trading below 4.37. However, for the USDMYR to challenge the low 4.30s and the rest of Asia FX, including the Yuan, to bounce significantly higher, there may need to be a more comprehensive China economic reopening which will unlock gushers of regional positivity

Euro

German inflation again surprised substantially to the upside at 8.7% year-on-year, on the back of higher Spanish CPI earlier Monday. And this drove the EURUSD slightly higher on the day. Indeed, this will put significant pressure on the ECB to consider a 50bp hike in July and remove negative rates in one go.

However, ECB Lane pushed back against 50bp hikes: removing stimulus “should be gradual”, quarter-percentage increases in July and September will be “benchmark pace.”

But this holiday-shortened economic calendar will be packed with important US data releases that will inform the Fed’s near-term growth and labour market outlook heading into the June 15 FOMC meeting. Hence, traders were reluctant to push the envelope above 1.08 just yet.

British Pound

GBP continues to polarise views across the investment community, with a general sense of bearishness seeming an ever-constant reality. BAML is the latest to warn of an “existential” GBP crisis and a perfect storm due to the current account deficit, EU/Northern Ireland, and questions over the BoE’s credibility. This toxic combination of factors could make it increasingly challenging to attract portfolio flows to finance the widening current account deficit. Keeping the GBP soft on the crosses and straight up against the US dollar if US economic data positively surprises this week

The Week Ahead – Economic Data and Central Bank Chatter in Focus

On the Macro

It is a busy week ahead on the economic calendar, with stats 75 due out through the week ending May 27. In the week prior, 46 stats were in focus.

For the Dollar:

US consumer confidence will be in focus ahead of private sector PMIs on Wednesday and Friday.
Expect the consumer confidence and the market’s preferred ISM non-manufacturing PMI to draw plenty of interest.

The key stats of the week, however, will be nonfarm payrolls and the unemployment rate on Friday, which could define the Fed’s next move on interest rates.

On the monetary policy front, expect FOMC member chatter to draw plenty of attention.

In the week ending May 27, 2022, the Dollar Spot Index slid by 1.44% to end the week at 101.668. In the week prior, the Index fell by 1.35% to 103.150.

For the EUR:

Early in the week, French GDP and German unemployment figures will draw interest, as will member state and Eurozone inflation.

Mid-week finalized Eurozone manufacturing figures will also draw interest.

After a quiet Thursday, German trade data and finalized service PMI and composite PMI figures will influence.

On the monetary policy front, ECB President Christine Lagarde will also provide direction.

For the week, the EUR jumped by 1.62% to $1.0735. In the previous week, the EUR rallied by 1.46% to $1.05064.

For the Pound:

It is a quiet week ahead, with stats limited to finalized manufacturing PMI numbers for May. The stats are unlikely to have a material impact on the Pound, however.

In the week, the Pound rose by 1.21% to end the week at $1.2631. The Pound rallied by 1.78% to $1.2480 in the week prior.

For the Loonie:

On Tuesday, GDP numbers will be the key stats of the week.

The main event, however, will be the Bank of Canada monetary policy decision on Wednesday.

With the markets expecting a 50-basis point hike, it will come down to the rate statement.

In the week ending May 27, the Loonie rose by 0.90 to C$1.2724 against the greenback. The Loonie rose by 0.69% to C$1.2840 in the week prior.

From the Asia Pacific

For the Aussie Dollar:

Private sector credit and company gross operating profit figures will be in focus on Tuesday.

On Wednesday, the market attention will shift to Q1 GDP numbers ahead of finalized retail sales and trade data on Friday.

In the week, the Aussie Dollar rose by 1.73% to $0.7162.

For the Kiwi Dollar:

It’s a quiet week ahead, with building consents and business confidence numbers due out.

Expect the ANZ Business Confidence report to have the greatest impact.

The Kiwi Dollar rallied by 2.16% to end the week at $0.6532.

For the Japanese Yen:

Prelim industrial production and retail sales figures will draw market interest on Tuesday.

On Wednesday, capital spending figures for the first quarter are also due out ahead of finalized service PMI numbers on Friday.

The Japanese Yen rose by 0.59% to end the week at ¥127.12 against the dollar. In the week prior, the Yen ended the week up 1.04% to ¥127.88.

Out of China

Private sector PMIs are due out in the week ahead. While the NBS numbers will influence on Tuesday, the market’s preferred Caixin Manufacturing PMI should have a greater impact on Wednesday.

In the week ending May 20, the Chinese Yuan slipped by 0.10% to CNY6.6994. The Yuan rose by 1.42% to CNY6.7930 in the week prior.

Geo-Politics

Russia and Ukraine will remain the area of focus in the week ahead, along with chatter from China.

The Weekly Wrap – The Greenback Slides for a Second Week in a Row

The Stats

It was a quieter week on the economic calendar for the week ending May 27, 2022.

A total of 46 stats were monitored, following 60 stats in the week prior.

Of the 46 stats, 11 beat forecasts, with 28 economic indicators falling short of forecast. Seven stats were in line with forecasts.

Looking at the numbers, 12 of the stats reflected an upward trend. Of the remaining 34 stats, 32 stats were weaker.

Out of the US

In the first half of the week, private sector PMIs and core durable goods orders were the key stats.

The numbers were skewed to the negative, supporting the negative sentiment towards the economy.

In May, the services PMI fell from 55.6 to 53.5, with core durable goods orders rising by just 0.3%. Core durable goods orders had risen by 1.2% in April.

On Thursday, the stats were also Dollar negative, with the US economy contracting by more than expected.

Inflation and personal spending numbers wrapped things up on Friday.

In April, the core PCE price index increased by 4.9% year-on-year, softer than a 5.2% rise in March.

Personal spending increased by a further 0.9% in April, following a 1.4% jump in March.

While the stats influenced, the FOMC meeting minutes on Wednesday also drew plenty of interest. The minutes were hawkish, showing members’ willingness to deliver multiple 50 basis point rate hikes. Aligned with previous Fed Chair Powell’s commentary, members were also willing to move beyond neutral to curb inflation.

The minutes did talk of a shift in policy in the coming months, however, which eased investor fears of a move beyond neutral.

In the week ending May 27, 2022, the Dollar Spot Index slid by 1.44% to end the week at 101.668. In the week prior, the Index fell by 1.35% to 103.150.

Out of the UK

A quiet week left the Pound in the hands of private sector PMI numbers for May, which were Pound negative.

In May, the all-important services PMI slumped from 58.9 to 51.8 versus a forecasted fall to 56.9. With manufacturing sector activity also slowing, the Composite PMI tumbled from 58.2 to 51.8.

While the numbers were Pound negative, Dollar weakness prevailed to deliver a return to $1.26 levels.

In the week, the Pound rose by 1.21% to end the week at $1.2631. The Pound rallied by 1.78% to $1.2480 in the week prior.

The FTSE100 ended the week up 2.65%, reversing a 0.38% loss from the previous week.

Out of the Eurozone

It was a busy first half of the week, with German business and private sector PMIs in focus.

The stats were market positive, with German business sentiment and German manufacturing sector activity delivering support.

Germany’s ifo Business Climate Index increased from 91.9 to 93.0 in May, with the manufacturing sector PMI up from 54.6 to 54.7.

For France and the Eurozone, however, the private sector numbers were EUR negative.

The Eurozone manufacturing PMI fell from 55.5 to 54.4, with the composite declining from 55.8 to 54.9.

Mid-week, German GDP and consumer climate figures failed to impress, with consumer sentiment still weak in June. The second estimate GDP numbers were in line with the first estimate, with the German economy expanding by 0.2% in the first quarter.

While the stats were mixed, hawkish ECB chatter delivered EUR support, with the ECB talking of a shift from negative rates.

For the week, the EUR jumped by 1.62% to $1.0735. In the previous week, the EUR rallied by 1.46% to $1.05064.

The EuroStoxx600 rose by 2.98%, with the CAC40 and the DAX seeing gains of 3.67% and 3.44%, respectively.

For the Loonie

Economic data was limited to retail sales figures for March. It was a mixed set of numbers, with core retail sales jumping by 2.4% to deliver support. Retail sales were flat, however, falling well short of a forecasted 1.4% rise.

In the week ending May 27, the Loonie rose by 0.90 to C$1.2724 against the greenback. The Loonie rose by 0.69% to C$1.2840 in the week prior.

Elsewhere

It was a bullish week for the Aussie Dollar and the Kiwi Dollar.

The Aussie Dollar rose by 1.73% to $0.7162, with the Kiwi Dollar rallying by 2.16% to end the week at $0.6532.

For the Aussie Dollar

Retail sales delivered support late in the week, with sales up 0.9% in April. In March, retail sales had risen by 1.6%.

Other stats included construction work done and private new CAPEX numbers that had a muted impact on the Aussie Dollar.

For the Kiwi Dollar

Retail sales were also the key stat in the week, which disappointed. In the first quarter, retail sales fell by 0.5% quarter-on-quarter. Retail sales had jumped by 8.6% in the previous quarter.

While the stats disappointed, the RBNZ lifted the cash rate by 50 basis points with the talk of more to come delivering Kiwi Dollar support.

For the Japanese Yen

Early in the week, private sector PMI numbers were Yen positive, with inflation figures also delivering support.

According to prelim figures, Japan’s service sector PMI increased from 50.7 to 51.7.

Tokyo’s core annual rate of inflation held steady at 1.9% in May.

While the stats were Yen positive, a shift in sentiment towards Fed monetary policy delivered the upside for the Yen. The latest stats from Japan are unlikely to pressure the Bank of Japan to make a move.

The Japanese Yen rose by 0.59% to end the week at ¥127.12 against the dollar. In the week prior, the Yen ended the week up 1.04% to ¥127.88.

Out of China

There were no major stats to influence.

In the week ending May 20, the Chinese Yuan slipped by 0.10% to CNY6.6994. The Yuan rose by 1.42% to CNY6.7930 in the week prior.

The Hang Seng Index and the CSI300 ended the week down by 0.10% and by 1.87%, respectively.

The Week Ahead – Private Sector PMIs and US Inflation in Focus

On the Macro

It is a quiet week ahead on the economic calendar, with stats 41 due out through the week ending May 27. In the week prior, 59 stats were in focus.

For the Dollar:

Prelim private sector PMIs for May kick things off. With markets fretting over the risk of a recession, expect the services PMI to be the key.

On Wednesday, core durable goods orders will draw interest ahead of GDP and jobless claims figures on Thursday.

At the end of the week, core PCE price index and personal spending figures will also have a material impact on the dollar and market risk sentiment.

From the Fed, the FOMC meeting minutes should provide few surprises following recent Fed Chair Powell speeches.

In the week ending May 20, 2022, the Dollar Spot Index slid by 1.35% to end the week at 103.150. In the week prior, the Index rose by 0.87% to 104.563.

For the EUR:

On Monday, Germany’s Ifo business climate index will draw interest ahead of private sector PMI numbers on Tuesday.

While the markets may forgive a weaker business climate index, weak manufacturing PMIs will test support for the EUR.

On Wednesday, the German economy will be back in focus with GDP and consumer sentiment to wrap up the week.

For the week, the EUR rallied by 1.46% to $1.0564. In the previous week, the EUR slid by 1.32% to $1.0412.

For the Pound:

It is a quiet week ahead.

Prelim private sector PMIs for May will be in focus on Tuesday. With the markets looking to second guess the Bank of England’s interest rate trajectory, expect the Services PMI to have the greater influence.

In the week, the Pound rallied by 1.78% to end the week at $1.2480. The Pound fell by 0.70% to $1.2262 in the week prior.

For the Loonie:

On Thursday, retail sales will provide the Loonie with direction.

Away from the economic calendar, crude oil prices and market risk sentiment will remain key.

In the week ending May 20, the Loonie rose by 0.69 to C$1.2840 against the greenback. The Loonie fell by 0.42% to C$1.2929 in the week prior.

From the Asia Pacific

For the Aussie Dollar:

Private new CAPEX numbers for Q1 will set the tone ahead of all-important retail sales figures on Friday.

Expect the retail sales numbers to be the key driver.

In the week, the Aussie Dollar rose by 1.44% to $0.7040.

For the Kiwi Dollar:

On Tuesday, retail sales will be in focus ahead of the RBNZ monetary policy decision on Wednesday. The markets are expecting a 50-basis point rate hike. Impressive retail sales figures could support a bigger move.

The Kiwi Dollar rallied by 1.88% to end the week at $0.6394.

For the Japanese Yen:

It’s a quiet week, with economic data limited to private sector PMIs and Tokyo inflation figures due out on Friday.

The PMIs will provide the markets with a look at how the Japanese economy is affected by the war in Ukraine and COVID-19 in China.

While inflation is key for the BoJ, May figures are unlikely to shift the Bank of Japan’s stance on interest rates. Concerns over China’s lockdown measures and the war in Ukraine remain the central bank’s main consideration near-term.

The Japanese Yen rose by 1.04% to end the week at ¥127.88 against the dollar. In the week prior, the Yen ended the week up 1.03% to ¥129.22.

Out of China

There are no material stats due out of China to provide the markets with direction.

The lack of stats will leave the markets in the hands of COVID-19 news updates and chatter from Beijing.

In the week ending May 20, the Chinese Yuan rose by 1.42% to CNY6.6930. The Yuan slid by 1.84% to CNY6.7893 in the week prior.

Geo-Politics

Russia and Ukraine will remain the area of focus in the week ahead.

The Weekly Wrap – A Six Week Winning Streak Ends for the Dollar

The Stats

It was a busy week on the economic calendar for the week ending May 20, 2022.

A total of 60 stats were monitored, following 45 stats in the week prior.

Of the 60 stats, 32 beat forecasts, with 20 economic indicators falling short of forecast. Eight stats were in line with forecasts.

Looking at the numbers, 25 of the stats reflected an upward trend. Of the remaining 35 stats, 34 stats were weaker.

Out of the US

Early in the week, retail sales and industrial production figures eased fears of an economic meltdown.

In April, retail sales jumped 2.5%, with industrial production rising by 1.1%.

On Thursday, jobless claims and Philly Fed Manufacturing numbers disappointed, however.

Initial jobless claims rose from 197k to 218k, in the week ending May 13, with the Philly Fed Manufacturing Index falling from 17.6 to 2.6 in May.

While the stats were mixed, Fed Chair Powell tested investor sentiment on Tuesday.

After providing the markets with assurances about larger rate hikes in the week prior, the Fed Chair talked of a willingness to move policy beyond neutral to curb inflation. Powell also discussed some possible pain ahead for the labor market while acknowledging that the Fed should have lifted rates sooner.

In the week ending May 20, 2022, the Dollar Spot Index slid by 1.35% to end the week at 103.150. In the week prior, the Index rose by 0.87% to 104.563.

Out of the UK

Employment and wage growth figures impressed, with average earnings + bonus up 7% in March versus a forecasted 5.4%.

The unemployment rate slipped from 3.8% to 3.7%, with claimant counts supporting a positive outlook for April. In April, claimant counts fell by 56.9k, following a 46.9k decline in March.

Inflation figures tested support for the Pound mid-week, however, with another spike raising concerns over the economic outlook.

The annual rate of inflation accelerated from 7.0% to 9.0% in April, falling just shy of a forecasted 9.1%.

On Friday, retail sales beat forecasts to deliver Pound support following a Dollar sell-off on Thursday.

In April, retail sales jumped by 1.4%, reversing a 1.2% slide from March.

In the week, the Pound rallied by 1.78% to end the week at $1.2480. The Pound fell by 0.70% to $1.2262 in the week prior.

The FTSE100 ended the week down 0.38%, reversing a 0.48% gain from the previous week.

Out of the Eurozone

Early in the week, trade data and GDP numbers delivered mixed results.

In March, the Eurozone’s trade deficit widened from €7.6bn to €16.4bn, with the war in Ukraine continuing to hit crude oil prices.

Second estimate GDP numbers for the Eurozone were EUR positive, however. In Q1, the economy grew by 0.3%, up from a first estimate of 0.2%. Year on year, the economy expanded by 5.1%, up from a first estimate of 5.0%.

Finalized inflation figures for the Eurozone had a muted impact mid-week, with the annual rate of inflation easing from 7.5% to 7.4%.

At the end of the week, however, German producer prices for industrial goods surged by 33.5% compared with April 2021, the highest increase on record.

From the EU, downward revisions to economic forecasts failed to sink the EUR while weighing on the European equity markets.

For 2022, the European Commission forecasts growth of 2.7% and 2.3% for 2023. While the Commission revised both downwards, the 2022 revision was most marked.

In February, the European Commission forecast growth of 4.0% for 2022 and 2.7% for 2023.

From the ECB, the monetary policy meeting minutes provided few surprises, with the talk of summer rate hikes in line with market expectations.

For the week, the EUR rallied by 1.46% to $1.0564. In the previous week, the EUR slid by 1.32% to $1.0412.

The CAC40 slid by 1.22%, with the EuroStoxx600 and the DAX seeing losses of 0.55% and 0.33%, respectively.

For the Loonie

The key stats of the week were inflation figures for April, which were Loonie positive.

In April, Canada’s annual rate of core inflation picked up from 5.5% to 5.7% versus a forecasted 5.4%.

Other stats in the week included manufacturing and wholesale sales and RMPI numbers that had a muted impact on the Loonie.

A pickup in crude oil prices also delivered support.

In the week ending May 20, the Loonie rose by 0.69 to C$1.2840 against the greenback. The Loonie fell by 0.42% to C$1.2929 in the week prior.

Elsewhere

It was a bullish week for the Aussie Dollar and the Kiwi Dollar.

The Aussie Dollar rose by 1.44% to $0.7040, with the Kiwi Dollar rallying by 1.88% to end the week at $0.6394.

For the Aussie Dollar

Wage growth and employment numbers drew interest in the week, with the stats Aussie dollar positive.

In Q1, wages grew by 0.8%, following a 0.7% rise in Q4.

Full employment jumped by 92.4k in April to leave the unemployment rate at 3.9%. Employment increased by just 4.0k, with part-time employment a drag.

For the Kiwi Dollar

A quiet week on the data front left wholesale inflation and trade data in focus.

The stats were Kiwi dollar positive. In Q1, the PPI Input Index jumped by 3.6%, following a 1.2% rise in the quarter prior.

In April, New Zealand’s trade balance rose from a NZ$581 million deficit to a NZ$584 million surplus, with exports to Japan leading the way.

For the Japanese Yen

It was a busy week on the economic front, with GDP, trade, and inflation figures drawing interest.

The stats were skewed to the negative, with weaker GDP and trade data confirming the Bank of Japan’s concerns.

In Q1, the economy contracted by 0.2% and shrank by 1.0%, year on year.

The trade deficit widened from ¥414.1bn to ¥839.2bn in April, while the annual rate of inflation jumped from 0.8% to 2.1%.

With economic uncertainty likely to linger, the pickup in inflation is unlikely to force the BoJ’s hand just yet.

The Japanese Yen rose by 1.04% to end the week at ¥127.88 against the dollar. In the week prior, the Yen ended the week up 1.03% to ¥129.22.

Out of China

Economic data disappointed in the week and raised market fears of a global economic recession.

In April, industrial production fell by 2.9% year on year versus a forecasted 0.4% rise. Production had risen by 5.0% in March.

Fixed asset investments also continued a downward trend.

Assurances of government support, however, limited the damage.

In the week ending May 20, the Chinese Yuan rose by 1.42% to CNY6.6930. The Yuan slid by 1.84% to CNY6.7893 in the week prior.

The Hang Seng Index ended the week up 4.11%, with the CSI300 rising by 2.23%.

SWIFT Network To Begin Exploring Cross-Border CBDC Payments

Key Insights:

  • SWIFT, in collaboration with Capgemini, is testing interlinking domestic CBDC networks.
  • CBDCs are currently being explored by economies that account for 90% of the global GDP.
  • China’s Chongqing municipality recorded $43 million worth of CBDC transactions as of this month.

Central Bank Digital Currencies have become a government favorite tool to usher the advancement of web3 and digital currencies.

Whether or not the countries looking into CBDCs legalize crypto has no impact on the rapid growth of the newest form of currency.

SWIFT To Connect CBDCs

With most countries now beginning to understand the demand and applications of digital currencies, CBDCs have been added to most of the countries’ agendas.

As per a report from the Bank of International Settlements (BIS), nine out of 10 central banks are actively looking into bringing CBDCs to the general public and into circulation.

Thus since the number of countries participating in digital currencies has increased significantly, SWIFT is seeking a way to bring them all together to create an interconnected network of CBDCs.

The Chief Innovation Officer at SWIFT, Thomas Zschach, said,

“Facilitating interoperability and interlinking between different CBDCs being developed around the world will be critical if we are to fully realise their potential. Today, the global CBDC ecosystem risks becoming fragmented with numerous central banks developing their own digital currencies based on different technologies, standards and protocols.”

SWIFT is a core part of global transactions, and it believes that fragmentation of CBDCs could hamper the ability of businesses and consumers to make cross-border payments using digital currencies.

Therefore, in collaboration with IT services company Capgemini, SWIFT will begin solving the interoperability issue.

By testing the network for its capability of interlinking, SWIFT intends to explore whether a highly scalable and easily integrated solution to make CBDC networks’ cross-border payments ready’ is achievable or not.

Use of CBDCs

While about nine countries have already brought CBDC into use, China’s digital yuan (e-CNY) has been one of the most widely experimented with digital currency.

By debuting it during the Winter Olympics in Beijing, China noted high volumes of usage among citizens and foreigners alike.

Recently China’s southwestern municipality Chongqing observed a total e-CNY trading volume of  288 million yuan or about $43 million from its 1.576 million transactions.

China’s central bank remarked that the usage of the CBDC in the Chongqing region was starkly higher than that of other regions.

This is because Chongqing is the host of 1.1 million e-CNY wallets, with over 96% of these wallets belonging to individual holders.

So if in a country such as China, where freedom of choice is questionable, CBDCs can flourish significantly, it leaves no room for doubt that the same could happen in other countries as well.

Negative Feedback Loop, Oil Off the Lows ,Gold Shines + Friday Forex Follies – G10 and Asia FX

Global Macro and Stock Markets Analysis

Broader indexes are off the lows, but conviction remains near zero. The rebound was primarily due to covering bids by crowded shorts and a slight bounce in higher beta Tech as bond yields fall.

Mounting global recession risk is top-of-mind for markets but as the procession to recession shortens, growth concerns are rising, leaving equities vulnerable to the negative feedback loop.

What would typically be met with a shoulder shrug, incrementally weaker data can now amplify downside move. And with few positive developments of late, the market remains vulnerable to the prevailing narrative, with the negative feedback loop only growing louder in recent sessions.

Oil Fundamental Analysis

China is easing lockdowns and mobility restrictions in Shanghai and considering more widespread easing, leading to higher oil prices. Though Brent is off weekly highs, it is still well-above weekly lows.

The growing threat of disruption to Russian crude exports continues to help oil sentiment, despite opposition to an EU-wide embargo from Hungary and a handful of other EU member states that remain heavily reliant on Russia.

News of unrest in Libya reminds supply-side risks, but Russia remains the focus.

And while more extensive than expected drops in US crude and gasoline inventories initially had a limited impact, this week’s US inventory data still screens bullish for oil.

But if US growth data continues to sour, oil prices could get caught up in the negative stock market feedback loop.

Gold Fundamental Analysis

Gold has turned higher as US yields slip and the US dollar sheds some of its safe-haven appeals due to weaker US growth data.

The dynamic in the gold market has changed for the first time in several months. Bullion prices have begun liberating themselves from the tendency to sell into economic destruction, similar to other commodities, and now appear to be acting as a safe- haven. With gold performing well as equities tumble, bullion could catch a short market by surprise if it can hold this pattern.

Friday’s Forex Follies

The safe-haven dollar is not so safe these days.

The US dollar is weaker as the curve is pricing in fewer hikes, and some are putting higher weight on recession probability.

So, the focus has turned from don’t fight the Fed to a policy mistake with hikes getting priced out along the US curve on poor data and higher recession risks. The Fed is leading the hiking cycle, so USD will also get hit first as hikes are repriced lower.

Rates market Technicals are also playing a role, with 10y yields topping out near 3%. The lower end of the range is now 2.70%, so some in the market think there can be a test of that level on the downside; hence gold has found some lustre.

China stabilizing would be a massive weight off the equity market’s shoulders. A couple of well-positioned areas could see a flip if there starts to be some better news from China.

From the G10 side, AUD has room to move higher if China can stabilize short term (NZD and CAD should benefit).

JPY remains a buy in a recessionary environment, as is CHF on SNB intervention talk. The ECB is raising rates into a perfect storm that will undoubtedly widen periphery spreads, making lower EURCHF screens brighter.

In Asia FX, the periphery would benefit from any easing of China concerns. Hence there has been some selling interest across $Asia pairing longs and initiating some tactical shorts on the China easing impulse. I think the undervalued MYR could be an excellent rally candidate with the BNM already hiking rates. And of course, the travel-sensitive THB is well on its way after the robust trade data, and a bounce in tourism will meld to offer the BoT room to hike rates to ward off imported inflation.

As we suggested on the China reopening bounce, it could turn the tide for the YUAN; it is seemingly doing that as there has been less USD buying the past few sessions while longs have started to give way to a strong domestic equity impulse.

However, the lower move is likely due to reports suggesting members of the Chinese Communist Party should shed overseas assets is likely contributing to the downdraft.

For a look at all of today’s economic events, check out our economic calendar.

Investment banks rush to cut yuan forecasts again after April revisions

By Winni Zhou and Alun John

SHANGHAI/HONG KONG (Reuters) – Major investment houses are cutting their forecasts for the yuan for the second time in just three weeks as the Chinese currency’s recent sharp declines tore through their previous revisions, catching many off guard.

A triple whammy of slowing growth, COVID-19-related economic disruptions and aggressive U.S. Fed tightening has put strong downward pressure on the yuan, while Chinese authorities appear to be standing aside to let their tightly managed currency drop.

The spot yuan rate has tumbled more than 6% against the dollar in the last four weeks and was at 6.7992 per dollar on Monday, busting past the 6.71 median year-end forecast in a poll of nine banks in late April.

Several banks now see the yuan weaking to 6.9 or even hitting the 7 mark before the end of the year, levels not seen since the early stage of the pandemic in 2020.

HSBC said in a note that the currency had become stretched, “especially against the backdrop of China’s economy slowing and the Fed remaining firmly hawkish.

“Neither are new developments per se, but things have become more intense, which we believe warrants consideration for our forecasts.”

HSBC, cutting its yuan forecast for the second time in three weeks, now expects the yuan to trade at 6.75 per dollar at the end of the second quarter before bouncing to 6.70 at the end of Q3, compared with 6.60 and 6.62, respectively, after its previous revision.

The late April poll of nine banks had projected the yuan at 6.63 per dollar at the end of June, according to the median forecast. A majority of respondents expected the yuan to weaken further to 6.71 towards the year-end.

But the yuan’s latest fall, to its lowest in nearly 20 months and a rare gyration for a currency that has typically been tightly managed within a thin range, has led many analysts to project further weakness.

A slew of weaker-than-expected April economic data released on Monday and last week, including credit lending, retail sales and industrial output, reaffirmed market views that the world’s second-largest economy faces mounting headwinds as COVID-19 lockdowns take a heavy toll.

“USD/CNY could rise fast to 7 if onshore COVID situations worsen with more lockdowns followed by severe supply chain disruptions,” Barclays said in a note.

The bank also noted the possibility, however, that the yuan could quickly retrace if authorities step in to prop up the currency or to bolster the economy.

“The downside risk comes from the People’s Bank of China (PBOC) leaning aggressively against further CNY weakness and a sharper decline in dollar than we expected; risk sentiment could also boost CNY in the case of massive stimulus. In this case, USD/CNY could see quick retracement to 6.70.”

Barclays lowered its yuan forecasts to 6.9 per dollar at end-Q2 from 6.3 previously, to account for a stronger dollar and foreign portfolio outflows.

Others, including Mizuho Bank and UBS, also trimmed their yuan projections to reflect bearish sentiment.

Ken Cheung, chief Asian FX strategist at Mizuho Bank, cut his year-end yuan forecast for a second time on Monday to 6.7 from 6.6.

Wang Tao, chief China economist at UBS, revised her year-end yuan forecast to 6.9 from 6.6 previously.

“USD/CNY may break 7 before end-year due to USD strength and a likely sharp weakening of China’s exports and general economy, but should settle below 7 by year end,” she said.

“This is because we expect the COVID-related economic impact to decline in the second half of the year, with growth momentum rebounding and market confidence improving.”

(Reporting by Winni Zhou and Alun John; Editing by Edmund Klamann)

The Week Ahead – Central Banks Back in Focus Amidst Recession Fears

On the Macro

It is a busy week ahead on the economic calendar, with stats 59 due out through the week ending May 20. In the week prior, 45 stats were in focus.

For the Dollar:

It is a relatively busy week ahead.

On Tuesday, retail sales will be the area of focus ahead of jobless claims and Philly Fed manufacturing numbers on Thursday.

While the numbers will influence, Fed Chair Powell and FOMC member chatter will be the key in the week. The markets will be looking for Fed Chair Powell to back up comments from Friday and for members to align with his assurances.

On Friday, the Fed Chair assured the markets that larger rate hikes were off the table.

In the week ending May 13, 2022, the Dollar Spot Index rose by 0.87% to end the week at 104.563. In the week prior, the Index rose by 0.68% to 103.660.

For the EUR:

It is a quiet week ahead.

Eurozone trade and GDP numbers are due out ahead of finalized inflation figures on Wednesday.

Expect any revisions from the first estimate GDP and any upward revisions to prelim inflation figures to draw interest.

On Friday, flash consumer confidence figures for the Eurozone will wrap things up.

From the EU, the Economic Forecasts are due out on Monday and will likely have a greater impact than the numbers, however.

On the monetary policy front, ECB President Lagarde is due to speak on Tuesday, with the policy meeting minutes due out on Thursday.

For the week, the EUR slid by 1.32% to $1.0412. In the previous week, the EUR rose by 0.06% to $1.0551.

For the Pound:

It is a busy week ahead.

On Tuesday, claimant counts and the UK unemployment rate will draw interest ahead of inflation figures on Wednesday.

On Friday, retail sales numbers wrap things up. The stats will give the markets an idea of the impact of inflation on spending and whether the Bank of England needs to take a more hawkish stance to curb inflation.

From the BoE, the monetary policy report hearings will influence on Monday.

In the week, the Pound fell by 0.70% to end the week at $1.2262. The Pound tumbled by 1.79% to $1.2348 in the week prior.

For the Loonie:

Inflation will be the area of focus. On Wednesday, April’s figures are due out and will provide the Loonie with direction.

Other stats in the week include wholesale sales and RMPI numbers that will have less impact.

From the Asia Pacific

For the Aussie Dollar:

Wage growth will be in the spotlight on Wednesday ahead of employment numbers on Thursday.

While wage growth is an RBA consideration, employment figures will need to be positive to support a more hawkish RBA.

From the RBA, the meeting minutes are due out on Tuesday and will provide direction.

In the week, the Aussie Dollar slid by 1.92% to $0.6940.

For the Kiwi Dollar:

Wholesale inflation figures for the first quarter are out ahead of trade data on Friday.

With little else to consider, both sets of numbers will influence. However, China and sentiment towards the global economic outlook will remain the key drivers.

The Kiwi Dollar tumbled by 2.09% to end the week at $0.6276.

For the Japanese Yen:

First quarter GDP numbers will draw plenty of interest on Wednesday ahead of trade data on Thursday.

The Bank of Japan painted a grim picture at the last policy meeting, highlighting downside risks stemming from China and the war in Ukraine.

This week’s stats will give a sense of how bad it could be.

At the end of the week, April inflation figures are also due out. Barring a spike, however, we don’t expect too much influence on the Yen.

The Japanese Yen rose by 1.03% to end the week at ¥129.22 against the dollar. In the week prior, the Yen ended the week down by 0.66% to ¥130.56.

Out of China

Fixed asset investments, industrial production, and retail sales figures are out on Monday.

Expect plenty of interest in the numbers as the markets look to assess the impact of lockdown measures on economic activity.

While the government has promised support, we can expect market sensitivity to the numbers.

On the policy front, the PBoC will set loan prime rates on Friday, with any cuts to support riskier assets. Forecasts are for the PBoC to leave the LPRs unchanged.

Away from the economic calendar, COVID-19 news updates and chatter from Beijing will also influence.

In the week ending May 13, the Chinese Yuan slid by 1.84% to CNY6.7893. The Yuan declined by 0.88% to CNY6.6667 in the week prior.

Geo-Politics

Russia and Ukraine will remain the area of focus in the week ahead.

The Weekly Wrap – Fed Chair Powell Delivered Friday Comfort

The Stats

It was a quiet week on the economic calendar for the week ending May 13, 2022.

A total of 45 stats were monitored, following 62 stats in the week prior.

Of the 45 stats, 20 beat forecasts, with 22 economic indicators falling short of forecast. Three stats were in line with forecasts.

Looking at the numbers, 13 of the stats reflected an upward trend. Of the remaining 32 stats, 30 stats were weaker.

Out of the US

Inflation was back in focus, which caused market turbulence mid-week.

In April, the annual rate of inflation softened from 8.5% to 8.3% versus a forecasted 8.1%. The core annual rate of inflation softened from 6.5% to 6.2%. While softer, inflation was stronger than anticipated, supporting the more hawkish sentiment towards Fed monetary policy.

On Thursday, wholesale inflation also drew attention. In the month of April, the core producer price index increased by 0.4% after a 1.2% rise in March.

Initial jobless claims had a muted impact despite a rise from 202k to 203k in the week ending May-06.

On the monetary policy front, Fed Chair Powell calmed the markets on Friday, assuring that larger rate hikes remained off the table.

In the week ending May 13, 2022, the Dollar Spot Index rose by 0.87% to end the week at 104.563. In the week prior, the Index rose by 0.68% to 103.660.

Out of the UK

GDP and production figures were the main areas of focus in the week.

The stats were Pound negative, with the UK economy contracting in March and production hitting reverse.

In the first quarter, the UK economy grew by 0.8% quarter-on-quarter versus a forecasted 1.00%. The economy expanded by 1.3% in the previous quarter.

Year-on-year, the economy grew by 8.7% versus a forecasted 9.0%. The economy expanded by 6.6% in the fourth quarter of last year. More significantly, the economy contracted by 0.1% in March, after no growth in February.

Production figures also provided little comfort.

 

Production fell by 0.2%, partially offset by construction (+1.7%), with manufacturing production declining by 0.2%.

In the week, the Pound fell by 0.70% to end the week at $1.2262. The Pound tumbled by 1.79% to $1.2348 in the week prior.

The FTSE100 ended the week up 0.41%, partially reversing a 2.08% loss from the previous week.

Out of the Eurozone

ZEW Economic Sentiment figures for Germany and the Eurozone and Eurozone industrial production figures were the key stats.

In May, economic sentiment improved, with Germany’s ZEW Economic Sentiment Index up from -41.0 to -34.3. The Eurozone’s ZEW Economic Sentiment Index climbed from -43.0 to -29.5.

At the end of the week, industrial production disappointed, however.

In March, industrial production fell by 1.8% to test EUR support. Production rose by a modest 0.5% in February.

For the week, the EUR slid by 1.32% to $1.0412. In the previous week, the EUR rose by 0.06% to $1.0551.

The DAX rallied by 2.59%, with the EuroStoxx600 and the CAC40 seeing gains of 0.83% and 1.67%, respectively.

 

For the Loonie

It was a quiet week on the economic data front, leaving the Loonie in the hands of market risk sentiment.

In the week ending May 13, the Loonie fell by 0.42 to C$1.2929 against the greenback. The Loonie slipped by 0.21% to C$1.2875 in the week prior.

Elsewhere

It was a bearish week for the Aussie Dollar and the Kiwi Dollar.

The Aussie Dollar slid by 1.92% to $0.6940, with the Kiwi Dollar tumbling by 2.09% to end the week at $0.6276.

For the Aussie Dollar

Business and consumer confidence numbers disappointed.

In April, the NAB Business Confidence Index fell from 16 to 10. The Westpac Consumer Sentiment Index fell by 5.6% in May, following a 0.90% decline in April.

For the Kiwi Dollar

Electronic card retail sales reversed a 1.3% decline with a 7.0% jump in April. The Business PMI disappointed, however, falling from 53.8 to 51.2.

For the Japanese Yen

Service sector PMI and household spending drew market interest in a quiet week on the data front.

In April, Japan’s services PMI rose from 49.4 to 50.7, up from a prelim 50.5. Service sector activity picked up in response to the government removing remaining COVID-19 restrictions.

Household spending figures disappointed, however. In March, spending slid by 4.1%, following a 2.8% decline in February.

The Japanese Yen rose by 1.03% to end the week at ¥129.22 against the dollar. In the week prior, the Yen ended the week down by 0.66% to ¥130.56.

Out of China

Trade and inflation tested investor appetite for riskier assets.

In April, exports increased by 3.9%, year-on-year, versus a forecasted 3.2% rise. Exports were up 14.7% in March.

The US dollar trade surplus widened from $47.38bn to $51.12bn as imports stalled.

Inflationary pressures picked up in April, with the annual rate of inflation accelerating from 1.5% to 2.1%.

In the week ending May 13, the Chinese Yuan slid by 1.84% to CNY6.7893. The Yuan declined by 0.88% to CNY6.6667 in the week prior.

The Hang Seng Index ended the week down 0.52%, while the CSI300 rose by 2.04%.

The Week Ahead – Economic Data and Central Bank Chatter in Focus

On the Macro

It’s a quieter week ahead on the economic calendar, with 47 stats in focus in the week ending May 13. In the week prior, 62 stats were in focus.

For the Dollar:

Inflation is back in the spotlight, with consumer and wholesale inflation figures due out on Wednesday and Thursday.

Another spike in inflation would test support for riskier assets following the Fed’s forward guidance from last week.

On Thursday, initial jobless claims will also draw interest ahead of consumer sentiment figures on Friday.

While the stats will influence, news updates on the war in Ukraine and FOMC member chatter will also need monitoring.

In the week ending 6th May, the Dollar Spot Index rose by 0.68% to 103.660.

For the EUR:

ZEW Economic Sentiment figures for Germany and the Eurozone will be in focus on Tuesday.

On Friday, Eurozone industrial production numbers will influence.

Other stats in the week include finalized member state inflation figures for May that should have a muted impact on the EUR.

ECB President Lagarde will also draw interest on Wednesday, with the markets looking for any forward guidance on monetary policy.

For the week, the EUR rose by 0.06% to $1.0551.

For the Pound:

It is a busy week, with key stats including Q1 GDP and March industrial and manufacturing production figures.

Trade data and BRC retail sales figures are also due out but should have a muted impact on the Pound.

The Pound slid by 1.79% to end the week at $1.2348.

For the Loonie:

It’s a quiet week ahead on the economic calendar. There are no material stats due out of Canada to provide the Loonie with direction.

A lack of stats will leave the Loonie in the hands of Geopolitics, OPEC, and crude oil prices.

The Loonie ended the week down 0.21% to C$1.2875 against the U.S Dollar.

From the Asia Pacific

For the Aussie Dollar:

Business and consumer confidence will be in focus in the week ahead.

On Tuesday, NAB Business Confidence figures are due out ahead of Westpac Consumer Sentiment numbers on Wednesday.

The RBA will be eyeing the numbers, with the need to curb inflationary pressures amidst heightened economic uncertainty could test sentiment.

The Aussie Dollar rose by 0.21% to $0.7076.

For the Kiwi Dollar:

Electronic card retail sales and business PMI numbers are due out in the week ahead.

While the numbers will influence, data and news updates from China will remain key.

The Kiwi Dollar ended the week down by 0.74% to $0.6410.

For the Japanese Yen:

It’s a relatively quiet week ahead. Finalized service sector PMI numbers for April and household spending figures are due out early in the week. Expect both sets of numbers to draw plenty of interest following the BoJ’s most recent dovish signals.

The Japanese Yen declined by 0.66% to ¥130.560 against the US dollar.

Out of China

On Monday, trade data will draw interest, with the markets looking to assess the impact of China’s COVID-19 lockdown measures and the war in Ukraine on demand.

Inflation figures, due out on Wednesday, will influence.

The markets will also be looking for updates from Beijing on COVID-19 lockdown measures.

The Chinese Yuan ended the week down by 0.88% to CNY6.6667 against the US dollar.

Geo-Politics

News updates on the war in Ukraine and chatter from Russia will need continued monitoring.

The Weekly Wrap – Fed Monetary Policy Sinks Riskier Assets

The Stats

While it was a busy week on the economic calendar for the week ending May 6, 2022, the Fed monetary policy decision was the main event.

A total of 62 stats were monitored, following 56 stats in the week prior.

Of the 62 stats, 25 beat forecasts, with 30 economic indicators falling short of forecast. Seven stats were in line with forecasts.

Looking at the numbers, 20 of the stats reflected an upward trend. Of the remaining 42 stats, 36 stats were weaker.

Out of the US

Private sector PMIs were the key stats in the week ahead of nonfarm payroll numbers on Friday.

The numbers were mixed, with private sector PMI figures disappointing.

In April, the ISM Manufacturing PMI fell from 57.1 to 55.4, with the Non-Manufacturing PMI down from 58.3 to 57.1.

Labor market numbers were also dollar negative ahead of the NFP numbers. The ADP reported a 247k increase in nonfarm payrolls for April, falling short of forecasts, and a 479k rise in March.

For the week ending April 29, initial jobless claims increased from 181k to 200k.

On Friday, the stats were dollar neutral. Nonfarm payrolls increased by 428k in April, following a 428k rise in March. As a result, the US unemployment rate held steady at 3.6%.

While the stats were of interest, the Fed monetary policy decision and forward guidance were the key drivers in the week.

On Wednesday, the Fed delivered a 50 basis point rate hike, which was in line with forecasts. Fed Chair Powell also looked to calm the markets by assuring that 75 basis point hikes would not be on the table.

Relief was brief, with jitters over inflation and Fed policy returning in the second half of the week.

In the week ending May 6, 2022, the Dollar Spot Index rose by 0.68% to end the week at 103.660. In the week prior, the Index rallied by 1.72% to 102.959.

Out of the UK

It was a quiet week, with stats limited to finalized private sector PMIs. The numbers were GBP positive, with the all-important services PMI revised up from 58.3 to 58.9. Despite the upward revision, the PMI was still down from March 62.6.

On the monetary policy front, the Bank of England was in action. On Thursday. The BoE lifted rates by 25 basis points to 1.00%.

The rate hike came despite concerns over the economic outlook. However, risk aversion offset any monetary policy moves to leave the pound in the red.

In the week, the pound slid by 1.79% to end the week at $1.2348. The pound tumbled by 2.07% to $1.2573 in the week prior.

The FTSE100 ended the week down 2.08%, reversing a 0.30% gain from the previous week.

Out of the Eurozone

The German economy and private sector PMIs were the areas of focus.

It was a mixed set of numbers, with economic data from Germany disappointing.

In March, German retail sales unexpectedly fell by 0.1% versus a forecasted 0.3% increase. Unemployment also fell more slowly, leaving the German unemployment rate at 5.0%.

Trade, factory orders, and industrial production figures also sounded the alarm bells.

Germany’s trade surplus narrowed from €11.1bn to €3.2bn, with factory orders tumbling by 4.7%.

Industrial production was not much better, sliding by 3.9%, to reflect the impact of the war in Ukraine and lockdown measures in China.

Private sector PMIs were also negative, with the Eurozone’s manufacturing PMI falling to a 15-month low of 55.5. Easing lockdown measures provided some relief, with the Eurozone services PMI rising from 55.6 to 57.7 in April.

For the week, the EUR rose by 0.06% to $1.0551. In the previous week, the EUR tumbled by 2.27% to $1.0545.

The DAX fell by 3.00%, with the EuroStoxx600 and the CAC40 seeing losses of 4.55% and 4.21%, respectively.

For the Loonie

Key stats included trade and employment figures for March and April, respectively.

The stats were mixed. Canada’s trade surplus narrowed from C$3.08bn to C$2.49bn.

Employment figures were Loonie positive, with the unemployment rate falling from 5.3% to 5.2% in April. In the month, employment increased by 15.3k, following a 72.5k surge in March.

In the week ending May 6, the Loonie slipped by 0.21 to C$1.1.2875 against the greenback. The Loonie slid by 1.09% to C$1.2848 in the week prior.

Elsewhere

It was a mixed week for the Aussie Dollar and the Kiwi Dollar.

The Aussie Dollar rose by 0.21% to $0.7076, while the Kiwi Dollar fell by 0.74% to end the week at $0.6410.

For the Aussie Dollar

Positive stats failed to support the Aussie, with the markets also brushing aside an RBA rate hike.

Key stats included retail sales and trade data for March. Retail sales increased by 1.6%, with the trade surplus widening from A$7.457bn to A$9.314bn.

Early in the week, the RBA raised cash rates by 25 basis points to 0.35% versus a forecasted 0.25%. Monetary policy divergence remained firmly in the favor of the greenback, however.

For the Kiwi Dollar

A quiet week left the markets to consider employment change figures and the RBNZ financial stability report.

In Q1, the New Zealand unemployment rate held steady at 3.2%, with employment rising by 0.1% in the quarter.

The RBNZ provided little Kiwi dollar support in the week, however, with the RBNZ talking of a possible house price correction.

Rising prospects of a house price correction could test the RBNZ’s appetite to lift cash rates at a more aggressive pace.

Monetary policy diversion with the Fed left the Kiwi on the back foot.

For the Japanese Yen

Economic data was limited to inflation figures. There was little support for the Yen, however, despite a pickup in inflationary pressure.

In April, Tokyo’s annual core rate of inflation accelerated from 0.8% to 1.9%.

The Japanese Yen fell by 0.66% to end the week at ¥130.56 against the dollar. In the week prior, the Yen ended the week down by 0.93% to ¥129.70.

Out of China

It was a particularly quiet week, with service sector PMI numbers for April in focus.

The Caixin Services PMI slid from 42.0 to 36.2, with COVID-19 lockdown measures weighing on service sector activity.

In the week ending May 6, the Chinese Yuan declined by 0.88% to CNY6.6667. The Yuan slid by 1.65% to CNY6.6085 in the week prior.

The Hang Seng Index ended the week down 5.16%, with the CSI300 falling by 2.67%.

The Week Ahead – Its All Eyes on the Fed, with the BoE also in Focus

On the Macro

It is a busy week ahead on the economic calendar, with stats 68 due out through the week ending May 6. In the week prior, 56 stats were in focus.

For the Dollar:

It is a big week ahead. On the economic data front, ISM survey PMIs will influence this Monday and Wednesday, with Wednesday’s ISM Non-Manufacturing PMI the main driver.

The US labor market will also be in focus, with the ADP nonfarm employment change figures and official nonfarm numbers due out on Wednesday and Friday.

The main event of the week, however, is the FED’s monetary policy decision. A larger than expected rate hike will spook the markets.

In the week ending April 29, 2022, the Dollar Spot Index surged by 1.72% to end the week at 102.959. In the week prior, the Index rose by 0.72% to 101.22.

For the EUR:

On Monday, manufacturing PMIs and German retail sales will draw interest ahead of German unemployment figures on Tuesday.

On Wednesday, the market attention will shift to service sector PMIs, German trade data, and Eurozone retail sales.

Over the remainder of the week, the German economy will remain in the spotlight. On Thursday, German factory orders are due out ahead of industrial production figures on Friday.

For the week, the EUR slumped by 2.27% to $1.0545. In the previous week, the EUR fell by 0.19% to $1.0790.

For the Pound:

It is a relatively quiet week, with economic data limited to finalized private sector PMI numbers. Expect any revisions to the services PMI to have a greater influence.

Following last week’s tumble, however, the Bank of England monetary policy will be the Pound’s key driver.

In the week, the Pound tumbled by 2.07% to end the week at $1.2573. In the week prior, the Pound slid by 1.69% to $1.2839.

For the Loonie:

Mid-week, trade data will draw interest ahead of employment figures due out on Friday.

On Friday, Ivey PMI numbers for April should have a muted impact on the Loonie.

In the week ending April-29, the Loonie slid by 1.09 to C$1.2848 against the Greenback. In the week prior, the Loonie fell by 0.79% to C$1.2710.

From the Asia Pacific

For the Aussie Dollar:

It is a busy week ahead. Key stats include manufacturing numbers on Monday ahead of retail sales and trade data on Wednesday and Thursday.

While the stats will influence, the RBA monetary policy decision and rate statement will be the key drivers. A larger-than-expected rate hike or the talk of a more aggressive rate path trajectory would support an Aussie Dollar breakout.

At the end of the week, the RBA will also release its Statement on Monetary Policy.

In the week, the Aussie Dollar tumbled by 2.53% to $0.7061.

For the Kiwi Dollar:

On the economic data front, labor market conditions will be in focus. Employment change figures for Q1 and New Zealand’s unemployment rate will be the key stats of the week.

On the monetary policy front, the RBNZ will release its financial stability report on Wednesday and hold a press conference that will likely be the main event of the week.

The Kiwi Dollar ended the week down 2.73% to end the week at $0.6458.

For the Japanese Yen:

It is a quiet week ahead, with stats limited to finalized private sector PMIs and inflation.

We don’t expect the numbers to influence, however, leaving the Yen in the hands of monetary policy divergence.

The Japanese Yen fell by 0.93% to end the week at ¥129.70 against the Dollar.

Out of China

It is another quiet week ahead, with service PMI numbers for April due out on Thursday. Following last week’s assurances of economic support, the markets will be more interested in any chatter from Beijing on how to boost economic activity.

Private sector PMIs from the weekend reflected the need for policy support.

In April, the Caixin Manufacturing PMI fell from 48.1 to 46.0, with the NBS Manufacturing PMI declining from 49.5 to 47.4.

In the week ending April-29, the Chinese Yuan slid by 1.65% to CNY6.6085. The Yuan tumbled by 2.04% to CNY6.5014 in the week prior.

Geo-Politics

Russia and Ukraine will remain the area of focus in the week ahead.

The Weekly Wrap – Monetary Policy and Economic Woes Drive Dollar Demand

The Stats

It was a busy week on the economic calendar for the week ending April-29, 2022.

A total of 56 stats were monitored, following 57 stats in the week prior.

Of the 56 stats, 26 beat forecasts, with 26 economic indicators falling short of forecasts. 4 stats were in line with forecasts.

Looking at the numbers, 30 of the stats reflected an upward trend. Of the remaining 26 stats, 25 stats were weaker.

Out of the US

Core durable goods orders and consumer sentiment drew interest on Tuesday. The stats were market positive, with core durable goods orders rising by 1.1% in March.

Consumer sentiment held steady in April, which was also market positive. The CB Consumer Confidence Index slipped from 107.6 to 107.3.

On Thursday, US GDP numbers disappointed, however, with the US economy contracting by 1.4%. In the previous quarter, the economy expanded by 6.9%.

At the end of the week, inflation and personal spending were market positive. Personal spending rose by 1.1% in March, while inflationary pressures softened. The Core PCE Price Index increased by 5.2% year on year in March, down from 5.3% in February.

In the week ending April 29, 2022, the Dollar Spot Index surged by 1.72% to end the week at 102.959. In the week prior, the Index rose by 0.72% to 101.22.

Out of the UK

It was a particularly quiet week, with stats limited to CBI Industrial Trend Orders. In April. Industrial Trend Orders fell from 26 to 14, which was Pound negative.

Risk aversion and market sentiment towards Fed monetary policy ultimately left the Pound deep in the red.

In the week, the Pound tumbled by 2.07% to end the week at $1.2573. In the week prior, the Pound slid by 1.69% to $1.2839.

The FTSE100 ended the week up 0.30%, partially reversing a 1.24% loss from the previous week.

Out of the Eurozone

Early in the week, German business and consumer sentiment diverged. While business sentiment improved, consumer sentiment weakened further.

The Ifo Business Climate Index increased from 90.8 to 91.8 in April, while the Gfk German Consumer Climate Index fell from -15.7 to -26.5.

In the second half of the week, the market focus shifted to inflation and economic growth.

The stats were market positive, with German and the Eurozone GDP numbers for the first quarter providing support.

In Q1 2022, the German economy expanded by 4.0% year on year, up from 1.8% in the previous quarter.

The Eurozone’s economy grew by 5.0% year on year, up from 4.6% in the quarter prior.

On the inflation front, inflationary pressures ticked up further, though only moderately. According to prelim figures, the Eurozone’s annual rate of inflation picked up from 7.4% to 7.5%.

For the week, the EUR slumped by 2.27% to $1.0545. In the previous week, the EUR fell by 0.19% to $1.0790.

The CAC40 fell by 0.73%, with the EuroStoxx600 and the DAX seeing losses of 0.64% and 0.31%, respectively.

For the Loonie

It was also a quiet week, with economic data limited to February GDP numbers.

While Loonie positive, the numbers had a muted impact on the Loonie following the latest Bank of Canada rate hike.

In February, the economy grew by 1.1%, accelerating from 0.2% growth in January.

In the week ending April-29, the Loonie slid by 1.09 to C$1.2848 against the Greenback. The Loonie fell by 0.79% to C$1.2710 in the week prior.

Elsewhere

It was yet another bearish week for the Aussie Dollar and the Kiwi Dollar.

The Aussie Dollar tumbled by 2.53% to $0.7061, with the Kiwi Dollar sliding by 2.73% to end the week at $0.6458.

For the Aussie Dollar

Inflation was in focus mid-week.

The stats were Aussie Dollar positive, supporting a near-term RBA move on cash rates. Monetary policy divergence remained strongly in favor of the Greenback, however.

In Q1, Australia’s annual rate of inflation accelerated from 3.5% to 5.1%. Wholesale inflationary pressure also picked up, with the annual wholesale rate of inflation accelerating from 3.7% to 4.9%.

For the Kiwi Dollar

Trade data and business confidence were in focus in the week, with the stats Kiwi dollar negative.

In March, New Zealand’s trade deficit widened from NZ$8,680m to NZ$9,110m.

The ANZ Business confidence slipped from -41.9 to -42.0 in April.

For the Japanese Yen

On the economic data front, industrial production and retail sales figures for March were in focus. The stats were Yen negative.

Industrial production increased by a modest 0.3% after rising by 2.0% in February.

Retail sales provided some relief, rising by 0.3% year on year. In February, retail sales declined by 0.9%.

On the monetary policy front, the Bank of Japan was also in action, though there were no surprises to support the Yen.

The Japanese Yen fell by 0.93% to end the week at ¥129.70 against the Dollar. In the week prior, the Yen ended the week down by 1.61% to ¥128.50.

Out of China

It was a particularly quiet week, with no economic data from China to influence market risk sentiment.

In the week ending April-29, the Chinese Yuan slid by 1.65% to CNY6.6085. The Yuan tumbled by 2.04% to CNY6.5014 in the week prior.

The Hang Seng Index ended the week up 2.18%, with the CSI300 gaining by 0.07%.

The Key Passage to Calmer Waters Is Getting Through Earnings Season Relatively Unscathed

US Markets Fundamental Analyis

US equities rose Thursday, S&P up 2.5%, with gains led by tech after solid earnings from Meta, NASDAQ up 3.1%. JPY broke through 130 against USD after BoJ kept policy on hold, a twenty-year low. US 10yr yields down 1bp to 2.82%.

The S&P 500 Index had its best session since early March on Thursday, reversing weekly losses, as investors grew confident that corporate earnings can endure rapid monetary tightening by the Federal Reserve.

One of the key passages to calmer waters in equities and lower bond volatility is getting through earnings season relatively unscathed. Last night was a modest step forward in that regard.

A big miss on US GDP, down 1.4%qoq saar in Q4, consensus looked for a 1% rise. But details lessen some of the pain: a considerable drag from net exports and a surprise drop in government spending. Still, final sales to private purchasers were up 3.7%, pointing to strong underlying demand.

While USD gets a bit of reprieve from its relentless march higher as US yields stabilize and fall slightly, I don’t feel the disappointing US Q1 advance GDP headline figure will derail Fed momentum overall.

The US dollar bulls will likely come up for air while factoring in risks for a downside surprise to their projections for US core PCE today. If that were to materialize, it would mark a more significant start to the decline in inflation expectation, drive down US yields and likely soften the US dollar. But it may not drift too far from its current axis due to growing downside risks elsewhere, particularly in China and the Eurozone, where RMB weakness and EUR downside continue, and a stronger USD is a tailwind.

Asia Markets Fundamental Analysis

In Asia, the Chinese Politburo will focus on spreading good cheer to Asian markets so expect China to show a more pro-growth policy tone in terms of covid restrictions, the housing market, internet regulation, and consumption boost.

Chinese President Xi’s call for an ‘all-out effort to boost infrastructure for economic stability helped both A- and H-share market sentiment. Traders are positioning for a potential upside ahead of today’s Politburo meeting and the long holiday.

But there are no quick fixes here. China’s property market will remain weak in 2022, with homebuyers lacking confidence in non-SOE developers after recent defaults and being concerned about job security and property prices. While the government looks to keep costs stable in Tier 1&2 cities, price-to-income ratios are among the highest in the world.

Against this backdrop, we should expect further easing to support the market, but significant moves are unlikely given the protracted lockdown scheduled to run through June. There is no point in throwing money at people who are scared to leave their apartment for one reason or another.

I expect more upside to USDCNH; with the Bank of Japan firmly committed to its YCC target via unlimited bond-buying, USDCNH could push higher. China is at a competitive disadvantage to Japan in third markets on a multi-month move higher in CNY/JPY.

With the PBOC also forced to be on an easing path, the similarities to the Bank of Japan have spooked the market and hence probably the main driver of the move above 6.65 in the absence of any other local news. As I mentioned last week’s weaker fix where the PBoC invisible hand wasn’t so hidden, core long dollar positioning looks attractive for a move towards 6.70 and possibly 6.80, but factor in the potential for PBOC measures to calm volatility.

Oil Fundamental Analysis

Russia’s decision to switch off natural gas supplies to Poland and Bulgaria spooked the European energy market and seemed to trigger a call to action by German policymakers.

Crude oil prices have been quietly grinding higher on the report Germany is no longer opposing a ban on Russian oil. Of course, the devil will be in the detail as the EU policymaker tries to engineer a response that will not compensate Russia for the lost EU barrel through higher oil prices. Not to mention all 27 EU governments must approve an oil ban.

If we thought the Fed had an impossible task, perhaps the EU oil puzzle comes in a close second.

Aisa’s focus could shift back to China, where more Covid-19 cases are reported, but policymakers increase screening to avoid Shanghai-type chaos. While the prospect of a further drop in Russian production continues to support.

Gold Fundamental Analysis

Gold traded a bit firmer overnight. A jump in oil prices drove inflation expectations slightly higher while US yields were relatively calm, with stocks stabilizing.

One of the reasons I have not bought this dip was the risk of a downside surprise for US core PCE today. If that were to materialize, it could mark the start of a significant decline in inflation expectations for the remainder of the year. The signal could be conflicting, driving both yields and inflation expectations lower. But with the bullion market singularly focused on inflation, it could hurt gold.

The market remains understandably cautious as the risk of near-term liquidation looms – some unwinding is perfectly understandable as investors adjust their gold exposure to further Fed tightening and real rates threatening to turn positive.

Gold firms as concerns over growth, inflation persist

By Seher Dareen

(Reuters) – Gold rose on Tuesday, recovering slightly from a retreat to an over one-month trough in the last session, as investors sought cover from fears of stalling global growth and soaring inflation.

Spot gold rose 0.4% to $1,904.36 per ounce by 10:40 a.m. ET (1440 GMT). Prices popped back above the key $1,900 level, after falling to $1,890.20 on Monday – its lowest since March 29.

U.S. gold futures gained 0.3% to $1,902.30.

Some buying was re-emerging in safe haven products like gold, after news of China’s lockdown impacting demand in the energy and metals markets, said David Meger, director of metals trading at High Ridge Futures, also attributing the uptick to bargain hunting following the “overdone” dip.

While gold is considered a hedge against inflation and economic and political risks, including the Ukraine war, capping gains were expectations of rapid U.S. rate hikes, which increase the opportunity cost of holding the non-yielding asset.

A higher dollar also slowed gold’s gains. [USD/]

“The market is starting to believe that the Fed is willing to be a bit more aggressive and hence it has taken a little bit of the wind out of some of the sails of these commodities rallies,” Meger added.

The Fed is expected to raise rates by a half a percentage point at each of its next two meetings. But at the same time, this left markets worried that the aggressive tightening could derail the global economy.

Palladium, used primarily in vehicle exhausts to curb emissions, rose 1.4% to $2,174.08 per ounce, a day after concerns over reduced demand due to COVID lockdowns in China dragged it down as much as 12.9%.

“This year as semiconductor availability improves, we should see car demand rising… Yesterday’s fall should be a very good bargain hunting opportunity,” said WisdomTree analyst Nitesh Shah.

Silver fell 0.3% to $23.53 per ounce and platinum fell nearly 1% to $911.81.

(Reporting by Seher Dareen and Eileen Soreng in Bengaluru; Editing by Shailesh Kuber)