Weekly analysis

The US dollar is biding its time in a range after the huge sell-off that was mostly on the back of the October CPI release. If we get another couple of days or so of waiting for follow through lower in the greenback, the momentum will really have begun to seep out of the move. Still, the move was extensive enough to require a considerable rally indeed to argue that the USD bull market is returning. As I have noted, the next heavy hitting data points aren’t up until the November 30th PCE inflation print, and then the jobs report on December 2 and November CPI on December 13th. 

A huge break higher through 1.0100 in EURUSD was sparked by the hot October US CPI print last Thursday and we have closed every day this week within half a figure of the Friday close. A few days of consolidation is one thing, but if the pair doesn’t follow through higher in the coming couple of days, the move will have lost considerable momentum. Note the 200-day moving average that was touched earlier this week for the first time since June of last year, a remarkable run. That 1.0100 area is an important pivot, with the retracement of this large rally wave not coming into until close to parity. To the upside, the next important zone is perhaps 1.0611  retracement of the sell-off wave from the multi-year high at 1.2349 to the 0.9536 low for the cycle and then the 2020 pandemic outbreak a tad higher at 1.0636. 

Trade accordingly with yiur risk

AUDUSD an interesting pair that looked heavy on the cycle lows  A strong US jobs report and earnings, together with higher US yields and a CPI release that doesn’t move the needle this week are likely needed to prompt a new slide, perhaps eyeing the 0.6000 area eventually. Clearly weak jobs growth, indifferent or worse average hourly earnings, and a weaker than expected US CPI next Thursday, together with a celebratory surge in risk sentiment as treasury yields presumably drop. Remember that the RBA pivoted dovish and concerns remain on demand from China, where new Covid cases remain a threat as the cold season approaches in norther regions ahead of the pageantry of appointing leader Xi to a third term. 

For the moment, the Fed tightening rhetoric appears to be unmovable, meaning supposedly that we’ll have to look through many months of softening employment data before we can expect the Fed to climb down from its hawkish freight train. In that light, today’s September jobs data may weigh little, barring huge surprises.

As for the Fed, speeches from no fewer than three FOMC voters suggest that all Fed members are on the same page in continuing to deliver a message of determination to see the inflation dragon slain before easing up.

Gold is heading for its biggest weekly gain since March after the weaker-than-expected CPI print gave metals, including silver, a major boost from the subsequent drop in yields and the dollar. The yellow metal traded up 7% during the past two weeks after once again finding support in the $1615 area, now a triple bottom. Whether the break above resistance-turned-support at $1735 now signals a change in the trading behaviour among speculators from sell-into-strength to buy-on-weakness remains to be seen. 

Copper traded near a five-month high, with the +12% gain during the past two weeks being supported by a weaker dollar and the prospect of China showing willingness to support economic growth by allowing Covid restrictions to be eased despite seeing infections increase to the highest level since April. With the global economic outlook still clouded by the prospect of recession hitting some economies, the potential for a sustained recovery at this stage is probably still too early to call. For now, traders and investors responding to higher prices by reducing negative biased positions.
The copper intensive electrification of the world will continue to gather momentum, following a year of intense weather stress around the world and the need to reduce dependency of Russian produced energy from gas, oil and coal. But for power grids to be able to cope with the extra baseload, a massive amount of new copper intensive investments will be required over the coming years. In addition, producers like Chile, the world’s biggest supplier of copper, struggling to meet production targets amid declining ore grade quality and water shortages. China’s slowdown is viewed as temporary and the economic boost through stimulus measures are likely to focus on infrastructure and electrification – both areas that will require industrial metals. 

The USD has pulled higher , setting new cycle lows for EURUSD, GBPUSD and in other USD pairs, though with the notable absence of the USDJPY on the list as the market respects the risk of Bank of Japan intervention, at least at the margin. Still, the directional sympathy in USDJPY to the USD direction elsewhere has been in evidence since the pair bottomed below 142.00 overnight, trading above 143.00 as of this writing. More importantly, the massive surge in US long treasury yields to new cycle- and 11-year highs are piling on the pressure for the Bank of Japan to change its policy. US treasuries are the dominant driver across markets. 

The USDJPY situation played out largely as one might have anticipated after the FOMC took US yields higher and the Bank of Japan continued to take a stand on its currency policy and then made good on its intervention threats shortly after USDJPY breached 145.00 to the upside, taking the pair all the way back below 141.00 at one point before the price action stabilized. Now, the upside pressure has ratcheted significantly higher for the pair as the key coincident indicator for USDJPY historically, a longer-dated US treasury yield like the 10-year benchmark, surged yesterday by nearly 20 basis points. Without the BoJ’s presence and threats, we would likely be well on our way to 150.00. How long can the market stand to sit back before challenging the BoJ once again? It doesn’t seem a war the latter can win as long as Kuroda and company insist on staying pat with the current policy of freezing yields out to 10 years as US treasury yields march ever higher… Plenty of danger for market participants wanting to make that challenge, however, as the BoJ/MoF have shown tremendous determination in the past, at least when intervening against JPY strength as in 2003.  

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Worth considering how the dovish Bank of England meeting  is weighing heavily on sterling, as it should, with the Bank of England reluctant to signal much tightening energy when it sees an incoming recession. Sterling is down sharply across the board, with EURGBP suddenly well backed up within the old range and now far away from the sub-0.8600 range support. The next area between the 0.8800 and pivot high of 0.8870 area looks key for whether sterling weakness is set to become a bit more unhinged, and the next key event-risk test is likely how the market greets an austere Autumn budget statement on November 17. 

The BoE hiked by 75 bps to 3%, as most expected and as was mostly priced in, but Bailey and company strongly pushed back against expectations for the scale of future moves, saying that the terminal rate priced in currently by the markets would induce a two-year recession. There were also two dovish dissenters at the meeting, one calling for 50 bps rate hike and another for a mere 25 bps. New forecasts were also released, which gave a particularly grim outlook for the economy, looking for a GDP print of -0.5% QoQ in Q3 2022 vs -0.1% expected in September. The inflation forecast now shows a peak around 11% in Q4, which is marginally hotter than the prior meeting’s projection. Sterling was crushed lower, having already fallen heading into the meeting, and it speaks volumes that even though the BoE pushed back against the forward implied expectations for further tightening, which it said would trigger a 2-year UK recession, the market did not budge those expectations. In short: the market refuses to acknowledge what the BoE thinks it might do, probably figuring that the BoE will have no choice due to sterling weakness but to pursue the path to 4.50% or higher rates before mid-next year. I was surprised by the lack of discussion or journalist questioning in the press conference around the risk that currency weakness drives worse inflationary outcomes if the BoE fails to do as much as the market is pricing. Sterling remains in a heap of trouble. 

The commodity sector traded lower for a third week, with the main market focus being the risk of an economic slowdown caused by runaway inflation and central banks stepping up their efforts to bring it under control .
Gold, which has been on the defensive for the past five weeks in response to stubbornly high US inflation driving up the dollar and US government bond yields, slumped below support-turned-resistance at $1680 as the market was overwhelmed by momentum and technical-driven selling related to the risk of a 1% US rate hike next week. In addition, the market continued to raise expectations for how high Fed funds will rise over the coming months.

Crude oil traded lower in the week, partly driven by losses across fuel products such as gasoline and diesel, but remained within a recently lowered range, with demand concerns once again being the main focus more than offsetting potential supply challenges in the coming months. Growth and demand concerns, as well as the stronger dollar making the cost of fuel increasingly expensive around the world, remains the focus as the market prepares for another growth dampening rate hike from the US FOMC next week.

In addition, demand in China continues to linger after the IEA said the world's largest importer of oil was heading for its biggest annual drop in demand in more than three decades. Meanwhile, the US Department of Energy walked back on its SPR refill stance by saying that it didn’t include a strike price (that was said to be around $80/barrel) and it isn’t likely to occur until after fiscal 2023.

In Europe and increasingly also Asia, elevated prices for gas and power continue to attract substitution demand into fuel products like diesel and heating oil. In addition, the supply side will also be watching the impact of the EU embargo on Russian oil, which will begin impacting supply from December. The IEA in their latest monthly oil market report highlighted the embargo as their reason for lowering Russian supply in early 2023 by 1.9 million barrels per day – a development if not arrested by a peace deal or any other political development in Moscow could see the market turn increasingly tight again. In addition, the current lull in Chinese demand look set to reverse once lockdowns are lifted and, together with the risk of supply tightening, we see potential weakness in Q4 being replaced by renewed strength next year.

Interesting to note the CHF weakening here versus both the Euro and US dollar as yields march higher. USDCHF is one of the few USD pairs outside of USDJPY to post a new cycle high. Swiss yields have not tracked higher with Europe and the US and important EURCHF resistance is falling above 0.9800, just as USDCHF has traded above 1.0100 for the first time since 2019. The high since all the way back in 2010 is 1.0344. 

Trade accordingly with your risk.

EUR/GBP advanced significantly this week to trade back within the ascending channel. A series of extended lower wicks set the scene for the bullish move which appears to have encountered an immediate level of resistance at 0.8670  a level that has kept higher prices at bay many times before.

Price action also trades around the midline of the ascending channel which may serve as additional resistance in conjunction with the 0.8670. Should we see an advance above immediate resistance, the next significant level of resistance comes in at 0.8723  a stronger level that has proven to be rather effective in acting as a pivot point.

Support appears at 0.8670 and if we are to see a retracement of this weeks move, 0.8470 becomes the next level of support.

Trade accordingly with your risk

Commodity markets continue to attract a great deal of directional inspiration from the price action across financial markets with traders and investors trying to gauge the risk and potential depth of an economic slowdown by watching developments in stocks, bonds and forex. A focus which during the past two week sent precious metals on major rollercoaster ride.
Gold’s ability to act as a diversifier has increasingly been called into question in recent months with the metal falling despite seeing inflation at the highest level in four decades. Once again, however, it is important to note that gold as an integrated part of financial markets will continue to be impacted by movements and correlations to other markets, especially yields and the dollar. Gold trades down by 9% in a year.

Gold in a downtrend since March has settled into a wide $1617 to $1725 range, with support being of the 2018 to 2022 rally. While  maintain a bullish long-term outlook for gold, a break lower may raise concerns about a double top sending prices even lower. For a change towards a more bullish sentiment to occur the metal first needs to break the downtrend followed by a move above $1735.

If we have a look at the reaction in Fed expectations from Friday’s Fed Chair Powell speech at Jackson Hole, there was no major market takeaway. During the speech, there was a trivial marking down of expectations as Chair Powell emphasized the “totality” of data in setting the appropriate rate at the September meeting. (And 90 minutes before his speech, the July PCE inflation data was out a tad softer than expected, while the final University of Michigan sentiment survey for August saw longer inflation expectations 0.1% lower). But for that September 21 FOMC rate decision, the payrolls and earnings data this Friday and the Sep 13th CPI release will weigh more heavily.

Somewhat more importantly, Powell underlined the importance of ensuring that The Fed’s policy remains persistent enough to ensure that the inflationary cycle has abated. One of the key passages worth highlighting is “Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.” Powell then went on to invoke Paul Volcker and his fight with recurring bouts of high inflation in the 1970’s and early 1980’s. 

Watching USDJPY closely this week to see if US data takes US treasury yields higher still – especially at the longer end of the US yield curve, which could serve to renew the pressure on the Bank of Japan as it insists on maintaining the yield-curve-control policy. Arguably, as long as the longer end of the US yield curve is anchored below the June highs, the pair doesn’t have particularly cause to run higher unless there is a USD liquidity problem not connected to yield volatility. And if we get weak US data this week through Friday’s jobs and earnings report, we might be instead looking at a “double top” scenario. The 139-140.00 zone looks important this week. 

Trade accordingly with your risk