Volatile Markets: US Dollar (USD), Euro (EUR), British Pound (GBP), Russian Ruble (RUB)

Week Ahead – Volatile Markets

Every asset class has been on a rollercoaster ride as investors are watching central bankers all around globe tighten monetary policy to fight inflation.  Financial conditions are starting to tighten and the risks of slower growth are accelerating.

 

The focus for the upcoming week will naturally be a wrath of Fed speak and the latest US CPI data which is expected to show inflation decelerated sharply last month. A sharper decline with prices could vindicate Fed Chair Powell’s decision to remove a 75 basis-point rate increase at the next couple policy meetings.

 

A close eye will also stay on energy markets which has shown traders remain convinced that the market will remain tight given OPEC+ will stick to their gradual output increase strategy and as US production struggles to ramp up despite rising rig counts.  Energy traders will continue to watch for developments with the EU nearing a Russian energy ban.

US inflation expected to drop

Oil rallies as EU nears Russian energy ban

Gold remains vulnerable if bond market selloff accelerates


US

Market volatility following the FOMC decision won’t ease up anytime soon as traders will look to the next inflation report to see if policymakers made a mistake in removing even more aggressive rate hikes off the table over the next couple of meetings.  The April CPI report is expected to show further signs that peak inflation is in place.  The month-over-month reading is expected to decline from 1.2% to 0.2%, while the year-over-year data is forecasted to decrease from 8.5% to 8.1%.

The producer prices report comes out the next day and is also expected to show pricing pressure are moderating.  On Friday, the University of Michigan Consumer Sentiment report for the month of May should show continued weakness.

The upcoming week is filled with Fed speak that could show a divide from where Fed Chair Powell stands with tightening at the June and July meetings.  On Tuesday, Fed’s Williams, Barkin, Waller, Kashkari, Mester, and Bostic speak.  Wednesday will have another appearance by Bostic. Thursday contains a speech from the Fed’s Daly.  On Friday, Fed’s Kashkari and Mester speak.

 

UK

The Bank of England delivered a 0.25% rate hike at this week’s meeting. This brings the benchmark rate to 1.00%, its highest since 2009. At the same time, the BoE painted a grim economic picture at the meeting, as it revised its inflation forecast to above 10% and warned of a recession.

The UK releases GDP for Q1 on Thursday. The consensus estimate stands at 1.0% after a 1.3% gain in Q4 of 2021. A loss of momentum in the economy could mean a contraction in the second quarter, raising the likelihood of stagflation. The only new data in the GDP report will be the March figures, as January and February were already published. The estimate for March is for a flat reading, after gains of 0.1% in February and 0.8% in January.

 

EU

The Russia/Ukraine war and the sanctions against Russia have dampened economic activity in the eurozone. Germany, the largest economy in the bloc has been posting weak numbers as the war goes on. With the EU announcing it will end Russian energy imports by the end of the year, there are concerns that the German economy could tip into a recession.

On Tuesday Germany releases ZEW Survey Expectations, which surveys financial professionals.

Economic Sentiment is expected to decline to -42.5 in May, down from -41.0 in April.

On Friday, the Eurozone releases Industrial Production for March. The Ukraine conflict has exacerbated supply line disruptions, which is weighing on industrial production. The sharp drop in German Industrial Production (-3.9%), suggests that the Eurozone release will also show a contraction. The March estimate is -1.8%, following a gain of 0.7% in February. 

 

Russia

Russia’s inflation has been accelerating sharply since the invasion of Ukraine. In March, CPI rose to

16.7% (YoY) and is expected to climb to 18.1% in April. The driver behind the sharp upswing has been Western sanctions, which have reduced the availability of consumer imports and key components for domestic products. CPI is expected to continue to climb in the coming months.

 

China

China releases its Balance of Trade on Monday and Inflation on Tuesday. Both have downside risks given the disruption to business and the collapse in property sales and sentiment due to the covid-zero policy. Restrictions continue tightening in Beijing and the covid-zero policy has become the biggest headwind to a China recovery. The government reaffirmed its commitment to the policy Friday, sending China stocks lower.

Additionally, US-listed China stocks face new delisting risk from US regulators that is weighing on Hong Kong markets especially, where most dual listings live. Negative headlines around Covid 19 or US delisting over the weekend could send China equities sharply lower into the start of the week.

USD/CNY and USD/CNH have now risen from  6.4000 to 6.7000 in just two weeks. The PBOC remains comfortable at this stage, being a back door stimulus to manufacturers. The PBOC USD/CNY fixing will be the key indicator as to whether the authorities have said Yuan depreciation has gone far enough.

 

India

The Reserve Bank of India sprung a surprise rate hike on markets this past week, sending the Sensex lower whilst providing some support to the INR temporarily. India’s CPI inflation release on Thursday will be this week’s key risk event. If the data comes in above expectations at 7.30%, expectations will rise of a faster more aggressive hiking cycle from the RBI which was quite hawkish in its guidance after the hike. THat will send Indian equities sharply lower once again, while possibly mollifying the impact on the INR from a rampant US Dollar.

 

Australia

Australia could be a correlation trade for the tier-1 PMI releases from China over the weekend. Poor China data could see the AUD and local equities pressured with most of Asia, ex-Japan closed.SImilarly, a decent showing by the China PMIs will have a positive impact.

Markets, especially currency markets, could face liquidity issues and see sharp moves if the weekend news wire is heavy as Australia and Japan will be the only two major centres open.

Most attention will be focused on Tuesday’s RBA rate decision. A 0.15% hike is fully priced by markets and the clouds from Ukraine and China are weighing heavily on AUD/USD anyway. If the RBA does not hike AUD/USD could fall sharply in the short-term. If the RBA hikes and adjusts its guidance to a more hawkish, AUD/USD could potentially see a big move higher.

 

New Zealand

NZ Retail Card Spending has downside risks and the Food Price Index, upside risks this week. The cost of living has become the central issue in New Zealand at the moment and a high FPI will heap pressure on the RBNZ to accelerate rate hikes as the economy starts to show signs of stress elsewhere.

NZD/USD has traded very heavy in past two weeks as investors price in a hard landing and an RBNZ behind the curve, and as risk sentiment sours internationally. NZD/USD is closing at the weeks lows and could test 0.6200 this week.

 

Japan

Japan releases a raft of second tier data this week. THe 10 and 30-year JGB auctions will be closely watched, if only for signs of poor cover ratio given the BOJ JGB intervention and weakening Yen.

THe centre of attention will remain the USD/JPY as the US/Japan rate differential widens. USD/JPY could well test 135.00 in the week ahead if the negative sentiment sweeping markets on Friday spills into next week. Higher oil prices will also weigh onthe Yen. We expect the noise to increase from Tokyo but little chance of USD/JPY intervention at these levels.

 

Singapore

No significant data. The currency remains under pressure as a proxy for China and also because the MAS meets six monthly to determine monetary policy. The next meeting will not be until October to determine if monetary policy gets tightened once again. 

 

 

Markets


Oil
Crude prices are steadily rising as the EU is making progress towards its Russia oil sanctions ban. The oil market will remain tight going forward now that OPEC+ is set on delivering meager output increases and as US production struggles despite rising rig counts. The biggest uncertainty for the crude demand outlook remains the outlook for the Chinese economy. China won’t be abandoning their zero-COVID policy anytime soon and that will keep the short-term crude demand outlook vulnerable. China’s COVID situation might not be improving anytime soon and now that the data is showing the impact of business restrictions is more widespread than just to Shanghai and Beijing.

Oil will remain a volatile trade going forward with most of the fundamentals still pointing to higher prices.


Gold
Just when gold seems to be showing signs it is getting its luster back, the bond market says ‘not so fast’.  Gold continues to struggle in this current environment of surging global bond yields and that might last a little while longer as some central banks for the purpose of defeating inflation might be willing to send their respective economies into a recession.

Gold’s awful few weeks of trade has seen a collapse of the $1900 level and that should prove to be key resistance now.  If the bond market selloff accelerates and the dollar surges, gold could be vulnerable to a drop towards $1835 and if that does not hold, $1800 might be targeted.

Bitcoin

Confidence in crypto markets is waning after Bitcoin tumbled below the $37,000 level following the surge in global bond yields.  If risk appetite does not return, Bitcoin could be vulnerable to a significant drop towards the $30,000 level.  Choppy trading between $35,000 and $40,000 could be where Bitcoin settles if Wall Street does not price in much more tighter monetary policy by the Fed.

Week Ahead – Volatile Markets

Ed Moya

With more than 20 years’ trading experience, Ed Moya is a senior market analyst with OANDA, producing up-to-the-minute intermarket analysis, coverage of geopolitical events, central bank policies and market reaction to corporate news. His particular expertise lies across a wide range of asset classes including FX, commodities, fixed income, stocks and cryptocurrencies. Over the course of his career, Ed has worked with some of the leading forex brokerages, research teams and news departments on Wall Street including Global Forex Trading, FX Solutions and Trading Advantage. Most recently he worked with TradeTheNews.com, where he provided market analysis on economic data and corporate news. Based in New York, Ed is a regular guest on several major financial television networks including CNBC, Bloomberg TV, Yahoo! Finance Live, Fox Business and Sky TV. His views are trusted by the world’s most renowned global newswires including Reuters, Bloomberg and the Associated Press, and he is regularly quoted in leading publications such as MSN, MarketWatch, Forbes, Breitbart, The New York Times and The Wall Street Journal. Ed holds a BA in Economics from Rutgers University.