Holiday-thinned Asia follows Wall Street lead

With a mid-week FOMC and holidays in Mainland China, Hong Kong, Australia and Macau, Asia appears content to gently mimic the price action seen on Wall Street on Friday. Equities and the US Dollar are modestly higher, as is oil, while precious metals remain on the back foot.

Friday was notable for the US dollar's strong rally, which saw the major currencies all in retreat. The move was even stranger given that longer-dated US bond yields edged lower as the bond market short squeeze continued. There was some talk around of a rotation from the UK and European markets after the ECB remained unchanged, and rumours swirled that the UK will delay full reopening by a month. Both cases have merit, but the US Dollar strength was broad-based. My feeling is that with markets having hung their hat, coat and their entire wardrobe on the transitory US inflation peg, what we saw was a good old fashioned short squeeze.

Bitcoin has had some fun over the weekend, rallying over 9.0% yesterday thanks to, you guessed it, Elon Musk. Mr Musk tweeted that Tesla would accept Bitcoin again once Bitcoin miners started using more renewable energy, suggesting a starting point of 50%. I am not sure how he will collect the data to ascertain that, but never let the facts get in the way of a good story in the crypto-space. Bitcoin is trading at $39,000.00 this morning, and the weekend rally has invalidated the bearish symmetrical triangle I was watching last week. The charts suggest consolidation followed by a rally through $41,000.00 targets further gains to around $44,000.00. Or you could say, “^$()&%&^$^*, Jeff is bullish Bitcoin today, sell them all now.”

The weekends G-7 meeting passed without incident, which given the ups and downs of the previous four years under President Trump, President Biden will take as a win. The leaders endorsed the 15% global corporate tax plan, made noises on climate change, donated some vaccines and pointed fingers at China and Russia. Back to business as usual then, where's the cocktail bar?

The week's focus will remain on the US FOMC meeting, the latest results of which will emerge on Thursday morning Asian time. I am expecting no change to the Fed Funds rate or the language. Despite US core inflation being at 30-year highs, the Fed is too heavily invested in the transitory inflation narrative to blink now. Thus, I very much doubt the members will even move their rate hike expectations forward in the dot-plot. One look at the US bond market will tell them any mention or hint of the taper word will result in carnage across multiple asset classes. I expect them to suck it up and shut up, even if some members are wavering behind closed doors. That gives them room to massage the narrative ahead of Jackson Hole in August and the FOMC meeting in September if required. 

I am in the Federal Reserve's camp on transitory inflation. The world was heading into a slowdown before the pandemic; it certainly wasn't overheating. Strip used cars, hotels, and other leisure-related reopening plays out of the CPI, and I am not sure the inflation outlook is the end of days many are predicting. Yes, PPIs are racing higher, but will that be reflected in higher consumer goods prices from China? I am not so sure on past experience. I could go on and on, but the honest answer is that we just don't know yet. Certainly, that's what the US bond market is saying to us all.

The week is not without some highlights, the FOMC meeting aside. Norway and Japan announce policy decisions on Friday, after the FOMC. Japan will remain a rabbit in the headlight, its happy place for the last 30 years. Although it would be a surprise if they hiked rates, Norway could well be hawkish. Given that and the trajectory of oil prices, it would be a brave man shorting the Norwegian Krone this week.

The Bank of Indonesia (BOI) announces its latest decision on, as does Taiwan. Both will remain unchanged, but nerves will be rising in Indonesia. Covid-19 cases are creeping up here after post-Eid travel, and testing numbers are very low. At 3.50%, rates in Indonesia are about as low as the BOI can push them without imperilling the Rupiah. If Covid-19 cases rush higher, and the US bond market yields turn higher after the FOMC, the BOI will be between a rock and a hard place. The same could be said for much of Asia, with rates at rock bottom levels. The inevitable casualty will likely be the Rupiah. Readers should watch developments closely in Indonesia over the coming week.

India's WPI Inflation this morning came in at a whopping 13.07% YoY increase in May, well above expectations of 12.0%. USD/INR has risen from 73.000 on Friday to 73.192 this morning. Base effects from last year aside, India's stagflationary bind continues, magnified somewhat by rising oil prices and their latest pandemic tragedy. An easing of the pandemic (by Indian standards) is likely to heighten the inflationary pressures from now on. USD/INR traded as low as 73.00 at the start of June, as oil importer demand slumped, dragging demand for US Dollars with it. With oil consumption now recovering, international oil prices higher, and food price inflation a persistent social problem, I believe that 73.000 was USD/INR's low, and IDR weakness will resume in earnest.

China releases Industrial Output and Retail Sales on Wednesday. Both are expected to retreat from last months outsized readings. However, China markets will be vulnerable to a pullback if Industrial Output prints below 9.0%, or Retail Sales below 12.0%, especially if the Covid-19 situation in Guangdong Province gets murkier.

The US also releases Industrial Production and Retail Sales data on Tuesday. With a dovish FOMC backstop to come on Wednesday, I doubt even poor numbers will have much impact. If anything, they will give more impetus to the grind lower by US long-dated bonds. Similarly, markets seemed to have discounted the Biden infrastructure package and associated spending plans some time ago. They are barely making news now, and all that news suggests the whole thing is in trouble, not just from Republicans but also middling to right-wing Democrats. If anything does emerge, it looks like it will have been impressively slimmed down to qualify for its own weight-loss advertorial.

Australia releases May Employment Change on Thursday. A volatile data series, it should bounce back into positive territory after last month’s net fall. As ever, it is the full-time/part-time components that really matter and the participation rate. I wouldn't bet against the luck of the lucky country, though, to give us a surprise 50,000+ headline. That should be good for some volatility intra-day in the Australian Dollar (AUD). However, as a bellwether for global risk sentiment and a partial substitute for Asian currency exposure, thanks to all their dirty pegs, AUD's fate will still be decided by external forces and not internal ones.

Asian equities are drifting

With Australia wishing Her Majesty a happy birthday and Greater China out dragon boating, the rest of the region has contented itself with replicating Wall Street's positive close on Friday. Especially with no fireworks emerging from the G-7 summit over the weekend. 

Friday saw the S&P 500 close 0.20% higher; the Nasdaq climb by 0.35%, and the Dow Jones edge 0.04% higher. Index futures on all three have drifted higher in Asia, with markets supported by the expectation that the FOMC this week will be as dovish as ever.

The Nikkei 225 has risen by 0.60% today, while the Kospi is unchanged. With Greater China and Australia away, Singapore is flat, while Kuala Lumpur has increased 0.65% and Jakarta by 0.25%. Bangkok and Manilla are 0.25% lower.

If Asia is in wait-and-see mode, the uneventful G-7 should be all Europe needs to open higher this afternoon. However, London may be held back as it awaits official confirmation of a one-month delay in full reopening, with travel and leisure stocks likely to feel the chill winds the most.

The US rally continues in Asia

The US Dollar staged an impressive rally on Friday, which, as I have stated earlier, looks to be a good old-fashioned short squeeze given that US bonds and US equities did not move that much. On Friday, the dollar index rose 0.50% to 90.51, climbing another 0.06% to 90.57 in Asia. Friday's rally sees the index near the top of its two-week range. A rise through the double top at 90.62 could see the US Dollar short squeeze extend to 91.00 initially.

In the same vein, both the Euro and British Pound fell on Friday, as did most of the majors. The price action looks corrective, with EUR/USD at 1.2100 and GBP/USD at 1.4110 today. Both could potentially fall in the days ahead, but only the failure of 1.2000 and 1.4000 changes the bullish underlying technical picture.

Both AUD/USD and NZD/USD were sold heavily on Friday for much the same reasons. Of the two, the NZD/USD looks the more vulnerable, with a failure of 0.7100 opening another 100 points of losses. AUD/USD has firm support at 0.7650 and 0.7600.

With China away, Asian currencies have given ground versus the US Dollar today in Asia with USD/IDR, USD/MYR and USD/PHP and USD/IDR all 0.20% higher. With the PBOC back in the office tomorrow, markets will watch the USD/CNY fix closely for signs that the PBOC is happy to see CNY weakness. That could lead to more Asian FX weakness as well.

Overall the US Dollar rally looks like a corrective culling of short US Dollar positioning ahead of the mid-week FOMC.

International Energy Agency sends oil higher

Oil spent much of Friday on the back foot as the US Dollar surged. However, a report from the International Energy Agency (IEA) stating the demand would continue to recover and urging OPEC+ to pump more to contain price increases sent oil higher. Brent crude finished 0.30% higher at $72.60 a barrel, with WTI climbing by 1.0% to $70.80 a barrel. 

Another bullish factor adding to the bullish outlook is the oil futures prompt spread. That widened notably last week, suggesting that immediate oil demand is increasing.

The rally has continued in Asia, where liquidity has been thinned by a China holiday. Brent crude has risen 0.55% to $73.00 a barrel, with WTI rallying by 0.60% to $71.20 a barrel. 

Brent crude has nearby resistance at $73.30, followed by $76.00 a barrel, and only the failure of $70.00 a barrel undermines the bullish outlook. WTI has resistance at $72.50, followed by $75.00 a barrel. Only a fall through $68.00 a barrel changes its bullish outlook.

That oil has rallied so significantly in the face of prominent US Dollar strength suggests the rally has plenty left in it, as does the widening of the futures curve backwardation.

Gold wilts on US dollar strength

Gold endured a torrid session on Friday, with the US Dollar rally sending it 1.10% lower to $1878.00 an ounce. Things have continued in the same vein today, with gold retreating another 0.72% to $ 1864.25 an ounce.

Although US Dollar strength explains the capitulation on Friday, I highly suspect that Bitcoin's impressive 9.0% weekend rally and a non-event G-7 have contributed to its demise this morning. The price action suggests that the speculative market was heavily long as of Friday and that the culling of positioning continues in Asia today.

Gold has support at $1856.00 an ounce, but the $1840.00 to $1845.00 zone must hold to keep the bullish case on track. That contains a series of previous daily highs and the 200-day moving average (DMA). Failure means that gold is undergoing a much deeper correction that could extend to its 100-DMA at $1800.00 an ounce. Rallies will be limited to $1880.00 and $1900.00 an ounce ahead of the FOMC.