The impact of China’s admittedly extreme sabre rattling appears to be passing

And now, on with the show

With the Pelosi show having also left the building, the impact of China’s admittedly extreme sabre rattling appears to be also passing. Asian markets seem to be pricing in the missiles flying over Taiwan in much the same manner as North Korean missile tests. A few wobbles in Seoul and Tokyo and then back to business as usual.

After a few days' holidays, my initial impression is that Asian markets are looking at another night of tumbling oil prices and soft commodity prices as a much more positive longer-term driver than short-term noise from mainland China. A weaker US Dollar will also be cause for cheer for the region, although that story has been confined to the major currency space thus far, with Asian currencies yet to find much support from it. That said, inflation data today from Asia suggests that the regional inflation lag is loitering and in some cases, playing catchup.

Assisting the US Dollar fall overnight was the Bank of England, which hiked rates by 0.50%. As ever, it is what the central bank said, and not what they did, that had the greatest impact. The BOE remained hawkish, saying the UK inflation could hit an eye-watering 13.0%. But the BOE also sounded a loud warning about both the UK and the international economy, signalling a bitter recession was on the way. The BOE has been the most straight-talking of the G-10 central banks for a long time now, but on a slow US data night, it was enough to see energy prices and the US Dollar tank. Oddly enough, most of the US Dollar losses were made against the Euro, surely the ugliest horse in the glue factory right now. I am at a loss to explain this.

Today in Asia, the South Korean Current Account for June improved to $5.61 billion, boosted by falling input prices, while Japanese Household Spending sharply outperformed in June, rising by 3.50%. That will give the Bank of Japan some cheer after 20 years, suggesting that inflationary forces are finally doing their job after decades, convincing Japanese households that goods won’t be cheaper next month than this month. 2022 continues to surprise me on many levels.

Philippines Inflation YoY for July rose to 6.40%, well above the 6.20% expected. That should ensure the central bank continues its hawkish pivot and may give some support to the beleaguered Peso. Indonesian GDP YoY for Q2 outperformed impressively, riding recovering consumer demand and robust commodity prices as it climbed by 5.44%. USD/IDR remains uncomfortably near 15,000.00, but with inflation also rising at a decent pace now, the stubbornly dovish Bank Indonesia may also be nearing a hawkish pivot, supporting the Rupiah. Thailand's Inflation YoY for July printed at 7.61% this morning, only marginally lower than last month, keeping the pressure on the Bank of Thailand to keep hiking.

The Reserve Bank Of India announces its latest policy decision this afternoon, the most anticipated data point in Asia today. Markets forecasts are for a 0.35% hike to 5.25%. India is ahead of the rest of Asia on the inflation front. Inflation rose there far sooner and by more than in the rest of Asia, which is now clearly playing catchup. Ironically, with RBI policy rates and India inflation moving closer together, the RBI may have more room to be a little softer on rate hikes. However, I remain in the 0.35% to 0.50% camp as the Indian Rupee remains one of the region's worst performers. The joys of stagflation.

All roads lead to the US tonight, though, and the week’s data highlight the US Non-Farm Payrolls. Despite all the recession doom and gloom in the US, with the housing market under stress and stubbornly high inflation, not all the pieces have fallen into place. Nor is there actually any unity in the market about the trajectory of US growth or inflation. US ISM Manufacturing was robust earlier this week, consumer spending is holding up, and the labour market appears to be remaining as tight as ever.

A weak US Non-Farm Payrolls this evening will give ammunition to the riders of the apocalypse if labour market weakness is finally seeping through in tier-1 data. Despite some very hawkish Fed speakers this week, a soft number probably sees US yields and the US Dollar fall, while somewhat perversely, US stocks will probably rally due to the former. A US recession being good for stocks, apparently. Conversely, another surprise upside release is likely to have the opposite reaction, at least in the short term, as it reinforces the Fed speaker’s hawkish rhetoric.

China releases its July Balance of Trade over the weekend, expected to print at around a $90 billion surplus. That data is unlikely to shake the tree too much. Far greater risk lies in the geopolitical sphere, and the property sector slow moving trainwreck, as well as the usual covid-zero risks. For that reason, and with US data and the weekend ahead, the animal spirits of Asia may be tempered today, with quiet days on equities and currency markets.

Pelosi relief rally in Asia

The further from Asia Nancy Pelosi goes, the more supportive of local equities it becomes, it seems, as Asian markets draw a collective sigh of relief and climb into the green today. China’s military exercises around Taiwan seem to be getting the “one and done” treatment. That followed a mixed session on Wall Street overnight, which could only be described as noisily sideways. Asian markets are also likely to react positively to another slump in oil futures overnight, even as Saudi Arabia raises its crude prices to Asian buyers.

On Wall Street overnight, the S&P 500 finished just 0.08% lower, while the Nasdaq climbed by 0.41%, and the Dow Jones eased 0.26% lower: an inconclusive session. US futures in Asia are on the move higher, though, as China nerves abate. S&P 500 and Dow futures have risen by 0.25%, while Nasdaq futures have gained 0.35%.

In Asian markets, the Nikkei 225 has climbed 0.75% higher today, with South Korea’s Kospi rallying by 0.80%. Taipei is experiencing an inverse-Pelosi rally of impressive proportions, the TAIEX leaping higher by 1.85%.

Things are more sedate in Mainland China, where the Shanghai Composite, CSI 300 and the Hang Seng are almost unchanged. Singapore has added 0.25%, while Kuala Lumpur has fallen by 0.50%, and Jakarta is 0.20% higher. Bangkok is unchanged, with Manila easing 0.25% after higher inflation data.

Australian markets have been content to track US index futures higher. The ASX 200 and All Ordinaries gaining 0.40%, while New Zealand, with the All Blacks Springboks rugby test tomorrow consuming mental capacity, is unchanged.

US Dollar has had an uneven sell-off overnight

The US Dollar fell overnight, led by losses against the Euro for unknown reasons, with the Japanese Yen also gaining as US yields slid slightly. Sterling and the Australasians hardly moved, while Asian currencies remain stubbornly anchored near to recent lows.

The dollar index fell 0.59% lower at 105.75 overnight, retracing slightly higher by 0.11% to 105.87 in Asia. The dollar index breakout lower at 106.45 has continued to cap rallies this week on a closing basis, suggesting downside risks are still the path of least resistance. Beyond that, 106.75 is the next resistance. Support is at 105.65, and then the more important 1.0500 level. Failure signals a deeper move lower to 1.0350 and, potentially, the 102.50 longer-term breakout.

EUR/USD rallied by 0.76% overnight to 1.0245, easing slightly to 1.0235 in Asian trading. Given stubbornly high European gas prices and the recessionary risks from its Eastern border, the single currencies environment remains challenging, even if 0.9950 is now looking like a medium-term low. EUR/USD had solid resistance nearby at 1.0250 and then 1.0300. A close above 1.0300 this even would signal further gains to 1.0500, however. Meanwhile, EUR/USD has support at 1.0150 and then a series of daily lows between 1.0100 and 1.0125.

GBP/USD traded in a choppy 150+ point Bank of England range overnight but ultimately finished nearly unchanged at 1.2160. In Asia, it has edged lower to 1.2145. When your central bank has forecast a recession and inflation rising to 13.0% but has only hiked rates to 1.75%, it is reasonable to assume they are behind the curve. That stagflationary reality could be limiting sterling’s gains. Support is at 1.2065, the overnight low, with resistance at 1.2215, the overnight high, followed by 1.2300.

Four days in Bali saw me miss the long-awaited capitulation sell-off by USD/JPY as the US/Japan rate differential narrowed. Much will depend on the US Non-Farm Payroll data this evening and the reaction by US bonds. The sell-off this week went further than I expected but held the 100-day moving average (DMA), which today is at 130.70. Resistance is clearly denoted at 134.65 now. Expect plenty of noise in between.

AUD/USD rose 0.25% to 0.6965 overnight, and NZD/USD rose by 0.40% to 0.6295. Both are almost unchanged in Asia as risk sentiment holds up into the Asian session. The technical picture for both remains constructive as both currencies staged upside breakouts higher a fortnight ago. They remain well above their breakout lines at 0.6790 and 0.6145, and a daily close above either 0.7050 or 0.6350 signals the next stage of the recovery rally.

Asian currencies were steady overnight, booking an uneven session of mixed gains against the greenback. In Asia, surging inflation numbers from the Philippines and Thailand have sparked 0.75% rallies by THB and PHP to 35.620 and 55.17 as markets price in faster monetary tightening. That has had a knock-on impact across the Asian FX space, with the Korean Won gaining 0.40% to 1297.20. The Indonesian Rupiah and Malaysian Ringgit remain near recent lows, however, as both central banks remain very reluctant rate hikers. With inflation rising in Asia, lifting rate hike expectations, Asian currencies could finally be starting also to gain some benefits from recent US Dollar strength elsewhere. USD/INR has eased to 89.976 today. With the RBI rate decision this afternoon, I expect volatility ahead. Further INR strength from here probably relies on the RBI statement being hawkish; otherwise, I suspect INR weakness will resume.

Oil prices slump overnight

Although OPEC+ was a damp squib, rising recession fears saw oil prices slump once again overnight after a negative global outlook from the Bank of England policy meeting. Both Brent crude and WTI have now comprehensively broken lower through their 200 DMA’s, a negative technical development. Although Saudi Arabia continues raising prices for their crude grades to Asian and US customers in the real world, futures markets suggest this may be a last hurrah.

Brent crude slumped by 3.55% to $93.55 a barrel overnight. WTI fell by 3.10% to $88.00 a barrel. In Asia, the overnight dip in prices has been irresistible to local buyers, sending Brent crude 0.75% higher to $94.25 and WTI 1.00% higher to $88.90 a barrel.

Brent crude broke below its 2022 uptrend at $109.00 in early July, and it seems unlikely we will see $110.00 Brent again this year, barring Eastern European shocks. The 200-DMA at 98.35 is the initial resistance, followed by 102.50 a barrel. Support is at $93.55, and failure clears the road to 90.00 a barrel. Failure of $90.00 could trigger another wave of capitulation selling.

WTI’s 2022 trendline failed at $108.35 in early July, never to be seen again. US recession fears continue to weigh on WTI prices. Resistance lies at $95.20 barrel, the 200-DMA, followed by $102.00. Support is at $87.50 and then $82.00 a barrel.

As noted in earlier newsletters, the avalanche of $200.00 a barrel, end of the world Brent crude forecasts, proved an uncannily accurate indicator of the impending peak in oil prices.

Gold rallies, did I just say that?

My four days away in Bali have seen gold’s impressive recovery rally continue. Overnight gold rose an impressive 1.45% to $1791.50 an ounce, edging to $1792.00 an ounce in Asian trading. It continues to benefit from a weaker US Dollar, in turn, driven by falling US bond yields, as markets continue to price in peak inflation and a US recession.

Notably, gold prices based, mid-July, at critical long-term support at $1680.00 an ounce. The ensuing rally remains a powerful bullish technical pattern which seems to be now attracting plenty of interest. Gold should remain well supported on dips to $1775.00 now, with a test of $1800.00 imminent. ​

Gold’s technical picture suggests it will continue grinding towards the $1900.00 region in the coming weeks. Until such a time as bond markets decide that inflation will be stickier than anticipated and yields start to rise again. The first test of that will come in the form of the US Non-Farm Payrolls this evening. A soft US payroll number, though, will likely support gold's upward momentum, as it is likely to result in another bout of US Dollar weakness as yields fall.

My last commentary closes with a bullish outlook on gold; who would have thought? And with that, dear readers, all I can say is thank you very much; you’ve been a wonderful audience.