Sentiment has turned sour as unrest across China grows, including in some major cities and prominent universities. Protest of this extent is rare in the country and raises many uncertainties. The best scenario is further easing and reopening, but the speed at how things deteriorated over the weekend suggests the government needs to act fast. The risk of the situation escalating from here and short-term volatility remains high.
Outside of China, which is mired tug-of-war between weakening macroeconomic fundamentals and increasing reopening hopes, what the Fed does next will determine whether the dollar surges again and the S&P slumps. Or if the dollar has peaked, the equity market can embark on a rally next year.
On cue, this week brings US nonfarm payrolls, a speech from Fed chair Powell and Eurozone inflation. Investors will be keying on Powell's speech – especially given as it is one of the last before the blackout period, ahead of December's FOMC.
Oil prices are shifting tangentially lower to the trending higher Mainland COVID cases, which typically leads to an " unswerving" lockdown response from China's policymakers. Any hopes of accelerating reopening plans when new covid cases are rising are unlikely; hence oil traders are taking a rather dim view of the current COVID situation on the ground in China.
The USDCNH spot has already moved 600 pips higher pre-market in the Asia FX space. FX traders are looking at 7.20-35 in the subsequent few sessions and are likely looking for more clarity on the ground before fading the move. Until policymakers can get things under control, traders will probably maintain a topside bias in USDCNH here despite the pair moving into the PBoC's intervention zone of above 7.2500.
FX swaps will likely start lower with the risk-off sentiment. But if the spot continues higher, the curve may bounce on outright buying.
In G-10 forwards, the December/January turn is the hot topic. The EUR turn led all other G10 turns, tightening 200bp last week. CHF and JPY followed, tightening by 180bp. This week will be volatile for the turn as month-end flows across all currencies are on the radar. So, I suspect outside of the principal risk events, G-10 currency markets will turn more transactional than speculative in nature.
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