No one can complain about a lack of volatility in financial markets at the moment. The tug-of-war between economic recovery and inflation risks continued on Wall Street on Friday and spilt out onto the street in Asia.

Friday's outsized 379,000 gain in Non-Farm Payrolls caused US yields to spike initially. Still, equity markets just couldn't keep saying no to the recovery story, and unwound all their ugly intra-day losses to post strong finishes. US 10-year yields peeped their head over 1.60%, before helpfully retreating to 1.55%, aiding the equity recovery story. 

The weekend had plenty of interest as well. China's Balance of Trade exploded higher in Dollar terms to $103.25 billion for JAN-FEB yesterday. For all the noise about its comparison to JAN-FEB 2020 ($78.17 billion), it flatters to deceive. The same period last year being the start of the Covid-19 economic implosion. Still, given that the number encompasses Lunar New Year, the data is impressive.

By contrast, Japan's Current Account this morning disappointed, rising only Yen 645.8 billion, roughly half the number expected. Increasing gas and oil prices appear to be playing their part, along with flat domestic demand and Japan's Covid-19-lite state of emergency. 

The US Senate passed the Biden $1.9 trillion stimulus package over the weekend, which has continued the market sugar rush this morning after equities closed positively on Friday. Apart from ditching the minimum wage and tweaking whom is entitled to the fiscal goodies, the bill is relatively intact. It will now pass back to the House tomorrow in its amended form, and then onto President Biden's desk for signing.

An attempted drone attack on a giant Saudi Arabia oil refinery and transport hub in the Kingdom this morning by the Yemeni Houthis has seen oil prices spike higher once again. No damage was caused, but Brent crude and WTI are 2.50% higher. Brent crude is now well above the $70.00 a barrel mark at $71.30 a barrel.

Notably, US 10-year yields have now climbed five basis points higher this morning, back to the 1.60% mark. The explosion higher by equities this morning on the US stimulus news was also a sign of pent up demand, much like New York on Friday, after a series of torrid sessions. A tough mental state for a market programmed to FOMO-buy each day.

Despite the warm afterglow seen in equities this morning, the charts for the S&P 500 show the index has only retraced to its downside breakout level. The story is similar for the Shanghai Composite, CSI 300 and Nikkei 225. The Nasdaq broke out of its Mar 2020 uptrend two weeks ago and remains there. Only the Dow Jones remains safe for now, having bounced off its March 2020 support line on Friday. 

Higher oil prices, robust US employment data and a $1.9 trillion US stimulus, sound more than a little inflationary to me. US bonds seem to agree. Assuming that equity markets are out of the woods is a risky business. 

Equities pare early gains

The US stimulus package's move through the US Senate, and a robust post-payroll finish from Wall Street on Friday, lifted Asian equities initially this morning. With US 10-year futures moving lower today in sympathy (yields higher), the firm moves higher across Asia have been pared back.

On Friday, Wall Street had an emotional session, falling aggressively, before a retreat by US bonds and a strong Non-Farm Payrolls released bullish animal spirits. The S&P 500 finished 1.95% higher, with the Nasdaq climbing 1.55%, and the Dow Jones closing 1.85% higher. Opening higher this morning, US index futures on all three have now turned lower, the Nasdaq futures now down nearly 0.90%.

Today's climb in oil prices is also weighing on energy-hungry Asian markets, but the retreat by US index futures as US yields climb in Asia is the main driver for the reversal. The Nikkei 225 is now 0.35% lower, with the Kospi back to flat. The Shanghai Composite is 0.55% lower, with the CSI 300 down 0.85%. Meanwhile, the Hang Seng has now fallen by 1.10%.

Notably, like Friday, the pro-cyclical ASEAN markets are outperforming once again, with their high beta to traditional recovery sectors. Singapore is 1.65% higher, Kuala Lumpur is 1.25% higher as oil prices track higher, Bangkok has risen 0.50%, and Jakarta has climbed 0.60%. 

Those same factors, along with firm commodity prices, seem to be saving Australian markets blushes today as well. Have leapt higher on the open in their slavishly following Wall Street way, Australian markets have pared gains but remain well in the green. The ASX 200 and All Ordinaries are both 1.05% higher.

Despite the initial US stimulus surge, the price action in equities shows that the trajectory of US 10-year yields continues to be the one ring that rules them all. The fact that the inflation story only took a one session break from being at the top of investor minds bodes ill for equities for the rest of the week.

The US Dollar consolidates gains in Asia

The US Dollar powered higher on Friday, with currency markets much more focused on yield differentials then equity markets. Also helping things along is that commodity markets remain mostly priced in US Dollars. Oil's rise on Friday and this morning suggest that real-economy demand for greenbacks will remain strong.

On Friday, the dollar index rose 0.40% to 91.98, with the index creeping above 92.00 to 92.03 this morning, its highest level in three months. Notably, the Euro fell through support at 1.1960 on Friday, with EUR/USD testing 1.1900 this morning. The European Central Bank's rate decision on Thursday will undoubtedly be ultra-dovish, with ECB officials expressing displeasure with the rise in Eurozone yields in no uncertain terms. That will almost certainly place more pressure on EUR/USD this week, which should target 1.1800 and could extend as low as 1.1600 in the coming fortnight.

USD/JPY rose to 108.40 as of this morning and targets 110.00 in the days ahead. It may not be a linear path, though, as short-term technical indicators are extremely overbought. USD/JPY is probably a buy on dips to 107.50 for a move to 1100.00 rather than chasing it higher at present levels. 

The once bullet-proof Sterling is testing the bottom of its four-month rising wedge at 1.3800 today. Failure signals a deeper correction in the weeks ahead, potentially as far as its long-term rising support line, today at 1.3430. AUD/USD and NZD/USD have both made weekly breakouts, and although attempting to regain support lines today, the technical picture suggests another 250 points lower for both at least. USD/CAD has yet to break higher but remains near resistance 1.2670, with the Canadian Dollar supported by higher oil prices. 

Asian currencies are threatening to capitulate to higher US yields today finally. The PBOC set the USD/CNY mid-point lower at 6.4795 today, but USD/CNY has climbed higher through 6.5000 to 6.5080. The offshore USD/CNH climbing to 6.5230. The divergence from the PBOC fixing is significant and will flow through to weakness in regional Asian currencies as well. With most of Asia running direct or dirty pegs to the US Dollar, rising US yields and a strengthening greenback will present challenges of unintended consequences for regional Asia. 

It becomes challenging to maintain an easy monetary policy if you semi-peg your currency to the US Dollar and yields rise there. Either a weaker currency is accepted, indirectly tightening policy for deficit countries, or yields must rise, something no one in Asia wishes to contemplate. Asian currencies are mostly lower today, with the Indonesian Rupiah looking most vulnerable, USD/IDR increasing 0.50% to 14,368.00 today. Monetary policy easing in Asia looks to be over, with regional central banks appearing to accept weaker currencies for now. 

Overall, currency markets are ignoring retracements in equity markets and US bond markets; remaining laser-focused on yield differentials. In this scenario, US Dollar strength is likely to continue with movements in the US 10 and 30-year yields dictating overall direction.

Oil prices race higher on Saudi's and stimulus

Oil prices exploded higher once again on Friday after OPEC+ left production targets unchanged, and an impressive US Non-Farm Payrolls threw more fuel on the recovery/demand fire. Brent crude rose 3.85% to $69.55, and WTI jumped 3.55% to $66.25 a barrel.

The attempted Yemeni Houthi drone attack on a major Saudi Arabia oil installation overnight saw both contracts gap higher in Asia, also powered by the US stimulus bill passing through the US Senate over the weekend. Brent crude has leapt 1.60% to $70.65 a barrel, and WTI has rallied 1.60% to $67.35 a barrel.

Brent crude has a definite gap on its chart, suggesting it could retreat to $69.75 a barrel; it's Friday high. Support then follows at %67.50 a barrel. The short-term technical indicators are still not overbought, suggesting further gains to $73.50 a barrel are possible. The rise through $70.00 a barrel appears to be flushing out physical buyers who were waiting for the dip. With supplies tight in the physical market, any drop under $70.00 a barrel will be short-lived now.

WTI's initial target is $70.00 a barrel, followed by $72.50 a barrel. Friday's high at $66.40 a barrel becomes initial support, followed by $63.50 a barrel. Like Brent crude, WTI's short-term technicals are not yet overbought, suggesting that and dips below $67.00 a barrel will be keenly sought after. 

Gold stages a dead cat bounce

Gold's relative strength index (RSI) dipped into oversold territory on Friday, and that, combined with a late surge in US equities, helped it stage a slight recovery. Gold rose 0.30% to $1703.00 an ounce. Gold's early session gains quickly ran out of steam, and gold has crawled just for dollars higher to $1707.00 an ounce today.

To say that gold's price action is unimpressive is an understatement. Gold is climbing the stairs on one leg while descending by jumping out of the 10th-floor window. One positive is that gold tested critical support at $1689.00 an ounce on Friday; it's 61.80% Fibonacci and managed to hold that support. An oversold RSI means that gold may spend the subsequent few sessions consolidating in a $1690.00 to $1720.00 an ounce range, forgotten by the rest of the financial world.

Gold remains on life support, though, and if US Dollar strength continues, a fall to $1600.00 an ounce is entirely possible later in the week. Gold needs to recapture the $1760.00 an ounce region to suggest that the worst is over. 

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities.

Opinions are the authors — not necessarily OANDA’s, its officers or directors. OANDA’s Terms of Use and Privacy Policy apply. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

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