Forexlive Americas FX news wrap: Dollar and bonds go for a wild ride

Forexlive Americas FX news wrap: Dollar and bonds go for a wild ride

Markets:

  • Gold flat at $1806
  • US 10-year yields down 8.5 bps to 2.89%
  • WTI crude oil up $2.51 to $108.29
  • S&P 500 up 1.1%
  • JPY leads, AUD lags

This was a holiday-thinned trade with Canada out and many US traders heading out early for the long weekend but it was also the start of a new month of trade.

There were some massive moves in FX and bonds. The dollar and yen soared in Asia and Europe with the euro, pound and Australian dollar crumbling. The latter ran stops after busing the May low and fell to 0.6765, which is the lowest since June 2020.

In the bond market, 5-year yields were down 22 bps at the lows to 2.88%, a far cry from 3.62% on June 14. It’s a similar story across the curve as it bull flattens. The Fed funds market has taken down the terminal top to 3.34% in Feb and falling 50 bps over the remainder of the year from there.

The moves in the dollar and bonds both unwound to some extent. 5-year yields halved the decline while the dollar did the same.

EUR/USD fell as low as 1.0367 before bouncing to 1.0422. Cable was even more intense in a swan dive to 1.1971 before bouncing 130 pips (and still ending down 85 pips).

The commodity currencies turned around with the loonie finishing nearly flat with the help of oil and gas, far outperforming its commodity cousins. I’d caution on that trade as Canada was out.

The yen was the winner on the day as spread compression becomes the norm. The BOJ may have won the war if inflation starts coming down again and so do international bond yields. That will be an interesting one to watch in the days ahead.

fx wrap

The big US dollar moves have now mostly unwound

The big US dollar moves have now mostly unwound

There was a fierce bid for US dollars to start the month but it’s now largely reversed.

I could tie together a narrative around rates, Fed hikes and whatnot but I’m going to shrug here and put this on flows around the turn of the calendar.

I don’t know if that was European money scrambling for dollars or something else. But it ended abruptly after the European close.

Directionally, some of it makes sense with the market significantly shifting the terminal top of Fed funds down to 3.33% from +4% a couple weeks ago.

cable intraday chart

You have two options

You have two options

Meme markets growth inflation

The market is navigating different outcomes and in the simplest terms, here’s how it shapes up.

1) High inflation with ongoing growth and Fed hikes above 4%

This is the scenario the market grappled with for most of the year and the results speak for themselves. It was the worst H1 for the S&P 500 since 1970 and the worst for the Nasdaq ever.

2) A recession but inflation under control

The word ‘recession’ never sounds good to investors but I’d argue that done right, this is the better scenario. As the market has shifted its focus to recession, borrowing costs have come down and a terminal rate of 3.25-3.50% in Fed funds is priced in, coming down to 2.75% about 8 month later.

Unfortunately, markets have gotten drunk on cheap money for far too long and are hopelessly addicted now. Everything is leveraged. If rates top out and we can kick the can down the road on popping the bond bubble, then there’s scope for a ‘recession rally’ as bizarre as that sounds.

The third scenario

The nightmare scenario is stagflation, where we get a recession and  inflation 
Inflation

Inflation is defined as a quantitative measure of the rate in which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general level of prices where a given currency effectively buys less than it did in prior periods.In terms of assessing the strength or currencies, and by extension foreign exchange, inflation or measures of it are extremely influential. Inflation stems from the overall creation of money. This money is measured by the level of the total money supply of a specific currency, for example the US dollar, which is constantly increasing. However, an increase in the money supply does not necessarily mean that there is inflation. What leads to inflation is a faster increase in the money supply in relation to the wealth produced (measured with GDP). As such, this generates pressure of demand on a supply that does not increase at the same rate. The consumer price index then increases, generating inflation.How Does Inflation Affect Forex?The level of inflation has a direct impact on the exchange rate between two currencies on several levels.This includes purchasing power parity, which attempts to compare different purchasing powers of each country according to the general price level. In doing so, this makes it possible to determine the country with the most expensive cost of living.The currency with the higher inflation rate consequently loses value and depreciates, while the currency with the lower inflation rate appreciates on the forex market.Interest rates are also impacted. Inflation rates that are too high push interest rates up, which has the effect of depreciating the currency on foreign exchange. Conversely, inflation that is too low (or deflation) pushes interest rates down, which has the effect of appreciating the currency on the forex market.

Inflation is defined as a quantitative measure of the rate in which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general level of prices where a given currency effectively buys less than it did in prior periods.In terms of assessing the strength or currencies, and by extension foreign exchange, inflation or measures of it are extremely influential. Inflation stems from the overall creation of money. This money is measured by the level of the total money supply of a specific currency, for example the US dollar, which is constantly increasing. However, an increase in the money supply does not necessarily mean that there is inflation. What leads to inflation is a faster increase in the money supply in relation to the wealth produced (measured with GDP). As such, this generates pressure of demand on a supply that does not increase at the same rate. The consumer price index then increases, generating inflation.How Does Inflation Affect Forex?The level of inflation has a direct impact on the exchange rate between two currencies on several levels.This includes purchasing power parity, which attempts to compare different purchasing powers of each country according to the general price level. In doing so, this makes it possible to determine the country with the most expensive cost of living.The currency with the higher inflation rate consequently loses value and depreciates, while the currency with the lower inflation rate appreciates on the forex market.Interest rates are also impacted. Inflation rates that are too high push interest rates up, which has the effect of depreciating the currency on foreign exchange. Conversely, inflation that is too low (or deflation) pushes interest rates down, which has the effect of appreciating the currency on the forex market.
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doesn’t fall. That might be possible if the world continues to be short of commodities, or loses faith in central banks. I think we priced in a chance of this in the past few weeks but given how quickly consumer sentiment and industrial orders are declining, along with  commodities 
Commodities

Commodities are assets that are either naturally grown or occurring in the environment. Most commonly this includes precious metals such as gold, silver, and palladium.Beyond metals, commodities can also focus on agricultural or industrial goods that are central to manufacturing or other sectors. This includes crude oil, copper, wheat, and others.Relative to other assets, commodities are an extremely complex form of investment, with many similarities and differences to existing products.Commodities can be traded on exchanges where investors work as a team to purchase or trade products in an attempt to generate profit from the fluctuation of market prices or because they need that particular product.Additionally, commodities are often traded through the use of exchange-traded-funds (ETFs) to give exposure to investors.How to Trade CommoditiesCommodities trading is not reserved only for institutional traders but also ordinary retail ones as wellNearly all retail brokers carry some offering of commodities, giving investors access to these assets.Investors, just like companies or other investment institutions, are able to make a profit from daily changes in commodity prices. There are several methods that investors can use to trade commodities. Commodities can be traded in futures – these are contracts that direct the purchase or trade of a commodity at a certain price. Futures trading can be particularly risky and is usually reserved for more advanced traders given the complexity of these trades.In addition, commodities can also be traded with options – this means the commodity is purchased or traded at a particular date and price.Commodities are also commonly traded with leverage, not unlike other assets, which can result in large profits or losses due to volatility in markets.

Commodities are assets that are either naturally grown or occurring in the environment. Most commonly this includes precious metals such as gold, silver, and palladium.Beyond metals, commodities can also focus on agricultural or industrial goods that are central to manufacturing or other sectors. This includes crude oil, copper, wheat, and others.Relative to other assets, commodities are an extremely complex form of investment, with many similarities and differences to existing products.Commodities can be traded on exchanges where investors work as a team to purchase or trade products in an attempt to generate profit from the fluctuation of market prices or because they need that particular product.Additionally, commodities are often traded through the use of exchange-traded-funds (ETFs) to give exposure to investors.How to Trade CommoditiesCommodities trading is not reserved only for institutional traders but also ordinary retail ones as wellNearly all retail brokers carry some offering of commodities, giving investors access to these assets.Investors, just like companies or other investment institutions, are able to make a profit from daily changes in commodity prices. There are several methods that investors can use to trade commodities. Commodities can be traded in futures – these are contracts that direct the purchase or trade of a commodity at a certain price. Futures trading can be particularly risky and is usually reserved for more advanced traders given the complexity of these trades.In addition, commodities can also be traded with options – this means the commodity is purchased or traded at a particular date and price.Commodities are also commonly traded with leverage, not unlike other assets, which can result in large profits or losses due to volatility in markets.
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, this has grown more remote.

Overall though, I don’t see a ‘recession’ scenario as that bad, especially since I think the hit to the jobs market will be modest.

SPX daily chart

OPEC badly missed production quotas in June

OPEC badly missed production quotas in June

OPEC production fell 120,000 barrels per day in June to 28.6 million barrels per day, according to a Bloomberg survey. Earlier, Reuters’ survey estimated at 100,000 bpd decline.

OPEC was supposed to increase production in the month but instead it declined. Saudis missed their quota by 213k bpd.

There’s a good chance that by announcing further production hikes, OPEC simply embarrasses itself.

Here are the numbers:

OPEC tables

Atlanta Fed GDPNow Q2 tracker falls deeper into negative territory

Atlanta Fed GDPNow Q2 tracker falls deeper into negative territory

Atlanta Fed GDPNow

We started the week at +0.2% in the Atlanta Fed’s GDP tracker. After a series of economic data point disappointments, it’s now at -2.1%. That’s down from yesterday’s reading of -1.0% and comes after today’s data on manufacturing and construction spending.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2022 is -2.1 percent
on July 1, down from -1.0 percent on June 30. After this morning’s
Manufacturing ISM Report On Business from the Institute for Supply
Management and the construction report from the US Census Bureau, the
nowcasts of second-quarter real personal consumption expenditures growth
and real gross private domestic investment growth decreased from 1.7
percent and -13.2 percent, respectively, to 0.8 percent and -15.2
percent, respectively.

Yikes. That line has gone straight south.

I maintain that a recession isn’t going to be that bad of a thing for jobs and the real economy; it will mostly be due to pandemic skews but right now there’s no fighting the negative sentiment.

Honda reports a sharp drop in June US auto sales, blames supply issues

Honda reports a sharp drop in June US auto sales, blames supply issues

Honda

Honda sold 71,048 vehicles in the US in June, which is a sharp drop compared to last month (-53.6%) and a year ago(–55.4%).

Everyone expected auto sales to slow after the frenzied pace of the pandemic but this is a almost a sudden stop. There are still shortages of parts and that’s turning away prospective buyers. There’s also long lead times on many new models along with low inventories, so factories will stay busy for awhile.

Looking beyond that, it looks like it won’t be long until sales and incentives are back on the table.

Baker Hughes US oil rig count 595 vs 594 prior

Baker Hughes US oil rig count 595 vs 594 prior

Baker Hughes

  • Prior was 594
  • Gas rigs 154 vs 157 prior

Rigs continue to rise but they’re not back to 2019 levels yet and DUCs continue to be drawn down. The pace of drilling will have to step up from here.

oil technical analysis

WTI  crude oil 
Crude Oil

Crude oil is the most popular tradable instrument in the energy sector, offering exposure to global market conditions, geopolitical risk, and economics. The instrument is strategically relied upon and situated in the global economy. Crude oil has proven to be a unique option for traders given volatility and the efficacy of both swing trading and longer-term strategies. Despite its popularity, crude oil is a very complex investing instrument, given the litany of fluctuations in oil prices, risk, and impact of politics stemming from OPEC. Short for the Organization of the Petroleum Exporting Countries, OPEC operates as an intergovernmental organization of 13 countries, helping set and dictate the global oil market.How to Trade Crude Oil Crude oil is most commonly traded as an exchange-traded fund (ETF) or through other instruments with exposure to it. This includes energy stocks, the USD/CAD, and other investing options. Crude oil itself is traded across a duality of markets, including the West Texas Intermediate Crude (WTI) and Brent crude. Brent is the more relied upon index in recent years, while WTI is more heavily traded across futures trading at the time of writing. Other than geopolitical events or decisions by OPEC, crude oil can move due to a variety of different ways.  The most basic is through simple supply and demand, which is affected by global output. Increased industrial output, economic prosperity, and other factors all play a role in crude prices. By extension, recessions, lockdowns, or other stifling factors can also influence crude prices. For example, an oversupply or mitigated demand due to the aforementioned factors would result in lower crude prices. This is due to traders selling crude oil futures or other instruments.  Should demand rise or production plateau, traders will bid increasingly on crude, whereby driving prices up.

Crude oil is the most popular tradable instrument in the energy sector, offering exposure to global market conditions, geopolitical risk, and economics. The instrument is strategically relied upon and situated in the global economy. Crude oil has proven to be a unique option for traders given volatility and the efficacy of both swing trading and longer-term strategies. Despite its popularity, crude oil is a very complex investing instrument, given the litany of fluctuations in oil prices, risk, and impact of politics stemming from OPEC. Short for the Organization of the Petroleum Exporting Countries, OPEC operates as an intergovernmental organization of 13 countries, helping set and dictate the global oil market.How to Trade Crude Oil Crude oil is most commonly traded as an exchange-traded fund (ETF) or through other instruments with exposure to it. This includes energy stocks, the USD/CAD, and other investing options. Crude oil itself is traded across a duality of markets, including the West Texas Intermediate Crude (WTI) and Brent crude. Brent is the more relied upon index in recent years, while WTI is more heavily traded across futures trading at the time of writing. Other than geopolitical events or decisions by OPEC, crude oil can move due to a variety of different ways.  The most basic is through simple supply and demand, which is affected by global output. Increased industrial output, economic prosperity, and other factors all play a role in crude prices. By extension, recessions, lockdowns, or other stifling factors can also influence crude prices. For example, an oversupply or mitigated demand due to the aforementioned factors would result in lower crude prices. This is due to traders selling crude oil futures or other instruments.  Should demand rise or production plateau, traders will bid increasingly on crude, whereby driving prices up.
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has bounced back from yesterday’s decline and is trading up $2.54 to $$108.54. There are conflicting signs on the chart, with the steady uptrend as the most-dominant feature. But his week’s bearish engulfing candle and failure to break above the 50-61.8% Fibonacci are negative.

Here’s how the forward curve looks for the next year. There’s some further backwardation going on today, which (to me anyway) suggests further tightening in the market.

Oil CT

Fed’s Daly: Want to get to around 3.1% Fed funds at year end

Fed’s Daly: Want to get to around 3.1% Fed funds at year end

Mary Daly

  • “My own views on policy… are that we need to get to something like the neutral rate of interest by the end of the year, which in my judgment would be to around the 3.1% range of a nominal Fed funds rate.”
  • “And so what would unwind the need to do that? Well, if there were some extraordinary unexpected developments in the economy that pull inflation down rapidly, or supply chain would repair or some another global shock that we had to deal with, but none of those things are happening”
  • The data on inflation are coming in more or less as expected
  • “I would say 75 [basis points] in July, and then you figure out what else needs to be done so that we can get to 3.1% by the end of the year.
  • “Systemic risk from housing slowing is just not there.”

Here is the full text.

She has an interesting take on crypto too:

“In terms of the real economy effects, I was doing a CEO round table in LA last week. And they all came to the same conclusion, which is they lost a lot of younger people to the idea that you could work a little bit in trading crypto, and so they quit their jobs. And now they’re getting calls back saying, ‘well, probably the working thing is a good gig and I want to invest in the diversified portfolio.’

European equity close: Middling start to the new quarter

European equity close: Middling start to the new quarter

Last quarter was rough for European stocks and there wasn’t exactly a rush to buy into the new quarter:

  • UK FTSE 100 -0.2%
  • Stoxx 600 -0.1%
  • German DAX +0.1%
  • French CAC +0.1%
  • Italy MIB +0.3%
  • Spain IBEX +0.8%

On the week:

  • UK FTSE 100 -0.7%
  • Stoxx 600 -1.45%
  • German DAX -2.3%
  • French CAC -2.3%
  • Italy MIB -3.5%
  • Spain IBEX -1.0%

There is some breathing room in some of these markets but the Italian MIB is up against it. If anyone tells you that stocks always win in the long term, shown them the MIB, which is at 1998 levels.

Italy MIB weekly chart

Treasury yields bounce big. USD/JPY follows.

Treasury yields bounce big. USD/JPY follows.

There’s an early close in the bond market today at 2 pm Eastern so it’s an abbreviated session but certainly not a quiet one.

A crater in yields have turned into a large hold. US 5-year yields were down 22 bps at the lows but have trimmed that to just 12 bps. It’s similar across the curve as the market fleshes out the state of play in the new quarter.

US 5 year yields

The moves highlight the difficulty in interpreting markets at the turn of the quarter and in holiday-thinned liquidity. With the turn in yields, USD/JPY has bounced.