Struggling for parity

Things sure are looking messy out there right now, especially in Forex Land where the euro is within a hair’s breadth of trading at parity with the US dollar this morning. Overnight, the single currency slumped by 1.45% to 1.0040 as Euro yields edged lower as markets fell over themselves to price in a European recession. Energy, and by this, I mean Russian energy, lies at the heart of Europe’s turmoil, with news that Canada would release a specialised gas pipeline pump back to Russia to keep the petajoules flowing having no positive impact. My understanding is that as of yesterday, Nord Stream 1 which carries the fruits of Germany’s energy policies from Russia has entered its annual 10-day maintenance shutdown. The key question is, will the gas return after the 21^st of July. Markets seem to be making up their mind already.

The slump by the euro overnight also dragged sterling down with it, which faces a messy leadership battle now post-Bojo. Today it was announced that the process would be concluded by err… September 5^th. Wonderful. Risk sentiment indicators, the Australian and New Zealand dollar, were also dragged down the euro whirlpool as well, as investors loaded up on US dollars and a fair few US government bonds as well by the looks, as US yields fell overnight. Gold, the forgotten asset class, is also trading one-for-one with EUR/USD this morning as well.

Euro falls close to parity

As for EUR/USD itself, it has never looked back after it fell through the multi-decade support line at 1.0850 earlier this year. I have no doubt there are plenty of options-related buds just ahead of parity. Likely these are related to 1.0000 knockouts and one-touches and other arcane options “structures”. If previous form is followed, we are likely to see a slow erosion of those bids, along with some dead cat bounces, and when parity finally goes, the stop-losses will kick in sending EUR/USD quickly lower. My charts are thin on the ground at these subterranean levels, but somewhere around 0.9900 looks like the next stop for the train.

US data has thrown the cat amongst the pigeons of course. Friday produced another blockbuster Non-Farm Payrolls, which leapt higher to 372,000. Unemployment was unchanged at 3.60% suggesting Americans are returning to the workforce and are being slurped up by employers. That certainly rained on the “recession-is-nigh” party, something I have been saying isn’t a done deal to global deaf ears. The street is locked and loading another 75 basis points from the Fed at the end of the month. This Thursday’s US Inflation data will be the pivotal moment for financial markets this morning. If headline inflation stays at or above 8.80% YoY, and/or the core stays at 5.70% or above, get ready for a risk-aversion sell-off. Having said that, given the genetic propensity of the equity market FOMO gnomes to buy the dip, lower prints could spark a welcome relief rally in the stock, bond, and currency markets.

Another risk point the street is begrudgingly waking up to at last is China and covid-zero. The city of Wugang is being locked down today for three days, while cases are creeping higher in other parts of the mainland. That is weighing heavily on China’s equities right now with mainlanders rightly worried that more lockdowns, especially in Shanghai or Beijing, could occur. That has overshadowed excellent lending data released this week, as banks respond to central government exhortations to get play their stimulus part. ASEAN markets are yet to wilt, although the Northern Asia heavyweights geographically collocated certainly are. That could be because of their correlation to the Nasdaq though. The value-heavy ASEAN stock markets are looking like a safety play this morning, I’m not sure how long that will last.

Japan’s Finance Minister Suzuki has been on the wires this morning as USD/JPY approaches 138.00 saying Japan will take “necessary steps” in the forex market, as necessary I suppose. He also said that they would be closely communicating with other FX authorities internationally. This is the usual rhetoric when things don’t go to plan, and I do not believe we are imminently going to see the Ministry of Finance intervening in USD/JPY. (sidenote: the MOF makes the call on intervention; the BOJ merely executes it.) I am a little surprised that USD/JPY has remained at these levels, just as I am certain other “authorities” have bigger fish to fry right now and don’t think the yen’s depreciation is a threat to global financial stability. If the MOF intervenes, it’ll be doing it alone. Probably the best hope Japanese authorities have for some yen relief is a slump in US yields triggering a culling of the heavily long USD/JPY open interest out there.

China will also be front-and-centre at the end of this week amongst the tier-1 US data dump. On Friday, it releases its House Price Index, Industrial Production, Retail Sales, Fixed Asset Investment, and Unemployment for June, as well as quarterly GDP Growth and Capacity Utilisation. Although virus nerves will captivate the short-term attention of traders and investors, the data will go a long way to answering how well-placed China is to weather another bout of Covid lockdowns.

Tomorrow, we get rate decisions from the Bank of Korea and Reserve Bank of New Zealand as well as China’s 1-year Medium Term Facility Rate. The lending numbers from China this week mean there is no urgency to lower the 1-year MTF. The Bank of Korea is on track to announce a punchy (by their standards), 0.50% rate hike after recent elevated inflation data and a rapidly weakening won in the face of the dollar juggernaut.

The Reserve Bank of New Zealand is being bandied around as the canary in the coal mine for other central banks, having started normalising policy sooner than other developed market central banks. That is giving the RBNZ far too much credit; only the Central Bank of Turkey has done a worse job. The RBNZ kept quantitatively easing as inflation exploded in New Zealand and sent house prices spiralling. Having sat like a possum in the headlights while the cost of living spiralled out of control and presided over the greatest transfer of wealth ever from our young people to our old people, they were then tardy and timid in stopping QE and then raising interest rates. They have nicely set up the country for an abrupt slowdown this year. A 0.50% rate hike is baked in, but the attention will be on whether they indicate a slower pace of hikes going forward. Given the stagflation nightmare they created, this would be a mistake and all I can say to any central bankers reading this newsletter is if the RBNZ blinks, you should absolutely do the opposite. The RBNZ is a reverse leading indicator, not a leading indicator. (NB: I am a Kiwi, and you may have noticed, that I am a bit upset with the RBNZ).

Data released today in Asia have been second-tier. Japan’s June PPI rose by 9.20% YoY, higher than expected, and the Bank of Japan sticking to an easy monetary policy has kept up the pressure on the yen. The Philippines’ Balance of Trade was worse than expected, falling to USD -5.678 billion in May as imports exploded. Once again, a deteriorating trade balance will keep the pressure on the peso, already at record lows. Australian Consumer and Business Confidence data was weak, but a much lower Australian dollar overnight is keeping local equities supported.

This afternoon sees the release of the German ZEW Economic Sentiment Index for July. It goes without saying it has serious downside risks and will be another headwind for the euro and European equities this afternoon. India’s Inflation data this evening should see YoY Inflation remaining above 7.0% as the Indian rupee slump continues and energy prices remain firm. The US 10-year note auction will be worth watching, with heavily US bond issuance this week. A weak bid-to-cover could give the US dollar rally a reason to pause, while the API Crude Inventories could lift oil prices if the headline number falls sharply from last week’s 3.8 million-barrel gain.

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