InvestMacro

By Orbex

EURUSD weakens ahead of Fed meeting

The US dollar rallies as the markets price in a hawkish tone out of this week’s Fed policy meeting.

As the US unemployment rate falls under 4% and inflation reaches a 40-year high, traders are pondering how strong the Fed’s hand will be. Market rumors are that there could be at least four hikes this year. And a half percentage point in March (rather than a quarter point) could further boost demand for the dollar.

Soaring US Treasury yields offers the greenback solid support. In the meantime, the euro would continue to suffer from the ECB’s inaction. The pair may still drift between 1.1200 and 1.1600.

USDCAD slips over BOC rate hike hopes

The Canadian dollar climbs as the Bank of Canada may raise interest rates this week.

Canada’s annual inflation rate hit a 30-year high in December. In turn, this fuelled bets that the central bank will bring forward its tightening agenda and announce a hike in the upcoming meeting.

The greenback may continue to shed gains as its neighbor’s monetary policy catches up. Meanwhile, loonie buyers enjoy a sweet spot amid rises in commodity prices.

As oil prices reach seven-year highs, the Canadian dollar has found an effective floor. The pair is sliding towards 1.2300. A rebound may come under pressure near 1.2680.

UKOIL rallies on tight supply

Oil prices find support from robust demand forecasts and short-term supply constraints. Producers’ firm grip on the output makes it a seller’s market.

The International Energy Agency reported that the OPEC+ group’s production was below its targets in December. In conjunction with low inventories across major economies and upgraded demand forecast, the bulls’ run is yet to end.

Sporadic outages and geopolitical risks in the Middle East could only exacerbate price volatility. A pullback towards 82.00 could be due to the recent parabolic rise. The psychological tag of 90.00 is the next target.

US 100 slumps as sentiment worsens

The Nasdaq tumbles as investors bet on the Federal Reserve’s aggressive monetary tightening.

Expectations of a sharp rise in US interest rates would send Treasury yields sky-high, making risk assets like growth stocks much less attractive. To rub salt in the wound, earnings disappointments from what were hot stocks last year shatter investors’ hope for a swift rebound.

Lastly, tensions in Ukraine add a layer of geopolitical risks that could keep investors on their feet. Needless to say, the market is in for a bumpy ride as sentiment deteriorates.

The index is hovering above the daily support at 14500. 15600 is the first hurdle ahead.

Article by Orbex

Orbex is a fully licensed broker that was established in 2011. Founded with a mission to serve its traders responsibly and provides traders with access to the world’s largest and most liquid financial markets. www.orbex.com

By Dan Steinbock

– Understandably, there was great interest in President Xi’s Davos address. Despite great global challenges, China’s economic performance reflects long-term strength, with strong data on trade and investment, and new resiliency.

In his January 2017 address at the World Economic Forum (WEF), Chinese president Xi Jinping promoted global economic interdependency warning that protectionism would produce no winners. A year ago, Chinese he called for both greater global efforts in the fight against an unprecedented public health crisis and a renewed commitment to multilateral cooperation.

In his third WEF address, President Xi noted that the recovery of the world economy is predicated on the defeat of the once-in-a-century pandemic and the new inflation risks of inflation. As Xi cautioned: “If major economies slam on the brakes or take a U-turn in their monetary policies, there would be serious negative spillovers. They would present challenges to global economic and financial stability, and developing countries would bear the brunt of it.”

Prior to Xi’s speech, Western media featured gloomy expectations over the 4^th quarter growth data. Yet, China topped impressively its 2021 growth (8.1% over the target of “above 6%”), despite expected deceleration in the 4^th quarter.

Recent elevated regulatory activity and emphasis of “common prosperity” will reinforce sustained and more inclusive growth in the long-term – as evidenced by strong data on trade and investment, reforms in capital markets and new resiliency.

Strong trade and investment performance

In 2021, China’s exports and imports exceeded $6 trillion for the first time. The economy continued its recovery over the past year, despite slowing export growth on the back of a stronger yuan. Global prospects remain challenging, due to the Omicron variant, supply disruptions and higher costs, and weakening demand.

In December, China’s trade surplus widened to a record high of $95.5 billion; over $20 billion more than in the same month a year earlier. For the full year, the trade surplus widened to $676 billion, the highest on record with exports surging 29.9% and imports 30.1%. Exports continued their double-digit growth for the 15^th month.

For 2021, China’s trade surplus with the US was $397 billion; 25% higher than in 2020. In light of the ongoing US trade wars and geopolitical containment efforts against the mainland, the achievement is extraordinary.

China’s performance has been reinforced by strong capital flows, thanks to the mainland’s encouragement of foreign direct investment (FDI).

Actualized foreign direct investment (FDI) into China reached a new record in 2021, when the FDI increased 14.9% year-on-year; or 20.2% in US dollar terms. In relative terms, countries and regions along the routes of Belt and Road Initiative (BRI) booked a 29.4% rise in their investment in China, while investment flows of the Southeast Asian economies (ASEAN) soared 29%.

Opening of capital markets

Heralding promising future, China’s strong performance has been reinforced by further opening of capital markets.

By December 2021, overseas investors had raised their holdings of mainland stocks and bonds by over 11% since the end of 2020, according to the People’s Bank of China (PBOC). As Reuters headlined, “foreign holdings of China government bonds smash record in November on index inclusion.”

Indeed, November marked the first full month of phased inclusion of China’s government bonds in FTSE Russell’s World Government Bond Index (WGBI). The inclusion could eventually drive $130 billion of index-related foreign inflows into the mainland bonds over a 36-month period.

Recently, US Treasuries have traded around 1.86%, as opposed to Chinese government bonds around 3.39%. As the Federal Reserve will hike rates in the coming months, US yields are likely to increase. Then again, so may Chinese yields. Moreover, as the Fed may respond hastily and belatedly to America’s highest inflation in 40 years, it could stir more volatility in the market. In contrast, Chinese bonds represent a vital diversification instrument and promising future.

Yuan’s appreciation

Last October, the PBOC stated it was phasing out the use of the countercyclical factor, launched in 2017 to contain yuan’s depreciation. A more hands-off stance toward the exchange rate has fostered appreciation. The yuan may face a rougher ride in 2022, due to normalization by overseas central banks.

Nonetheless, all these trends contributed to an intriguing development in late 2021, when Chinese yuan seemed to “decouple” from the US dollar.

The bilateral relationship between the two currencies had been consistent since the mid-2010s, as measured by the US Dollar Index (DXY). When the value of the US dollar increased, that of the Chinese yuan decreased. In the last quarter of 2021, the inverse relationship changed. US dollar and Chinese yuan appreciated in tandem.

The shift was reflected by the CFETS RMB Index; China’s version of the US Dollar Index. It measures the value of the yuan against a basket of 24 currencies, including the US dollar and the euro. The weakness of other major world currencies pushed Index from 94.8 in December 2020 to a high of 102.8 at the end of November and remains around 102.1.

Signs of new resiliency

Obviously, China’s recent data has been fostered by the mainland’s strong trade performance, impressive investment and promising capital flows. Moreover, the Omicron variant and its potential offspring pose new challenges to global prospects.

Even if the Fed’s impending rate normalization would constrain capital flows to emerging markets, the continued opening of the mainland’s financial sector is likely to offset some of the pressure. Furthermore, FDI into China is likely to prove resilient, due to capital inflows from the Belt and Road and ASEAN economies.

China’s strategic focus is on enduring secular trends, not fleeting quarterly results.

About the Author:

Dr. Dan Steinbock is an internationally recognized strategist of the multipolar world and the founder of Difference Group. He has served at India, China and America Institute (US), Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see https://www.differencegroup.net/  

A version of the commentary was published by China Daily on Jan. 17, 2022

By Orbex

The omicron variant has restored the question of how much the restrictions to curb the spread of covid will affect retailers. Now, the focus across Europe seems to be more on getting people to vaccinate, than restricting gatherings or access to enclosed spaces.

That could put additional strain on retailers in the form of increased costs to check patrons’ vaccination status. However, it doesn’t directly impede people from going shopping. Since even the unvaccinated can get tested to comply with the rules.

So, the restrictions aren’t the largest problem retailers are facing during this stage of the pandemic. The issue now has shifted to being able to get supply and deal with rising costs.

What the data means for the markets

Services PMI figures have come to the fore during the recovery, as investors gauge how much the economy has reopened and normalized. The sector has remained largely in positive territory during the recovery period.

But at some point, it will start normalizing. And the data can lead to two conflicting effects, so it’s important to understand the underlying dynamics.

On the one hand, higher PMI indicates more optimism among retailers and could be a sign of better economic conditions. On the other, it could also indicate increased consumer demand in a situation plagued by supply problems.

Moreover, it can potentially indicate higher inflation. This could change the market’s outlook for when the ECB could start dealing with inflation.

This could explain the unusual situation where manufacturing PMI in some cases is higher than the services PMI. We have to remember though, that these are preliminary results, and subject to adjustment when the final results come out on February 1st.

What we are expecting

First to report is France, and it’s likely to set the tone for the day. Analysts project French Services PMI to decline modestly to 56.5 from 57.0 in December. Meanwhile, they expect Manufacturing PMI to perform a little worse, declining to 54.4 from 55.6 prior. Both are well in expansion, but trending in the wrong direction.

Germany’s PMIs could move the market if they contradict France’s. German Manufacturing PMI could slip a bit, though stay well in expansion at 57.0, compared to 57.4 in the prior month. The Services component, however, could move further into contraction to 48 from 48.7.

That’s a worrying sign for the economy. Nevertheless, this could indicate that consumer demand is faltering, potentially easing inflationary pressures in the EU’s largest economy.

For the whole of the eurozone, economists anticipate Composite PMI to show dwindling optimism among businesses. Specifically, it could just barely be in expansion at 52.2 compared to 53.3 in the prior reading.

Finally, the prediction for the UK Services PMI is to buck the European trend, moving higher to 54.0 from 53.6. Most notably, the survey was largely conducted before PM Johnson announced the lifting of most covid restrictions. UK Manufacturing PMI could show a little loss of optimism but still remain comfortably in expansion at 57.0, down from 57.9 in December.

Article by Orbex

Orbex is a fully licensed broker that was established in 2011. Founded with a mission to serve its traders responsibly and provides traders with access to the world’s largest and most liquid financial markets. www.orbex.com