Forex Fundamental News Facts for 20th May, 2024
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[Quick Facts]
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1. The Bank of Japan may not be able to raise rates in July.
2. Neither Russia nor Ukraine agrees to a truce during Olympics.
3. Fed’s Bowman is open to a rate hike.
4. U.S. economic conditions will be weaker in the future.
5. ECB is likely to cut rates in June, but future path remains uncertain.
6. WTI may break above $80 again but will weaken in next few days.
7. There Are Limits to China’s ‘No Limits’ Partnership With Russia.
8. US Stock Settlement Switch Faces Early Resilience Test.
9. The Commodities Feed: Metals Surge Higher.
10. Gold Hits Record High on Fed Rate-Cut Hopes, Rising Haven Demand.
11. BTC Weathers Regulatory Uncertainty and Rate Fears.
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[News Details]
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Bank of Japan’s Rate Hike Dilemma:
While some market players anticipate a rate hike by the Bank of Japan (BOJ) in July, the country’s Q1 GDP data paints a different picture. The lackluster economic performance makes it challenging for Japan to tighten its fiscal and monetary policies in the near term due to inadequate aggregate demand. Therefore, under the prevailing economic conditions, the BOJ might hold off on any rate hikes until the Q2 GDP data is released in August. Furthermore, the current weak yen does not provide a solid basis for another rate hike.
Hiroyuki Kimura, the head of investment management for Japan at Western Asset, a subsidiary of US fund giant Franklin Templeton, anticipates another rate hike from the Bank of Japan (BOJ) this year, likely in the fall. This is due to the demand from life insurance companies and other institutions for super-long bonds, which should prevent yields from rising excessively.
The BOJ has been purchasing more bonds due in five to ten years and fewer of longer debt, leading to a surge in yields on some sovereign bonds in Japan to decade highs. The yield gap between 10-year and 30-year bonds, the main investment target for life insurers, expanded to around 110 basis points. Kimura expects bond yields to rise in line with the BOJ’s gradual interest-rate hikes, but not significantly exceed 1% for 10-year sovereign notes, and he doesn’t foresee 30-year counterparts firmly breaking above 2%.
Governor Kazuo Ueda clarified that reducing purchases of Japanese Government Bonds (JGBs) is separate from monetary policy moves. The BOJ aims to communicate with the market to avoid surprises and is likely to lower holdings cautiously rather than cutting monthly buying from ¥6 trillion to ¥5 trillion all at once.
The BOJ still needs more economic data to determine when it can hike interest rates again. The first-quarter gross domestic product showed a greater-than-expected drop in private consumption expenditure, indicating sluggish domestic demand. However, if a virtuous cycle where wages are rising in line with increasing prices and consumption is recovering can be clearly seen by the fall, the BOJ could increase rates by 15 basis points.
The yield on 10-year government debt rose to 0.975%, a level last seen when the then newly appointed Bank of Japan Governor Haruhiko Kuroda was starting his radical monetary easing. Now under his successor Kazuo Ueda, the yield is edging toward the closely watched 1% mark. This has raised expectations that Japanese investors will put more of their funds into domestic debt rather than markets in the US and Europe.
Investors are analysing data and policymaker statements to predict the BOJ’s next move. Pacific Investment Management Co. sees the prospect of three more moves this year, while Vanguard Group Inc.’s head of international rates Ales Koutny expects hikes to around 0.75% by the end of the year. In contrast, Alliance Bernstein Holding LP said last week that the BOJ is likely to favor reducing its vast balance sheet over increasing interest rates.
This matters for the currency market because the huge gap in yields between Japan and the rest of the world has driven the yen to a 34-year low against the dollar. Even as Japan’s 10-year yield has risen, its US counterpart is still about 3.4 percentage points higher. The yen was down 0.1% versus the dollar.
Ueda told Prime Minister Fumio Kishida earlier this month that he’s watching the yen’s impact on prices. He said in parliament that “a monetary policy response might be needed.” Japan’s inflation has been above the central bank’s target of 2% every month since April 2022. Reflecting this, an auction of 10-year inflation-indexed bonds saw the highest bid-to-cover ratio since August 2007 on Monday.
Goldman Sachs Group Inc. strategists now predict Japan’s 10-year sovereign yield to rise to 2% by the end of 2026 on expectations the central bank will deliver a “prolonged” tightening cycle. They expect the BOJ to raise interest rates to 1.25%-1.50% by 2027. They believe this rise in nominal yields will be led by rising inflation expectations and real rates will be relatively contained. Still, “real rates in Japan are unlikely to fall from current levels given the likelihood of hikes in response to higher inflationary pressure from here.”
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No Olympic Truce for Russia and Ukraine:
Ukrainian President Volodymyr Zelensky dismissed France’s proposal for an Olympic truce during the Paris Olympics in May. He argued that such a truce would only aid Russia in mobilizing its military forces. Russian President Vladimir Putin echoed this sentiment, stating that Russia does not support a truce during the Paris Olympics.
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Fed’s Bowman Open to Rate Hike:
Fed Governor Bowman expressed openness to a rate hike after observing significant progress in curbing inflation last year. However, she noted that this progress has not continued into the current year and expects inflation to remain high for a while. According to forex fundamental news, she also mentioned that she is open to raising the federal funds rate target range in future meetings if data suggests a stagnation or reversal in U.S. inflation progress.
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Weakening U.S. Economic Conditions:
The U.S. Leading Economic Index, a forex fundamental news index experienced a 0.6% month-on-month decline in April, following a 0.3% drop in March. This decline, fueled by a negative consumer outlook, weaker new orders, a negative yield spread, and a drop in new building permits, indicates a potential weakening of U.S. economic conditions.
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Boštjan Vasle, a member of the European Central Bank (ECB) Governing Council, suggested that June might be an opportune time to start cutting rates, barring any major surprises. However, the path beyond that remains uncertain. Isabel Schnabel, an ECB Executive Board member, echoed this sentiment, stating that a rate cut in June aligns with the ECB’s forecasts and current economic data.
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Crude oil futures are set to end the week with gains, despite a subdued monthly performance. Energy assets are expected to end the week on a stable or strong note, with WTI crude likely to surpass $80 once again. However, signs indicate that prices could soften in the coming days, with WTI crude expected to hover between $75 and $80.
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There Are Limits to China’s ‘No Limits’ Partnership With Russia:
This week, a restricted meeting took place between China’s Xi and Russia’s Putin, celebrating Putin’s recent presidential victory and the 75th anniversary of their bilateral ties. They reaffirmed a 2030 development plan and announced a new phase of synergy in their strategies.
However, the economic narrative isn’t about these two leaders uniting against the US. It’s becoming evident that there are boundaries to the “limitless” partnership they proclaimed before Russia’s full-scale invasion of Ukraine. This is based on Alex Isakov’s analysis at Bloomberg Economics, who has examined bilateral trade and finance data to highlight mutual concerns.
Both Beijing and Moscow support a de-dollarization agenda, but companies and financial institutions on both sides are cautious of being cut off from a global financial system still dominated by the dollar. China’s hesitance to commit to new natural-gas pipelines demonstrates its ongoing commitment to avoid over-dependence on a single source, even if it’s a seemingly friendly partner like Russia.
Russia may help strengthen Xi’s vision of a multipolar world against a US that wants to maintain the old world order. However, it can’t replace the West in terms of purchasing Chinese exports, particularly when exports are crucial to China’s economic growth.
China exported approximately $24 billion to Russia in the first seven months of its fiscal year, less than a quarter of its direct shipments to the US. Furthermore, a significant portion of exports to Hong Kong, Southeast Asia, Mexico, and others end up as purchases by American households.
Russia’s appeal as an export destination may not improve. Recent data showed that Russia’s current-account surplus increased in the first four months of 2024, mainly due to a drop in imports. Russia’s central bank indicated that payment issues might be a problem.
Russian importers should theoretically have ample foreign currency—Chinese yuan—from the country’s export earnings. However, much of these earnings are being held overseas—in China. This is because exporters are concerned about the cost of settlement and exposure to sanctioned banks in Russia.
Chinese banks in Russia are also exercising caution. Given their global presence, they are motivated to heed US Treasury Secretary Janet Yellen’s recent warning about ties with Russia, a forex fundamental news to keep our eye on.
Regarding Russian energy exports to China, Putin stated that the two countries are looking to increase oil and gas trade. However, there was no new announcement about Moscow’s long-held dream of constructing a new natural-gas pipeline—the would-be Power of Siberia 2. Beijing’s reluctance is rooted in geostrategic considerations.
China, unable to meet its energy needs domestically, has sought to limit its vulnerabilities by establishing a diverse set of suppliers. Russia is part of that, as is the Middle East and even the US. But increasing reliance on Russia could disrupt the balance. And then there’s the sanctions challenge again.
In conclusion, there are indeed many limits to the Sino-Russian partnership established by Xi and Putin. It appears that only one of them truly understands these limitations.
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US Stock Settlement Switch Faces Early Resilience Test:
The U.S. securities markets, worth trillions of dollars, are bracing for a significant change in trade settlement regulations. From May 28, U.S. stocks and corporate bonds will have to settle one business day after trading, a shift from the current two-day period. This change, known as T+1, is also being adopted by markets in Canada and Mexico, with the aim of reducing counterparty risk and enhancing market liquidity.
However, just three days after the implementation of T+1, the MSCI global indexes will undergo a quarterly rebalance. This event, which involves thousands of funds, ETFs, and portfolio structures adjusting their holdings to track the index, could strain markets that are still adapting to the new settlement regime. The industry is preparing for a potential increase in failed settlements due to the rebalance and other related market events.
Failed trades occur when a counterparty fails to deliver the securities or funds necessary for settlement, leading to financial losses, increased transaction costs, and reputational damage. The U.S. Securities and Exchange Commission has stated that faster settlement will enhance market efficiency, but it also means foreign investors will have less time to recall their U.S. securities and gather the necessary dollars for trading.
The Depository Trust Company has reported that 83.5% of transactions from U.S. and non-U.S. firms in April were affirmed by the cut-off time of 2100 ET on the trade date. While affirmation is not required for settlement, it facilitates the process and reduces the risk of failed settlement. Despite the potential challenges, the industry is confident in its ability to handle the additional volumes from the MSCI rebalance and ensure a successful T+1 implementation.
The transition to T+1 and the subsequent index rebalance could pose risks for funds and other entities as they adjust their portfolios. There could be an increase in trading costs and a greater need for attention to settlement operations. However, if market participants can align settlement cut-off times and peak liquidity, the impact should be minimal. The components of the rebalanced index are announced weeks in advance to prevent market surprises. Despite the expected increase in trading volume on May 31, the industry does not anticipate any added complexity.
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The Commodities Feed: Metals Surge Higher:
Oil prices have been stable, with ICE Brent seeing a slight increase of 0.85% on Friday. However, the market has been trading within a narrow range of less than $3.50/bbl since early May. The market is likely to encounter resistance along the 200-day moving average. Clarity from OPEC+ regarding its output policy for the second half of the year might provide the market with the impetus to break out of its current range.
Speculative selling in ICE Brent was significant over the past week, with speculators selling 47,146 lots, leaving a net long of 213,502 lots. This move was mainly driven by longs liquidating. In contrast, speculators increased their net long in NYMEX WTI by 11,095 lots, largely due to short covering.
The natural gas market continues to be robust. In the US, front-month Henry Hub futures are trading above $2.60/MMBtu. The market has rallied over 60% since late April, with fundamentals appearing tighter. While US inventories remain comfortable, flat supply and stronger demand growth this year should begin to tighten the US gas balance.
In Europe, TTF remains above EUR30/MWh despite storage being almost 67% full and still above levels seen at the same stage last year. It is expected that Europe will enter next winter with full storage, suggesting prices should trade lower from current levels. However, large speculative inflows into European gas have kept the market well supported.
Spot gold prices broke above $2,400/oz on Friday, nearing the record level reached in April, while silver prices hit an 11-year high on Friday. Softer US data over the past week or so has raised expectations of rate cuts. Silver prices surged above US$30/oz for the first time since February 2013 at the end of last week due to strong financial and industrial demand.
Industrial metals also saw significant strength last week. LME nickel prices settled more than 6% higher on Friday, taking total gains for the week to over 11%. Reports of unrest in New Caledonia have triggered supply concerns. New Caledonia’s nickel output was already reduced earlier this year, following a drop in nickel prices. According to the International Nickel Study Group (INSG), New Caledonia accounted for 6% of global nickel output in 2023.
LME copper rallied almost 7% last week, pulled higher by COMEX copper, which experienced a short squeeze. Sentiment in the copper market is bullish, reflected by the speculative buying seen in the market. However, short-term fundamentals remain a concern, particularly when it comes to China. SHFE copper stocks are at their highest levels for this time of year in at least 15 years, while premia for imported refined copper into China remains at zero.
Cancelled warrants for aluminium rose by 60,000 tonnes (+15.3% DoD) to 452,175 tonnes as of Friday, the highest since October 2021. The majority of the increase was in warehouses in Malaysia’s Port Klang. Cancelled warrants are up by 329,200 tonnes in the last week alone. On-warrant inventories declined for a third straight session to 641,100 tonnes as of Friday.
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Gold Hits Record High on Fed Rate-Cut Hopes, Rising Haven Demand:
Gold prices have reached a new peak, driven by the growing belief that the Federal Reserve will soon relax its monetary policy and the escalating geopolitical tensions in the Middle East. The price of gold rose by as much as 1.4% to $2,450.07 an ounce in Asia on Monday, breaking the previous record set in April. This surge is due to traders’ increasing speculation that the Federal Reserve may lower borrowing costs as early as September, a move that would benefit gold, which does not yield interest.
The US dollar’s decline and the rally in Treasuries last week, following data showing that inflation in April was lower than anticipated, provided further support for gold, which is priced in dollars. Gold’s status as a safe haven was highlighted on Monday following news of a helicopter crash involving Iranian President Ebrahim Raisi. This incident, along with a Houthi missile attack on a China-bound oil tanker in the Red Sea on Saturday, has heightened geopolitical risks in the region.
According to Nicholas Frappell, global head of institutional markets at ABC Refinery in Sydney, the rally in gold prices is driven by news and uncertainty about the situation in Iran. Hedge funds trading Comex futures have increased their bullish bets on gold to a three-week high in the week ending May 14, according to the latest data from the Commodity Futures Trading Commission.
The rise in gold prices suggests that the metal has broken out of its recent narrow trading range due to uncertainty over the US interest rate path. Gold prices have risen nearly 20% this year, following a strong rally that saw the metal hit consecutive records throughout April. The strength of gold has been attributed to purchases by central banks, strong demand from Asian markets, particularly China, and heightened geopolitical tensions in Ukraine and the Middle East.
As of 1:59 p.m. in Singapore, spot gold rose 1.4% to $2,449.27 an ounce. The Bloomberg Dollar Spot Index remained flat, after falling 0.7% last week to its lowest level in over a month. Silver, palladium, and platinum all saw price increases. Silver reached its highest level since December 2012, aided by a strong rally on Friday and spillover sentiment from the broader physical metals market, where tightening supply has increased investor demand for materials like copper. Unlike gold, silver is also considered an industrial commodity due to its use in products such as solar panels.
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BTC Weathers Regulatory Uncertainty and Rate Fears:
On Sunday, May 19, Bitcoin (BTC) experienced a slight dip of 0.96%, following a 0.21% decrease on Saturday, May 18. Despite these declines, BTC finished the week 4.80% higher at $66,248.
Over the weekend, the market was influenced by hawkish comments from FOMC member Michelle Bowman, who suggested that interest rates could increase if consumer prices continue to rise. Other FOMC members, including Neel Kashkari, Loretta Mester, and Raphael Bostic, have indicated a delay in interest rate cuts, signaling a longer period of high rates to ensure inflation returns to the 2% target.
Despite these factors, BTC managed to avoid a significant drop, supported by inflows into the US BTC-spot ETF market. In the week ending May 17, the market saw total net inflows of $948.3 million, a significant increase from the $139.4 million in the previous week. This marked a second consecutive week of net inflows after four weeks of net outflows.
US inflation and retail sales data countered the hawkish Fed commentary, driving demand for US BTC-spot ETFs. On Monday, May 20, investors are advised to monitor speeches from FOMC members Raphael Bostic, Christopher Waller, and Philip Jefferson, as their views on inflation and the timing of a Fed rate cut could impact demand for US BTC-spot ETFs and BTC price trends.
Investors should also pay attention to crypto-related legislative updates. The market is awaiting President Joe Biden’s decision on whether to sign or veto the SAB 121 resolution. If signed, this resolution would allow firms, including US banks, to exclude assets under custody from their balance sheets, enabling them to hold crypto for clients—a positive development for BTC and the broader crypto market.
BTC is currently trading above the 50-day and 200-day EMAs, indicating bullish price signals. A breakout from the $69,000 resistance level could push BTC towards the $70,000 mark. If BTC surpasses $70,000, it could potentially reach the all-time high of $73,808.
However, if BTC falls below the $64,000 support level and the 50-day EMA, it could drop to the $60,365 support level. But, the buying pressure may increase at the $64,000 support level, which is confluent with the 50-day EMA. With a 14-Daily RSI reading of 55.89, BTC could return to the $70,000 level before entering overbought territory.
ETH is currently trading below the 50-day EMA but above the 200-day EMA, indicating near-term bearish but longer-term bullish price signals. If ETH breaks above the 50-day EMA, it could move towards the $3,244 resistance level. A breakout from this level could push ETH towards the $3,480 resistance level. Conversely, if ETH falls below the $3,033 support level, it could drop to the 200-day EMA. The 14-period Daily RSI reading of 49.37 suggests that ETH could drop to the 200-day EMA before entering oversold territory.
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🔥News releases on THIS WEEK :
20/05 Mon All Day EUR(german,french), CHF, CAD Bank Holiday
20/05 Mon 1:30am USD Fed Chair Powell Speaks
20/05 Mon 7:15am CNY 1-y Loan Prime Rate
20/05 Mon 7:00pm USD FOMC Member Waller & Barr Speaks
21/05 Tue 7:30am AUD Monetary Policy Meeting Minutes
21/05 Tue 2:00pm EUR ECB President Lagarde Speaks
21/05 Tue 2:00pm USD Treasury Sec Yellen Speaks
21/05 Tue 6:30pm CAD CPI m/m
21/05 Tue 7:00pm USD FOMC Member Waller Speaks
21/05 Tue Tentative NZD GDT Price Index
21/05 Tue 11:00pm GBP BOE Gov Bailey Speaks
22/05 Wed 8:00am NZD Official Cash Rate & RBNZ monetary Policy
22/05 Wed 12:00pm GBP CPI y/y
22/05 Wed Tentative GBP Monetary Policy Report Hearings
22/05 Wed 8:00pm USD Existing Home Sales
22/05 Wed 8:30pm USD Crude Oil Inventories
23/05 Thu 12:00am USD FOMC Meeting Minutes
23/05 Thu 2:10am NZD RBNZ Gov Orr Speaks
23/05 Thu 1:15pm EUR French Flash Manufacturing & services PMI
23/05 Thu 1:30pm EUR German Flash Manufacturing & Services PMI
23/05 Thu 2:00pm EUR Flash Manufacturing & Services PMI
23/05 Thu 2:30pm GBP Flash Manufacturing & Services PMI
23/05 Thu Day 1 All G7 Meetings
23/05 Thu 6:30pm USD Unemployment Claims
23/05 Thu 7:45pm USD Flash Manufacturing & Services PMI
23/05 Thu 8:00pm USD New Home Sales
23/05 Thu 8:30pm USD Natural Gas Storage
24/05 Fri 12:00pm GBP Retail Sales m/m
24/05 Fri 1:45pm CHF SNB Chairman Jordan Speaks
24/05 Fri Day 2 All G7 Meetings
24/05 Fri 6:30pm CAD Core Retail Sales m/m
24/05 Fri 6:30pm USD Core Durable Goods Orders m/m
24/05 Fri 7:35pm USD FOMC Member Waller Speaks
24/05 Fri 8:00pm USD Revised UoM Consumer Sentiment
N.B. Time mentioned here is on Gmt +6
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Sources :
– CNBC, Bloomberg, Reuters, Fastbull, Yahoo Finance, CNN, ForexFactory News, Myfxbook News etc
Prepared to you by “Akif Matin“
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