Overview: The recovery attempt of risk appetites, reflected in the recovery and strong close in US stocks yesterday was dealt a blow by Russia's Foreign Minister's warning of a "serious" danger of nuclear conflict.  In Asia-Pacific, most of the large equity markets advanced.  China was an exception even though the currency snapped a five-day slide following the hike in foreign currency reserve requirements announced yesterday.  Australia's resource companies led the ASX to its largest loss (~2%) since Russia's invasion of Ukraine two months ago.  European shares are trying to stabilize after the Stoxx 600 fell by 3.6% over the past two sessions. US futures are softer.  The US 10-year yield is a few basis points lower around 2.79%. European benchmark yields are slightly softer. The dollar is mostly firmer, though the Antipodean and yen have edged higher.   The euro's loss has been extended deeper into the $1.06-handle and sterling still struggles to sustain modest upticks.  Among emerging market currencies, several Asia Pacific currencies, in addition to the yuan have traded better.  European currencies are taking the brunt.  Gold closed below $1900 yesterday for the first time since late February and is straddling that area in quiet turnover.  June WTI stabilized after falling to around $95.30 yesterday.  An attempt on the upside stalled in front of $100. US natgas is up 3.5% after yesterday's 2% advance.  Europe's benchmark is off 1.7% after falling nearly 8% over the past two sessions.  Iron ore stabilized, rising by about 1.6% earlier today after dropping almost 9.7% yesterday. Copper is also trying to steady.  It fell by more than 5% Friday-Monday. Poor planting news is helping July wheat rise 2.1% after falling for the past five sessions.   Asia Pacific The PBOC cut the reserve requirement for foreign currency deposits in a clear sign of concern about the yuan, which had fallen sharply and was trading near 17-month lows.  The 1% cut was more symbolic than substantive.  It had lifted the reserve requirements twice last year for the first time in a decade and each move was 200 bp.  Ostensibly, the reduced reserve requirements boost the local supply of dollars and other currencies.  The Politburo's quarterly meeting is expected to announce new measures to support the economy and counter the effect of the lockdown.  Some industries are being allowed to re-open in Shanghai, while the lockdown continues, including autos and semiconductor producers.  Universal testing is required in Beijing and some fear that the testing is a prelude to a lockdown.  Some districts have already restricted movement.   There are four developments in Japan to note.  First, Finance Minister Suzuki denied reports that he discussed the possibility of intervention with US Treasury Secretary Yellen.  The initial press reported from Tokyo said that such a discussion was "likely," but in later reiterations in what seemed like an echo chamber, it become a definite.  Given the assessment by the IMF's regional head that the yen's gains reflected fundamentals, and the US efforts to rein in prices, the bar to intervention is high.  Second, the Japanese labor market improved marginally last month.  The unemployment rate unexpectedly eased to 2.6% from 2.7% and the job-to-application ratio ticked up to 1.22 from 1.21.  Third, the BOJ's defense of the 0.25% 10-year yield cap had it buy JPY921.5 bln today, its largest purchase in nearly four years.  Moreover, it extended its fix-rate purchases for the next two days, which carries it through the BOJ meeting.  Fourth, the government's support measures for the economy are taking shape.  A JPY6.2 trillion (~$48.5 bln) package that will be funded by an additional budget and tapping into the fiscal reserves will be submitted.  The economic objective is to help curb the rise in energy prices, ensure stable food supplies, support small and medium-sized businesses, and help struggling families.  The current Diet session ends in mid-June ahead of the upper house elections. The dollar made a marginal new five-day low against the Japanese yen near JPY127.35.  Buyers stepped in the middle of the Asia Pacific session and retested the session high around JPY128.20.  It is consolidating in the European morning.  The nearly 20 bp pullback in the US 10-year yield from last week's highs has helped to blunt the upside pressure.  A break of the JPY127.25 area could spur a move toward JPY126.75 initially.  On the upside, the greenback may be capped around JPY128.40.  The Australian dollar has stabilized after falling from about $0.7560 four sessions ago to $0.7135 yesterday.  It needs to rise above $0.7260 now to signal a correction is at hand.  And even then, the $0.7300 area may prove to be formidable resistance.  While the Chinese yuan snapped its losing streak, it still looks fragile and the relative wide range (~CNY6.5275-CNY6.5610) suggests the market remains unsettled.  The dollar traded inside yesterday's range.  The PBOC set the dollar's reference rate today at CNY6.5590, slightly below the median...

Overview: The recovery attempt of risk appetites, reflected in the recovery and strong close in US stocks yesterday was dealt a blow by Russia's Foreign Minister's warning of a "serious" danger of nuclear conflict.  In Asia-Pacific, most of the large equity markets advanced.  China was an exception even though the currency snapped a five-day slide following the hike in foreign currency reserve requirements announced yesterday.  Australia's resource companies led the ASX to its largest loss (~2%) since Russia's invasion of Ukraine two months ago.  European shares are trying to stabilize after the Stoxx 600 fell by 3.6% over the past two sessions. US futures are softer.  The US 10-year yield is a few basis points lower around 2.79%. European benchmark yields are slightly softer. The dollar is mostly firmer, though the Antipodean and yen have edged higher.   The euro's loss has been extended deeper into the $1.06-handle and sterling still struggles to sustain modest upticks.  Among emerging market currencies, several Asia Pacific currencies, in addition to the yuan have traded better.  European currencies are taking the brunt.  Gold closed below $1900 yesterday for the first time since late February and is straddling that area in quiet turnover.  June WTI stabilized after falling to around $95.30 yesterday.  An attempt on the upside stalled in front of $100. US natgas is up 3.5% after yesterday's 2% advance.  Europe's benchmark is off 1.7% after falling nearly 8% over the past two sessions.  Iron ore stabilized, rising by about 1.6% earlier today after dropping almost 9.7% yesterday. Copper is also trying to steady.  It fell by more than 5% Friday-Monday. Poor planting news is helping July wheat rise 2.1% after falling for the past five sessions.   Asia Pacific The PBOC cut the reserve requirement for foreign currency deposits in a clear sign of concern about the yuan, which had fallen sharply and was trading near 17-month lows.  The 1% cut was more symbolic than substantive.  It had lifted the reserve requirements twice last year for the first time in a decade and each move was 200 bp.  Ostensibly, the reduced reserve requirements boost the local supply of dollars and other currencies.  The Politburo's quarterly meeting is expected to announce new measures to support the economy and counter the effect of the lockdown.  Some industries are being allowed to re-open in Shanghai, while the lockdown continues, including autos and semiconductor producers.  Universal testing is required in Beijing and some fear that the testing is a prelude to a lockdown.  Some districts have already restricted movement.   There are four developments in Japan to note.  First, Finance Minister Suzuki denied reports that he discussed the possibility of intervention with US Treasury Secretary Yellen.  The initial press reported from Tokyo said that such a discussion was "likely," but in later reiterations in what seemed like an echo chamber, it become a definite.  Given the assessment by the IMF's regional head that the yen's gains reflected fundamentals, and the US efforts to rein in prices, the bar to intervention is high.  Second, the Japanese labor market improved marginally last month.  The unemployment rate unexpectedly eased to 2.6% from 2.7% and the job-to-application ratio ticked up to 1.22 from 1.21.  Third, the BOJ's defense of the 0.25% 10-year yield cap had it buy JPY921.5 bln today, its largest purchase in nearly four years.  Moreover, it extended its fix-rate purchases for the next two days, which carries it through the BOJ meeting.  Fourth, the government's support measures for the economy are taking shape.  A JPY6.2 trillion (~$48.5 bln) package that will be funded by an additional budget and tapping into the fiscal reserves will be submitted.  The economic objective is to help curb the rise in energy prices, ensure stable food supplies, support small and medium-sized businesses, and help struggling families.  The current Diet session ends in mid-June ahead of the upper house elections. The dollar made a marginal new five-day low against the Japanese yen near JPY127.35.  Buyers stepped in the middle of the Asia Pacific session and retested the session high around JPY128.20.  It is consolidating in the European morning.  The nearly 20 bp pullback in the US 10-year yield from last week's highs has helped to blunt the upside pressure.  A break of the JPY127.25 area could spur a move toward JPY126.75 initially.  On the upside, the greenback may be capped around JPY128.40.  The Australian dollar has stabilized after falling from about $0.7560 four sessions ago to $0.7135 yesterday.  It needs to rise above $0.7260 now to signal a correction is at hand.  And even then, the $0.7300 area may prove to be formidable resistance.  While the Chinese yuan snapped its losing streak, it still looks fragile and the relative wide range (~CNY6.5275-CNY6.5610) suggests the market remains unsettled.  The dollar traded inside yesterday's range.  The PBOC set the dollar's reference rate today at CNY6.5590, slightly below the median...

The Australian central bank has dropped its patient stance and announced monetary policy would be data-dependent. Australian quarterly inflation is expected to surpass the upper end of the RBA’s target. The AUD/USD pair is technically bearish, although upbeat inflation figures could trigger a recovery. Australia will release its latest inflation estimates on Wednesday, April 27. The annual rate is expected to have reached 4.6% in the first quarter of the year, up from 3.5% in Q4 2021. The RBA's Trimmed Mean core CPI is foreseen at 3.4%, much higher than the previous 2.6% and above the upper end of the Reserve Bank of Australia’s target for the first time in over a decade. Central banks and inflation As is the case globally, rising fuel prices and global supply chain issues are behind price pressures. Australian policymakers dropped their patient stance at the beginning of the year and began sending hawkish messages to financial markets, hinting at a potential rate hike, with speculative interest now looking at June as the time for the first movement. Reserve Bank of Australia Governor Philip Lowe & co announced that monetary policy would be data-dependent, but it is not just about inflation. “The Board has wanted to see actual evidence that inflation is sustainably within the 2 to 3% range before it increases interest rates. Inflation has picked up, and a further increase is expected, but growth in labor costs has been below rates that are likely to be consistent with inflation being sustainably at target.” However, Q1 wage growth figures will not come out until June 1st. It seems unlikely the Australian central bank could take a decision before the latter is released. Policymakers would need to gather more info, yet at the same time, not fall too behind their overseas counterparts, which have adopted a more aggressive stance well ahead of the RBA. Chances of Australian consumer prices contracting instead of rising are pretty much null. Nevertheless, in the case of a modest advance that falls short of the market’s expectations, investors will likely rush into pricing in a later hike, which would mean an AUD/USD decline. On the other hand, if the report results above analysts’ forecasts, the aussie will probably get a temporal boost. Sustained gains would depend on how speculative interest perceives risk and hence, the greenback. AUD/USD Technical outlook The AUD/USD pair is technically bearish, although showing signs of bearish exhaustion. The pair broke below the 61.8% retracement of this year’s rally at 0.7230 on Monday and completed a pullback to the level on Tuesday. It currently trades at around 0.7180, after bottoming on Monday at 0.7134. The daily chart shows that the pair has also broken below all of its moving averages, while the 20 SMA gains bearish traction above the longer ones. Technical indicators, in the meantime, have reached oversold readings, from where they are now attempting to bounce. As such, AUD/USD may correct higher before resuming its decline, as it would take a recovery beyond 0.7400 to see the pair reestablish its bullish momentum. A positive reaction to inflation data could see the pair breaking through the aforementioned 0.7230 and extending its advance towards the 0.7300 figure.  On the other hand, a break below the weekly low should open the doors for a steeper decline, eyeing the 0.7070 level first, en route to the yearly low at 0.6966. 

Outlook: We get a ton of data today, starting with the preliminary March durable goods, housing data from Case-Shiller (but for Feb), consumer confidence, new home sales and the Richmond Fed manufacturing index. Oh, yes, earnings reports are due from Alphabet and Microsoft, plus a slew of others. We’d like to be able to select an indicator or two (durables, consumer confidence) but in practice, sentiment is both reflected in the stock market and in FX, partly determined by the stock market. The Musk/Twitter story is going to change the world, and not just the political world. Of course there is plenty of slip to get to Elon’s lips and perhaps regulatory and other issues can intervene to kill the deal, but probably not. We have to expect the usual wavering up and down after a big burst of risk-off. In particular, look at the monthly chart of the euro. We see a highly probable range forming. We have a double top and a mirror-image double bottom forming, With a max recovery near 1.2500. Nobody looks at monthly charts to make trading decisions, of course, but enough are going to see this chart and withdraw their horns shorting the euro, land-war and looming recession or not. If the euro does correct to the upside, beware “explanations.” A lot of it will be simple re-positioning. It would take something far more dramatic than we foresee now to drive the euro much lower. The yen is under the microscope ahead of the BoJ policy meeting on Thursday. The FT reports a division among central bankers on embracing devaluation or fighting it, which means a policy shift away from curve control. “The yen has tumbled more than 11 per cent in less than two months to hit a 20-year low of nearly ¥130 against the dollar, as traders bet on an expanding gulf in monetary policy between the Bank of Japan and other major central banks that are rapidly removing stimulus measures. BoJ officials have shown no sign of deviating from their ultra-loose monetary policy ahead of a meeting on Thursday even as a worldwide surge in energy prices begins to generate some elusive inflation in Japan.” Speculation about intervention persists but most analysts say it’s unlikely, and because the price move is orderly, the BoJ lacks cause. Besides, if devaluation brings about some more lasting inflation, that’s exactly what the BoJ wants, anyway. It’s up in the air whether the market is going to challenge the resolve not to intervene. Traders love to taunt the BoJ under these conditions. But the BoJ may shrug. FinMin Suzuki denied the reports of him talking about intervention with TreasSec Yellen. Apparently the Japanese press reported he did while the US press was silent on the matter. And to drive the point home, overnight the BoJ bought ¥921.5 billion in 10-year JGB’s, the biggest purchases in years, and will continue buying for the next two days. This is digging in heels. The usual result of a contretemps like this is wide uncertainty and a narrowing price range. A decent estimate might be 126.50 to 129. When ranginess in the dollar against two majors is the forecast, it’s time to raise the drawbridge—reduce position size, speed up the trading timeframe/holding period, and narrow the stops. This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes. To get a two-week trial of the full reports plus traders advice for only $3.95. Click here!

EUR/USD dived to its lowest level since March 2020 on Monday amid sustained USD buying. Aggressive Fed rate hike bets, the risk-off mood continued underpinning the safe-haven buck. Bulls seemed unimpressed by reports that ECB is keen on starting the rate hike cycle in July. The EUR/USD pair witnessed heavy selling on the first day of a new week and slipped below the 1.0700 round-figure mark for the first time since March 2020 amid sustained US dollar buying. Hawkish comments by various FOMC officials last week, including Fed Chair Jerome Powell, reaffirmed bets for a more aggressive policy tightening by the Fed. In fact, the markets now expect the US central bank to raise interest rates by 50 bps at each of its next four meetings in May, June, July and September. This, along with, the prevalent risk-off environment, lifted the safe-haven greenback to a more than two-year high and exerted downward pressure on the major. Against the backdrop of expectations for rapid US interest rate hikes, prolonged COVID-19 lockdowns in China fueled concerns about a global economic slowdown. This, in turn, tempered investors' appetite for perceived riskier assets and boosted demand for traditional safe-haven assets. On the economic data front, the German Ifo Business Climate Index unexpectedly improved to 91.8 for the current month, though did little to lend any support to the shared currency. Bulls failed to gain any respite from reports that some European Central Bank (ECB) policymakers were keen to end the asset purchases in June and start raising interest rates as soon as July. That said, the recent pullback in the US Treasury bond yields kept a lid on any further gains for the buck. This, in turn, assisted the pair to find some support at lower levels and regain some positive traction during the Asian session on Tuesday. There isn't any major market-moving macro data due for release from the Eurozone, while the US economic docket features Durable Goods Orders and the Conference Board's Consumer Confidence Index. Apart from this, traders will take cues from the US bond yields and the broader market risk sentiment, which will influence the USD price dynamics and produce some short-term opportunities around the major. Technical levels to watch From a technical perspective, nothing seems to have changed for the pair and the near-term bias remains tilted firmly in favour of bearish traders. That said, it will be prudent to wait for sustained weakness below the 1.0700 mark before positioning for any further losses. The pair might then accelerate the slide towards testing the 2020 low, around the 1.0635 region. Some follow-through selling, leading to a subsequent breakthrough the 1.0600 mark, will set the stage for an extension of the recent well-established downtrend. On the flip side, attempted recovery now seems to confront stiff resistance near the previous YTD low, around the 1.0760-1.0755 region ahead of the 1.0800 round-figure mark. Any subsequent move up is likely to attract fresh selling and remain capped near the 1.0850-1.0855 zone. The latter should act as a pivotal point, which if cleared decisively will suggest that the pair has formed a near-term bottom and trigger a fresh bout of a short-covering move. The pair might then aim to surpass the 1.0900 mark and test last week's swing high, around the 1.0935 region.

In a word, no. Let's discuss what's really going on. Rate hike probabilities for December 2022 Half-point rate hikes in May and June?  Yesterday, I noted Half-Point Rate Hikes in May and June? That's What's Priced In! A couple of my readers misinterpreted that as if the bond market was forcing the Fed.  That's not really what's happening. Rather, the Fed does what it wants 100% of the time and will make excuses to get what it wants.  If anything is forcing the Fed it's inflation, but inflation marched higher for over a year with the market barely moving at all.  Fed's primary tool is communication The Fed's primary tool is communication. If the bond market and Fed Funds Futures don't do what the Fed wants, the Fed communicates endlessly.  That's why despite surging inflation, yields barely moved for a long time. Big swift kick in the pants Recall that 50% was a 90% chance for March until a parade of Fed presidents walked it back. There is no functioning market here. The Fed views communication as its primary tool. The market front runs Fed communication. Recall my February 11 post The Fed Uncertainty Principle and a Big Swift Kick in the Pants Does the Fed follow the market's lead? Most believe so, but it's not quite that simple. Bullard gave the market a kick. The market responded by pricing in a 50 basis point hike for March.  For whatever reason, Powell didn't like it. Then a literal parade of Fed presidents walked back the hike to 25 basis points. Does the Fed follows the market? Most think the Fed follows market expectations. However, this creates what would appear at first glance to be a major paradox: If the Fed is simply following market expectations, can the Fed be to blame for the consequences? More pointedly, why isn’t the market to blame if the Fed is simply following market expectations? This is a very interesting theoretical question. While it’s true the Fed typically only does what is expected, those expectations become distorted over time by observations of Fed actions. The observer affects the observed The Fed, in conjunction with all the players watching the Fed, distorts the economic picture. I liken this to Heisenberg’s Uncertainty Principle where observation of a subatomic particle changes the ability to measure it accurately. The Fed, by its very existence, alters the economic horizon. Compounding the problem are all the eyes on the Fed attempting to game the system. A good example of this is the 1% Fed Funds Rate in 2003-2004. It is highly doubtful the market on its own accord would have reduced interest rates to 1% or held them there for long if it did. What happened in 2002-2004 was an observer/participant feedback loop that continued even after the recession had ended. The Fed held rates rates too low too long. This spawned the biggest housing bubble in history. The Greenspan Fed compounded the problem by endorsing derivatives and ARMs at the worst possible moment. The Fed has so distorted the economic picture by its very existence that it is flawed logic to suggest the Fed is simply following the market therefore the market is to blame. There would not be a Fed in a free market, and by implication there would be no observer/participant feedback loop. Fed uncertainty principle The Fed, by its very existence, has completely distorted the market via self-reinforcing observer/participant feedback loops. Thus, it is fatally flawed logic to suggest the Fed is simply following the market, therefore the market is to blame for the Fed’s actions. There would not be a Fed in a free market, and by implication, there would not be observer/participant feedback loops either. Corollary number one The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn’t know (much more than it wants to admit), particularly in times of economic stress. Corollary number two The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing. Corollary number three Don’t expect the Fed to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem. Corollary number four The Fed simply does not care whether its actions are illegal or not. The Fed is operating under the principle that it’s easier to get forgiveness than permission. And forgiveness is just another means to the desired power grab it...