Mohicans markets：Excessive Rate Hike Worries Support Gold Prices Falling Crude Inventories Boost Oil Prices

Todays Financial Events

☆At 20:30 today, the U.S. will release the number of initial jobless claims for the week to August 13. The market is currently expecting it to register 265,000, and investors need to pay attention to this data. If the U.S. labor market turns stronger again, the probability that the Fed will raise interest rates by 75 basis points in September may increase. 

☆The next day morning, at 1:20 am, the 2022 FOMC voting member and president of the Kansas City Fed George speaks on the U.S. economic outlook. Investors need to pay attention to his views on the state of the U.S. economy and the pace of subsequent Fed rate hikes. 

☆The next day morning, at 1:20 am, the 2023 FOMC voting member and president of Federal Reserve Bank of Minneapolis Kashkari participates in a question-and-answer session at the conference. Kashkari previously said that the idea of cutting interest rates early next year is “unrealistic”. A more realistic approach is to raise interest rates until inflation falls to 2%.

Global Views - List of Major Markets

On Wednesday August 17, spot gold rose to a daily high of $1782.16 before plunging about $23, once falling below the 1760 mark. It eventually closed down 0.78% at $1761.68 per ounce. Spot silver followed gold lower and fell below the $20 mark. It finally closed down 1.77% at $19.79 per ounce.

The U.S. dollar index oscillated upward and dived about 30 points at the end of the session. The 10-year U.S. bond yield opened up in the European session and returned to above 2.9%. The final close was 2.902%. In terms of crude oil, both oils showed oscillating sentiment. WTI crude oil oscillated around $87 and ended up 0.21% at $87.29 per barrel. Brent crude ended up 0.23% at $92.82 per barrel. The U.S. Dow closed down 0.50%, the S&P 500 closed down 0.72% and the Nasdaq closed down 1.25%. Takeaway, LIDAR and charging pile concepts were among the top decliners, while the oil and gas sector bucked the market. European stocks generally sank, with Germany‘s DAX30 index closing down 2.01% at 13630.66 points. Britain’s FTSE 100 index closed down 0.26% at 7516.15 points. The Euro Stoxx 50 index closed down 1.37% at 3753.25 points.

Precious Metals

Spot gold was shaking slightly up in the early trading hours of Thursday, August 18, Beijing time. It is currently trading around $1765.65 per ounce. The Fed Meetings Minutes previously showed that the pace of future rate hikes will depend on the economic data in the future. Traders saw the overall slightly dovish bias, which helped gold prices hold the 1760 handle. Although technically gold prices still have the possibility of further down to the low that near 1752.36 support on July 8, gold prices will be expected to resume the rally if the support is held.

Although Eurozone employment grew again in the second quarter and U.S. core retail sales were strong, the possibility of a small dip in gold prices cannot be ruled out yet. But a pullback in U.S. equities from more than three-month highs, a halt to the dollars upside, a Russian setback in Crimea and a change in the commander of the Black Sea Fleet are expected to give gold prices upward momentum.

This trading day also needs to pay attention to the market against further interpretation of the Fed Meetings Minutes. Please watch for the annualized total of the U.S. home sales in July and the change in the U.S. initial jobless claims.

   Fundamentals are mostly bullish

【The Fed Meetings Minutes show rate hikes will continue, but at a slower pace】 

【U.S. dollar upside blocked as the Fed Meetings Minutes show Fed officials worries about excessive rate hikes】 

【Three major U.S. stock indexes close lower】 

【A Russian setback in Crimea and a change in the commander of the Black Sea Fleet】

   Fundamentals are mostly bearish

【U.S. retail sales are unexpectedly flat in July as gasoline prices eased, but consumer spending remained resilient】

【Eurozone economic growth slightly below previous forecasts in Q2, but employment rises again】

【Gold ETF positions continue to fall】

Data showed that the world's largest gold ETF - SPDR's position fell 0.32% to 989.01 tonnes on Wednesday from 992.20 tonnes on Tuesday, hitting another low since January 20. It implies that institutional and professional investors are on a bearish bias in the medium term for the future market.

In general, gold prices are still at risk of further dips in the short term. Focusing on the high that near 1752.36 support on July 8, the impact of the Fed Meetings Minutes dovish is expected to still have room for further fermentation and attract low and safe-haven buying of gold to enter. It is expected to give gold prices the opportunity to resume the rally. The upper side is concerned about the double resistance around the 10-day SMA and 55-day SMA at 1783.23. If we can recover this position, it will increase the bullish signal of the market. If the unexpected break below the support near 1752.36, you need to beware of the possibility of accelerated decline.

Crude Oil

The U.S. oil is now trading at $87.75 per barrel in the early trading hours of Thursday, August 18, Beijing time. Oil prices recovered slightly on Wednesday after hitting a six-month low. A sharp drop in U.S. crude inventories overshadowed concerns about increased Russian production and exports and the recession.

Intraday focus on the U.S. initial jobless claims for the week ending Aug. 13.

   Positive factors affecting oil prices

【U.S. crude oil inventories plunge by 7.1 million barrels

【Russia suffers setback in Crimea, and the commander of the Black Sea Fleet is dismissed】

【A Russian nuclear power plant transmission line tower is blown up】

【Russia expects gas export prices to double this year】

  Negative factors affecting oil prices

【Russias energy export revenues to grow 38% this year】

【U.S. retail sales data in July fell short of expectations】

【Goldman Sachs cuts Brent crude oil price forecast for next year】

【Three major U.S. stock indexes close lower】

【Outbreak data for Canadas Omicron variant is grossly underestimated】

Overall, the big drop in U.S. crude oil inventories boosted oil prices from a six-month low. In addition, Russias setback in Crimea may further highlight the escalation of the conflict between Russia and Ukraine, and oil prices may oscillate to the long side in the short term. However, caution is needed before the Iranian nuclear deal is implemented.

Foreign Exchange

In early trading on Wednesday, August 17, Beijing time, the U.S. dollar index rose slightly and is currently trading around 106.65. Solid U.S. retail sales data for July, released on Wednesday, helped reduce worries about a slowdown in the U.S. economy. The euro remained under pressure as analysts worried that energy shortages would push record inflation further higher, tipping the continent into recession. The British pound jumped briefly after the U.K. announced that the annual rate of CPI in July was 10.1%, the highest level in 40 years, but recession fears still weighed on the pound.

At 02:00 Beijing time on Thursday, August 18, the Federal Reserve released the minutes of its July meeting, showing that Fed officials were worried that they may raise interest rates excessively in the process of fulfilling their pledge to control inflation, and the U.S. dollar index subsequently pared its gains.

The size of the Fed's next expected rate hike will depend on consumer inflation and employment data for August, which are due before the September meeting.

Following the release of the minutes, the probability of a 75-basis-point rate hike in September fell to 40% from 52% earlier on Wednesday, and now sees a 60% chance of a 50-basis-point hike.

The euro closed up 0.07% against the dollar at $1.0177 on Wednesday. Weakness in the euro zone economy remains a major drag on the euro.  

The Australian dollar closed 1.25% lower at 0.6934 on Wednesday as concerns over Asian demand for commodities including iron ore dented the Australian dollar's appeal.

At 10:00 Beijing time on, Wednesday, August 17, the Reserve Bank of New Zealand announced a 50 basis point rate hike, the seventh consecutive rate hike, and hinted that a more hawkish tightening policy will be adopted in the next few months to control the high inflation. NZD/USD got a boost, hitting a high of 0.6392, but then erased earlier gains in volatile trade in what was likely profit-taking on the initial move. Last NZD/USD closed down 1.02% at 0.6279. 

At 14:00 Beijing time on Wednesday, August 17, the United Kingdom announced that the annual rate of CPI in July was 10.1%, the highest level in 40 years. The pound jumped against the dollar, but then fell back and finally closed down 0.38% at 1.2046 . Recession fears still weighed on the pound.

Major events to watch: On Friday, August 19, 01:20 Beijing time, Kansas Fed President George delivered a speech on the U.S. economic outlook. Then at 01:45, Minneapolis Fed President Kashkari took part in a question-and-answer session at a meeting.

Institutional Currency Viewpoint 

1. JPMorgan Chase: It is recommended to maintain the bearish euro against the dollar, the stable performance of the euro is difficult to last

①The euro-dollar exchange rate was stable after briefly falling below parity in mid-July, but JPMorgan Chase strategist Meera Chandan said that this situation may not be sustainable, as economic and geopolitical factors may pull the euro down again in the short term.

②The euro is likely to weaken again as real yields have turned in favor of the U.S. and the euro does not reflect further downgrades in economic growth forecasts. Soaring gas prices, sluggish economic growth, and persistent inflation will also be detrimental to the euro, causing it to depreciate against all G-10 currencies, especially NOK and CHF.

③It is recommended to re-sell EUR/USD to maintain a bearish stance, and keep short EUR/CHF. The EUR may strengthen in the short term, but the duration will be short-lived due to the possibility of more hawkish expectations of the central bank.

2. Institutional analysis: Indian rupee gains against the dollar stalled due to corporate dollar outflows and a hawkish Fed outlook

① Anindya Banerjee, head of foreign exchange and interest rate research at Kotak Securities, said that falling oil prices and risk sentiment helped the Indian rupee appreciate. But KKR and Co. Inc. sold their entire stake in Max Healthcare Institute Ltd. for about 94 billion Indian rupees ($1.18 billion), implying more than $1 billion in corporate outflows, boosting interest in US dollar demand.

②Meanwhile, poor economic data and the prospect of Fed rate hikes supported the dollar, with Arnob Biswas, head of research at SMC Global Securities, saying it was hard to be bullish on the Indian rupee ahead of the Fed minutes.

3. ING: EUR/GBP to fall back to 0.8350

①The pound strengthened after the Bank of England's hawkish interest rate hike, and the euro against the pound was under pressure. It is expected that the euro against the pound will fall back to 0.8350. Overnight index swaps show the market has priced in the BoE policy rate for March 2023 from 2.72% at the end of July to around 3.40% yesterday. On this basis, the UK's inflation rate increased by 10.1% year-on-year in July, exceeding expectations and hitting a 40-year high. A further rise in gas prices could take EUR/GBP all the way back to 0.8350.

②The United States as a natural gas exporter does not face these challenges. Therefore, it is predicted that the pound against the dollar is still below 1.20.

4. Swedbank: Expect EUR/USD to fall to parity again

Anders Eklof, chief FX strategist at Swedbank, sees the idea that U.S. headline inflation has peaked enough for the Fed to ease as wishful thinking. Dollar bulls have diminished, with rates pricing priced at less than 50% for a 75bps hike in September.

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