Energy at the Mercy of Sanctions. Interest Rate Differential Cripples JPY. COVID Affecting the Chinese Economy
Welcome to our look back at the previous month and a look ahead to what we might expect to see throughout May and beyond.
As we finish the month, the European Union is getting more serious about stopping the import of Russian Oil and Gas. This may cripple the German economy but the world is desperate to find an end to the Ukraine War. Globally, the rising cost of natural gas is causing inflationary problems for manufacturers and consumers alike.
The situation with global Central Banks has not changed much except for the fact that inflation is not only causing uncertainty but is also turning out to be a major socioeconomic problem with many lower-income families not being able to heat their homes or buy decent food. As traders, we need to watch this carefully, as the normal tool for the Central Banks to keep inflation in check, is to raise Interest rates.
Unfortunately, under the current circumstances, there is a serious danger that these Monetary Policies might cause recessions which, with the resulting unemployment, make matters much worse for the bulk of the population.
As mentioned in the overview, the march higher in April of price action on Natural Gas is bad news for consumers and industry alike. Natural Gas is used in heating, transportation, production, and manufacturing and, therefore, is a main instigator of the inflation we are seeing now.
The European Union is seriously looking at cutting the import of Russian Natural Gas which may seriously hurt the German economy. The heavy reliance on its manufacturing, without sources of energy like gas and oil, means that production must be cut and therefore, more unemployment and fewer exports.
Meanwhile, many European countries, like Poland and Bulgaria have had to call on alternative sources for Natural Gas which, while prudent under the environment of Russian sanctions and threats, will inevitably increase costs.
Despite the increase in pricing caused by the supply uncertainty due to the Ukraine war, price action was bearish, albeit volatile, throughout April. The reason for this was the aggressive COVID lockdowns in China, which have caused factory shutdowns, and hindered demand for energy.
Less than encouraging Chinese PMIs were released on the last day of the month which caused Crude Oil to fall moderately. By the first trading day of May, much of the loss had been recovered based on Russian uncertainty.
As with Natural Gas, the threats from Russia and the decisions of major economies like Germany will affect price action on Crude throughout May and the rest of the year.
The consensus is that OPEC+ will maintain current levels of production at their 5 May meeting, but look at increasing production in June.
The chart of the NASDAQ shows the direct fall throughout April. Not only do we have huge supply chain issues from China, we still have supply chain and logistics hangovers from the COVID pandemic. On top of that, many companies are facing issues stemming from the Ukraine war and geopolitical uncertainty.
Inflation is running high, globally, which will inevitably remove disposable income from the pockets of consumers. The icing on the cake for US equities lies with the aforementioned inflation, in that central banks like the US Federal Reserve must raise interest rates. This rise in interest rates hits the bottom line of most corporations and their customers and causes investors to look elsewhere.
Every pair on this chart — the USD Majors — shows continued USD strength in April. The reasons? Being the world’s largest economy, it is affected more by monetary policy, like raising interest rates, or the tapering of bond purchasing, and this has added to the strength as the US Federal Reserve tries to get inflation under control. Also, the sell-off in the US equities markets has seen investors moving to cash.
Other safe-haven currencies like JPY and CHF are losing their desirability due to the economic issues and weaker JPY in Japan and uncertainty in Europe.
The first week of May should see USD getting even stronger as we expect to see a 1% rate very soon, with more increases coming in 2022 and more into 2023.
If you follow our Market Blast videos, you would have seen the call for 130 JPY to USD. We haven’t seen 130 Yen since the beginning of 2002 and before that in 1998.
Why? Soaring energy prices have hit Japan’s huge trade deficit which has weakened the yen. As other Central Banks have raised Interest Rates to fight inflation, Japan had the opposite problem with months of deflation so, the differential in Interest Rates has had a negative effect on JPY. In the same vein, a huge differential in Japanese government bond yields vs US government bond yields has had holders of JPY converting the currency to buy bonds in other jurisdictions.
A cheaper JPY should be good for the economy with the heavy reliance on exports. However, with the massive lockdowns in China, expensive logistics, and serious inflation problems from other economies, this export business may continue to shrink.
Last month we looked at the steady fall of the Euro based on the fact that this economic region is feeling the impact of the Ukraine war more than others.
Price action EURUSD is now at a key level of support that we last saw in 2017 and it looks like it is heading lower. The chart tells the story as April saw nothing but declines.
We will learn, early in May, about Christine Lagarde’s intentions regarding interest rate rises. Raising interest rates can strengthen the EUR, but with the corporate scene balancing the Ukraine war, a slowing economy, inflation, and a potential energy crisis, the ECB does not want to cause any damage to the economy in spite of the EUR.
Mid-month we had a news event that gave us the perfect counter-trend trade with price action bouncing off support and heading back up. I hope you caught it!
Price action on Gold has been volatile throughout the Ukraine war and almost hit $2000 again during the month of April.
As the markets do, they get used to longer-term geopolitical events and gold had retreated to the high $1800s. Just as importantly, however, is the fact that the other half of the XAUUSD pair is quite strong. All things being equal (which they never are) the value of USD will dictate the price of gold for the near future.
From the technical side, we can see how important Fibonacci levels are with the 23.6%, 38.2%, and 50% in play. In fact price action hit 2 levels at support and resistance during the last 2 days of the month, and again on the first trading day of May.
That’s all for now. Make sure you subscribe to the Valutrades blogs and videos and we will see you here at the end of May.
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