Forex Friday: Bitcoin, Gold, Yields and Yen

Welcome to another edition of Forex Friday, a weekly report in which we discuss selected currency themes mainly from a macro viewpoint, but we also throw in a pinch of technical analysis here and there.

In this week’s edition, we discuss Bitcoin, gold, dollar and yields, and look forward to the key events coming up in the week ahead.

• Bitcoin +20% on week and counting
• Gold set for fresh breakout?
• Yields dip again amid turmoil for banks
• USD/JPY drop as FX catches risk-off signal from equities
• FOMC, BoE and SNB among next week’s highlights

Bitcoin +20% on week and counting

The price of Bitcoin has hit a fresh 9-month high today, following two days of consolidation and big gains at the start of the week

Cryptos have made a big comeback this week, following their reversal in the previous week when the earlier selling pressure was reversed in the latter parts of the week when Silicon Valley Bank collapsed. This week, troubles for Credit Suisse came to the forefront, leading to a bailout by the Swiss National Bank. We have also seen troubles for a couple of other US banks.

So, crypto prices are rallying in part because of heightened uncertainty over the traditional banking system. Meanwhile, we have seen central bank rate hike expectations fall sharply amid the turmoil in the banking sector. Reduced rate hike expectations is something that has supported all zero-yielding assets, including gold and silver. For the same reason, low-dividend paying technology stocks have led the stock market recovery.

At the time of writing, it was trading near its session highs, closing in on $27K. On the week, it was up an impressive 20%. How high will BTC/USD go from here?

BTC needs to hold the breakout above $25.3K old resistance to sustain the bullish reversal. Failure to do so would be bearish. The next level of potential resistance is seen around $28K, the base of the prior breakdown.

Gold set for fresh breakout?

Gold could be set to stage a breakout on the back of falling interest rate expectations and heightened uncertainty over the banking system. Meanwhile, China continues to demand more and more gold, suggesting there’s strong physical demand too. Gold withdrawals from the Shanghai Gold Exchange totalled 169 tons in February, up by 30 tons month-on-month and 76 tons year-over-year to represent the strongest February for wholesale gold demand since 2014, according to the World Gold Council. Gold demand has risen because of the economic recovery and the release of pent-up demand in China.

Yields dip again

As mentioned, bond yields have fallen sharply in recent days, mainly because of heightened uncertainty over the traditional banking system causing investors to reduce central bank rate hike expectations. Though they rebounded on Thursday, the recovery was short-lived. Bond prices rose again on Friday on haven flows, causing yields to dip again.

The ECB went ahead with 50 bps hike on Thursday, but provided no guidance, suggesting that they may pause going forward.

The FOMC, BoE and SNB will be in focus next week. Expectations over tightening have been slashed for all three.

Indeed, according to a Reuters poll, the majority of the respondents reported that the Fed will raise interest rates by 25 bps in March, not 50 bps as had been priced in just a week ago. Some 76 of the 82 surveyed economists agreed, while 5 said the Fed will pause. The survey also found that 56 of 64 economists surveyed said the Fed will raise rates to at least 5.00-5.25% in Q2, lower than was recently priced.

Meanwhile, China’s central bank overnight cut the reserve required ratio to ease monetary conditions and help boost bank lending.

USD/JPY drop as FX catches risk-off signal from equities

By mid-morning London session, we saw the FX markets catch a risk-off signal from equity markets. Credit Suisse saw its shares drop over 6% to re-ignite fears over EU banks. Meanwhile, in the US, First Republic Bank shares sunk some 12% as the bailout from major US banks failed to calm nerves there. This saw the major indices turn sharply lower, giving up earlier gains. In response, the safe-haven Japanese yen rallied again, boosted further by falling global yields.

The USD/JPY formed a hammer candle on Thursday, but the fact that we have not seen any follow-through on the upside suggests the bulls might be in trouble. Those who bought the rally yesterday will be sweating. Their stops will be resting below Thursday’s low, around 131.70. That’s where the USD/JPY could be heading unless risk sentiment improves unexpectedly, or we see a big upside surprising in upcoming US data: Consumer Sentiment and Inflation Expectations surveys from UoM.

The USD/JPY has broken its bullish trend and has held below the 200-day average. More recently, it held below 134.00 key resistance. For as long as the upside is capped by this level, the path of least resistance would remain to the upside.

The US dollar is falling because of the falling expectations about the Fed tightening its policy aggressively further. A lot will now depend on the financial stability of banks. Next week, all eyes will be on the FOMC. Below is everything you need to keep an eye on in the week ahead…

Looking ahead to next week

UK CPI

Wednesday March 22

The BoE policy makers are looking at signs that inflation is proving more persistent than it expected, with UK CPI remaining above 10% and threatening a wage-price spiral. A big miss could influence the BoE’s decision whether to hike or not on Thursday, in light of the recent turmoil concerning banks. However, if we see another print above 10%, this should almost certainly seal the deal for another rate increase.

FOMC rate decision

Wednesday March 22

So much has happened in recent weeks that there are many question marks as to whether the Fed will hike rates at all at this meeting. The probability of a 50 basis point which was around 70% just a week ago, sunk to zero. The probability of a no hike rose sharply. It looks like the market has settled for somewhere in between: a 25 bp hike. Indeed, according to a Reuters poll, the majority of the respondents reported that the Fed will raise interest rates by 25 bps in March, not 50 bps as had been priced in just a week ago. Some 76 of the 82 surveyed economists agreed, while 5 said the Fed will pause. The survey also found that 56 of 64 economists surveyed said the Fed will raise rates to at least 5.00-5.25% in Q2, lower than was recently priced. With not much macro data to come until the FOMC meeting, a lot hinges on financial stability of US banks now.

Bank of England rate decision

Wednesday March 23

A few weeks ago, the market was certain the BOE would raise rates by a quarter point to 4.25% on March 23. This would have been the continuation of the quickest tightening cycle in three about decades. But the recent banking turmoil has caused investors to cut BOE rate expectations. But will the BoE follow the footsteps of the ECB and hike anyway? After all, UK inflation is simply too high.

Global flash PMIs

Friday March 24

The latest PMI figures will give us a snapshot of the state of the global economy, providing us with leading indication of whether the recovery has held or whether things have started to change for the worse. The PMIs may determine how central banks might proceed with future rate decisions.

-- Written by Fawad Razaqzada, Market Analyst at City Index

Follow Fawad on Twitter @Trader_F_R

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Forex analysis FAQs

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You should always buy spot gold in forex markets (XAU/USD) when liquidity is higher, to ensure your position can be executed quickly and at the best price. Although FX markets trade 24 hours a day, five days a week, XAU/USD is most actively traded between 13:00 and 22:00 UTC (08:00 to 17:00 EST) when the New York market is open.

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What is PPI in forex?

The Producer Price Index (PPI) is a measure of inflation, it tells us whether prices are rising or falling. As such, the PPI is an important metric for forex traders to look at, as a rising PPI could be a leading indicator of higher interest rates, which would boost a currency.

Learn about measuring inflation with the PPI