Forex Friday: Bitcoin, Gold, Yields and the Yen

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

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

• Bitcoin +20% on week and counting
• Gold set for fresh breakout?
• Interest rates are falling again amid the turmoil for the banks
• USD/JPY falls as FX picks up on risk-off signals from equities
• FOMC, BoE and SNB among next week’s highlights

Bitcoin +20% on week and counting

The price of Bitcoin has hit a new 9-month high today, after two days of consolidation and big gains at the beginning of the week

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

So crypto prices are rising in part due to increased uncertainty surrounding the traditional banking system. In the meantime, we have seen expectations for the central bank’s rate hikes fall sharply amid the turmoil in the banking sector. Reduced expectations for interest rate increases is something that has supported all zero-yielding assets, including gold and silver. For the same reason, technology shares with low dividends have led to the rise in the stock market.

At the time of writing, it was trading near its session highs, approaching $27K. That week it was up a whopping 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 around $28K, the bottom of the previous breakdown.

Gold set for fresh breakout?

Gold may be set to stage a breakout against the backdrop of falling interest rate expectations and increased uncertainty around the banking system. Meanwhile, China continues to demand more and more gold, suggesting that there is also strong physical demand. Gold withdrawals from the Shanghai Gold Exchange totaled 169 tonnes in February, up 30 tonnes monthly and 76 tonnes year-over-year to represent the strongest February for wholesale gold demand since 2014, according to the World Gold Council. Demand for gold has increased due to the economic recovery and the release of pent-up demand in China.

Crops fall again

As mentioned, bond yields have fallen sharply in recent days, mainly due to increased uncertainty around the traditional banking system, which has caused investors to reduce expectations of the central bank’s interest rate increases. Although they recovered on Thursday, the recovery was short-lived. Bond prices rose again on Friday on safe-haven flights, sending interest rates down again.

The ECB went ahead with a 50bps hike on Thursday but gave no guidance, suggesting they may take a break going forward.

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

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

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

USD/JPY falls as FX picks up on risk-off signals from equities

Mid-morning in London we saw the currency markets catch a risk-off signal from the equity markets. Credit Suisse saw its shares fall more than 6% to reignite fears about EU banks. Meanwhile, in the US, First Republic Bank shares fell around 12% as the bailout of major US banks failed to calm nerves there. This caused the major indices to turn sharply lower, giving up earlier gains. In response, the safe-haven Japanese yen rose again, further bolstered by falling global interest rates.

USD/JPY formed a hammer candle on Thursday, but the fact that we haven’t seen any follow-through to the upside suggests that the bulls may be in trouble. Those who bought the rally yesterday are sweating. Their stop will rest below Thursday’s low around 131.70. That’s where USD/JPY could be headed unless risk sentiment improves unexpectedly, or we see a big upside surprise in upcoming US data: Consumer Sentiment and Inflation Expectations Surveys from UoM.

USD/JPY has broken its bullish trend and has remained below its 200-day moving average. Recently it held below 134.00 key resistance. As long as the upside is limited by this level, the path of least resistance will remain to the upside.

The US dollar is falling on the falling expectations that the Fed will tighten policy further aggressively. Much will now depend on the banks’ financial stability. Next week, all eyes will be on the FOMC. Below is everything you need to keep an eye out for in the week ahead…

Looking forward to next week

UK CPI

Wednesday 22 March

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

FOMC rate decision

Wednesday 22 March

So much has happened in recent weeks that there are many question marks over whether the Fed will raise interest rates at all at this meeting. The probability of a 50 basis point that was around 70% just a week ago dropped to zero. The probability of a no increase increased sharply. It looks like the market has settled down somewhere in between: a 25 bp run. In fact, according to a Reuters poll, the majority of respondents reported that the Fed will raise interest rates by 25 bps in March, not the 50 bps priced in just a week ago. About 76 of the 82 economists surveyed agreed, while 5 said the Fed will take a break. The survey also found that 56 of 64 economists polled said the Fed will raise interest rates to at least 5.00-5.25% in Q2, lower than recently priced. With not much macro data to come before the FOMC meeting, much depends on the financial stability of US banks now.

Bank of England interest rate decision

Wednesday 23 March

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

Global flash PMIs

Friday 24 March

The latest PMI numbers will give us a snapshot of the state of the global economy, giving us a leading indication of whether the upswing has sustained or if things have started to change for the worse. The PMIs can determine how central banks can proceed with future interest rate decisions.

— Posted by Fawad Razaqzada, Market Analyst at FOREX.com