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What surprises will the Fed offer and why bitcoin fears regulation?

29 जुलाई 2022

The cryptocurrency market ends the first quarter of 2022 with multidirectional dynamics, where the BTC/USD consolidates around $47,000. Investors expected that the events in Eastern Europe would not only become a source of increased volatility but also allow the cryptocurrency market to aim for highs last seen in December 2021. Instead, the rates of digital assets remained at the same levels where they were before the crisis began.

The absence of pronounced dynamics can be explained by two opposite trends that compete with each other. On the one hand, this influx of investments in the crypto sector is against the backdrop of financial restrictions imposed on the Russian economy. On the other hand, the fears of market participants that the fight against circumvention of sanctions will tighten the digital currency market regulation by the West. These fears are increasingly taking up over-optimism. In the last two weeks alone, the outflow of funds from crypto funds amounted to $150 million. It can be assumed that large investors expect the continuation of the crypto winter and therefore leave the exchanges until better times.

Fig. 1. Weekly dynamics of cash flow on cryptocurrency exchanges. (million $)

Returning to the situation with the trends outlined above, it is worth noting that the interest of Russian investors in crypto assets has recently grown: the number of users on exchanges almost doubled in March alone. Russians seek to preserve capital during inflation growth, ruble devaluation, and in conditions of “hard” currency control when the population does not have the physical ability to buy foreign currency. The EU and US authorities try to prevent the current sanctions from being circumvented by tightening control over digital assets and classifying digital assets as securities.

Two weeks ago, the European Parliament was supposed to adopt a bill containing restrictions on cryptocurrencies based on the Proof-of-Work (PoW) algorithm; however, this initiative did not get the required number of votes. In particular, the European Parliament’s Committee on Economic and Monetary Affairs voted by 30 votes to 23 to remove this provision from the draft proposed structure of Markets for Crypto Assets regulation (also known as MiCA), the EU’s comprehensive regulatory package for the management of digital assets. A different outcome of the vote could lay the foundation for further restrictions on the use of cryptocurrencies based on energy-intensive computing processes in the 27 EU member states.

Meanwhile, US authorities require cryptocurrency companies to provide personal customer information to hinder Russian users or even block their accounts. Obviously, blockchain technology has become a weapon in the current geopolitical crisis, and each party seeks to use it in their interests. So far, most of the largest companies in the digital sector have refused to restrict market access for Russian users, excluding those whose names are directly on the sanctions lists; however, further pressure on the cryptocurrency market may continue soon. Given the above, we recommend “shorting” BTC with a target of $30,000.

BTC/USD SellStop $44 000 TP $30 000 SL $50 000

Fig. 2. BTC/USD price chart (daily timeframe)

 

Oil: lack of supply or decline in demand?

In the first quarter of 2022, the price of Brent oil updated a 14-year high and tested the resistance of $130 per barrel, then the initiative passed to sellers, and prices retreated to $100. The unprecedented volatility in the hydrocarbon market was the result of fears about the lack of supply against the backdrop of events in Eastern Europe, as well as the panic that replaced them due to a potential drop in demand associated with a worsening epidemiological situation in China, the world’s critical oil consumer. At the end of March, the Chinese authorities, trying to stop the surge in the incidence of coronavirus, were forced to re-impose restrictions on more than 45 million people in two industrial centers. Most of the infections were recorded in Jilin province and the city of Shenzhen. It is important to note that investors still do not know how much the new measures will affect the growth of the Chinese economy.

Despite the situation in China, the global energy market is still threatened by the most significant supply shortage for many large companies. Events in Eastern Europe prompted the West to impose “tough” sanctions on the Russian economy. The United States went furthest by extending the package of restrictive measures to the Russian energy sector by imposing an immediate ban on oil imports. It is worth noting that many other countries took similar efforts in an unofficial form by fearing reputational risks. According to experts, the result of the actions may be underestimating about 3 million barrels of oil per day in the world economy since April. International Energy Agency (IEA) research analysts have lowered their forecast for world oil this year by 2 million barrels to 99.5 million barrels per day.

Rising oil prices have already provoked stagflation in almost all countries of the world and had a negative impact on global economic growth. Logically, demand also sank, but the volume of its decline is not so significant as to offset the loss of Russian hydrocarbon supplies. According to the IEA forecast, oil demand this year will decrease by 1.1 million barrels per day and equals 99.6 million barrels per day. According to the supply and demand indicators, the oil market is waiting for a shortage that may occur in the coming months.

Fig 3. Forecast of the ratio of supply and demand in the global oil market. (million barrels per day)

The imbalance between supply and demand is exacerbated by the fall in world oil reserves to multi-year lows and the reluctance of OPEC + countries to increase oil production. The West has repeatedly called on OPEC + to increase oil production beyond the limits set in the middle of last year. Still, the cartel and its allies prefer to stick to the previous plan, increasing output by no more than 400,000 barrels per day every month. The prospects for the return of Iranian oil to the market are also entirely illusory, given the ongoing disagreements between Washington and Tehran on the issue of resuming the nuclear deal and lifting sanctions. Against this background, the mood in the oil market remains exclusively bullish. According to Goldman Sachs experts, the cost of Brent crude oil in the 2nd quarter of this year could reach $125.

Brent BuyLimit $105,00 TP $125,00 SL $97,00

Fig. 4. Brent crude oil price chart (H4 timeframe)

 

EUR/USD: the energy crisis will not allow the euro to grow

The EUR/USD pair ends the 1st quarter of 2022 with a consolidation near 1.1000 – the psychological level. Recent events in Eastern Europe once again reminded all market participants how strong the dependence of the currency bloc countries on the import of Russian hydrocarbons remains. For this reason, Europe has not joined the US and UK sanctions against the Russian energy sector yet. Nevertheless, Europe could be forced to do so, just as Russia could reduce gas supplies to Europe by cutting off “Nord Stream 1”, running now at 100% capacity. Since oil and gas quotes may be at new highs, the current reality for the EU countries is more like an expectation of a recession, and the one could be a trigger for an uncontrolled rise in inflation caused by an energy shock.

The rise in hydrocarbon prices is a severe problem for the EU countries since the increase in oil prices accelerates inflation and slows down the pace of economic recovery because consumers, spending more on fuel, are forced to cut costs on other goods and services. The consequences of this are already being seen. According to data published last week by Eurostat, the annual value of the consumer price index (CPI) in the Eurozone in February reached 5.9% after rising by 5.1% in January. Economists polled by The Wall Street Journal had expected the rate to remain at 5.8%.

Fig. 5. Monthly dynamics of changes in the annual supply in the Eurozone (%)

Thus, the level of inflation in the EU countries has already updated the maximum of the entire observation period. Also, the level of industrial optimism in Germany set a new anti-record. In particular, the German ZEW index sank to -39.3 from 54.3 in February, indicating a collapse in economic expectations that has spread to all European businesses. The ongoing events have laid a shaky foundation for the prospects for the European currency. The situation is further aggravated by the unwillingness of the European regulator to intervene by analogy with the actions of other world central banks. Following the results of the March meeting, the ECB left its key interest rate unchanged at 0%, noting that one would not change it until inflation in the euro area reaches the target level of 2%. Since this is definitely not going to happen next quarter, the euro risks remaining underdog with the potential to fall towards 1.0700.

EUR/USD SellStop 1,0940 TP 1,0700 SL 1,1050

Fig. 6. EUR/USD price chart (daily timeframe)

 

USD/JPY: monetary policy contrast

The first quarter of 2022 was successful for buyers of the US currency, and one managed to strengthen its position against all major competitors. The greenback showed one of the best results against the Japanese yen. As a result, the USD/JPY pair hit a new high since 2016, testing the resistance of 120.00. Events in Eastern Europe caused increased attention of traders to protective assets, including as an active safe-haven asset for US dollar traders. This choice is quite logical due to the tightened monetary policy course of the US Federal Reserve.

In March, the Fed raised interest rates by an expected 25 basis points to 0.50%, signalling that it plans to continue raising rates to keep the economy from overheating and curb inflation, which has reached a four-decade high. For the Fed, inflation is a double threat. First, the rise in prices can become so persistent and prolonged that it will change the attitude of consumers and companies to the very essence of inflation, leading them to believe the rise in prices is now forever. The second risk is a strong labour market, where demand for labour far exceeds supply. Companies compete for workers but then pass the costs on to the final consumer by raising selling prices for goods and services. These factors create the threat of an inflationary spiral as workers face rising prices and demand higher wages.

Expensive oil remains another trigger for higher inflation. A simple rule says that an increase in the cost of oil by $10 accelerates inflation by 0.4-0.5%. It means that inflation will rise even more in the coming months, and the Fed will respond by raising rates and supporting the dollar.

Despite the lack of supply and rising energy prices, significant inflation in Japan has not been observed yet. Unlike the Fed, the Bank of Japan keeps the rate at a record low -0.1%, intending to pursue an exceptionally loose monetary policy. The main reason for this approach is low inflation levels, allowing the Japanese regulator to stay away from the trend of tightening monetary policy, typically for developed countries. Consumer prices rose by 0.6% compared to the same period last year and, excluding food and energy prices, increased by 1%. In the US, inflation reached 7.9%, a 40-year high.

Fig. 7 and 8 US (left) and Japan (right) annual inflation monthly dynamics (%)

Thus, while the Fed, the Bank of England, and the European Central Bank (ECB) are trying to contain the record growth in consumer prices, the Bank of Japan keeps the rate at its minimum values, creating ideal conditions for trading the USD/JPY pair against the contrast of monetary policies. In other words, the growth of the USD/JPY pair may continue with the target of 125.00.

USD/JPY BuyLimit 120,00 TP 130,00 SL 117,00

Fig. 9. USD/JPY price chart (daily timeframe)

 

USD/CAD: three reasons for the growth of the Canadian dollar

According to the results of the first quarter of 2022, the USD/CAD pair updated the minimum levels since the beginning of the year, dropping to 1.2500. The Canadian dollar has become one of the few risky assets of the foreign exchange market, providing excellent resistance to the American competitor, even despite the Fed’s actions to tighten monetary policy.

The significant strengthening of the Canadian dollar resulted from a more proactive position of the Bank of Canada by effectively increasing the key interest rate since the start of the pandemic in contrast with the Fed. In early March, the Bank of Canada raised the rate, responding to rising inflation to 5.7% – a maximum in 30 years. The main trigger for increased inflationary pressure was oil; the price of one also renewed a multi-year high, exceeding $130 per barrel. As noted earlier, the bullish dynamics of the oil market resulted from investors’ fears about the shortage of world supply and the inaction of the OPEC + countries, refusing to increase oil production. It is worth noting that, unlike the United States, Canada’s rise in oil prices has positive aspects. The fact is that Canada is an export-oriented economy, where the lion’s share of exports is oil. This year alone, Canada’s income from the sale of oil and petroleum products may exceed $100 billion, improving the trade balance significantly and providing adequate support to the national currency. Among the factors of inflation growth in Canada, one can distinguish the developing supply of goods crisis. By the end of March, representatives of the Canadian Pacific Railway announced that they were forced to suspend their operations in the US and Canada after an unsuccessful attempt by management to negotiate a labour agreement with workers’ unions. The railway spans more than 20,000 km of tracks, and its shutdown risks a serious blow to the supply chains of goods, especially the agricultural sector.

In addition to high inflation and expensive oil, the national labour market also contributes to the active growth of the Canadian currency. According to February data, Canada’s unemployment rate hit pre-Covid levels, dropping to 5.5%.

Fig. 10. Monthly dynamics of changes in the unemployment rate in Canada (%)

Progress in the labour market suggests that the Bank of Canada will raise rates at its next meeting on April 13, following the increase in March. If expectations come true, then selling the USD/CAD pair with a target of 1.2200 may be the first successful trade in the second quarter of 2022.

USD/CAD SellLimit 1,2600 TP 1,2200 SL 1,2750

Fig. 11. USD/CAD price chart (H4 timeframe)