What if …

Upcoming Economic Events (Singapore Local Time):

Upcoming Economic Events (Singapore Local Time):






PBoC Interest Rate Decision



German HICP (January)



FOMC Minutes






US Durable Goods Orders (January)



US ADP Employment Change (February)



US ISM Manufacturing PMI (February)

Looking at the recent equity market performance, one may think that we are out of the woods and all is back to normal. Is it true that inflation is now a story of the past and we will never experience it again?

Markets in Focus

Figure 1 US Dollar Index

The US Dollar has lost nearly half of its gains since 2021 due to the market’s anticipation of the Fed’s tightening coming to an end. However, the DXY did find its footing above 100, a significant support level. It remains to be seen if the recent reversal has more leg to go.

Figure 2 USD/CNH

After breaking down from the Head-and-Shoulder top in later 2022, the RMB has continued to strengthen against the greenback. However, 6.7 has proven to be a significant support for the USD/CNH pair, as a small double-bottom has now been completed. If the broad US Dollar strengthens again, this pair could potentially climb back to 7.

Figure 3 Generic 1st Silver Future (Weekly)

The recent US Dollar weakness has been a tailwind for silver as it rallied from 18 to 24. However, the rally could not continue as we saw the price rolling back to 22. On a longer-term timeframe, silver is still making lower highs and lower lows, confirming the bearish bias.

Figure 4 Corn May 2023 Future

Corn has been trading in a giant symmetric triangle since mid-2022. Price is now near the apex with compressing range, which means a breakout soon is likely from a technical perspective. We are watching closely in which direction the breakout will take place.

Our Market Views

What if… it sounds like Marvel’s legendary comic series. This is the situation which the market aptly found itself in. What if inflation makes a surprise comeback instead of the expected soft landing? What if our monetary heroes are not able to save the day? What secret weapons do they have against the forces of inflation? What could be the root cause that has led to this alternate reality, where the economy and financial market hang in the balance? Welcome to the world of “What if… Inflation Strikes Back!”

Without trying too hard to sound witty, we would like to invite our readers to have a thought experiment with us and entertain a scenario that very few people anticipate, an alternate reality if you will, that instead of the “soft landing” most people had hoped for, the economy actually reheated back into rising inflations, despite the aggressive rate hikes done thus far.

First off, some facts. The US headline inflation figure has come down for a few consecutive months. That is encouraging. The Fed has also dialed back its pace of rate hikes to increase the policy rate by 25bps in the first FOMC meeting of 2023. So far, so good – it seems tightening has effectively brought inflation under control.

However, on the labor market side, we saw the US unemployment rate drop to 3.4%, the lowest in half a century. We also saw January’s Non-farm Payrolls (NFP) number at a staggering 517k, multiple standard deviations above the consensus. In other words, we still have an extremely robust labor market in the US.

The market seems to have overly fixated on headline inflation and intentionally ignored the labor market. Among the major factors that affect the overall financial conditions, the US Dollar weakened more than 10% since the 2022 peak, and the equity market rallied more than 20% from the 2022 bottom. These two have substantially loosened the financial conditions, undoing some of the tightening effects of rate hikes.

Next, we couldn’t help but notice that the commodity market is displaying a noticeable level of skepticism regarding China’s re-opening narrative and the potential impact on the global economy, as most market participants are expecting an economic slowdown, a.k.a. the soft landing. Hence the rather lackluster price actions in many markets, such as energy and agriculture.

What if the US avoids a soft landing altogether thanks to its strong labor market and renewed investor optimism in anticipation of a “Fed Pivot,” while at the same time, a surge in demand from China starts to get realized by the commodity market? This perfect storm could result in a resurgence of inflation. To quote Fed Chairman Jerome Powell, “the largest amount of pain, the worst pain, would come from a failure to raise rates high enough and from us allowing inflation to become entrenched.” If this scenario becomes a reality, the market may be in for a rude awakening.

How We Express Our Views

We consider expressing our views via the following hypothetical trades1:

Case Study 1: Long USD/CNH Future

We would consider taking a long position on the USD/CNH future (CNHH3) at the present level of 6.81 with a stop-loss below 6.7, which could bring us a hypothetical maximum loss of 0.11 points. Looking at Figure 2, if the double-bottom breakout is confirmed and the reversal continues, USD/CNH has the potential to reach 7.0, a hypothetical gain of 0.19 points. Each point move in the USD/CNH future contract is USD 100,000.

Case Study 2: Short Silver Future

We would consider taking a short position on the silver future (SIH3) at the present level of 22 with a stop-loss above 23, which could bring us a hypothetical maximum loss of 1 point. Looking at Figure 3, if the reversal continues, silver has the potential to reach 18, a hypothetical gain of 4 points. Each point move in the silver future contract is USD 5,000.

1 Examples cited above are for illustration only and shall not be construed as investment recommendations or advice. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. Please refer to full disclaimers at the end of the commentary.

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