Our latest weekly analysis on Sunday (Feb 19) featured economist and certified financial planner Sani Hamid. This issue is a compilation of his thoughts during the session.

This Week’s Top Headlines

i) Bulls reclaim market dominance as Bitcoin surges over 14% to reach its August 2022 high of $25,200, following a minor retracement. It attempted to break this 5-month high resistance twice this week but failed miserably.

ii) The latest US CPI data released on Feb 14 came out at 6.4%, the lowest since 2021. However, the reading failed to meet expectations, prompting investors to factor in more aggressive rate hikes from the Federal Reserve.

iii) US equity markets rallied nonetheless, ignoring the fact that the recent inflation print fell short of expectations. It was only on Friday (Feb 17) did US markets close in the red.

iv) The ringgit falters against the greenback. It is currently trading at RM4.426, having lost over 4% of its value since the start of February. The downtrend is expected to continue.

Scroll down to read the details.

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The tug of war between Bulls and Bears.

After a minor retracement to $21,800 the previous week, Bitcoin rallied to its August 2022 high of $25,200 and made two attempts to break this resistance level.

The Relative Strength Index (RSI), an oscillating indicator which tracks the relationship between buyers and sellers, made lower highs in the recent weeks while Bitcoin gained ground. This divergence paints a bearish signal, as the lower highs of the RSI indicate that buyers are weakening in this rally.

A second retracement is currently underway, but economist Sani Hamid believes that it is still possible to see another upswing after this pause. He noted that many traders will short Bitcoin at the $25,200 resistance level with stop-losses placed slightly above that mark.

If Bitcoin's price were to increase even slightly, a significant short squeeze could occur, forcing short traders to buy back their positions and drive the market even higher, similar to what happened in January.

US inflation slows to 6.4%, missing expectations. But markets rallied..?

The latest US Consumer Price Index (CPI) disappointed expectations at 6.5%, having slowed to 6.4% in January compared to a year earlier, the lowest reading since 2021.

Stripping out volatile items like food and fuel, the core inflation also missed forecasts. The reading came out at 5.6%, slightly higher than expectations at 5.5%.

The US inflation data is a key measure for investors, economists, and most importantly, the Federal Reserve. The disappointing figure meant that the Fed may have to adopt a more aggressive stance for its future policies, which is usually negative for equity markets and Bitcoin.

When the CPI was released on Tuesday (Feb 14), however, US stocks were choppy, swinging from gains to losses with no clear direction. The S&P 500 ended the day with a slight gain, while Bitcoin soared to $25,200.

I could not begin to explain to you how surprising this is.

How could speculative assets rally even after the US inflation missed forecasts?

It was only on Friday that equities began to retrace almost 1% and close in the red. Even so, the decline was extremely shallow, though not negligible. Bitcoin, however, ventured on its own path and attempted to break through $25,200 another time.

I turned to Mr. Sani Hamid, expecting a comprehensive explanation for the unexpected rally.

He was equally stunned and at first replied, "Because there are more buyers than sellers."

We laughed.

However, we still failed to grasp why this was the case. Mr. Sani went on to explain that markets were already expecting inflation to cool in recent months, and the recent figure that missed forecasts is but a "little bump" in the steady downtrend.

So yes, inflation missed expectations, but it is lower than the prior month’s figure of 6.5%. Though stickier than expected, it is cooling, at least.

But wait, here comes something even more confusing.

Latest probabilities for the upcoming Fed meeting show 50 basis points in the cards.

With January’s CPI showing that inflation is not over, investors are now anticipating more rate hikes from the Federal Reserve. The latest probabilities from CME Group show 15.1% of investors expecting the Fed to go with a 50 basis point hike on 22nd March.

Bear in mind that the 50-bps probability was not even considered prior to the latest CPI print. Two weeks ago, the majority (almost 99%) of investors favoured a 25-bps hike, with the remaining probability at 0 bps.

The question now falls back to the market retracement. The new 50 bps consideration is a steep increase compared to previous probabilities. Mr. Sani believes that stocks should in fact correct even further than a measly 1% decline.

What’s weirder is that we’re currently seeing both the S&P500 and the dollar index rallying in tandem, when they are historically inversely correlated. This shifts more evidence that a steep fall in equities is imminent, considering the Fed’s projected aggressiveness.

The ringgit is losing ground against the dollar

As of the time of writing, the ringgit has weakened to RM4.426 against the US dollar, marking a 4% decline over the past few weeks. In our previous session with Mr. Sani on January 29, he suggested that we may have already seen the bottom for the US dollar, which appears to have been an accurate prediction.

The reasons behind the ringgit's decline are quite straightforward.

Recent US inflation has been higher than expected, leading to the likelihood that the Federal Reserve will maintain higher interest rates for a longer duration.

Bank Negara Malaysia (BNM) has also recently decided to halt interest rate hikes during their policy meeting.

These factors will widen the interest rate differential between Malaysia and the US, causing investors to move towards assets that yield higher returns and driving demand away from the ringgit and towards the dollar.

That’s all for this week’s newsletter!

Disclaimer: I am not a financial advisor. This newsletter is based on my own analysis and research. Do not take any of it as financial advice.

*This newsletter was written at 10.30 AM on 20 February 2023 and completed at 3.30 PM the same day. To get early access to our newsletter, be our patron for as little as $1/month!