Daily market and FX thoughts/recap

FX Thoughts on a Friday - January 21, 2022

Good morning and Happy Friday,

Just when you thought you had it all figured out, you realize you didn’t. On Wednesday, the NASDAQ had entered into the so-called “correction territory”, but everything seemed ok as the composite was up almost 2% during trading yesterday morning. Over the last few years, whenever there had been a large big tech selloff, it had been followed by a rally and new highs. That’s what it looked like yesterday. But then, news that Peloton was suspending production of their bikes caused the stock to tumble and everything else went right along with it. And the NASDAQ ended the day down 1.3%. The DOW fell 300 points and the S&P 500 fell 1% as well. And the downtrend continues. Many analysts have been talking about the need for strong earnings to reverse this rough patch but that isn’t happening and after the bell yesterday Netflix announced disappointing results as the company reported a little less than 8.3 million subscribers, below the forecast of 8.5 million. Yesterday, initial jobless claims for last week took an unexpected turn higher which could be looked as a potential sign that the wintertime omicron surge was hitting the employment picture. Initial filings for the week ended Jan. 15 totaled 286,000, well above the Dow Jones estimate of 225,000 and a substantial gain from the previous week’s 231,000. The total was the highest since the week of Oct. 16, 2021, and marks a reversal after claims just a few weeks ago hit their lowest level in more than 50 years.
Jobless claims are seen as a leading real-time gauge of the employment picture. While the unemployment rate has fallen to 3.9% after a record year of non-farm payroll growth, the total employment level remains about 2.9 million below where it was in February 2020, just before the pandemic began. As we begin the last day of trading this week, US stock futures are mixed in early morning trading with DOW futures up 66 points, the S&P 500 flat and the NASDAQ down 0.47%. As the stock indices continue to fall, Thursday’s move put the NASDAQ further into correction territory, as it is more than 10% below its November record high. Both the Dow and S&P 500 are on track for a third straight week of losses. The Nasdaq Composite is down nearly 5% on the week, putting it on track for its fourth-straight losing week and largest weekly loss since Oct. 2020. US treasury yields are lower this morning, with teh 10-year note trading at 1.7919% and the 30-year bond trading at 2.1103%. The USD is slightly lower during early morning trading, as traders focus on falling global equity indices and a move lower in treasury yields. On the macro side today, the Conference Board releases its leading economic index for December, economists are expecting a 0.75% increase for the index after a 1.1% rise in November.

EUR/USD is trading higher in early European trading, after testing overnight lows during the Asian time-zone. Technically, support for the single currency held at lower levels around 1.1300. The currency pair has been posting lower highs, suggesting that recovery remains technical in nature. The recent move up has the EUR trading between the 50 and 100-day moving averages and RSI has risen from the 30 level to 52. In a release yesterday, the December Meeting Accounts of the European Central Bank (ECB) showed there was a difference of opinion among policymakers regarding the inflation outlook. The publication revealed that the “higher for longer” inflation scenario couldn’t be ruled out and some members of the Governing Council wanted the ECB to communicate clearly that it’s ready to act if price pressures proved to be more persistent. On a dovish note, concerns were also expressed about any premature scaling back of monetary stimulus and asset purchases. On the calendar today Flash Consumer Confidence for January is scheduled for release and the market is expecting the number to come in at -9, after last months -8.3. ECB Board member Fernandez-Bollo and Chairwoman Lagarde are also scheduled to speak today and traders will look at those for some short-term trading opportunities. The continuing divergence of policy between the FED and ECB should keep a lid on any runaway rally for the EUR for the time being.

GBP/USD is trading lower this morning, trading below resistance levels at 1.3600, as traders react to worse than expected Retail Sales numbers for December. Technically the pound is trading below the moving averages and the 50-day has crossed the 100-day on the downside. RSI levels have been falling throughout the overnight period and is currently at 31. The UK’s Office for National Statistics reported that Retail Sales in December declined by 3.7% on a monthly basis. This release missed market expectations for a decrease of 0.6% by a wide margin. The yearly number came in at -0.9%, well below the forecast of 3.4% and worse than the revised November number of 4.3%. After the release of this data, the UK’s FTSE 100 opened deep in the negative territory and weighed on the currency pair. As of writing, the index was losing more than 1% on a daily basis. GfK Consumer Confidence was also released today and fell from -15 to -19, the lowest level since February 2021. Many believe the emergence of the omicron variant is the obvious explanation for the negative data and most believe that analysts will likely ignore this given the speed that the variant is passing as a disruptive factor for the economy. Despite these disappointing data releases, analysts still believe the BoE will go ahead and raise rates at their February meeting, but there no remains some doubt about the earlier expectation of rates rising four times this year.

USD/JPY is trading in the middle of its overnight range, around the 113.90 level after testing support during Asian trading at 113.60. Technically, the currency pair is trading well below the moving averages which appear to be consolidating at slightly higher levels. RSI has risen from a low in Asia around 30 to the present early European trading level at 43. The risk-off mood exhibited by traders has benefited the safe-haven JPY and was helped by sliding US bond yields. On the macro side, Japan’s core CPI came in unchanged at 0.5% annually in December, slightly below the expectation of 0.6%. It is the second increase in a row and the fastest pace of rising in nearly two years. In the minutes released from the December BoJ meeting, a board member was quoted saying “we’re seeing signs of change in price-setting behavior of Japanese firms, which had been said to be cautious about raising prices for fear of seeing sales volume fall. Earlier this week, the BoJ raised there 2022 and 2023 CPI projections, but also indicated that there was no rush to change their ultra-lose monetary policy,

USD/CAD is trading off of overnight lows, after oil prices fall in early Friday trading putting some pressure on the loonie. Technically, the currency pair is trading above the moving averages which are consolidating right around support levels at 1.2500. RSI is trading at a very neutral level of 51. Later this morning, Statistics Canada will release November Retail Sales figures which are expected to be 1.2% after the previous month’s 1.6%. Traders are also speculating that the Bank of Canada could raise rates at their meeting next week on January 26. With both the FED and the BoC announcing on the same day, traders may refrain from taking more aggressive positions until those meetings conclude. US oil prices fell on Friday, after rising to seven-year highs earlier in the week, as an increase in US crude and fuel stockpiles had traders taking profit from the earlier rally. Brent crude futures fell $2.46 to $85.92 per barrel, after falling as much as 3% in earlier trading, the most since December 20. Brent had risen to $89.50 per barrel yesterday, the highest level since October 2014. US West Texas Intermediate crude futures fell $2.61 to $82.94 per barrel. In earlier trading the crude future had fallen as much as 3.2%, the biggest fall since December 20, after it also had risen to its highest level since October 2014 on Wednesday. According to analysts, investors made some position adjustments after the increase in US inventories and ahead of the weekend. Falling equity markets have also impacted oil prices as investors remain concerned that with central banks raising rates to combat inflation this will have an effect of stocks.

AUD and NZD have bounced off overnight lows following the other currencies as US treasury yields put a dent in the move higher by the greenback. AUD is trading around the .7200 level while the NZD is trading at .6730. RSI levels for both currencies have moved off the 30 level and are currently trading at 44 for the AUD and 39 for the NZD. New Zealand PMI rose from 51.2 to 53.7 in December, as production rose from 53.0 to 56.3 and employment rose from 48.5 to 52.0. According to economists, the final quarter of 2021 the PMI averaged 53.2, indicating a return to positive manufacturing GDP growth after a sharp negative in the prior quarter.

Once again it appears the equity markets will be under pressure today. While there is focus on that market, investors will now be turning their attention to the Fed’s January two-day policy meeting, set to start on Tuesday. Some analysts are saying the believe the FED could announce an end to its asset purchases at next week’s meeting, setting the stage for the first interest rate hike in March. Good luck, stay safe and have a great day and great weekend.

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FX Thoughts on a Monday - January 24, 2022

Good morning,

Another bad week for the equity markets last week. The DOW and S&P 600 fell for the third straight week and the NASDAQ had its biggest loss since October 2020. And to add insult to injury, the tech-heavy NASDAQ fell into “correction territory” down more than 10% from their November record. And now we have the FOMC meeting this week on Tuesday and Wednesday with investors looking for any clues as to when and by how much will the FED start raising rates. There will be plenty of eyes on FED Chairman Powell’s press conference following the meeting. Most believe this meeting will be the last one before rates increase starting with the March meeting. While the FED maintained a lower interest rate policy and active bond purchases beginning in March 2020, the pandemic has eased and the economy has recovered very well. The unemployment rate is below 4%, while inflation has moved above 7%. While equity markets fell, bank earnings released last week, were at best mixed. BoA and Morgan Stanley posted good numbers, but Goldman Sachs’ earnings report was disappointing. US treasury yield eased on Friday, as the 10-year note fell to around 1.75%. The 30-year bond also fell easing to 2.0740%. The 10-year had risen as high as 1.9% on Wednesday as investors await the FONC meeting to see the timeline for higher interest rates. The ten-year yield rose above 1% for the first time in two years as investors sold out two year Treasuries, an indication of short-term rate expectations. Besides the FOMC meeting, this week is packed with fourth-quarter earnings releases, as more than 100 S&P 500 companies will report. IBM and Halliburton lead the Monday releases. US equity futures begin the week in the “red”, with DOW futures down around 80 points and the S&P 500 down 0.36% and the NASDAQ down 0.68%. All three indices had been higher earlier in overnight trading. US treasury yields struggled for direction in early morning trade ahead of the FOMC meeting beginning tomorrow. The 10-year note was trading at 1.7475%, while the 30-year bond fell to 2.0602%. On the macro side, Markit will release its flash purchasing managers’ index for January at 9:45 am, EST and that number is expected to ease to 56.7 from the previous 57.7. The USD is trading higher this morning against the major currencies.

EUR/USD is trading towards the lower end of the overnight trading range, edging towards the support level at 1.1300. Technically, the currency pair is trading below the moving averages as the 50 and 100-day moving averages consolidate at slightly higher levels. RSI had fallen towards 30 earlier in Asian trading, but has recouped slightly to trade at 39. Last week on Friday, while speaking at the Davos World Economic Forum, ECB President Lagarde said that the central bank was not seeing excessive demand in Europe and added that they were unlikely to face the same inflation as the United States, which put some pressure on the EUR, as investors once again were reminded of the monetary policy divergence between the FED and the ECB. On the macro side. Business activity in the Eurozone’s manufacturing sector expanded at a great pace in early January than it did in December, as IHS Markit’s Manufacturing PMI rising to 59 from 58. Market expectation had been 57.5. On a negative note, Services PMI fell to 51.2 from 53.1 in December, compared to analysts’ estimate of 52.2. Finally, Composite PMI edged lower to 52.4 from 53.3. Commenting on the data economists from IHS noted that "while the Omicron wave has dented prospects in the service sector, the impact so far looks less severe than prior waves.” They also added that "prices for goods and services are rising at a joint-record rate as increasing wages and energy costs offset the easing in producers’ raw material prices, dashing hopes of any imminent cooling of inflationary pressures.” The EUR remains under modest pressure following these data releases.

GBP/USD has fallen to overnight lows in early European trading as PMI numbers come in lower than expected and the pound is facing pressure due to the political storm that is brewing in the UK. Technically, the move this morning has put the pound well below the moving averages and the RSI level in the last few hours has fallen below the oversold 30 level, currently trading at 22. On the political front, pressure on PM Johnson to resign is growing, following a series of scandals, that latest of which is “Partygate”. Allegedly staff members held parties during the lockdowns of 2020 and 2021, one of which was attended by the Prime Minister. Traders are also beginning to focus on what the BoE will do at their next meeting in February. Will they raise rates for a second time? Those thoughts may have been dampened by the release this morning of UK Manufacturing and Services PMIs that came in slightly weaker than expected in January. Manufacturing PMI in the UK declined to 56.9 in early January from 57.9 in December, IHS Markit reported on Monday. This release came in worse than the market expectation of 57.9. Further details revealed that the business activity in the services sector expanded at a softer pace than it did in December with the Services PMI edging lower to 53.3 from 53.6. According to the comments from IHS economists, “consumer-facing businesses have been hit hard by Omicron and manufacturers have reported a further worrying weakening of order book growth, but other business sectors have remained encouragingly robust.” The pound has been under pressure since the release of this data

USD/JPY is trading in the middle of its overnight range, after testing support earlier in the overnight session at 113.50. Technically, the currency pair remains below the moving averages but has been bumping up against the 50-day during early European trading. RSI which had dipped to 35, has recouped and is currently trading at 47. On the macro side, Japan’s Manufacturing PMI rose slightly to 54.6 from 54.3 in January, below the expected level of 55.0. PMI Services dropped sharply from 52.1 to 46.6, and the PMI Composite also dropped from 52.5 to 48.8. According to economists from IHS, “Flash PMI data indicated that activity at Japanese private sector businesses dipped into contraction territory for the first time in four months at the start of 2022. The pace of decline was modest, and was led by the sharpest fall in services activity since August, while manufacturers commented on a slight quickening in output growth.” Adding to the pressure on the JPY, according to sources at the Kyodo News agency, PM Kishida is expected to place more prefectures under a Covid-19 quasi state of emergency, as news reports showed covid infections of more than 50,000 on Sunday, after the country reported the highest daily case level of 54,000 on Saturday. The COVID-19 restrictions are slated to be in place until Feb. 13 in Tokyo and the 12 prefectures, including Saitama, Chiba, Kanagawa, Aichi, Nagasaki and Kumamoto.

USD/CAD is trading higher this morning reversing a lower trend as oil prices have eased in early morning trading and traders await the Bank of Canada meeting that will take place on Wednesday. Technically, the currency pair is trading just below resistance levels at 1.2620, as the moving averages have converged and the 50 and 100-day moving averages have crossed the 200-day moving average. RSI has crossed the overbought 70 level, currently trading at 75. According to analysts, the BoC will be the first major central bank to raise rates in 2022, as rate hike bets are intensifying and a 25 bp increase is now 85% priced in. Expectations of this move were reinforced by the latest CPI data that showed annual inflation hit a 30-year high of 4.8% in December. At their late meeting, the central bank had reiterated its view that the first rate hike would probably not occur until April. But with inflation clearly rising, and with the FED expected to raise rates this year, the BoC is expected to act on Wednesday. The move in USD/CAD occurs despite the move higher in oil prices earlier this morning, as geopolitical tensions in Eastern Europe and the Middle East raise concerns about the supply outlook moving forward. In early morning trade, Brent crude futures rose $0.87 to $88.76 per barrel, while US West Texas Intermediate crude futures gained $0.86 to $86.00 per barrel. Investors remain bullish due to geopolitical risk between Russian and Ukraine as well as in the Middle East while OPEC+ continued to fail to reach its output target.

AUD and NZD are trading lower this morning as well. Technically, both currencies are trading below their moving averages and RSI levels are lower with the AUD trading below 30 at 25, while NZD RSI is trading at 36. AUD is testing support levels at .7130 after the release of PMI for January. Australian Manufacturing PMI dropped from 57.7 to 55.3 in January. PMI Services fell as well much sharply to 45.0 from 55.1. PMI Composite also dropped to 45.3 from 54.9, the first contraction following three months of growth. All releases were at a 5-month low. According to analysts, the Australian economy had slipped from a state of strong recovery at the end of 2021 to being affected by the surge in COVID-19 infections at the start of 2022. Supply issues remain prevalent and this has ed to input price inflation worsening.

As we begin the week markets are expected to remain on edge ahead of the FOMC meeting. Also there will be increased concerns as to what is happening in the Ukraine as the US announced over the weekend that the State Department has urged US citizens to leave the Ukraine amid the Russian troop buildup on the border. As far as the FOMC meeting is concerned, Goldman Sachs said on Sunday that its baseline forecast now calls for four rate hikes this year, but the bank sees a risk for more rate increases due to the surge in inflation. There will certainly be more comments like this after the meeting as analysts expect the central bank to move aggressively toward tightening. Good luck, stay safe and have a great day.