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.