Fx and general market updates. 1/24/2022

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.