FX Thoughts on Friday - September 30, 2022
Good morning and Happy Friday,
YESTERDAY’S RECAP:
The one-day respite in equities ended yesterday as US markets resumed their 2022 sell-off yesterday. The S&P 500 fell to a new low for the year, as concerns continue that a recession won’t stop the FED from raising interest rates. The S&P 500 declined 2.1% to a new low close for the year at 3,640. During yesterday’s session, it also fell to a new 2022 intraday low at 3,610, which is also its lowest intraday level since 2020. The DOW plunged 458 points and the NASDAQ fell 2.84%. Yesterday’s moves followed a broad rally for stocks Wednesday, after the Bank of England announced it would purchase bonds in an effort to help steady its financial markets and the falling British pound, which had reached lows against the US dollar not seen in years recently. Today is the last trading day in the third quarter and the S&P 500 is on track to decline for a third straight quarter for the first time since the first quarter of 2009, during the Global Financial Crisis. The NASDAQ is poised for even worse performance. Its third straight quarterly decline will be the worst since the third quarter of 2002. As equities continue to trade lower, the US dollar index appears to be at the opposite end of the spectrum. It is on the verge of gaining for the fifth straight quarter for the first time since the Q1 of 1998. Yesterday the dollar index fell closing at 112.15. Treasury yields rose across the board yesterday, with the 10-year note reversing some of the losses it made on Wednesday. The yield on the 10-year note rebounded to 3.749%. The policy-sensitive 2-year yield also rose to 4.176%. The 30-year bond closed at 3.7150%. On the macro side, a stronger-than-expected jobless claims report didn’t help sentiment for the equity markets. Jobless claims for the week ending Sept. 24 totaled 193,000, hitting a five-month low, according to the Labor Department. The figure was lower than the prior week’s adjusted 209,000 and below the 215,000 Dow Jones estimate.
Cleveland FED President Mester said yesterday that interest rates are not yet restrictive, as she indicated that there is more to be done to bring down inflation.
ASIAN/EUROPEAN RECAP:
Following yesterday’s action on Wall Street, Asian equity markets traded mostly lower, during overnight trade. The Nikkei 225 fell 1.83% and the ASX fell 1.23%. The Hang Seng index actually improved in the last hour of trading to finish up 0.27%. China’s Shanghai Composite was down 0.55% and the Shenzhen Component closed 1.29% lower. Analysts in Asia believe that as geopolitical and inflation risks keep rising, risk assets will be affected as expectations of lower growth and higher funding costs continue. European markets are trading higher this morning as the third quarter comes to an end. The pan-European Stoxx 600 has risen 1.00% in early morning trade, as oil and gas stocks have lead the gain into positive territory. The FTSE 100 is up 0.59% this morning as well as the has risen against the USD and EUR recovering loses from earlier in the week. US equity markets are higher this morning, while treasury yields and the USD are lower ahead of the North American trading day. DOW futures are up 185 points. S&P 500 and NASDAQ futures are up 0.75% and 0.68%, respectfully. Treasury yields are lower across the board this morning. The yield on the 10-year note is trading at 3.6990%/. The yield on the policy sensitive 2-yer note is trading at 4.1590%. And the yield on the 30-year bond is trading at 3.6380%. The USD is trading lower this morning as EUR and GBP lead the currencies higher, currently trading at 111.95.
TODAY’S DOCKET:
There are a couple of macro releases due out today at 8:30 am, EST. The Bureau of Economic Analysis reports personal income and expenditures for August. Income is expected to increase 0.3% monthly, while spending is expected to rise 0.2%. The compares with 0.2% and 0.1%, respectfully in July. Also due out today is the FED’s favored inflation gauge, the core personal-consumption expenditures price index. PCE for August is expected to rise on an annual basis of 4.8% after a 4.6% increase in July. Core PCE inflation, which excludes volatile food and energy prices are forecast to rise 6.6% and 4.7%, respectfully. Also out later this morning at 10:00 am, EST is the final Michigan Consumer Sentiment which is forecast to rise slightly to 59.2 from 58.2. This morning there will be a number of FED members speaking.
EUR/USD:
EUR/USD is trading higher this morning, holding onto gains made during overnight trading after rising above resistance levels at .9800. Technically, the 50-day has a crossed above the 100 and 200-day moving averages and the 100-day appears ready to cross over as well. RSI which had traded above the 70 level in earlier overnight trading ha eased back to 59. The technical correction in the US dollar index has helped support the EUR. On the macro side, Eurozone inflation rose to a record 10% in September, up from 9.1% in August and above the consensus projection of 9.7% according to data provided by Eurostat. The readings show price increases rising in the volatile food and energy segments in all 19-member Euro-bloc economies. Energy prices rose 40.8% year-on-year, up from 38.6% in August. Food alcohol and tobacco rose to 11.8% from 10.6% last month. Core inflation, which excludes food and energy, climbed 4.8% on the year, up from 4.3% in August, and economists broadly expect the situation to get worse before it gets better. This data will certainly add pressure to the ECB to raise interest rates aggressively (75 bps) at their October meeting and it increase the likelihood of a longer and deeper recession across the Eurozone.
GBP/USD:
Following yesterday’s rise the British Pound has continued to move higher in overnight trade, testing resistance levels at 1.1225 before easing back to slightly lower levels. Technically, the 50-day moving average has crossed the 200-day and the 100-day is about to cross over as well. RSI levels remain elevated rising above 70 earlier in the overnight before falling back to the current level of 63. On the macro side, the UK’s final reading for the second quarter GDP came in surprising better earlier this morning. Q2 GDP improved to 0.2% on a quarterly basis vs. -0.1% forecasted, while the annual GDP number increased to 4.4% vs 2.9% estimates. Also this morning, British PM Truss and Finance Minister Kwarteng are expected to meet with the UK’s independent monetary watchdog. The Office for Budget Responsibility, which produces financial forecasts for the UK economy has been asked to draft a fill report following the release by Kwarteng of the “mini-budget” last week, plunging the pound to record lows and forcing the BoE to intervene in gilt markets. The pound has recovered to the pre-mini budget level in trading as technical selling of the USD has aid the pound’s rise.
USD/JPY:
USD/JPY is trading in a quiet overnight range as the moving averages consolidate around the 144.50 level. Technically, the currency pair has traded through most of the overnight between the 50 and 200-day moving averages and the RSI level is trading at 49. On the macro side, Japanese industrial production rose 2.7% monthly in August, much better than the expectation of a -0.2% decline. This is the third consecutive month of growth. The Ministry of Economy, Trade and Industry expects production to rise further by 2.9% in September and 3.2% in October. Retail sales rose 4.1% annually in August, better than the expected 2.8% and the unemployment rate fell from 2.6% to 2.5%, matching expectations. Consumer confidence remains pressured falling to 30.8. from 32.5, well below the expected rise to 33.6. The JPY should benefit from lower US treasury yields and profit taking at month-end on the USD.
USD/CAD:
USD/CAD is trading lower this morning after testing overnight highs near resistance levels of 1.3725. Technically, the currency pair is trading amid the moving averages as the 50 and 100-day averages are trading together slightly above the 200-day average. RSI levels have steadied after fluctuating throughout the overnight at 54. Overall USD selling as well as higher oil prices have given some support to the loonie in early European trading. Oil prices are higher this morning, in early Friday trade, heading for their first weekly gain in five weeks as crude is underpinned by a weaker US dollar and the possibility that OPEC+ may agree to cut crude output when in meets next week on Oct. 5. Brent crude futures rose $1.05 to $89.54 per barrel. US West Texas Intermediate crude futures rose $1.11 to $82.34 per barrel. Oil prices are on track for their first quarterly loss since 2020 as recession fears have driven oil prices down for most of the quarter. The expectation is that prices will increase for the fourth quarter based on earlier OPEC+ comments about cutting output.
AUD/USD & NZD/USD:
AUD and NZD are trading near the bottom of their respective overnight range, consolidating among the moving averages. Technically, the AUD has fallen below support levels at .6500, while the NZD has eased below support at .5700. RSI levels are both below 50 with the AUD at 47 and NZD at 44.
CLOSING COMMENT:
Another quarter in the books today. The lower USD appears to be more of a month end sell-off than for any real economic reasons. Treasury yields also rose to higher than expected levels earlier this week and they have eased a bit aiding to the equity rise. The major averages are on pace for a losing week and a month of sharp declines. The NASDAQ is leading the monthly losses, down 9.1%, while the DOW and S&P 500 are on pace to end September roughly 7.3% and 7.9% lower, respectively. Good luck, stay safe and have a great day and a great weekend.