FX Thoughts on a Wednesday - February 2, 2022
Good morning,
Its Ground Hog Day. Will Punxsutawney Pete see his shadow and will we have six more weeks of winter, or will there be no shadow and an early spring? Wouldn’t it be great if Phil could tell us whether of not the markets would rise or fall depending on his shadow? Oh well, wishful thinking!! But, teh new month saw US equities close at near session highs as the DOW rose 273 points, the S&P 500 rose 0.7% and the NASDAQ rose 0.75%. This has been the best three trading days since November 2020. Trading ranges and “FED-speak” were reasons given for yesterday’s action. After a few days of taking profits, traders decided that the markets had moved low enough and with strong earnings reports the buying resumed. As for the central bank comments, some members of the FED seemed to “push-back” on the idea of a 50 bp rise in March. According to the experts, the chance of a 50-basis point increase had risen to 10% in recent days, up from almost no chance a month ago. Trading in Fed futures still implies a 90% likelihood of a quarter-point rate boost in March. US treasury yields moved higher yesterday with the 10-year note touching 1.8%, before easing back to close at 1.7930%. The 30-year bond rose slightly to trade at 2.115%. But the most interesting news of yesterday came when Alphabet, the parent of Google announced they were splitting their stock on a 20-for-1 basis later this year. Based on today’s close at $2,753 per share, the stock would trade at $138 per share. Analysts believe that besides the fact that splitting a stock allows investors to purchase lower priced shares, Alphabet wants to be admitted to the DOW. With brokerage firms offering fractional ownership the reason for stock splits has become as obsolete as rotary phones. It will be interesting to see if another NASDAQ giant, amazon.com considers a stock split. There shares closed at $3,023 per share today. The stock hasn’t split since 1999. Amazon reports their earnings on Thursday but today Boston Scientific, Humana, Marathon Petroleum, Meta Platforms, MetLife, Novartis, Qualcomm, Sony Group, T-Mobile US, and Waste Management are among those companies reporting 4th quarter results. On the macro side, ADP releases its national employment report for January at 8:15 am, EST this morning and. private-sector employment is seen increasing by 215,000 jobs, after 807,000 were added in December. As we begin the trading day. US equity futures are trading higher, led by NASDAQ futures which are up 1.5%, once again led by Alphabet. Treasury yields have eased a bit ahead of the ADP release, with the 10-year now at 1.7769% and the 30-year at 2.0988%. Following the move lower in yields the USD is also trading lower this morning.
EUR/USD is trading higher this morning, breaking above the resistance level of 1.1300, as the market reacts to EU inflation data which showed that CPI edged higher in January to 5.1% from 5.0% in December. This also surpassed expectation of 4.4%, which helped the EUR gather strength. Technically, the move above the resistance level of 1.1300 has been beneficial to the EUR bulls, but has brought the single currency well above the moving averages. The 50-day has crossed both the 100 and 200-day averages, and the 100-day looks ready to cross the 200-day as well. RSI levels, which have been steadily rising during the European session are now at an overbought level of 75. While the ECB is not expected to make any changes in monetary policy at tomorrow’s meeting, Eurozone money markets are now pricing in 30 bps of rate hikes by December 2022 according to a report from Reuters. The fact that CPI has rose higher than expectation is giving investors some guidance towards whether or not the ECB will decide to move forward at some point on their path to monetary policy tightening. Looking at the main components of Euro area inflation, energy had the highest annual rate in January (28.6%, compared with 25.9% in December), followed by food, alcohol & tobacco (3.6%, compared with 3.2% in December), services (2.4%, stable compared with December) and non-energy industrial goods (2.3%, compared with 2.9% in December).” The unexpected release has helped the EUR in trading today.
GBP/USD is trading at overnight highs in European trading this morning, testing resistance levels at 1.3550, ahead of tomorrow’s Bank of England policy meeting. Technically, the move higher has seen the GBP rise well above the moving averages as well, with the 50-day crossing the 100-day. As is the case with the EUR, the RSI levels have been rising steadily throughout the European morning and are now well overbought at 78. Equity markets in the UK are higher as the FTSE 100 has risen 0.5% this morning. There is some concern of some profit taking at these levels and the pound most likely will react to US ADP data released later this morning. As the pound trades near its one-week high, all eyes are now focused on the Bank of England policy meeting tomorrow. While members of the FED have made comments that have weighed on the USD over the last few days, pushing back thoughts of a 50 bp hike in March, the BoE is scheduled to announce their first back-to-back interest rate hikes since 2004. This will allow policymakers to begin paring back the GBP895 billion balance sheet by stopping the reinvestment of expired bonds and this should continue to act as support for the pound. On the macro side, according to the latest report published by the British Retail Consortium, UK retailers rosed their prices to the highest levels in more than nine years in January as firms passed along rising food, fuel and transportation costs to consumers. It is expected that the pressure on profit margins will rise further in the coming months. According to the BRC, prices rose 1.5% from a year earlier. Almost double the pace in December.
USD/JPY is trading at overnight lows this morning, following the other currencies lower as the currency pair tests support levels at 114.30. Technically, the USD/JPY is trading below the moving averages as the 50-day has crossed below the 100 and 200-day moving averages. RSI levels have fallen below the oversold 30 level, currently trading at 25. While speaking overnight, Bank of Japan Governor Kuroda said that “Japan’s economy is expanding moderately thanks in part to the BoJ’s aggressive monetary easing.” He added that its true that Japan’s low-interest rate environment has had an impact on regional banks, but he doesn’t believe that the central banks easy policy has led to regional banks’ deteriorating health. Japanese PM Kishida added that “consolidation is among the options for regional banks to prop up their business health, but any decision to consolidate must lead to the revitalization of regional economies.” Adding to support for the “safe-haven” JPY is the ongoing conflict between Russia and the West over the Ukraine. Easier treasury yields have also helped support in overnight trade.
USD/CAD has consolidated just above support levels at 1.2675, as higher oil prices support the loonie in overnight trade. Technically, the currency pair is trading just below the moving averages which have consolidated around resistance levels at 1.2700, as the 50-day crosses the 100-day and approaches the 200-day. RSI levels have remained neutral through most of the overnight session currently at 45. Yesterday, Canada’s GDP for November rose to 0.6% on an annual basis, well above the consensus level of 0.3%. BoC Deputy Governor Gravelle as well as Governor Macklem are expected to speak today as traders look for hints on the next BoC rate hike. It should be noted that Canada will release employment data on Friday as well as the US. Oil prices are higher this morning, heading towards seven-year highs reached last week after data showed a fall in US crude stocks as well as solid demand. There is some caution ahead of the OPEC+ meeting occurring later today. Brent crude rose $0.36 to $89.52 per barrel during early trading, and US West Texas Intermediate crude rose $0.38 to $88.58 per barrel. Tighter global supplies as well as tensions in Eastern Europe and the Middle East have seen oil prices rise more than 15% so far this year. Most analysts expect that OPEC+ will maintain their policy, which should mean the upward trend in oil prices will continue.
AUD and NZD are trading higher this morning, as both currencies trade above their moving averages and the technicals point towards the currencies moving higher. Both currency pairs have seen the 50-day moving average trade above the 100 and 200-day moving averages and the RSI levels, having touched the 70 level in earlier trade are now slightly below with the AUD at 68 and the NZD at 63. RBA Governor Lowe spoke overnight and his comments were somewhat dovish as he said “the rise in inflation does not require an immediate response.” HE added that ending the bond purchase program “does not mean that a rate increase is imminent.”
Equity futures look strong and the resurgence in the markets looks to continue today. Later this morning the ADP report begins the employment data that traders will focus on through the rest of the week, with initial claims tomorrow and NFP on Friday. While economists continue to look for an NFP increase of 150,000 jobs in January, we are beginning to hear some “hedging” comments from economists and White House officials who have warned that the January payroll numbers could disappoint due to the large number of worker absences attributed to the omicron spread. Is this the excuse they’ll use for bad numbers or just some caution being shown ahead of the release. Needless to say a bad ADP number will fuel greater speculation of a bad NFP number. Good luck, stay safe and have a great day.