FX Thoughts on a Tuesday - January 25, 2022

Good morning,

And you thought those football games over the weekend had incredible comebacks!! They were nothing compared to what we saw from the US equity markets yesterday afternoon. As trading began yesterday morning, stock indices opened lower and it looked as if we were going to see a continuation of the last three week’s of declines was the market braced for the FOMC meeting that begins this morning. After declining 5.7% last week, the S&P 500 continued to fall, as it fell 4% at its lows around noon. The DOW collapsed as well falling 1,115 points at its low and the NASDAW was down 4.9%. All three indices were well into corruption territory. But then, around lunchtime, investors basically said, “enough is enough” and the afternoon rally was just as strong as the morning’s slump. And when the final bell rang at 4 pm, all three indices ended positive. The S&P 500 finished up 0.3%. There have been only three days since 1978, when the index was down by a larger percentage before closing positively. The Nasdaq recovered its loss to close 0.6% higher, which was its greatest intraday comeback since 2008. And the Dow finished up 99 points, to close positive after being down at least 1,000 points for the first time in its history. Part of the recent decline has been blamed on the prospect of higher interest rates. Part of it has been blamed on uncertainty over fourth-quarter earnings and part of it has been blamed on geopolitical concerns around the globe. But it seems now that part of it was also some good old fashioned profit-taking after months of positive market returns. The Federal Open Market Committee begins their meeting today and concludes tomorrow afternoon. Current market pricing has the Fed raising its interest-rate target by a quarter of a point four times in 2022, beginning in March. That compares with the original thought of just one increase priced in, in early October. That shift in expectations has been felt most in Treasuries, where yields have risen, and in high-multiple growth and technology shares, which have led the market lower so far this year. A number of earnings reports are on deck for today before the market opens, including Johnson & Johnson, 3M, General Electric, American Express and Verizon. Microsoft will report their earnings after the market closes, along with Texas Instruments. On the macro side, S&P CoreLogic releases its Case-Shiller National Home Price Index for November at 9:00 am, EST. Economists are forecasting an 18% year-over-year rise, slightly less than the October number of 18.4. If estimates prove correct, it would be the 12th consecutive month with double-digit gains for home prices. Then at 10:00 am, EST the Consumer Board Consumer Confidence number for January will be released and it is expected at 111.8. slightly lower than the previous reading of 115.8. As we begin trading this morning, US equity futures are lower, with DOW Futures down 36 points, the S&P 500 down 0.6% and the NASDAQ down 1%. US Treasury yields are higher this morning, ahead of the FOMC meeting, with the 10-year note trading at 1.7760% and the 30-year bond trading at 2.1133%. The USD is stronger this morning as trader move towards safe-haven assets ahed of the FED meeting and the potential military conflict in the Ukraine.

EUR/USD is trying lower this morning, below the support level at 1.1300 as investors concentrate on headlines surrounding the Russia-Ukraine conflict. Technically, earlier attempts at recovery by the single currency, were met by resistance near the 50 and 100-day moving averages around 1.1330. As long as the currency stays below that level, sellers are expected to remain in control. The near-term bearish outlook has been confirmed by the RSI, which has been trending lower throughout the overnight session and is currently below the oversold 30 level at 25. On the macro side, data from Germany released this morning, showed the IFO Business Climate and Expectations indexes improved modestly in January to 95.7, versus last month’s 94.7 and above the estimates at 94.8. The IFO Expectations Index, indicating firms’ projections for the next six months rose to 95.2 in January, beating expectations at 93.00. The Current Economic Assessment however, fell to 96.1 in January, compared to last month’s 96.9. While reaction to the IFO release was “mixed”, concerns remain over heightened geopolitical tensions regarding Russia and the Ukraine. This is keeping investors away from the EUR and helping the USD outperform their major rivals. ECB chief economist Lane was on the wires this morning, saying that the coronavirus Omicron variant is not turning out to be a factor that will influence the activity levels for the year, according to a report from Reuters. He added that to this point they have not seen a big response of wages to inflation. The pressure remains on the currency pair heading into the North American trading session.

GBP/USD is trading towards the lower end of its overnight range, after testing support levels 1.3455. Technically, the currency pair is trading below the moving averages as UK political turmoil continues to put pressure on the pound. RSI levels which had dipped below the oversold 30 level earlier in overnight trading have regained that level and is currently at 41. There is growing demand for UK PM Johnson’s resignation over a series of lockdown parties that occurred at Downing Street during the pandemic. The findings of the investigation at teh official residence of the PM during Britain’s 2020 lockdown are expected to be published later this week. At this point, MPs may force a confidence vote on the PM, which would likely put further pressure on the pound. Acting as a positive buffer for the pound, continued expectations for additional interest rate hikes by the Bank of England at their next meeting in March. It seems as though investors appear to be waiting for the outcome of the FOMC meeting tomorrow before adding to positions. As with the EUR, the fact that NATO is readying their forces in Eastern Europe as tensions rise in the Ukraine has hiked the USD and put pressure on the other currencies. PM Johnson has warned Russia that an invasion would be “disastrous” and a “painful, violent and bloody business.”

USD/JPY is trading at overnight highs just below resistance levels at 114.15. Technically, the currency pair remains bid as it trades above the moving averages as we head into the North American trading day. RSI levels have been rising consistently overnight and are currently at 64. A combination of factors have contributed to the upward move in USD/JPY, as the currency pair continues to trade off the moves in US treasury bonds, which were positive overnight as well as safe-haven concern regarding the Ukraine. BoJ governor Kuroda spoke to parliament today saying “the BOJ will continue its ultra-easy policy so improvements in corporate profits and the economy prop up wages and gradually accelerate consumer inflation.” He added that the central bank “remains vigilant to the risk that prices may shoot up before wages begin to rise, or how (rising raw material costs) could hurt smaller firms. We must keep an eye out on these risks, while maintaining our current easy monetary policy,” Japan’s PM Kishida was also on the wires this morning saying “it’s desirable to create an environment in which companies can pass on rising costs and raise wages, so that increasing consumption spurs economic growth and inflation.” For the time being it appears the direction of the USD/JPY will continue to be dictated by the moves in treasury yields.

USD/CAD is trading in the middle of its overnight range, staying below resistance levels at 1.2650. Technically, the currency pair remains above the moving averages but trading has calmed a bit after yesterday’s test of higher levels. RSI which had reached a high of 80 during yesterday’s trade has moved back below the 70 level, currently trading at 55. The best way to describe the mood for the currency pair is “indecisive”. While some look at risk-off trading and USD safe-haven trade, others are looking at crude oil, the loonie’s key export item for some signs of support. It should also be noted that the FOMC is not the only central bank meeting occurring on Wednesday. The Bank of Canada meets tomorrow as well, and market consensus has the central bank raising interest rate by 25 bps. The market is currently attaching a 70% probability of a rate hike, which gives the loonie some room to move higher after the announcement, especially if the comments reinforce the view that the BoC will stay ahead of the FED in tightening by 1-2 months and by 25-50 bps. Oil prices are higher this morning, due to concerns over supply disruptions amid rising tensions in both Eastern Europe and the Middle East. Brent crude futures rose $0.48 to $86.75 per barrel, reversing a 1.8% fall during the previous session. US West Texas Intermediate crude futures climbed $0.34 to $83.65 per barrel, after falling 2.2% on Monday.
AUD/USD and NZD/USD are both trading lower this morning, below their respective moving averages as USD safe-haven strength prevails. RSI for both currencies are trading at their lows for the overnight session, with the AUD at 40 and the NZD at 38. Both currencies are also trading below their moving averages. On the macro side, Australia NAB business confidence dropped sharply to -12 in December from the previous +12. Business conditions fell from 11 to 8 and trading conditions were unchanged at 14.

There is a lot of information and data for investors to sift through right now. There’s the FOMC meeting, which ends tomorrow and will be followed by remarks from Chairman Jerome Powell. We’re in the thick of fourth-quarter earnings season, with some 200 S&P 500 companies on deck to report this week and next. Geopolitics are front and center, with near-daily headlines suggesting escalating danger of an armed conflict in Ukraine. And there are the midterm elections this fall, with all the uncertainty they bring. That’s an awful lot on the plate. We’ll see how things turn out. As I conclude this report, US equity futures are moving lower again, with DOW futures down 200 points and NASDAQ futures down almost 2%. Good luck, stay safe and have a great day.