FX Thoughts on a Friday - February 25, 2022
Good morning and Happy Friday,
Did someone say roller coaster? After initially falling almost 860 points on the news of the Russian invasion of the Ukraine, the DOW rallied in late afternoon trading to finish up 92 points. The NASDAQ which had briefly fallen into bear market territory for the first time since 2020, rallied as well ending up 3.3% higher. And last but not least, the S&P 500 rallied as well closing up 1.5%. The Russian invasion saw investors sell first and ask questions later and once again it appears that geopolitical events tend to have a short-term effect on equity markets. That doesn’t mean that Wall Street is out of the woods yet, as all three averages are still in correction territory, or down 10% or more from their respective record highs. And we also need to remember there is still a FED meeting happening on March 16 and rising inflation is still here. US treasury yields also staged a bit of a reversals yesterday as the 10-year note ended trading at 1.9650%, while the 30-year bond finished at 2.2790%. Initially yields had fallen sharply as investors moved to the safe haven asset of government bonds. On the US macro front. Initial jobless claims came in at 232,000, slightly better than expected. As we begin trading this morning, markets brace for another turbulent day as Russian forces are reported moving closer to the Ukrainian capital city of Kyiv. After yesterday’s surprising move, US equity futures are once again lower this morning, as investors continue to asses the risks that stem from teh Russian invasion. The latest numbers show DOW Futures down around 190 points while the S&P 500 and NASDAQ are down 0,57% and 0.43%, respectfully. US Treasury yields are also lower this morning, with the 10-year note trading at 1.9408% and the 30-year bond trading at 2.2500%. The USD is once again moving higher against the major currencies as safe-haven USD buying continues. On the macro side, the Census Bureau will report January durable-goods orders at 8:30 am, EST , which are often seen as a proxy for business investment. They are expected to come in at 0.8% after the previous -0.7%. Also at 8:30 am, EST The Bureau of Economic Analysis will also report personal income and spending for January. American consumers are expected to have spent more and earned slightly less compared with the prior month. Personal income is expected at -0.3% from the previous 0.3% and personal spending is expected at 1.5% after the previous -0.5%. EOG Resources and Liberty Media close out this week’s earnings reports later today.
After staging a brief rally in overnight trading and testing resistance at 1.1225, EUR/USD has once again moved lower, as the USD moves higher on fresh risk-aversion trades. Technically the currency pair remains below the moving averages and RSI which had moved up slightly overnight remains lower around 40, suggesting that the EUR/USD’s earlier advance was merely a technical correction as opposed to a reversal. Yesterday as war raged in the Ukraine, the EUR/USD fell to its weakest level since June 2020, near long-term support at 1.1100. As news continues to come in that the Russian forces are coming in on Kyiv, in an attempt to overthrow the government, investors will continue on the safe-haven path, pressing the EUR down further. However, a “relief rally” could occur at any moment if Russia would agree to hold off the attack and look towards a diplomatic solution. Later today, European Central Bank (ECB) President Christine Lagarde will speak on the impact of the Russia-Ukraine crisis on the ECB’s policy outlook. The ECB is facing a two-way risk and if Lagarde adopts a hawkish tone by noting that they will prioritize battling inflation, the common currency could stay resilient against the dollar. On the other hand, the euro could come under renewed bearish pressure in case the ECB decides to postpone policy normalization to support the economic activity.
GBP/USD is also trading lower this morning, mirroring the moves seen in overnight trading by the EUR/USD. After a brief rally, the pound has once again fallen below support levels at 1.3400. Technically, the currency pair is trading below the moving averages and RSI which had briefly reached teh 55 level is now trading lower at 40. After falling on Thursday to the lowest level this year, the pound has struggled to recover during early European trade. Earlier today, Russia announced that it was banning UK-registered airplanes from landing or crossing its airspace in retaliation to the UK sanctions, which is pointing to further escalation of geopolitical tensions. To this point, the sanctions against Russia have not had a significant impact on global inflation or economic activity. Now it seems the ball is in the “West’s” court as far as ramping up sanctions. At the moment, it appears any recovery in the pound will be “technical corrections.”
USD/JPY has bounced around a bit overnight, testing resistance at 115.60, before easing back to test support levels at 115.15. The currency pair is now trading slightly above the moving averages and the 50-day moving average has crossed above the 100 and 200-moving averages. RSI levels which had moved up to 70 overnight, is now trading at 56. On the macro side, Japan’s leading economic index for December came in at 104.8, above expectations at 104.3. Japanese Finance Minister Suzuki said early this morning, that his government will freeze assets in some Russian banks, as a part of the economic response to Russia’s invasion of Ukraine. Japanese Industry Minister Hagiuda said that Japan will appropriately deal with oil release from national reserves in cooperation with relevant countries and the International Energy Agency.
After a move lower during early overnight trading, USD/CAD has once again moved back above resistance levels at 1.2800, as escalation of the conflict in Ukraine has benefitted the safe-haven USD, despite the rise of oil prices in overnight trading. Technically, after trading below the 50-day moving average, the currency pair has once again climbed above as RSI levels are now testing the 60 level. Initially a pull-back in oil prices gave support to USD/CAD and despite the renewed move higher in oil prices, USD/CAD remains bid. In early trading this morning, oil prices have moved higher. Brent crude futures rose $1.99 to $101.07 per barrel. US West Texas Intermediate crude climbed $1.89 to $94.70 per barrel. The attack on Ukraine pushed oil prices above $100 on Thursday for the first time since 2014, as Brent reached a high of $105 per barrel. Analysts noted that “oil prices are particularly vulnerable to supply shocks” given that global oil stockpiles are at seven-year lows. There is some reports that the Biden administration has indicated it may look to release strategic oil stockpiles to address high prices. But, history suggests that any drawdowns on oil stockpiles only provides temporary relief from high oil prices.
AUD and NZD are bouncing around the moving averages during overnight trade as both currencies attempt to gain some positive traction during overnight trade. Resistance on the AUD remains at .7200, with resistance on the NZD appears at .6710. RSI levels remain rather neutral at 53 for AUD and 50 for the NZD.
Day two of the Russian invasion and right now it appears that equities are expected to trade lower as we end the week. News from the Ukraine will continue to influence the markets. Earlier this morning Ukrainian President Zelenskyy said the military had stopped the Russian invasion “in most directions”, but then there were reports that Kyiv is bracing for attack as Russian troops near the capital. The situation on the ground in Ukraine is extremely fluid, and accounts of the military situation are difficult or impossible to confirm. Good luck, stay safe and have a great day and a great weekend.