FX Thoughts on a Friday - January 28, 2022
Good morning and Happy Friday,
The equity markets once again traded lower yesterday, after another rally fizzled in the afternoon as the major indices closed lower. After trading positively until the middle of the day, the S&P 500 fell 0l5%, the NASDAQ dropped 1.4% and the DOW fell the least only loosing 7 points. The big news yesterday was the release of fourth-quarter U.S. gross domestic product data, which showed a 6.9% annual growth rate.This was well above the economists’ consensus estimate of 5.5% and the third quarter’s 2.3% growth rate. It brings the U.S. economy’s full-year 2021 expansion to 5.7%, its fastest since 1984. After looking deeper into the release it turned out that almost five points of the fourth quarter’s 6.9% GDP growth came from building up inventory, which basically meant retailers and wholesalers were replenishing their supplies after months of robust demand and hard-to-come-by goods. Earning releases were also a major factor yesterday with Apple the “bell of the ball”, showing better than expected revenue and earnings driven by strong iPhone sales. While it is still early, fourth-quarter earnings have been exceeding estimates. While the numbers have been upbeat,
supply chain bottlenecks, cost inflation, and labor shortages are the most common headaches cited by management teams so far. And that has added some gloom to what has otherwise been a record earnings season. Caterpillar, Chevron, Colgate-Palmolive, and Weyerhaeuser are among the companies reporting tomorrow. U.S. Treasury yields fell Thursday as investors reacted to a stronger-than-expected GDP report and the Federal Reserve’s latest policy update. The yield on the 10-year Treasury note fell 3.9 basis points to 1.8070% while yield on the 30-year Treasury bond fell 7.5 basis points to 2.0920%. As we end the week this morning, US equity futures are higher boosted by a rise in shares of Apple. Apple stock rose almost 5% in after hours trading after the company reported its largest single quarter in terms of revenue. The company beat analyst estimates for sales in every product category except iPads. The stock indices have had ridiculous intraday swings all week. The DOW has had nine negative session in the last 10 while the S&P 500 and NASDAQ are both in correction territory, sitting 10.2% and 17.5 % below their respective record highs. US treasury yields rose overnight has the 10-year note rose to 1.8266% and the 30-year bond rose to 2.1126%. On the macro side, December’s personal consumption expenditure index is due to be released at 8:30 a.m. EST, and is expected to rise 4.8% on an annual basis, from teh previous release of 4.7%. The PCE index is the FED’s primary inflation measure. The USD remains strong as the week ends rising against the major currencies in early Friday morning trading.
EUR/USD is trading lower this morning, testing support levels at 1.1120, falling to lows not seen in the last 20 months. Technically, the currency pair attempted a correction but failed at resistance levels at 1.1150 and has continued lower. The currency pair is trading below the moving averages and RSI which had fallen as low as 10 is now trading just below the 30 level at 29. While the near term outlook shows that the pair is extremely oversold, buyers appear unlikely to take action at the moment. On the macro side, the German economy shrunk by 0.7% during the 4th quarter of 2021, compared with expectations of -0.3% and 1.7% booked in Q3. Annualized GDP dropped to 1.4% in the fourth quarter against the previous reading of 2.5% , missing market expectations of 1.8%. Also released this morning, European Monetary Union Industrial Confidence for January came in at 13.9, below expectations of 15 I January. The Euro area Economic Sentiment Indicator also declined to 112.7 in January vs. the 114.5 expected. EUR continues to be under pressure for the fifth straight trading session as the USD rally intensifies on the last dat of the trading week, bolstered by firm sentiment after the FOMC meeting on Wednesday which has propelled the US dollar Index to new highs above the 97.00 level. Moving forward pressure appears to be continuing as the FED prepares for tightening while the ECB remains in an accommodative-for-longer stance, despite rising inflation in the Euro area.
GBP/USD is trading below support levels at 1.3400 after rebounding to those levels earlier in overnight trading. Technically, initial support for the pound is located at lower levels near 1.3350 and a test of these levels appears in the cards. RSI levels which had dropped earlier in overnight trading below the oversold 30 have regained that level and are currently trading at 38. There is some positive news regarding Brexit negotiations as UK Foreign Secretary Truss is looking to talks scheduled in February hoping to get some support from pro-British unionists in Norther Ireland. Adding some support to the pound is the delay in the Sue Gray report regarding Partygate, and it appears that PM Johnson may overcome hie latest political challenges. But any change in that status and a call for the PM’s resignation would add additional pressure to the GBP. While falling to one-month lows yesterday, being weighed down by the FOMC remarks, investors are looking positively at the next meeting of the Bank of England next Thursday where analysts expect the central bank to raise interest rates by 25 bps to 0.25%, after strong labor and inflation data that was released for December. While falling in the last few sessions, the pound still remains well above the December 2021 lows, as opposed to the EUR, AUD and NZD which have recently hit multi-year low levels.
USD/JPY is trading just below overnight highs after testing resistance levels at 115.70. Technically, the currency pair is trading well above the moving averages as the 50-day has crossed the 100 and 200-day moving averages. RSI levels which had risen as high as 80, has eased during the European trading session, currently trading at 65. The move in USD/JPY to these highs has been supported by the widening of the US-Japanese yield spreads which has been a constant during the currency pairs rise. This has been the fourth day of a positive move in the USD/JPY, building on the rally after testing support levels of 113.45 on Monday. As analysts continue to look for an interest rate hike in the US, the Bank of Japan has reaffirmed their stance to continue with their monetary easing until further notice. With no macro data coming from Japan overnight, trades will focus on US data later this morning. Direction for the USD/JPY appears clear especially with the continued strength of US treasury yields.
USD/CAD has hit a three-week high climbing towards a test of resistance levels at 1.2800. Technically, the currency pair is trading well above the moving averages as RSI bounces above and below the 70 level. Adding some pressure to the Canadian Dollar was the lest than hawkish Bank of Canada comments following the conclusion of their meeting on Wednesday. The decision to leave rates unchanged and may have disappointed some traders who anticipated a start of the tightening cycle after a surge of domestic inflation numbers pointed towards a three-decade high. After the FED’s hawkish comments, the selling pressure return to the C$. Crude oil prices are once again on the rise after falling on Thursday and this is expected to give support to the loonie moving forward. Oil prices are set for their sixth weekly gain, as Brent crude futures rose $0.45 to $89.79 per barrel, after falling $0.62 on Thursday, Prices did reach $91.04 earlier on Thursday, the highest since October 2014. US West Texas Intermediate crude futures rose $0.50 to $87.11 per barrel, after declining $0.74 on Thursday. WTI had reached a seven-year high of $88.54 per barrel.
AUD and NZD have fallen during the overnight session as both currencies test support levels. Technically the currency pairs are trading below the moving averages as AUD tests support at .6975 and NZD tests support at .6540. RSI for both currencies are well below the oversold 30 level, as AUD trades at 20 and NZD trades at 24.
It looks like it could be another tough day for the equity markets. As I complete these comments, the DOW futures have slipped and headed into negative territory falling around 100 points in the last hour. S&P 500 futures have also headed into negative territory. NASDAQ still remains positive, supported by the news from Apple. Good luck, stay safe and have a great day and a great weekend.