FX Thoughts on a Monday - January 31, 2022
Good morning,
US equities ended on an upbeat note last week as positive earnings from Apple and Visa aided the move. NASDAQ rose 3.1% to end the week on a slight gain and snap a four-week losing streak. The S&P 500 gained 2.4%, which was a the largest one-day percentage gain since June 5, 2020. The DOW rose 1.7%, as Visa led the DOW contributing 144 points to the 565 point rise. The personal consumption expenditure index came in a little better than expected as the core number came in at 4.9% annually, versus a 4.8% estimate. This was the largest gain going back to September 1983. This week continues with the release of fourth-quarter results, as Alphabet, Exxon Mobil, GM, Amazon, FORD and Merck are among the companies that will report this week. The macro highlight this week will be the Non-Farm Payroll release on Friday, as preliminary reports expect a gain of 150,000 jobs in January, after an increase of 199,000 in December. There will be plenty of news out this week, including ISM release of manufacturing purchasing managers’ index for January on Tuesday as well as the services equivalent of Thursday. As we begin the final trading day of the month, US equity futures are lower. This has been a bad month for stocks as the S&P 500 is headed for its worst month since the pandemic market turmoil that existed in March 2020, as investors ramen concerned over inflation, supply chain issues and eventual rate hikes from the FED. The DOW is also headed for its worst month since March 2020 and the NASDAQ will record their worst month since October 2008. Last week saw incredible volatility as the DOW swung 1,000 points in both directions. While earnings remain positive the markets are adjusting to shifts in monetary and fiscal policy. US treasury yields begin the week slightly higher from Friday’s close with the 10-year note trading at 1.7880% and the 30-year bond trading at 2.0940%. After achieving its biggest weekly rise in seven months, the USD has eased a bit in trading during the overnight period.
EUR/USD is trading just off of overnight highs near resistance levels at 1.1185. Technically, the currency pair is trading among the moving averages, trading between the 50 and 100-day averages. Stronger resistance is expected at higher levels, near 1.1200. RSI levels are trading near overnight highs at 57. EUR/USD was supported this morning with the release of Eurozone Preliminary GDP. The Eurozone economy expanded by 0.3% in the fourth quarter of 2021, meeting expectations. On an annualized basis, the bloc’s GDP rate rose by 4.6% in the fourth quarter vs. the 3.9% from the third quarter of 2021, slightly below the expected 4.7%. The EUR has reacted a bit positively towards that news, rising towards overnight highs. The big news event for the EUR this week is the ECB meeting later this week on Thursday. The central bank is not expected to signal any changes at this meeting as economic growth remains stuck in slow gear and the labor market is far from full employment, keeping wages subdued. ECB President Lagarde acknowledged this, stating that the cycle of economic recovery in the US is far ahead of that in Europe. This means that the ECB will not be acting as quickly as the FED, which suggest that the ECB will lag behind the other major central bank in raising rates. This should keep the overall outlook for the EUR negative, as political concerns enter the picture with the possibility of early elections in Italy as well as the French presidential election growing. The move higher this morning, is being looked upon as more profit taking and positioning than a change in sentiment.
GBP/USD is trading higher as well this morning after testing resistance levels at 1.3450, extending Friday corrective move from a five-week low. Technically, the currency pair is trading above the 50 and 100-day moving averages. RSI has been increasing during overnight trading and is currently just below the 70 level at 65. The GBP kicks off the week on a positive note ahead of the Bank of England meeting this Thursday. It is widely expected that the central bank will raise interest rates at the meeting and this is giving support to the pound. While traders have seen the expectations by the BoE as a “pound positive”, some traders are concerned about the recent UK political drama concerning PM Johnson and the alleged lockdown-busting parties at Downing Street during the lockdowns. The report is expected this week, which may decide the fate of the PM. Bloomberg has quoted Foreign Secretary Truss as saying that “the future of the PM is assured”. She added that the PM is “doing an excellent job on the things that matter, recovering the economy from Covid, getting Brexit done, getting the country going again.” It should be noted that the official report has been delayed a few days as police continue their investigation. Elsewhere, the Brexit Freedom Bill is expected to be passed despite the governments in Welsh, Scotland and Northern Ireland criticizing the plan. On a completely different and positive note, according to Sky News, the UK reported their lowest number of daily COVID cases since December 14.
USD/JPY is trading below overnight highs as the currency pair tests overnight resistance at 115.60. Technically, the USD/JPY is trading above the overnight moving averages, while the RSI levels have remained at around 57 throughout most of the trading sessions. Commenting on the FED’s hawkish moves last week, Bank of Japan Governor Kuroda said the central bank does not expect future FED policy to have a negative impact on the Japanese economy. He added that the central bank continues to monitor FX rate moves carefully, and that it is desirable for the Japanese economy that the US economy continues to achieve strong growth without excessive inflation. He added that when the 2% price target is achieved, the board will likely debate various options. On the macro side, Japan Industrial Production dropped -1.0% monthly in December, worse than the expectation of -0.8%. Manufacturers surveyed by the Ministry of Economy, Trade and Industry (METI) expected output to grow 5.2% in January and 2.2% in February. Retail sales grew 1.4% annually in December, below expectation of 2.7%. That’s nonetheless the third straight month of increase for sales, lifted by demand for general merchandise and food and beverages.
USD/CAD is trading lower this morning after testing support levels at 1.2720 during overnight trading. Technically, the currency pair is currently trading between the 50 and 100-day moving averages, and RSI has remained consistently below the 50 level, currently trading at 47. Bullish oil prices have given support to the loonie and acted as a tailwind for the Canadian Dollar. Crude oil prices remain near multi-year highs amid concerns about global supply shortages and geopolitical risks. Brent crude rose $1.07 to $91.10 a barrel, after rising $0.69 on Friday. US West Texas Intermediate crude also rose $1.07 to $87.89 a barrel after gaining $0.21 on Friday. Oil prices recorded their highest levels since October 2014 on Friday, and recorded their sixth straight weekly gain. Oil is expected to gain 17% this month, the most since February 2021. Continued anxiety about global supply shortages, coupled with ongoing political risks will keep the market better bid moving though this week. OPCE+ will meet on February 2 and they are likely to stick with a planned rise in its oil output target for March. According to researchers, ‘supply constraints will likely induce a sizable risk premium”, as travel begins to pick up. Analysts noted that traffic in Europe is rebounding as omicron case numbers decline, while US gasoline demand is only 4% below 2019 levels, which was better than expected in November.
AUD and NZD are higher this morning as well as the RBA will meet on Tuesday. While the central bank is not expected to raise rates this week, improvements in the economy suggest that rates will likely rise this year. Currently both currencies are trading between the 50 and 100-day moving averages. RSI levels for both are off overnight highs, with the AUD trading at 63 and the NZD at 55.
As we begin the week, traders will begin to focus on the NFP report on Friday, but the central bank meetings of the BoE, ECB and RBA should take from and center ahead of the US labor release. Good luck, stay safe, and have a great day.