FX Thoughts on a Tuesday - February 1, 2022
Good morning,
January is over!! And for the equity markets, it couldn’t come fast enough. The US equity markets finished higher yesterday as the DOW ended up 406 points, the S&P 500 rose 1.9% and the NASDAQ finished up 3.4%. But that only made a bad month a little less easy to take. The DOW finished January down 3.3%, the S&P 500 finished January down 5.3% and the NASDAQ finished the month with a 9% loss. All this angst and the FED still hasn’t even began to raise interest rates. So volatility and uncertainty looks to remain until the next FOMC meeting in mid-March. While investors realize that rate increases will occur this year, the unknown is the speed and amount of those increases. This will keep investors nervous and equity markets volatile as traders listen to every word that comes from the FED and continue to “over-analyze” every bit of macro data. So far, corporate earnings are going better than expected. According to Refinitiv, fourth-quarter earnings growth is coming in at 25.3% year-over-year, with companies in aggregate reporting earnings that are 4.1% above expectations.
As investors voice concerns over inflation, supply chain constraints and an inability to attract workers, profitable companies are a rare and welcomed commodity. On the earnings side, today will be a busy day with Alphabet, AMD, GM, Starbucks and UPS among those companies reporting fourth quarter earnings. US treasury yields took a breather yesterday as the 10-year note was unchanged at 1.7780%, while the 30-year bond ticked up 2 bps to 2.1090%. Investors remain focused on Friday’s NFP number, as well as Wednesday’s ADP number. They will also be paying attention to this mornings JOLTS release. On the macro side, Final Markit Manufacturing PMI will be released at 9:45 am, EST and its forecasted to dip slightly to 55, from last months 57.7. At 10:00 am, EST, ISM Manufacturing PMI will be released and it is also expected to dip from last month coming in at 57.5, after the previous 58.7. Also out at 10:00 am, EST, the Bureau of Labor Statistics releases the Job Openings and Labor Turnover Survey (JOLTS). Expectations are that there were 10.1 million job openings on December’s last business day, a half-million less than in November. Openings now outnumber the unemployed. As we begin the new trading month, equity futures are lower this morning with all three indices trading in the red as the market attempts to right itself from its worst month since March 2020. According to some analysts this latest decline is a normal market correction and it does not signal a recession or the end of the current bull market. It is hoped that as long as economic growth continues and the corporate earnings continue to rise, the FED will not be as aggressive as many fear. US treasury yields remain quiet rising slightly ahead of the data releases this morning, with the 10-year trading at 1.7893% and the 30-year trading at 2.1148%. The USD is trading lower this morning against the major currencies.
EUR/USD is trading higher this morning as the currency pair continues to rebound after reaching lows last Friday not seen since June 2020. Technically, the EUR is trading above the moving averages and the 50-day has crossed the 100-day. RSI which has been trading above the 70 level for part of the overnight session has eased back towards the 65 level. Some follow-through buying could see the EUR move higher to get resistance levels at 1.1300. The move in the EUR overnight was the largest gain the currency has made since mid-November, as the flattening of US treasury yields has put US dollar bulls on the defensive for the moment. The divergence of policy between the FED and ECB will once again be Brough forward later this week when the ECB holds their policy meeting on Thursday. The central bank has talked down any need to act to counter inflation and has hinted this stance could well continue for a while. In other words, while the other central banks are preparing to raise rates, the ECB appears ready to stand pat. With the Bank of England meeting on Thursday as well, the EUR may also face pressure against the pound on the EUR/GBP cross. On the macro side this morning, the European Monetary Union unemployment rate came in at 7% in December, below the expected 7.1%. Also released earlier this morning, Euro Area final Markit Manufacturing PMI for January was released and came in at 58.7, slightly below the expected 59 but above last month’s 58. Also released this morning, the German jobless rate retreated to 5.1% in January with 2.345 million people unemployed, and there were 48,000 less people claiming unemployment.
GBP/USD is trading higher this morning, testing resistance levels over the last few hours at 1.3500. From a technical perspective, the pound is trading above the moving averages as the 50-day moving average has moved above the 100-day moving average and the RSI level has been flirting with the 70 level over the last few hours. The move to four-day highs has been supported by a combination of factors. Expectations that the Bank of England will raise interest rates at its upcoming monetary policy meeting on Thursday continued acting as support for the pound. This would mark the first back-to-back interest rate rises since 2004. While expectations from the central bank have been GBP positive, the continued pressure on UK PM Johnson to resign over rule-breaking parties by his staff during the Covid lockdown, appear to be keeping GBP bulls from being even more aggressive. On the macro side, Marit Manufacturing PMI for January came in at 57.3 above forecasts at 56.9. As we prepare for the BoE meeting this week, a Reuters poll released yesterday said that most economists expect the Bank of England to raise rates 25 bps to 0.5%. According to reports, “‘reaching the 0.5% threshold would also see the bank stop reinvesting maturing gilts and start to reduce its 875 billion-pound government bond holdings.’’ There are some who expect the BoE to be even more hawkish. Goldman Sachs has issued a report predicting British rates to reach 1% in May and 1.25% in November as the MPC shows they are serious about inflation.
USD/JPY has fallen below the support level at 115.00 as USD sellers take command for the third successive day. Technically, the currency pair has fallen below the moving averages and the 50-day has crossed the 100-day. RSI levels have been falling throughout the overnight session and is currently trading at the oversold level of 30. On the macro side, Jibun Bank Final Manufacturing PMI for January came in at 55.4, better than the previous release at 54.3.
Also released, Japan’s unemployment rate dropped to 2.7%, better than the 2.8% forecast.
Earlier in the trading session, Japan’s Vice Finance Minister Kanda who is the key currency diplomat said “The boost a weak yen gives to Japan’s export volumes has declined compared with the past, as manufacturers target shipments to high-end, state-of-the-art products overseas rather than compete with price cuts,” as per Reuters. The diplomat adds, “The demerits of a weak yen are that it pushes up the import cost of energy and food, thereby increasing household burdens.” His comments did not appear to affect the movement in USD/JPY.
USD/CAD is also trading lower this morning, after testing higher resistance levels during early Asian trading. Technically, the currency pair is trading below the moving averages and the 50-day has crossed the 100-day moving average. RSI which had been testing 30 during earlier trading has moved a bit higher, and is now trading at 39. Bullish oil prices helped to support the loonie and placed some pressure on the USD. On the macro side, later this morning, Canada will release Markit Manufacturing PMI for January and that number is expected to increased slightly to 56.9 from last month’s 56.5. Also being released is November GDP which is expected at 0.3% following the previous release of 0.8%. Crude oil prices edged higher in early morning trading, trading near seven-year highs hit last week, as traders expect the supply of crude oil to remain tight with a limited production rise by the major producers as post-pandemic demand remains high. Brent crude for April delivery rose $0.14 to $89.40 per barrel, while the front-month contract for March delivery expired on Monday at $91.21 per barrel. US West Texas Intermediate crude rose $0.13 to $88.28 per barrel after rising 1.5% the previous day. Oil prices rose 17% in January, the highest monthly gain since February 2021, as concerns over geopolitical tensions in Eastern Europe and the Middle East keep prices well bid.
AUD/USD is trading higher this morning after the RBA kept the cash rate unchanged at 0.10% at their meeting earlier today. The statement said that the RBA “will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range”. The central bank also said they will stop their asset purchase program after February 10. The RBA also stated that omicron has not derailed recovery and they forecast GDP to grow about 4.5% in 2022 and 2% in 2023. The unemployment rate is expected to fall below 4% later this year. AUD is trading near overnight highs at .7100, as the currency pair has risen above the moving averages with the 50-day crossing the 100-day. RSI is currently at 65. NZD/USD has followed the AUD higher, also trading above the moving averages and testing resistance at .6815. RSI is at 68.
As we move through the week, macro releases will be at the forefront for traders, culminated with the NFP release on Friday. Just as analysts have noted that equity markets, taking some profits while remaining in a trading range is not the worst scenario, we are seeing that in the USD as well. As treasury yields seem to take a break, there has been some profit taking in the USD. The geopolitical wild card of Ukraine-Russia tensions has added to the upward pressure on energy prices as some expect the $100-a-barrel oil price might not be far off. Good luck, stay safe and have a great day.
