FX Thoughts on a Monday - February 28, 2022
Good morning,
For a week that only lasted four days last week, there was an awful lot going on. Stocks rose on Friday to close out quite a volatile week. Investors remain concerned and continue to assess Russia’s invasion of Ukraine. Over the weekend, it appears there will be some negotiation forthcoming but President Putin continues to issue threats. On Friday, the DOW gained 834 points, its best day since November 2020. The S&P 500 gained 2.2%, while the NASDAQ rose 1.6%. While stocks were buoyed by continued hope that a solution to the Ukraine conflict will be found sooner rather than later, they also appear to be reacting to the anticipated moves of the Federal Reserve. While the FOMC meeting is still a few weeks away, the FED is widely expected to begin raising interest rates. But many are now expecting the central bank may moderate their tightening in the near term, to accommodate uncertainty posed by Russia’s invasion. The turnaround in stocks appears to be fragile. The conflict in Eastern Europe, with the possibility of further sanction on Russia is still a major threat that could rise energy prices and exacerbate inflation. Much of the focus this week will be on things going on in Washington. Tuesday evening, President Biden delivers the State of the Union Address. On Wednesday, Fed Chair Jerome Powell will deliver his semi-annual policy update to the House Financial Services Committee. He will then repeat this to the Senate Banking Committee on Thursday. Which will take us to the main event, scheduled for Friday morning; the release of Non-farm payroll for February. The economy is expected to have added 350,000 jobs in February, after an increase of 467,000 jobs added in January. The unemployment rate is seen moving lower to 3.9% from 4 %. The January number was quite a surprise as most expected only a gain of 155,000. The macro news begins this morning at 9:45 am, EST as the Institute for Supply Management releases the Chicago purchasing managers’ index for February. Consensus estimate is for a 64.8 reading, slightly lower than the January number of 65.2. Earnings season continues as HP Inc., Workday, and Zoom Video Communications are among the companies that will be reporting. As we begin trading this morning, US futures have reversed Friday’s upswing and are lower this morning. DOW Futures are 470 points lower, while S&P 500 fell 1.96% and NASDAQ has fallen 1.78% ahead of the North American trading day. Adding to the tension, Russian President Putin has put his nuclear deterrence forces on high alert amid the growing international backlash agains the invasion. Representatives for the Ukraine and Russia have agreed to meet on the Ukraine-Belarus border, and this morning the central bank of Russia raised their interest rates to 20% from 9.5% as the ruble fell to a record low against the dollar. US Treasury yields are also lower this morning, with the 10-year note trading at 1.9044% and the 30-year bond is trading at 2.2270%. Investors have been buying safe-haven investments like US government bonds since the beginning of the Russian invasion of Ukraine last week, which has pushed yields lower. Sanctions continue, with the US, Canada and European allies agreeing on Saturday to remove Russian banks from teh interbank messaging system, SWIFT.
EUR/USD has gained some momentum in early morning European trade as the currency pair has rallied from overnight lows near resistance levels at 1.1120, as traders await the next moves by Russia as negotiations begin. After gapping lower to being trade in early Asia, the single currency has bounced back as some profit taking has been seen. The EUR continues to trade below the m moving averages, but RSI has risen from 35 to the current 48. The EUR continues to trade in “negative territory”as the currency pair reacts to geopolitical developments and it could be difficult to for the EUR to shake off the bearish pressure in case safe-haven flows continue to dominate financial markets. Belarus reportedly decided to join forces with Russia in the invasion of Ukraine.
Today, as delegations from Russia and Ukraine are expected to meet for talks on the Ukraine-Belarus border, it’s difficult to say whether or not sides will be willing to end the conflict and look for a diplomatic solution. If that solution happens, EUR/USD could stage a decisive rebound. On the flip side, a lack of progress and a further escalation of the crisis after Monday’s meeting could force the common currency to face additional selling pressure. Earlier today EU President von der Leyen was quoted by Euronews that the EU wants Ukraine adding to the bloc, saying “they’re one of us”. Poland’s President added his support to the move.
GBP/USD has staged a bit of a rally this morning as well, after moving up from lower levels seen during Asian trading. As with the EUR. The GBP began trading early in Asian trade, gapping lower before finding support and moving higher. The currency pair is trading right at the 50-day moving average and RSI levels are neutral at 52. As with the EUR, the GBP begins the week presumed by the flight to safety and escalating geopolitical tensions. The news from the “war zone” remains conflicted as one news agency Ifax reported that Russia was interested in coming to an agreement with Ukraine as soon as possible, while on a separate note, Russian forces have reportedly gained control of the Ukrainian cities of Berdyanks and Enerhoder. The optimism over negotiations as well as diminishing odd for a FED 50 bp rate hike have extended some support to the GBP. With the absence of any major market-moving macro releases, the market focus remains on fresh developments surrounding the Russia-Ukraine saga. This along with US bond yields, which will influence USD price moves could produce short-term trading opportunities for the GBP/USD.
After gapping lower in early Asian trade the USD/JPY regained traction around the 115.50 level, as the safe-haven JPY holds its ground against the USD. Technically, the currency pair is trading above the moving averages, and RSI levels have risen to 56. On the macro side, Japanese industrial production dropped -1.3% in January, worse than the expectation of -0.7%. Output declined for the second month, after the 1.0% contraction in December. Production of autos and other motor parts slumped 17.2 in January, falling for the first time in four months. According to a survey by the Minister of Economy, Trade and Industry, output is expected to bounce back by 5.7% in February and 0.1% in March. But these forecasts were taken before Russia’s invasion of Ukraine, and that impact is still unknown. On the positive side, retail sales rose by 1.6% annually, above the expectation of 1.1%, which was the fourth consecutive month of expansion.
USD/CAD has had quite a ride overnight, testing support in early Asian trade near 1.2730, as well as testing resistance levels at 1.2800, before settling below the moving averages, near the overnight lows. RSI levels which had been as high as 55, have fallen to the current level at 41. Oil prices rose overnight and into early Monday trading amid fears that Russia’s oil and gas exports will be disrupted as the US and Western allies imposed new rounds of sanctions on Russia that target their financial system and these sanctions could make it difficult for Russian petroleum sales to occur. Brent crude futures, which his the international oil benchmark, rose by 7% to a high of $105.00 per barrel, before easing back to $102.61. US West Texas Intermediate crude futures, the US benchmark, also rose 7% to trade above $98 per barrel, before easing back to $96.20. Analysts continue to expect to see the price of oil move higher as the standoff between Russia and the US and its allies continue. The move to remove Russia from the SWIFT system and well as President Putin putting his nuclear deterrence forces on high alert could see oil prices rise o $110 t0 $115 per barrel before it retraces.
AUD and NZD have followed the other currencies in overnight trading, initially gapping lower before gaining traction and are currently trading near overnight highs. Both currency pairs have moved above the moving averages as RSI levels for both currencies trade at 58. On the macro side, Australian retail sales rose 1.8% in January, above the expectation of 0.4%. Also released, Australian private sector credit rose 0.6% in January versus the expectation of 0.7%.
As I conclude to update, DOW futures have eased and are currently trading around 400 points lower. Will the negotiations help the situation and just how much will investors factor in the Russia-Ukraine conflict to their investment portfolios. Today is a rather quiet day macro wise here in the US and traders will be keeping an eye on the appearance of FED Chair Powell in Washington this week as well as President Biden’s State of the Union Address tomorrow. A volatile day awaits. Good luck, stay safe and have a great day.