Market recap & fx update 2/7/22

FX Thoughts on a Monday - February 7, 2022

Good morning,

Just when you think you have it all figured out, you don’t. Non-Farm payroll was expected to be weak, maybe even negative according to all the analysts out there, so what happened Friday morning? According to the Labor Department, the US economy added 467,000 jobs in January, more than three times better than the most optimistic expectations. What happened to the omicron variant that was supposed to severely hurt the number? So here is the next concern for traders? How will this report affect the FED and monetary policy as they central bank gets ready to meet next month. After the report, bond yields rose to close to yearly highs. Traders are now betting on five full rate hikes this year, assuming that the central bank raises rates by 0.25-percentage-point increments each time. The implied Fed policy rate at the end of the year has climbed to 1.4%, up from 1.3% on Thursday, according to futures-market data from Bloomberg. The equity markets finished mixed on Friday, with the DOW falling 21 points, while the S&P 500 and NASDAQ rose, with the S&P up 0.5% and the NASDAQ rising 1.6%. Adding to the positive equity news, Amazon rose nearly 14% after teh company reported their quarterly earnings. Heading into this week, we are still receiving fourth-quarter earnings, with some notable companies left to report. Tyson Foods and Simon Property Group will report earnings today. Also, three DOW components including Coca-Cola and Disney will provide quarterly updates. So far, over half of the S&P 500 companies have reported quarterly earnings, with 79% beating earnings estimates and 77% topping revenue expectations. While there is nothing due out on the macro side tomorrow, the highlight of the week will be Thursday’s CPI report for January. Economist consensus has the rate of inflation rising to 7.3% annually after rising 7% in December. That would be another highest reading since 1981. As we begin the week, US equity futures are lower this morning. DOW Futures are down around 100 points and the S&P 500 and NASDAQ futures are both down around 0.20%. US treasury yields are slightly lower this morning after Friday’s surge as investors await new economic releases this week. The yield on the 10-year note slipped 3 points to 1.9014%, and the yield on the 30-year bond fell 3 points as well to 2.1934%. After Friday’s NFP release, the 10-year rose to its highest level since December 2019. The USD is marginally higher against the majors this morning.

EUR/USD has moved lower during overnight trading falling below the support levels at 1.1450 as we begin the trading week. Technically, the EUR/USD has fallen below the 50-day moving average and RSI levels have been steadily easing throughout the overnight period, currently trading at 43. Macro data released earlier this morning showed Eurozone Sentix Investor Confidence improved to 16.6 in February, better than the 15.2 expected and higher than the January reading at 14.9. The data release failed to gather any support for the single currency. The Sentix Investor Confidence is a survey of 1600 financial analysts and institutional investors that shows the market opinion about the current economic situation and expectations for the future. Usually, a higher reading is seen as positive for the Eurozone, which means positive, or bullish, for the EUR, while a lower number is seen as negative or bearish for the currency. Today’s reading was not enough to overshadow the US NFP release on Friday which has given the USD renewed strength. ECB policymaker Kazaks was on the wires this morning, stating that “the ECB could end its stimulus program earlier than planned but it is unlikely to raise its main interest rate in July as investors are expecting,” These comments seemed to push back any thoughts that the end of the ECB bond purchases would begin the cycle of ECB Rate hikes.

GBP/USD is heading lower in early morning trading as well, coming close to testing support levels at 1.3500. Technically, the downside looks to gain possible momentum as the 50-day moving average has crossed below the 100-day and the currency is now trading right around the 200-day moving average. RSI has been pretty steady for most of the overnight period and is currently trading near the overnight low of 38. Adding to the pressure of the pound are new concerns surrounding Brexit talks that will happen on Thursday between UK Foreign Secretary Truss and EC VP Sefcovic. UK politics are in the news as UK PM Johnson supposedly hired Isaac Levido in an attempt to “save his job” according to the UK Express. Elsewhere, BoE Governor Bailey has come under criticism for “failing to nip inflation in the bud and taking a complacent attitude” towards rising prices, according to former economic advisor Gerald Lyons. Lyons has warned that the Bank’s failures could worsen the cost-of-living crisis. Without any major macro releases the GBP falls at the mercy of USD price dynamics, which means traders could take their lead from US bond yields, which have been driving USD demand.

USD/JPY is trading lower this morning, after testing resistance levels on Friday at 115.40 following the NFP release. The move lower this morning has snapped a two-day run-up seen last week. Technically, the USD/JPY is trading close to both the 100 and 200-day moving averages, which are located just below support at 115.00. RSI which had been trading around 60 for most of the overnight period has eased back and is currently trading at 44. According to reports the Japanese government is considering extension to the quasi emergency state in Tokyo and 12 other prefectures, due to the coronavirus spread. Expect the USD/JPY to continue to trade in line with US treasury yields without any major macro data coming from Japan at the moment.

USD/CAD is trading in the middle of its overnight range this morning, bouncing off support levels at 1.2710 during overnight trade. Technically, the currency pair trades between the moving averages, as the 50-day provides resistance while the 100 and 200-day moving averages provide support. RSI is trading neutrally at 49. As good as the US NFP report was on Friday, was literally as bad as the Canadian Jobs data was. Canada’s Employment Change for January fell 200,100 jobs, worse than the forecasted 116,500. And the unemployment rate rose to 6.5% from last month’s 6% and higher than the forecasted 6.2%. These numbers contributed to the USD/CAD trading higher for most of the Friday session. What happened in Canada regarding jobs was what was expected in the US. The latest numbers appear to relate to omicron lockdowns and are expected to quickly come back and should not deter the Bank of Canada from raising rates 25bps in March. The latest data does highlight some economic divergence between the US and Canada and adds risk to the possibility that the FED outpaces the BoC concerning monetary tightening this year, which could lead to USD/CAD buying. Oil prices are lower from overnight highs, as Brent crude futures currently trade at $92.83 per barrel after trading near $94.00 earlier in the session. US West Texas Intermediate crude futures are also lower trading at $91.37 per barrel after trading near 7-year highs on Friday at $92.56 per barrel. Investors remain bullish based on expectations that global supply should remain tight as demand begins to pick up.

AUD is trading higher this morning, testing resistance levels at .7100, as the currency pair reacts to macro releases. The AIG Performance of Services Index rose 6.6 pts to 56.2 in January, hitting the highest level since June last year. Looking at some details, sales rose 5.3 to 58.9, employment rose 0.5 to 56.7 and new orders rose 10.5 to 57.9. RSI levels are trading higher at 49. NZD is trading mid-range with the currency pair trading below the moving averages, with RSI trading at 54.

Focus to begin the week will be on the Ukraine-Russian crisis, as global powers have scrambled to prevent an all-out war. “Finger-pointing” has begun as Germany is being accused of failing to help the Ukraine. Germany has not sent any military aid to the Ukraine, unlike other nations. With the Ukraine not being a member of the EU or NATO, Germany seems to be caught between a rock and a hard place due to its dynamics with Russia concerning energy. Here in the US, the volatility in the equity markets should ease a bit as traders await inflation data later this week. Good luck, stay safe and have a great day.