Market recap & fx update 2/8/22

FX Thoughts on a Tuesday - February 8, 2022

Good morning,

Officially equity markets ended mixed in trading yesterday. The S&P 500 fell 0.37%, while the NASDAQ was down about 0.6%. But the DOW finished the day in the black, gaining 1 point. During the trading day, the DOW had been as much as 235 points higher, and 95 points lower.
Stocks appear to be struggling for direction and will continue to do so until the latest inflation numbers help analysts figure out just how aggressive the FED will be concerning their rate tightening. The focus continues to be Thursday’s Labor Department release of January’s consumer price index. After Friday’s strong jobs report, inflation data is expected to show that prices rose 0.4% in January for a 7.2% gain from a year ago. Speculation continues to grow
as to how many times the FED will raise rates this year. Yesterday it was reported by Bank of America that their economists now expect seven quarter-point interest rate increases during 2022. While this may hurt stocks and some other risky assets, it’s considered to be better than runaway inflation which could hurt earnings and valuations. Earnings continue to be positive and will continue today as BP, Chipotle Mexican Grill, DuPont, Lyft, and Pfizer, are among those who will release earnings today. US Treasury yields traded quietly yesterday, but managed to remain above the 1.9% level, trading at 1.9190%, while the 30-year bond traded at 2.2220%. Rates have certainly improved as 2022 began as the 10-year note was trading near 1.5% at the end of last year. The USD traded higher against the EUR as ECB President Lagarde clarified remarks made last week that had traders believing the ECB would raise rates later in 2022 as inflation risks rose. As we begin trading this morning, US equity futures, bond yields and the USD are all trading higher. Traders remain focused on data coming out later this week, but this morning, at 8:30 am. EST we will get the release of Balance of Trade for December and the deficit is expected to rise to $83 billion, after November’s deficit of $80.2 billion.

EUR/USD once again has fallen under pressure continuing the pullback from two-month highs. Technically, the failure of followthrough on the upside has added some confidence to sellers with the single currency testing support levels earlier during overnight trading. Currently the EUR is trading between the 100 and 200-day moving averages as the 50-day moves towards testing crossing the 100-day. RSI levels had fallen all the way to 30 in early Asian trade, but has moved back towards the 50 level during European trade, currently at 46. The negative feelings towards the EUR continue as the diverse moves between the central banks continue. European Central Bank President Christine Lagarde told the European Parliament yesterday that they will not hike the policy rate before ending the net asset purchases. In December, the ECB announced that it will ramp up the purchases under the Asset Purchase Program (APP) to EUR40 billion per month in the second quarter from EUR20 billion to ease the transition when the Pandemic Purchase Program (PEPP) ends. In order to hike the policy rate in September, the ECB would need to end the QE sooner than planned and investors will refrain from pricing an aggressive policy tightening until then. On the other hand, the 10-year US Treasury bond yield continues to rise towards the key 2% mark, helping the dollar find demand. Overnight, ECB Governing Council member de Cos, was quoted saying “risks to inflation are tilted to the upside in the short term.” He added that the level of uncertainty around inflation is very high due to geopolitical risks (Ukraine). According to de Cos the ECB will keep all options open regarding monetary policy. The EUR had little reaction to these comments.

GBP/USD is trading higher this morning, testing resistance levels at 1.3560, after testing lower levels earlier during overnight trading. Technically, the pound is straddling the 100-day moving average while the 50-day which had crossed below the 100-day is now trading close to the 200-day moving average. RSI levels which had fallen as low as 40 during the earlier part of overnight trade has rallied to trad above 60 at 61. While the pound has rallied over the last few hours, continuing tensions over the Northern Ireland Protocol of the Brexit agreement may undermine the pound and keep lid on any further upside for the pound. The UK region’s Agriculture Minister Poots was quoted in the Politico saying, “The Democratic Unionist Party (DUP) won’t allow Northern Ireland’s power-sharing government to be revived unless the European Union abandons its requirement for checks on British goods arriving here.” Lack of progress on talks over EU funding continues as Northern Ireland and fishing concerns consume all the Brexit negotiations. A German official was quoted last week saying that Britain should respect post-Brexit trade rules or else face consequences. It seems as though Brexit may never go away. Rising US bond yields will provide support for the USD and keep a lid on the pound for the time being.

USD/JPY is trading in the middle of its overnight range after testing resistance levels at 115.50 and support at 115.00. Technically, the currency pair is trading above the moving averages as the RSI levels ease back from testing 70 during the Asian trading session. RSI is currently at 53. The USD/JPY remains “better-bid” as US treasury yields continue to rise and the currency pair appears set to test the January high of 115.70. On the macro side, economic releases came in mixed as Japan’s Overall Household Spending dropped to -0.20% annually in December vs +0.3% forecast and -1.3% prior. Current Account details for December saw JPY-370.8B vs market consensus of JPY73.5B and JPY897.3B previously. There are talks underway between the US and Japan to ease the Trump-era steel tariffs. Expect the USD/JPY to continue to track US treasury yields moving forward, as US yields move towards levels not seen since late 2020.

USD/CAD is trading at overnight highs this morning, testing resistance levels at 1.2700 as oil prices slip a bit as talks resume between the US and Iran that could remove sanctions against Iranian oil sales, which would increase global supplies. Technically, the moving averages are consolidating right at the USD/CAD’s current level as RSI moves towards its overnight high at 55. On the macro side, Canada will release their Balance of Trade for December at 8:30 am, EST and the forecast is for the trade surplus to ease to C$2.5 billion from the previous C$3.13 billion. This number will be released at the same time as the US balance of trade and this could add some support to the loonie. Looking at crude prices, Brent crude futures were down $0.40 at $92.55 per barrel, after hitting a seven-year high of $94 on Monday. US West Texas Intermediate crude fell $0.01 to $91.31 per barrel. Both of the oil contracts have hit seven-year highs supported by strong global demand, ongoing tensions in Eastern Europe and possible supply disruptions due to cold US weather conditions. Talks concerning reviving the 2015 Iran nuclear deal will resume in Vienna today after pausing for 10-days. If Iranian oil returns to the market, this will certainly weigh on prices, adding supply.

AUD/USD is trading mid-range near .7120, as moving averages have consolidated just below the currency spot price and RSI is very neutral at 50. On the macro side, NAB business confidence rose from -12 to 3 in January, turning positive, but all news was not good as business conditions dropped from 8 to 3. According to analysts, overall, the January survey shows significant disruption to business activity from the spread of the omicron variant, but continued recovery is expected as case numbers come down. NZD/USD is also trading just above the moving averages with RSI trading at 50 as well.

As we conclude this report, equity futures have eased a bit with the S&P 500 and NASDAQ falling into negative territory. Trade numbers won’t have much affect on the markets this morning as traders have become accustomed to the growing deficit. Focus remains on Thursday’s macro release as well as the Ukraine. There was some apparent positive vibes coming from French President Macron’s meeting with Russian President Putin yesterday, but concerns over an invasion remain strong. Good luck, stay safe and have a great day.