Market recap & fx update

FX Thoughts on a Monday - February 14, 2022

Good morning,

After escalating headlines on Friday created havoc in the equity, bond and fx markets the weekend was somewhat calm as tensions remain high regarding Russia and the Ukraine. , President Biden warned Putin in a call this weekend that an invasion would result in “swift and severe” costs to Russia. German Chancellor Olaf Scholz is scheduled to meet with Putin on Tuesday. Tensions over the Ukraine-Russia crisis have been simmering for more than two months now, with diplomatic efforts to resolve the issue showing little sign of progress. While Russia-Ukraine are the main headline, there are other happenings this week that will no doubt affect the markets. FOMC minutes, FED and ECB speakers, US retail sales, UK jobs and CPI are also on the agenda this week. Debates over interest rates will continue to dominate the markets as investors seek guidance from FED speakers on the course of central bank hikes this year. St. Louis FED President Bullard will be n the wires today and his comments could create some movement. He has called for the Fed Funds rate to be at 1%. Equity markets fell hard on Friday after the White House warned of a possible Russian invasion of Ukraine occurring “any day now”. The S&P 500 fell 1.9%, giving the large-cap index a 1.8% loss on the week. That snapped a two-week winning streak and puts the S&P 500 7.9% off its record close from Jan. 3. The DOW fell 1.4% to snap a two-week winning streak of its own. And the NASDAQ was the worst of the major indices, falling l 2.8% on Friday, giving it a two-day drop of 4.8%. That’s the index’s worst two-day stretch since September 2020. Earnings reports continue today with Advance Auto Parts and Vornado Realty reporting. Stock futures begin the week trading lower as investors keep there eyes on Ukraine while remaining concerned over US interest rate hikes. DOW futures are down over 250 points, while the S&P 500 and NASDAQ futures are down 0.86% and 1.09%, respectfully. US treasury yields are lower this morning, after rising last week following the release of inflation numbers, then falling on Friday after news of an imminent invasion of the Ukraine by Russia. Investors are looking at safe haven assets as tensions rise in Eastern Europe. The yield on the 10-year note fell to 1.9371% in trading this morning, while the 30-year bond was trading at 2.2399%. There is no major macro data due for release today. The USD is receiving safe-haven support along with the JPY. Analysts see the EUR and oil importers’ currencies as those most at risk due to the conflict in the Ukraine.

EUR/USD is trading lower this morning as traders move towards the USD and JPY as safe-haven alternatives. Technically, the currency pair is testing support levels at 1.1300 as the EUR has moved lower during European trading. Following Friday’s move lower the 50-day moving average has crossed the 100 and 200-day averages as RSI levels are at or below 30 in the last few hours. As the EUR continues to be pressured, the European stock markets are also feeling the strain as the German DAZ 30 and the Euro Stoxx 50 indexes are both down more than 2.5%. Later this morning, ECB President Lagarde is set to deliver a speech. In an interview last week with a German newspaper, Lagarde said that raising rates would not solve the inflation problem and that she doesn’t want to “choke off the recovery”. If her speech is viewed in any way as less hawkish than her post ECB meeting press conference on February 7, that will add additional pressure to the EUR. The disparity between US and German bond markets is also adding pressure to the EUR, as the German 10 year Bund yields continue correcting lower, while until the moves on Friday, the spread differential has been widening. ECB governing council member Rehn spoke over the weekend, saying an overreaction to inflation by the central bank could cause a pause in economic growth. He added that it is better to look beyond short-term inflation and look at what inflation will be in 2023 and 2024 and that there is time to react in the March meeting and in later meetings if the situation changes.

GBP/USD is also trading lower as it has bounced off support levels at 1.3500 during early European trading to settle at slightly higher levels ahead of the North American trading opening. Technically, support at lower levels has held for the time being and those levels will be closely watched during the remainder of today. The moving averages have consolidated with the 50-day crossing the 100 and 200-day averages. RSI levels which had been down around the 30 area in earlier trading have moved back up to the current level of 43. The pound like the other currencies is being pushed lower due to safe haven flows into the USD and JPY. As with the other stock indexes, the UK FTSE 100 index is down 2.2% in early European trading adding pressure to the pound. There are no macro reports due out in the UK today, but tomorrow the UK’s office for National Statistics will release their labor market report. Analysts expect the annual wage inflation in the fourth quarter of 2021, as measured by the Average Earnings including Bonus to decline to 3.9% from 4.2%. A stronger-than-expected number could help the pound. Adding to pressure for the pound is the continued tension over Northern Ireland Protocol regarding the Brexit agreement. Also putting pressure on the pound is the continuing saga of “Partygate” as the PM was recently questioned by UK police, which could add pressure on his continuing as PM moving forward.

USD/JPY has bounced off support levels after testing 115.00 during the overnight trading session. In earlier Asian trade the RSI levels had dipped below the 30 level, but over the last few hours it has improved to the current 37. Technically, the currency pair is trading well below the moving averages and the 50-day has crossed the 100 and 200-day moving averages. Safe haven purchases have supported the JPY and it has also received some support due to the dip in the US treasury yields as traders continue to react to the tensions in the Ukraine. Earlier this morning the BoJ successfully defended its key bond yield target, maintaining their pledge for ultra-loose monetary policy. According to reports, “the 10-year JGB yield fell two basis points to 0.205% in early trade, after rising to 0.230% last week.“ It was also reported that the BOJ said it made no purchases of the debt, as there were no offers for sale. The BoJ said last week that it would buy an unlimited amount of 10-year government bonds at 0.25% to prevent rising global yields from pushing up domestic borrowing costs.

USD/CAD is trading just below overnight highs after testing resistance levels at 1.2780 in earlier trading. Technically, the currency pair is trading well above the moving averages and the 50-day has crossed the 100 and 200-day moving averages as the loonie feels the pressure of USD safe haven buying. RSI levels have retreated from testing the overbought level at 70 in earlier trading, currently settling at 65. Crude oil prices have eased a bit from their earlier highs adding some pressure to the Canadian dollar. Brent crude futures are currently trading at $94.75 per barrel, after trading at $96.16, the highest level since October 2014. US West Texas Intermediate crude futures are trading at $93.39 per barrel, after trading as high as $94.94, the highest level there since September 2014. Concerns over the possible invasion of Ukraine by Russia which could trigger US and European sanctions which would disrupt exports in an already tight market. Analysts look at the oil prices rallying above the $100 level if troop movements begin. Oil prices are expected to remain extremely volatile and sensitive to updates regarding the Ukrainian situation. On the domestic side, Canadian police arrested protesters near Ontario’s Ambassador Bridge, the vital U.S. crossing (where 1/3rd of all US/Canadian trade occurs) and a major site of recent demonstrations. Truckers and other Canadians had been protesting vaccine mandates for three weeks now, furthering supply-chain issues especially impacting the US auto industry. It also inspired copycat demonstrations across the country and abroad (in France). Growing social unrest, globally, is just simply stagflationary if it continues to upend already sticky supply chains.

AUD and NZD remain under pressure as traders remain focused on safe haven purchases, and anti-risk flows contribute to bearish pressure on the two commodity currencies. Both currencies are trading just above overnight lows. The 50-day moving average on both currency pairs has fallen below the 100 and 200-day averages and the RSI levels after both testing the 30 level have moved back to 35 for the AUD and 32 for the NZD. The RBA releases their policy meeting minutes from their last meeting tomorrow.
Ukraine and potential rate hikes will be the focus of traders as we begin the week. The main concern for traders appears to be the possibility of China backing Russia which would continue to deteriorate relations between the US and China There has been no breakthrough in negotiations over the weekend and concerns remain high. On the domestic front FED speakers continue to talk rate hikes. Good luck, stay safe and have a great day.

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