Market recap & fx updates 2/3/22

FX Thoughts on a Thursday - February 3, 2022

Good morning,

Yesterday started off pretty good for the equity markets, as all three indices finished on a positive note. This was the fourth day in a row that equities finished in the “green”, as markets make their way back from a downbeat January. The last time the three market indices had a four-day winning streak was in late December. But then the market closed and that’s when the market turned. During the session the move was based partly on tech earnings But then, after hours things came crashing down as shares of Facebook parent Meta and Spotify Technology tumbled after weak earnings. It looks like today could be a tough one based on the movement of equity futures overnight. Markets remain concerned over the anticipated move higher in interest rates, continuing inflation, the pandemic and whatever is actually going on in Eastern Europe. US treasury yields slipped after the release of private payrolls data showed a surprise decline last month. According to the ADP report, US payrolls fell by 301,000 in January, far worse than the expected 200,000 gain. This was the first time in more than a year that private payrolls fell. The 10-year fell to 1.7700%, while the 30-year fell to 2.1040%. While the ADP report is not always a reliable indicator of the government’s monthly jobs report, it may be a precursor to how grim, or maybe just how unpredictable, the January report, which comes out on Friday, could be. The concern, of course, is that the payrolls report will reflect the worst of the Omicron surge. The NFP number will be based on how many people were working during the survey week, which was January 9-15, and according to the CDC, the highest seven-day average of Covid cases occurred on January 15. Earnings season continues with Cigna, Clorox, ConocoPhillips, Eli Lilly, Honeywell International, Merck, Shell, and Snap among those reporting results today. On the macro side, the Labor Department releases initial jobless claims for the week ending January 28 at 8:30 am, EST, and they are expected to be 245,000 after last week’s 260,000. Also at 10:00 am, EST the Institute for Supply Management will release its services index for January which is expected at 59.5 after last month’s 62.0. Also the Commerce Department reports on factory orders for December which is expected to fall to 0.1% after the previous 1.6%. US Equity futures are lower this morning as traders continue to react to the disappointing numbers released by Meta Platforms. The other social media names also fell as Snap and Twitter shares fell 16% and 8% respectfully in after hours trading. It will be interesting to see if the equity markets can continue their daily winning streaks. US treasury yields are slightly higher with the 10-year trading at 1.7788% and the 30-year at 2.1156%. The USD is trading slightly higher against the majors this morning.

EUR/USD is trading off overnight highs falling below support levels at 1.1300, as traders await the ECB policy announcement later this morning. Technically, the overall mood still seems to favor EUR bulls as the 50 and 100-day moving averages crossed the 200-day. In the last few hours the currency pair has dipped below the 50-day, and RSI levels have been moving lower throughout the overnight session, currently at 42. The consolidation ahead of the ECB release is not surprising as the fate of the currency depends on teh ECB’s tone on inflation and their interest rate outlook. The ECB is not expected to announce any changes to its policy settings following today’s meeting. In case the bank changes its tone on inflation and acknowledges that it’s not transitory anymore, EUR/USD could gather bullish momentum. On the other hand, the EUR could face renewed selling pressure if ECB President Christine Lagarde downplays inflation concerns and continues to push pack against rate hike bets. Following Wednesday’s inflation data, which saw yearly inflation register a new high at 5.1% in January, well above expectations of 4.4%, eurozone money markets have priced in 30 basis points of rate hikes by December 2022, according to Reuters. On the macro side, EMU annual PPI came in at 26.2%, above the forecasted 26.1% for December.

GBP/USD is also trading off overnight highs after testing resistance levels at 1.3570 as traders await the interest rate decision by the Bank of England. Technically, the move upward that we have seen over the past week has stalled for the moment and some “before meeting” profit taking has occurred. The currency pair is still trading above the moving averages and the RSI level has settled around the 50 level, currently at 51. Later this morning, the Bank of England is expected to raise rates by 25bps to 0.50% in an effort to combat ongoing inflation risks. This will be the first back-to-back interest rate hikes by the “Old Lady” since 2004. Market participants believe that the UK central bank will also signal its approach to start unwinding the GBP895 billion quantitative easing program. The announcement should create some fresh volatility around the GBP pair and produce some meaningful trading opportunities. On the macro side, Markit Services PMI for January came in at 54.1, above forecasts of 53.3.

USD/JPY is trading at overnight highs this morning near resistance levels at 114,80 as the currency reacts to higher US treasury yields overnight. The currency pair seem to be caught trading up and down as yields fluctuate between 1.8% and 1.75%. Technically, the USD/JPY looks about to cross above the 50-day moving average and RSI levels have been steadily rising during the overnight session, and is currently at 66. BoJ Deputy Governor Wakatabe said in a speech overnight that, “given the current situation where Japan’s economy has finally started to pick up from the pandemic, it is definitely too early for the Bank to start tightening monetary policy when the target has not yet been achieved as this could hinder the economic recovery.”
He reiterated that current policy will continue with QQE with yield curve control, “as long as it is necessary” to maintain 2% inflation target in a “stable manner”. That is, CPI should remain at 2% while medium- to long-term inflation expectations are “anchored”. The JPY could see some safe-haven support as traders keep their eyes on the conflict between Russia and the West over the Ukraine.

USD/CAD is trading higher this morning testing resistance levels near 1.2715, as oil prices take a break on their moves higher. Technically, the currency pair is trading slightly above the consolidation moving averages, and RSI levels have been rising overnight currently trading at 60. The Canadian Dollar strengthened along with crude oil prices into mid-January but has eased off a bit after the Bank of Canada did not raise rates at their January meeting. BoC Governor Macklem told the Senate banking committee yesterday that inflation could stay “uncomfortably high” around 5% over the first half of 2022, and then “come down fairly quickly in the second half.” He added that “there is some uncertainty about how quickly inflation will come down because we’ve never experienced a pandemic like this before.” “It’s clear that interest rates need to be on a rising path,” Macklem said. “The slope of that path is going to depend on economic developments, and if consumers spend more, the slope of that path, likely, has to be steeper.” “It will be a series of increases, not a single increase,” he said. Oil prices eased on Thursday as Brent crude futures fell $0.17 to $89.30 per barrel after rising $0.31 on Wednesday. US West Texas Intermediate crude futures fell $0.31 to $87.95 per barrel after rising $0.06 the previous day. The move lower appears to be a reaction to the US ADP data, but analysts expect oil prices to regain support moving forward.

AUD and NZD are trading between the moving averages this morning. RSI levels remain pressured against the AUD at 44, while slightly higher by the NZD at 54. On the macro side, Australia NAB business confidence jumped from -2 to 18 in Q4. Current business conditions was unchanged at 12. Conditions for the next 3 months rose from 8 to 30. Conditions for the next 12 months also rose from 26 to 34.

Central banks should grab some early attention early this morning, with the BoE and ECB meeting concluding. Here in the US the three potential new Fed officials will be the subject of a Senate Banking Committee hearing this morning. The panel will consider the nominations of Sarah Bloom Raskin to be the vice chairwoman for supervision, and Lisa DeNell Cook and Philip Nathan Jefferson to be Fed governors. And of course, the equity markets will be in full focus following the Meta moves in after hours trading last night. Good luck, stay safe and have a great day.