FX Thoughts on Thursday - September 29, 2022
Good morning,
YESTERDAY’S RECAP:
At some point, everyone needs a “hero” to save the day. And yesterday, the US equity markets needed one and the Bank of England was more than happy to lend a hand. The stunning move by the BoE to buy long-dated bonds pushed yields down on both sides of the ocean and allowed the US equity markets to stage a bit of a comeback. The DOW rose 549 points, rising from their previous 2022 low. The S&P 500 rose 1.97% after posting a new bear market low the previous day. And the NASDAQ rose 2.05%. The DOW and the S&P 500 snapped six-day losing streaks. The DOW is now 19.7% off its 52-week high, while the S&P 500 is 22.8% below its record. The Nasdaq is down 31.8%. As their British counterparts were easing, US treasury yields tumbled as well. The yield on the 10-year note fell 26 basis points to close at 3.7070%, the largest one-day decline in the 10 yield yield since March 18, 2009. It had traded above the 4% level earlier in the day for the first time since 2008. The 2-year note closed at 4.25%, while the 30-year bond ended the day at 3.70%. The move by the BoE had its desired effect as the yield on the 10-year UK gilt fell about half a percentage point to end the da =ya at 4.01%. The move by the BoE also had the desired effect on the GBP which rose above resistance levels to trade roughly 1.5% higher against the USD. The central bank is now committed to buying as many long-dated government bonds, know as gilts, as needed between yesterday and Oct. 14. The US dollar currency index closed at 112.66 after hitting a fresh 20-year high of 114.78. While the dollar initially had broad-based gains, the greenback eased sharply as the U.S. trading session progressed.
ASIAN/EUROPEAN RECAP:
Equity markets in Asia were mostly higher in overnight trading as they followed the rebound on Wall Street following the Bank of England bond intervention. The Nikkei 225 rose 0.95% and the ASX 200 rose 1.44%. The Hang Seng index was higher during early trade but ended up falling 0.49%, while the Chinese markets were mixed, with the Shanghai Composite 0.13% lower and the Shenzhen Component 0.18% higher. After trading higher yesterday, European stocks fell this morning as teh euphoria of the BoE move appears to have faded. The pan-European Stoxx 600 is 1.6% lower this morning and the FTSE 100 is down 1.15%. US equity futures are following their European counterparts lower in early Thursday trade following yesterday’s rise. DOW futures are down around 245 points, while S&P 500 and NASDAQ futures are down 0.94% and 1.09% respectfully. US treasury yields have risen across the board this morning, with the 10-year note reversing some of the losses it made on Wednesday. The 10-year note was trading at 3.8420% while the policy sensitive 2-year note was higher trading at 4.2048%. The 30-year bond was trading at 3.7770%. FED speakers continue to be hawkish which has traders fearful of more rate hikes and a possible recession. The USD appears to have corrected a bit overnight as the US dollar currency index was trading at 113.29
TODAY’S DOCKET:
Today’s macro releases will be highlight by the release of GDP growth or the second quarter, due out at 8:30 am, EST. The forecast is for Q2 GDP to be down -0.6%, after the first quarter number at -1.6%. Also being released today at 8:30 am, EST will be initial jobless claims for the week ending September 24. They are expected to be pretty close to last week coming in at 215,000, after the previous 213.000. Today will also see a number of FED speakers throughout the day as FED members Bullard, Lane, Mester and Daly are scheduled to speak. Also this afternoon at 2:00 pm, the Bank of Mexico is scheduled to release their latest interest rate decision. The central bank, known as Banxico is expected to match the FED’s rate hike of 75 bps, bringing the interest rate to 9.25%.
EUR/USD:
After rising more than 100 pips yesterday, the EUR is already retracing a bit creating a trading range in between the moving averages. Technically, the 50-day moving average has crossed the 100-day moving average at support levels near .9650, while testing resistance levels at .9750. RSI which had crossed above the 70 level yesterday, has fallen back a bit and is currently trading at 59. On the macro side, data published by the EC this morning showed that the Economic Sentiment Indicator for the euro declined to 93.7 in September from 97.3 in August. This reading was weaker than the expectation of 95. Among the larger EU economics, the ESI fell in Germany by -4.8, the Netherlands by -3.7, Italy by -3.7 and France by -3.2. Further details of the report revealed that the Industrial Confidence Index fell to -0.4 from 1 and the Services Sentiment Index edged lower to 4.9 from 8.1. Finally, the Consumer Confidence Index for the euro area arrived at -28.8, a new all-time low, matching analyst’s estimates. ECB policymaker Hernandez de Cos was on the wires this morning, saying he hasn’t seen any clear evidence of a de-anchoring of inflation expectations in the Eurozone. He added that policy rates are a more effective instrument to tighten monetary policy and that based on current information, the median terminate rate according to value models would be 2.25%-2.50%. ECB hawks continue to stress the need for another 75 bp rate hike at the next ECB meeting.
GBP/USD:
GBP/USD is trading towards the top of the overnight range as the currency pair tested resistance levels at 1.0900, before easing back to current levels. Technically, the pound is trading amid the moving averages as the 50-day has moved above the 100-day and the pound tested the 200-day level earlier this morning. The surprise move by the BoE caught traders by surprise and “short-covering” gave the pound added upside impetus. RSI levels are trading around the 59 level at the moment after testing the 70 level during yesterday’s trade. UK PM Truss was on the wires this morning and stated that the government is working very closely with the BoE. She added that considering the difficult markets the world is facing she believes the government has done the “right thing”. She added that as PM, she is prepared to make the difficult decisions to get the economy moving again. On the economic data front, traders will focus on Friday’s Gross Domestic Product data. The annual growth rate is expected to come in at 2.9%, after there previous release of 8.7%. The quarterly rate is expected to come in at -0.1% after the previous release of 0.8%. Analysts are still not convinced that the BoE moves will support the pound as they expect BoE rate hikes to fall short of FED rate hikes adding pressure to the pound over the next six months.
USD/JPY:
With the markets focused overnight on the GBP, USD/JPY traded in a relatively quiet trading range, testing resistance at 144.80 and support at 144.20. Technically, the currency pair is trading just above the moving averages which are consolidating around 144.50. RSI levels have been rising throughout the overnight session currently at 58. As US treasury yields regain positive traction, this should prompt fresh USD/JPY buying. Japanese Chief Cabinet Secretary Matsuno was on the wires Thursday saying that they are reviewing whether to take additional steps to curb rise in electricity cost in upcoming economic stimulus package. Electricity bills have risen about 20% in the past year for households and by about 30% for businesses. Matsuno added that these increases are becoming a “heavy burden” for consumers. When all is said and done the continuing divergence of FED-BoJ interest rates will allow the USD/JPY to remain bid. There could be some safe haven buying in USD/JPY as traders remain concerned over Japanese-North Korean relations concerning North Korea’s use of nuclear weapons.
USD/CAD:
USD/CAD is trading in the middle of its overnight range as the currency pair picks up support after trading lower in the last few days. Technically, the currency pair is trading just above the moving averages. RSI which had traded as low as 30 over the last few days has risen to 53 in early morning trade. On the macro side, monthly Canadian GDP for July will be released at 8:30 am, EST and the expectation is for a -0.1% reading, vs. 0.1% prior. Oil prices are lower this morning as the continuing strong USD and economic concerns outweigh optimism over consumer demand. Brent crude futures fell $0.59 to $88.73 per barrel. US West Texas Intermediate crude futures fell $0.54 to trade at $81.59 per barrel. The stronger USD has put pressure on oil prices making it more expensive for buyers using other currencies.
AUD/USD & NZD/USD:
AUD and NZD are trading around their respective moving averages after testing support levels earlier in Asian trading. Technically, the currency pairs are trading right around the consolidating 50 and 100-day moving averages. RSI levels are both hovering around the 50 level with the AUD at 48 and the NZD at 52. On the macro side, Australian CPI rose 6.8% annually in June, accelerated to 7.0% in July and eased back to 6.8% in August as the slight fall in the annual inflation rate from July to August was mainly die to a decrease in prices for Australian fuel.
CLOSING COMMENTS
It appears that the euphoria from yesterday has all but disappeared this morning in the equity markets. The BoE move keeps pound somewhat bid but that move appears to be artificial as traders look for levels to sell. This should allow the USD to remain bid today, unless GDP numbers surprise. Good luck, stay safe and have a great day.