The Weekly Close Out

Dollar Index (DXY):

My view in the previous weekly seemed to be vindicated by the strange sell-off in the dollar. Given we saw net dollar longs were chopped significantly from the latest CFTC report, it gives credence to the shorter term positioning driven adjustment lower. Also, based on ETF flows data it looks like we also saw some capital allocated towards European equities away from the US which would have led to dollar selling. Pre-Fed meeting risk-off sentiment was driving dollar strength with rising tensions in Ukraine – we heard the US is putting as many as 8,500 troops on alert for deployment to bolster NATO forces given the build-up of Russian troops. This led to significant sell-offs in equity markets which led to a safe haven bid for DXY.

The marquee event of the Fed meeting certainly didn’t disappoint. Initially, markets were calm and then Chairman Powell opened his mouth during the presser and shattered that tranquillity. What were the main takeaways – 1) March hike is now a lock 2) That rate increases could be faster and larger (more than 4 over 2022 and potential for 50bps), this was evidenced by his comment that there was quite a bit of room to raise rates without hurting the labour market and that decisions around the size of rate increases haven’t been made 3) Although short on specifics a separate document for principles of balance sheet reduction was released – primarily treasuries will be held on the balance sheet and reduction will take place via modifying the reinvestment amount as opposed to outright asset sales 4) The Fed views interest rates as its primary tool for adjusting monetary policy.

The reaction to all of this was a surge in the 2-year yield (proxy for Fed rate), 5 hikes priced by the market over 2022, 30bps priced in for the March meeting and a bear flattening in the 2s10s curve. This hawkish repricing is underpinning the dollar’s price move north. The move has also been broad based as opposed to strength only against funding currencies. The greenback is really flexing its muscles now. 4Q GDP data out yesterday significantly beat market expectations, however, two things are important to note – 1) it’s stale given omicron effects which the weak PMI out on Monday pointed towards and 2) the gains were mostly driven by an inventory restocking as opposed to robust demand. Initial jobless claims improved on the previous week, dropping to 260k. The core PCE data out today was better than expected on a YoY basis, however, the market sold off the dollar in response. Employment cost component was weaker than forecast which could be what is causing a softer reaction and there has been a small scale back on hawkish pricing. 

(Source: Tradingview - Past performance is not indicative of future performance.)

DXY has breached the 97 range resistance and former highs. 97.5 beckons as the upside target. The RSI is plumbing overbought territory. There could be some negative divergence unfolding here though as the RSI makes a lower high compared to the December peak. The 21-day EMA is trying to cross above the 50-day SMA and both are pointing up. Downside area of interest would be back down at the former range resistance at 97 and below there we have the 50-day SMA at circa 96.

EURUSD:

Despite a positive flash PMI print on Monday for the eurozone and German economy, jitters over geopolitical problems east are weighing on the euro. If energy supplies are disrupted due to conflict this would hurt the eurozone. On this topic, the schedule is for talks to continue in another two weeks between Russia, Ukraine, France and Germany. With geopolitical tensions already dragging the euro lower, the hawkish Fed was the final nail in the coffin for an aggressive sell-off in EURUSD. Rate differentials widened significantly against the euro. Out this morning was some weak German Q4 GDP data, declining by 0.7% QoQ as opposed to -0.3% forecasted. Next week we have a full calendar with German flash inflation figures, eurozone flash GDP, unemployment for Germany & the eurozone as well as the main event - the ECB meeting. I’m not expecting any fireworks at the meeting, however, the ECB does have to do something about the market now pricing close to 35bps by the end of this year. It’s a big challenge to their forward rate guidance. Hopefully, the Italian presidential candidate will also be elected next week and we will know more on that.

(Source: Tradingview - Past performance is not indicative of future performance.)

EURUSD has fallen through the floor at range support of 1.125 and now looks towards 1.11. The November 2021 low of 1.118 has been taken out too. 1.11 is the obvious downside target from here while 1.12 would be the one on the upside in case of rallies. Again the RSI is nearing oversold, but isn’t as oversold as the November low, potentially creating some divergence and exhaustion in terms of selling pressure. The 21-day EMA is also crossing beneath the 50-day SMA which is usually short term bearish.

GBPUSD:

Sterling plunged lower given its high correlation to equity markets and it certainly didn’t disappoint its label as a high beta currency. PMI data was lower than consensus expectations and declined based on last month’s numbers, however, as the economy leaves omicron behind these numbers will likely be seen as stale. Cable also got caught up in the post Fed sell-off like other G10 FX pairs. Speaking of central bank meetings next week we have a big one with the BoE. The market will be disappointed if they don’t move by 25bps as implied by STIRs. We’ll also receive some updated forecasts on growth, inflation and the labour market. I’ll be looking at the longer term inflation forecasts to assess the BoE’s feelings towards the current market pricing of around 130bps by end of 2022. The much anticipated Sue Gray report looks likely to be released on Monday, however, another twist seems to be that it will be redacted as the Met Police have requested minimal reference to partygate given their investigation. On the Brexit front there is no fresh news out on the wires.

(Source: Tradingview - Past performance is not indicative of future performance.)

GBPUSD is finding some support around the 50-day SMA and the 61.8% Fibonacci level. We will have to see if it can hold. There is also a doji candle which can indicate a change in price direction. The RSI is trying to turn around too. Targets wise, on the downside 1.335 and 1.33 would be the scores on the door, while on the upside 1.345 around the 50% Fibonacci level would be important.

USDJPY:

BOJ minutes out earlier this week indicated an overall dovish approach despite changing views towards a more balance outlook on inflation. Governor Kuroda sees the 2% target as remaining a distant prospect. Inflation data out last night, does nothing to change that view. Hawkish Fed repricing is see weakness for the yen as yield differentials widen.

(Source: Tradingview - Past performance is not indicative of future performance.)

USDJPY sliced up through its downtrend line and former range resistance at 114.5 .Price is running into some stickiness around 115.5 (former high late November 2021). The RSI has some room to still run higher before overbought concerns filter through. Targets wise, on the upside 116 and 116.2 – the former high on January 4 could be key levels. While on the downside, 115 would be good to monitor.

Gold:

Gold to me has been one of the most interesting trading instruments currently. It has been holding up quite well until the Fed meeting. Despite higher real yields throughout last week, the yellow metal held its own. I think there was a couple of factors at play - 1) January seasonality +ve 2) Weakness in crypto given narrative of competition between both assets 3) Equity vol & Russia Ukraine tensions 4) Policy mistake hedge – i.e. Fed has to slam on the brakes quickly and then reverse 5) uncertainty over inflation. The surge in real yields and stronger dollar was too much for gold and we saw the key $1800 level breached. Real yields are retracing slightly lower into the weekend which is helping stabilize further weakness. trades higher, but still below key resistance, with rising stock market volatility potentially putting a lid on a further rise in bond yields for now. Continued weakness may trigger a rethink at the Fed regarding how hawkish a message it wants to send to the market following tomorrow’s FOMC meeting.

(Source: Tradingview - Past performance is not indicative of future performance.)

Price is trying to reclaim the $1800 level after slicing through the uptrend line of its ascending channel. The RSI once again ran right into 62 and got driven lower. Levels to watch on gold are - $1775 and $1800 (just below key moving averages, which are all pointing south).

Crude Oil:

Despite shaky risk sentiment for high beta assets, oil has remained firm and has topped the $90 threshold. The internal fundamentals for oil are strong and should continue to shield the black liquid. What are those fundamentals 1) Tight supply, disciplined OPEC+ (OPEC+ struggling to meet quotas) 2) risk of conflict in Ukraine 3) call options around $90 4) increasing travel – jet fuel demand. Crude also shrugged its shoulders at the build-up in US inventory data. Next week Wednesday OPEC+ meets again, but the expectation is for another rubber stamp of 400k bpd.

(Source: Tradingview - Past performance is not indicative of future performance.)