There is a sense that the global economy is
entering a new phase, and the markets are adjusting. Rates and energy
are being re-priced, with knock-on effects on risk assets. Although
European rates were already rising before the ECB meeting, the refusal to rule
out a hike this year pushed on the open door.
The stronger than expected US January jobs
data and a dramatic upward revision (709k) in the previous two months
emboldened rate hikes expectations. The market sees more than an almost 45%
chance of a 50 bp hike in March and nearly 145 bp of tightening over the next
12 months. At the end of last year, about 85 bp of tightening was
discounted.
The European interest rate adjustment also has been
significant. Benchmark 10-year yields rose 19-45 bp last week
alone (Germany was the lower end of the range and Italy the upper). Two-year
yields jumped 11-41 bp (France was the lower end of the range and Italy the
upper). The swaps market has about 60 bp of hikes discounted by the ECB
over the next year with a 10 bp move around mid-year.
Weather and some geopolitical tensions may be
contributing to the latest gains in oil, but the underlying issue is the
relatively low inventories and limited capacity to expand output among most
OPEC+ countries. Although the oil producers have ostensibly boosted
oil output by 400k barrels a day last month, this month, and plan another 400k
barrels a day next month, the actual output is considerably less. Even Russian
capacity appears nearly exhausted. Investment has withered.
With oil prices pushing above $90 a barrel, US
shale production is about to ramp up. Exxon has recently announced
plans to boost output by 25% from the Permian Basin. Chevron, with a
considerably larger base will boost output by 10%. It is not clear
what price triggers the Saudi officials to reassert its role as the swing
producer. It may be around $100-$110 a barrel.
Equities are making an adjustment too.
The S&P's impressive recovery off the January 25 low (~4222) ended with a
gap lower opening on February 3. It stalled near the (61.85) retracement
objective. That gap is found between 4543 and 4544. The NASDAQ rally
stalled near its (50%) retracement mark of this year's leg down, and it also
gapped lower on February 3. It entered the gap, but failed to close it. The gap is now found between roughly 14223 and
14264. Europe's Stoxx 600 held the (61.8%) retracement target in
the middle of last week and proceeded to drop more than 2.6% in the last two
sessions.
Let's look at how the dollar is faring.
Dollar Index: The Dollar Index
had approached the 97.70 area in late January, the (61.8%) retracement
objective of the down move since peaking near 103 when the pandemic first
struck. It stopped shy (~97.45) before being turned back. The main
culprit appears to be the shifting views on the ECB. The Dollar Index had
begun last week above its upper Bollinger Band. The MACD and Slow
Stochastic have turned down. It is possible that the Dollar Index's
rally, which began on January 6, 2020, put in a significant high, completed
some kind of five-wave technical move. Last month's low was near
94.65. A convincing break of 94.40 would lend credence to the bearish
outlook. It could spur an initial move to around 93.50 which holds the
200-day moving average and is the halfway mark of the rally that began last
year on January 6.
Euro: According to Bloomberg, shortly
before US employment report, the euro rose above last month's high by 1/100 of
a cent to near $1.1485. The unexpected strength of the report knocked the
euro to a new session low, slightly above $1.1410. It also stopped the
deterioration of the US 2-year premium after a five-day 27 bp narrowing of the
differential. However, it needs to take out the $1.1485-$1.1500 area to
denote anything important. If the low at the end of January (~$1.1120) is
significant, the euro may head toward initially, the (38.2%) retracement of the
losses seen since last January 6 peak (~$1.2350) found near
$1.1600. The momentum indicators have turned up. Playing for the
euro breakout failed twice in January. A move below $1.1340 would suggest
a third.
Japanese Yen: The dollar finished
last week knocking on the downtrend line connecting the early and late January
highs. It starts the new week around JPY115.50. A break targets the
five-year high seen in early January around JPY116.35. Surging global rates
pose a challenge for the BOJ which has capped the 10-year bond yield at
0.25%. It does not want to tighten financial conditions as its inflation
target remains elusive, while the economy may contract this quarter. Correlations
between the changes in the exchange rate and US yields and the S&P 500 have
broken down over the past month. However, the correlation with bonds is
stronger and looks poised to increase. A break of JPY114.75 would be
disappointing.
British Pound: Sterling's five-day
rallied halted ahead of the weekend amid the broad-based US dollar gains.
It had recovered from the previous week's low near $1.3360 to poke above
$1.3600 an intrasession basis, which is the (61.8%) retracement target of the
slide since mid-January's high (~$1.3750). The Governor Bailey cast the
deciding vote for a quarter-point instead of a half has boosted the perceive
odds of a 50 bp move at the next meeting (March 17) to almost 50/50.
Sterling found support ahead of the weekend near $1.3500. A break of the
$1.3460 area could spur a move to test the recent low. In the bigger
picture, sterling has been trading in a roughly $1.32-$1.38 trading range for
the better part of the past five months. It is around middle of that
range.
Canadian Dollar: The US dollar was
little changed against the Canadian dollar net-net last week. As we
anticipated the US dollar eased from the CAD1.28 area it had approached.
The pullback proved shallow. The CAD1.2650 area held on an intraday
basis, while the (38.2%) objective of the leg up from the January 19 low
(~CAD1.2450) near CAD1.2650 was not violated on a settlement basis. The
divergence between employment reports (US much better than expected--a
revisions--than Canada's) and helped lift the US dollar back to the CAD1.28
area. Penetration of this area could target the CAD1.2965, last's year's
high set in December, and the CAD1.3025 area, the (38.2%) retracement of drop
since the March 2020 high around CAD1.4670. The market continues to
discount 165 bp of tightening over the 12 months, which, in effect, is a little
more than one more hike from the end of last year.
Australian Dollar: The
Australian dollar bounced last week from deeply oversold levels and after
closing below key support at $0.7000 on a daily and weekly basis. While
we anticipated the recovery, we were disappointed that stalled near
$0.7170. It failed to close above the 20-day moving average. The
pre-weekend sell-off nearly met the (61.8%) retracement of the week's gains in
one fell swoop (~$0.7045). The price action was clearly more impulsive on the
way down and then up. The MACD appears to be rolling over, while the Slow
Stochastic is still climbing. The $0.7000 area remains important from a
technical perspective. It is just above an air pocket that extends toward
$0.6750-$0.6800.
Mexican Peso: The greenback's
five-day advance against the Mexican peso ended at the start of last week, but
here too the correction proved shallow. It pulled back from near MXN20.80
to around MXN20.50 where it carved a base for a few sessions. It
recovered to almost MXN20.79 ahead of the weekend before consolidating.
Initial support is seen around MXN20.65. The week ahead is important for
the peso. On February 9, the January CPI will be reported and the
following day, the central bank meets for the first time with the new
governor. Mexico's CPI is expected to have remained above 7% for the
third consecutive month. The median forecast (Bloomberg survey) looks for
a 50 bp hike. The economy contracted slightly Q3 21 and Q4 21. The
momentum indicators are giving conflicting signals. On balance, provided
the MXN20.50 support area holds, the dollar may be able to work its way
higher. The peso gained about 0.6% on the week, only bested in the
region by the Brazilian real. However, it snapped a five-day advance
after the central bank delivered the expected 150 bp hike. Initial
resistance is seen in the BRL5.36 area that houses a retracement objective and
the 200-day moving average. The MACD is turning higher and the Slow
Stochastic looks poised to turn in the days ahead.
Chinese Yuan: The mainland
markets re-open after the long holiday celebration. The offshore yuan is virtually
unchanged from when the mainland markets shut on January 28. The US
dollar weakened against all the major currencies last week, this may make it
difficult to deter a stronger onshore yuan. The dollar settled slightly
above CNY6.3610 on January 28. Some investors ae interested in the spread
between US and Chinese bonds. The Chinese rate premium is being compressed.
Another market segment is not interested in the yield spread, but the capital
appreciation/preservation. Over the past year, China's bonds have
increased in price while all others have fallen.
Disclaimer
Reviewed by Marc Chandler
on
February 06, 2022
Rating:
