Weekly Outlook W/C 5/12/22
Fundamentals: big themes this week are focused on USD NFP result impact and what that could mean for rates, EUR, and China reopening. AUD and CAD rates are out this week too.
NFP last week landed with a big upside surprise (260k vs exp.200k). Wages also rose higher than expectations. Pre NFP the expectation was a 50bps increase in December by the Fed. These positive figures which represented a very strong labour market and growth in wages could be used by the Fed to increase by 75bps in December.
During last week inflation numbers came in lower than expected for the US. This caused the USD to weaken – presumably on the thought that peak inflation had been reached and therefore the easing of rates would come sooner. Overall, the USD ended the week down against most currencies.
With Inflation still far above the 2% target and the labour market showing strength I think there is still a realistic probability of another 75bps increase.
This is also potentially supported by the following comments during the week.
Bowman: Core Inflation Have Slowed Slightly But Remain Unacceptably High
Williams: Have A Ways To Go With Rate Hikes
However, Barr had mixed comments saying Fed may shift to a slower pace but also said they still have some way to go to bring inflation down to target. “More work to do on rates this year and next”.
Despite all of these, the dollar finished weaker – but the technicals suggest the price may be at supporting levels.
Inflation figures pointed to a slight cooling as most were missed expected. The general theme from ECB members about the slowing of interest rate hikes and further increases should be data-driven – if the data is missing to the downside then using that logic is that rate expectations should be skewed to the downside too.
Some comments also say the QT will start in Q1 2023 – It has been suggested that QT has about the same impact as an extra 1-2% on rates – could this bring rate hikes lower. I do not know much about the impact of QT so I will research this.
Although the news wasn’t supportive of a strengthening EUR – the EXY strengthened – Bad news good price is something to note.
The big question is ‘will China stop with the COVID zero policy?’ – President Xi on Sunday (today) said that the current Covid variant is “less lethal” – this may allow him to save face and lessen COVID restrictions without appearing to give in to protests. The lockdowns have had a significant impact on the economy. If production picks up, this should also lead to a demand for hard and soft goods which in turn will strengthen the AUD and NZD. Both strengthened last week following tentative hints of China re-opening.
I would take this as a potential re-opening signal and will be looking for AUD and NZD to pick up – however, AUD has rate release so need to be wary of that.
OVERALL – Fundamentals are mixed and some of the price moves last week have not matched with my analysis – Good news/bad price and vice versa. The end-of-year effect, more volatility due to less liquidity may also play a factor in the coming weeks as big players drop out of the market for the holidays.
I will look for AUD and NZD strength, the rest is mixed for me.
DXY – Sitting on top of the weekly 55ema. Currently at 104, with 103 being a strong price level which has been both major support and resistance. DXY has broken below the Daily 200ema
EXY – Sitting just below the weekly 55ema. EXY has broken above the daily 200ema
As the EUR and Dollar make up most of each other’s index, these will look very similar but will have some variance due to the remainder of the pairs.
S&P – This is struggling at the descending trendline. The seasonality of stocks is bullish during December – however, we are in a different environment to the majority of previous years.
Copper: Copper has broken above the daily 50 and 200ema – if China reopens and manufacturing picks up, this will support this via increased demand. The copper price has a very good correlation to AUD pairs – this is due to the exports out of Australia. By overlaying China’s GDP YoY over the top of AUDUSD, you can see the strong correlation China’s growth up = AUDUSD up.
SZSE1000 – This has a negative correlation with the DXY. Due to outflows of money from the US for stocks and riskier assets. Finding strength in the SZSE and China would suggest a drop in the DXY and therefore weaker USD across pairs – especially the raw material exporters.
Oil – Broken below the daily EMAs and is sitting in the middle of the weekly EMAs – Oil could see decreased demand due to low output pushing prices lower. The US is now a net exporter of oil BUT The White House has said the US government will restock the strategic reserve when oil prices are at or lower than $67 to $72 a barrel – Biden removed a lot of oil from the strategic reserves earlier in the year – this restocking may keep demand steady and therefore oil prices artificially elevated.
There are a lot of major factors in play – the big two are the Fed’s decision on rates and then China. If China re-opens, there should be strength in AUD and NZD and possibly weakness in USD due to outflows of capital.
There are mixed signals across both the macro and technical themes – No clear narrative for me this week and due to the time of the year, I may make this my last trading week of the year and spend time reviewing my year in more depth and looking a building a bit more of my macro skills and knowledge until mid-January.
Trades to watch – Some strong correlations and it feels like there is a shift away from dollar strength with the setups- but this may be too soon especially based on the NFP print last week.
AUDCAD L @ 0.8900 area
AUDUSD S @ 0.6815 (taken this morning – will share write-up separately)
EURCAD L @ 1.3630
EURNZD S @ 1.6640
EURUSD L @ 1.0100
GBPUSD L @1.1600
NZDUSD L @ 0.6240