Sample Category Title

USD/CAD turned into sideway consolidation last week, but retreat was contained well above 4 hour 55 EMA and 55 day EMA. Initial bias remains neutral first and further rise is in favor. Break of 1.2795 will resume the rally from 1.2448 to 1.2963 resistance next. However, break of 1.2648 will turn bias back to the downside for 1.2448 support instead.

In the bigger picture, focus stays on 38.2% retracement of 1.4667 (2020 high) to 1.2005 (2021 low) at 1.3022. Sustained break there should confirm that the down trend from 1.4667 has completed after defending 1.2061 long term cluster support. Further rise would then be seen towards 61.8% retracement at 1.3650. However, rejection by 1.3022 will maintain medium term bearishness. Break of 1.2005 will resume the down trend from 1.4667 and that carries larger bearish implications too.

In the longer term picture, we're viewing price actions from 1.4689 as a consolidation pattern. Thus, up trend from 0.9506 (2007 low) is still expected to resume at a later stage. This will remain the favored case as long as 1.2061 support holds, which is close to 50% retracement of 0.9406 to 1.4689 at 1.2048. However, firm break of 1.2061 support will argue that USD/CAD has already started a long term down trend. Next target is 61.8% retracement of 0.9406 to 1.4689 at 1.1424.

EUR/GBP's strong break of 0.8421 resistance last weeks argues that a medium term bottom was formed at 0.8282, on bullish convergence condition in daily MACD, ahead of 0.8276 key long term support. Initial bias remains on the upside this week for 0.8598 resistance next. Decisive break there will add to the case of trend reversal and target 38.2% retracement of 0.9499 to 0.8282 at 0.8747 next. On the downside, below 0.8398 minor support will turn intraday bias neutral first.

In the bigger picture, price actions from 0.9499 (2020 high) are still see a corrective pattern that should be contained by 0.8276 long term support (2019 low). Bullish convergence condition in daily MACD and break of 55 day EMA raises the chance that it might be completed. Sustained trading above 38.2% retracement of 0.9499 to 0.8282 at 0.8747 will affirm this bullish case and target 61.8% retracement at 0.9034 and above).

In the long term picture, outlook will stay bullish as long as 0.8276 support holds. Break of 0.9499 is in favor at a later stage, to resume the up trend from 0.6935 (2015 low). However, sustained break of 0.8276 will indicate long term trend reversal, and target 61.8% retracement of 0.6935 to 0.9499 at 0.7917, and possibly below.

EUR/AUD's rise from 1.5559 accelerated to as high as 1.6223 last week. Break of 1.6168 resistance confirmed resumption of whole rise from 1.5354. Initial bias stays on the upside this week for 100% projection of 1.5354 to 1.6168 from 1.5559 at 1.6373 next. On the downside, below 1.6032 minor support will turn intraday bias neutral and bring consolidations first, before staging another rally.

In the bigger picture, rise from 1.5354 is seen as the third leg of the corrective pattern from 1.5250 low. Further rise cannot be ruled out, but even in that case, strong resistance should be seen at 38.2% retracement of 1.9799 to 1.5250 at 1.6988. Larger down trend from 1.9799 is in favor to extend through 1.5250 at a later stage.

In the longer term picture, fall from 1.9799 (2020 high) is seen as a long term down trend. Further decline will remain in favor as long as 38.2% retracement of 1.9799 to 1.5250 at 1.6988 holds. Break of 1.5250 will target 61.8 retracement of 1.1602 (2012 low) to 1.9799 at 1.4733

EUR/JPY's strong rally and break of 131.59 resistance last week confirmed resumption of rise from 127.36. Also, it revived the case that corrective pattern from 134.11 has completed with three waves down to 127.36. Initial bias remains on the upside this week for retesting 133.44/134.11 resistance zone. Decisive break there will resume larger up trend from 114.42. On the downside, below 131.20 minor support will turn intraday bias neutral and bring consolidations first, before staging another rally.

In the bigger picture, price actions from 134.11 are currently seen as a consolidation pattern only. As long as 38.2% retracement of 114.42 (2020 low) to 134.11 at 126.58 holds, up trend from 114.42 is still in favor to continue. Break of 134.11 will target long term resistance at 137.49 (2018 high). However, sustained break of 126.58 will raise the chance of bearish reversal. In this case, deeper decline would be seen to 61.8% retracement at 121.94, and possibly below.

In the long term picture, EUR/JPY is staying in long term sideway pattern, established since 2000. Long term outlook will remain neutral until breakout from the range of 109.03/137.49.

GBP/JPY's rebound from 152.88 extended higher last week, but lost momentum after hitting 156.48. Initial bias is neutral this week first. The consolidation pattern from 158.19 could still extend further. On the downside, below 154.46 minor support will turn bias back to the downside for 152.88 support and below. Nevertheless, above 156.48 will target a test on 157.74/158.19 resistance zone. Decisive break there will resume larger up trend.

In the bigger picture, price actions from 158.19 are seen as developing into a consolidation pattern to up trend from 123.94 (2020 low). Downside should be contained by 123.94 to 158.19 at 145.10 to bring rebound. Firm break of 158.19 will resume the up trend to long term fibonacci level at 167.93. However, sustained break of 145.10 will raise the chance of trend reversal and target 61.8% retracement at 137.02.

In the longer term picture, as long as 55 month EMA (now at 147.30) holds, we'd still favor more rally to 61.8% retracement of 195.86 to 122.75 at 167.93. But sustained trading below 55 month EMA will at least neutralize medium term bullishness and re-open the chance of revisiting 122.75 low (2016 low).

EUR/CHF soared to as high as 1.0515 last week and a medium term bottom should be formed at 1.0298 on bullish convergence condition in daily MACD. Initial bias stays on the upside this week for 38.2% retracement of 1.1149 to 1.0298 at 1.0623 first. Sustained trading above there will raise the chance of trend reversal and target 61.8% retracement at 1.0824 next. On the downside, below 1.0511 minor support will turn bias neutral and bring consolidation first, before staging another rally.

In the bigger picture, current development suggests that a medium term bottom is formed at 1.0298 on bullish convergence condition in daily MACD. Rebound from there is still tentatively viewed part of a corrective pattern. That is, larger down trend from 1.2004 (2018) could still extend through 1.0298 to 61.8% projection of 1.2004 to 1.0505 to 1.1149 at 1.0223. However, sustained trading above 55 week EMA (now at 1.0673) will argue that the down trend is over, and bring stronger rise back to 1.1149 next.

In the long term picture, prior rejection by 55 month EMA (now at 1.0967) maintains long term bearishness. Down trend from 1.2004 could still extend lower as long as 1.1149 resistance holds.

It was a week a surprises. While BoE delivered that a 25bps hike, four of the nine MPC members have indeed voted for a 50bps raise. However, there was no follow through buying as BoE indicated only "modest" tightening would follow. Also, the event was overshadowed by ECB's unexpected hawkish turn. Then, after US ADP report set up rather low expectation for non-farm payroll, NFP hit the markets with a bang.

Still, Dollar ended as the worst performing one even though it tried to strike a late come back. Yen was the second worst, followed by Canadian Dollar. Euro was the runaway winner, followed by Australian and then New Zealand Dollar. Sterling just ended mixed with Swiss.

Euro ended as runaway winner after ECB hawkish turn

The biggest surprise last week was ECB's hawkish turned. In the post meeting press conference, President Christine Lagarde declined to repeat her guidance that rate hike was "very unlikely" this year. Then, Governing Council member Olli Rehn was quoted on Friday that "if there are no setbacks in the pandemic or the geopolitical situation, it would logical for the ECB to hike its key interest rate at latest next year." Markets are now expecting the deposit rate to be raised from the current -0.50% to 0.00% by year end, even though the opinions on timing differ.

Euro was the runaway leader last week. EUR/USD's break of of the medium term channel resistance is a bullish sign, together with bullish convergence condition in daily MACD. Immediate focus is on 1.1482 resistance this week. Firm break there will confirm medium term bottoming at 1.1120, and raise the chance of trend reversal. Further rise should then be seen to 38.2% retracement of 1.2348 to 1.1120 at 1.1589 next.

EUR/CAD's rally argue that a medium term bottom was formed at 1.4098, on bullish convergence condition in daily MACD. Firm break of 1.4644 resistance will confirm this case and target 38.2% retracement of 1.5991 to 1.4098 at 1.4821. Sustained break there will raise the chance of trend reversal, that is, whole down trend from 1.5991 (2020 high) was complete. Further rally would be seen to 61.8% retracement at 1.5268.

EUR/JPY's break of 131.59 resistance confirmed resumption of the rise from 127.36. More importantly, it revives the case that consolidation from 134.11 has completed with three waves to 127.36. Retest of 133.44/134.11 resistance zone should be seen next. Firm break there will resume larger up trend from 114.42.

EUR/GBP's strong break of 0.8241 resistance and and 55 day EMA indicates medium term bottoming at 0.8282, on bullish convergence condition in daily MACD, just ahead of 0.8276 key long term support (2019 low). Next focus will be 0.8598 resistance. Sustained break there will argue that whole down trend from 2020 high at 0.9499 is finished too, and turn medium term outlook bullish.

EUR/CHF's strong break of 1.0510 resistance indicates medium term bottoming at 1.0298, on bullish convergence condition in daily MACD. Immediate focus is now on 38.2% retracement of 1.1149 to 1.0298 at 1.0623 first. Sustained trading above there will raise the chance of trend reversal and target 61.8% retracement at 1.0824 next

Fed hike expectations heightened further after NFP, but stocks resilient

Another big surprise last week was the much stronger than expected non-farm payroll report, which saw large job growth and faster wages growth. There are some speculations that Fed would start the tightening cycle in March with a 50bps hike. Yet, for now, the base case is still for Fed to deliver consecutive 25bps hike at the upcoming meetings. That would give policymakers more flexibility to wait-and-see how inflation develops.

Though, the March 15-16 FOMC meeting is more than a month away and many things could happen in between, starting with January CPI data to be featured this week. If inflation outlook does worsen much further, it would be hard for Fed to not acting quick and heavy.

US stocks remained pretty resilient in spite of heightened expectation on Fed's stimulus removal. For now, DOW is seen as in a consolidation pattern to the rise from 26143.77 only, not that from 18213.65. Such consolidations should extend for a while with another falling leg before completion. That is, in case of stronger rebound, break of 36952.65 high is not envisaged. In case of another fall, stronger support should be seen at 38.2% retracement of 26143.77 to 36952.65 at 32823.65 to bring rebound.

US 10-year yield surged, so did others

10-year yield broke out from range on Friday to close at 1.930. Near term outlook in TNX will stay bullish as long as 1.743 support holds. Current up trend is expected to continue through 2% handle to 2.159/87 cluster level. This represents 61.8% retracement of 3.248 to 0.398 at 2.159, and 61.8% projection of 0.398 to 1.765 from 1.343 at 2.187. This is where the real test lies, and no break is expected unless there are some dramatic underlying developments.

Meanwhile, it should be noted that US benchmark yields could provide little support to the greenback for now. As other major global yields are also on the way up. Germany 10-year bund yield has finally turned positive with some conviction and closed at 0.210, highest since early 2019.

Japan 10-year JGB yield also jumped to close at 0.210, highest since early 2016.

Dollar index dropped following the rebound in Euro

Dollar index basically followed the move in EUR/USD last week. The steep decline indicates that a short term top is at least formed at 97.44. The biggest question is whether it's already rejected by key resistance at 61.8% retracement of 102.99 to 89.20 at 97.72.

On the downside, sustained break of trend line support at around 95.00 will argue that it's at least correcting the whole up trend from 89.20. Deeper decline would be seen through 94.62. Reactions to 55 week EMA (now at 94.02) would reveal whether the medium term trend has reversed.

GBP/JPY Weekly Outlook

GBP/JPY's rebound from 152.88 extended higher last week, but lost momentum after hitting 156.48. Initial bias is neutral this week first. The consolidation pattern from 158.19 could still extend further. On the downside, below 154.46 minor support will turn bias back to the downside for 152.88 support and below. Nevertheless, above 156.48 will target a test on 157.74/158.19 resistance zone. Decisive break there will resume larger up trend.

In the bigger picture, price actions from 158.19 are seen as developing into a consolidation pattern to up trend from 123.94 (2020 low). Downside should be contained by 123.94 to 158.19 at 145.10 to bring rebound. Firm break of 158.19 will resume the up trend to long term fibonacci level at 167.93. However, sustained break of 145.10 will raise the chance of trend reversal and target 61.8% retracement at 137.02.

In the longer term picture, as long as 55 month EMA (now at 147.30) holds, we'd still favor more rally to 61.8% retracement of 195.86 to 122.75 at 167.93. But sustained trading below 55 month EMA will at least neutralize medium term bullishness and re-open the chance of revisiting 122.75 low (2016 low).

Monday, Feb 7, 2022

[php_everywhere instance="1"]

Tuesday, Feb 8, 2022

[php_everywhere instance="2"]

Wednesday, Feb 9, 2022

[php_everywhere instance="3"]

Thursday, Feb 10, 2022

[php_everywhere instance="4"]

Friday, Feb 11, 2022

[php_everywhere instance="5"]

Summary

United States: Omicron Not Enough to Crash the Payroll Party

• This week ushered in a broad range of economic indicators that covered everything from supply chains to the housing market, but needless to say it was the labor market that was top of mind. Nonfarm payrolls rose 467K in January, which was not only nearly four times the consensus estimate but also well ahead of any forecast. JOLTS and nonfarm productivity pointed to a strong and thriving labor force, while January's ISM surveys and construction spending data affirmed that we are not out of the woods yet when it comes to supply chain struggles and higher prices.
• Next week: NFIB Small Business (Tuesday), Trade Balance (Tuesday), CPI (Thursday)

International: Central Banks Take Center Stage

• The Bank of England delivered a hawkish monetary policy announcement, raising its policy rate by 25 bps, but with several policymakers dissenting in favor of a larger move. Given the hawkish announcement, we now expect the Bank of England to raise rates by more and earlier than previously. The European Central Bank held monetary policy steady but said inflation risks were to the upside, signaling it would re-assess its policy outlook in March.
• Next week: Brazil CPI (Wednesday), Mexico Overnight Rate (Thursday), U.K. GDP (Friday)

Interest Rate Watch: Shrinking Budget Deficit Leads Treasury to Issue Less Debt

• The federal budget deficit is narrowing sharply, and as a result, the U.S. Treasury announced this week that it would continue cutting the size of its Treasury security auctions, given the declining financing need.

Topic of the Week: Economic Resiliency and Progress in the Black & African American Community

• The Black and African American community in the United States has faced significant structural obstacles over the past few centuries that have impeded full economic participation. In commemoration of Black History Month, we look at the recent economic progress the Black and African American community has made, despite these obstacles.

Full report here.

U.S. Highlights

• This week provided the first glance at the economic impact of Omicron, which seems relatively benign compared to previous outbreaks. The poster child of this week is employment, which pulled off an Olympic medal’s worth performance, adding 467k jobs in January.
• On the business side, both the manufacturing and services sector remained in expansionary territory, while auto sales surprised with solid growth, reaching the highest level in seven months.
• Stock prices gyrated in sync with the earnings performance of individual tech companies. The bond market, meanwhile, reacted strongly to the employment data, with yields rising by 13 basis points for the week.

Canadian Highlights

• This week we got a glimpse of the damage to the economy from the Omicron wave. The employment report released earlier today showed the economy shed 200,000 jobs in January, and the unemployment rate rose to 6.5% from 6.0% a month earlier.
• GDP growth held up well in November, advancing by 0.6% on the month. However, activity slowed in December, with the preliminary estimate suggesting that GDP remained flat on the month. January is expected to be worse.
• Unlike other parts of the economy, the housing market remained hot in January. Several regional real estate boards released their data this week, indicating strong price growth and a flurry of activity ahead of Bank of Canada rate hikes.

U.S. - The U.S. Economy Endures Omicron

This week provided the first glance at the economic impact of Omicron. As it turns out, the damage wasn’t as bad as feared, at least according to early economic indicators. Hot off the press, the jobs report came in faster, higher and stronger than anticipated by the market consensus. The economy pulled off an Olympic medal’s worth performance, adding 467k jobs in January (Chart 1). December and November data were revised up adding another 709k, bridging the employment gap to less than 2% of its pre-pandemic level. The laggard industry remains leisure and hospitality, where employment rose by 151k, but remains well below its pre-pandemic peak.

This week’s Institute for Supply Management (ISM) reports filled in the narrative from the business perspective. Both the manufacturing and services sector indexes slowed in January, but continued to expand at an above-trend rate, with readings of 57.6% and 59.9%, respectively . As expected, Omicron weighed on demand, with services business activity dropping by 8.4 percentage points (ppts) and manufacturing production softening by 1.6 ppts. Some demand softening is a blessing in disguise as it helped reduce backlogs of orders, which dropped by 6.4 and 4.9 ppts for manufacturing and services sectors, respectively. Notably, demand for services still has room to grow, as it has not yet fully recovered from pandemic-related restrictions. Once the threat of Omicron fades, consumers are likely to direct more of their spending to services, giving the sector some added oomph.

At the same time, supply constraints may take a longer time to attenuate. Supplier delivery times remained relatively flat for manufacturing and increased marginally for the services sector (following a sizeable reduction in December). The tone of respondents’ comments on disruptions hardly lost its zing as the “lack of supplier manpower” continues to push prices up, affecting industries across the economy.

Nowhere is the impact of supply disruptions on prices more apparent than in the auto sector. This week, auto sales surprised with solid growth, reaching the highest level in seven months (Chart 2). The improvement can be attributed to a solid recovery in production, which was able to reduce the pre-pandemic gap from 30% in September to 8% in December. While chip shortages continue to affect the industry, anecdotal evidence suggests that Omicron has so far had a less dire impact on semiconductor supply chains compared to Delta.

All in all, early economic data suggest that the negative impact of the virus continues to diminish with each subsequent wave. Nevertheless, the equity market continued skating on thin ice as stock prices gyrated in sync with the earnings performance of individual tech companies. The bond market, meanwhile, reacted strongly to the employment data with yields rising by almost 10 basis points (bps) to an overall increase of 13 bps for the week (as of writing). This makes sense. With few signs of waning strength in the labor market, a data-dependent Fed is likely to act decisively to raise the federal funds rate starting at its next meeting in March. Balance sheet normalization shouldn’t be too far behind, but its pace is likely to be “gradual and not disruptive”, in the words of San Francisco Fed’s President Mary Daly.

Canada - Looking Past Omicron

This week we finally got a glimpse of the damage to the economy from the Omicron wave. The employment report released earlier today showed the economy shed 200,000 jobs in January. As a result of these losses, the unemployment rate rose to 6.5% from 6.0% a month earlier. Job losses were heavily concentrated in industries hard-hit by restrictions, such as accommodation & food (-113k) and culture & recreation (-48k) (Chart 1). Younger workers, who tend to work in those industries, were disproportionately affected. Seventy percent of the jobs lost in January were among workers aged 15 to 24.

In addition to the job numbers, earlier this week we also received November's GDP data. While somewhat outdated, the report had a few important takeaways. First, it reaffirmed that the economy was expanding at a healthy clip prior to restrictions. GDP rose by 0.6% (month-on-month) in November, finally recovering to the pre-pandemic level (Chart 2). November's solid increase in activity was broad-based, spanning both the goods-producing sector and the still-recovering services industries.

Secondly, on the goods side, there were signs that supply chain bottlenecks were easing prior to the most recent wave of the virus and the manufacturing sector was beginning to hum again. Auto production edged higher for the second consecutive month. With demand and prices for energy soaring, petroleum production also jumped. Lastly, while the severe floods in British Columbia did impact certain industries such as coal mining and wholesale of farm products, the overall impact on growth was small. Still, as expected, the Omicron wave slowed activity in December, with Statistics Canada's preliminary estimate suggesting that the GDP remained flat on the month. As evidenced in the job report, January is likely to be worse, with restrictions and staff absenteeism weighing on growth.

There are good reasons to look past the near term setback. Case loads have been falling, and both Ontario and Quebec eased their restrictions this week, suggesting that the economy and labour market will regain the spring in their step. As the labour market tightens further, stronger wage growth should follow suit.

Unlike other parts of the economy, the housing market could use some cooling. Alas, it remained hot in January. Several regional real estate boards released their data this week, indicating that home price growth was incredibly strong, as were home sales in Calgary and Vancouver. The latest flurry of activity and competition may reflect buyers and investors rushing ahead of the Bank of Canada rate hikes.

With the economy faring better than expected at the end of last year and restrictions looking to be short-lived, there is nothing in this week's data to dissuade the Bank from raising rates in March. Higher rates should cool Canadians' seemingly insatiable appetite for real estate.