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Key insights from the week that was.

A quiet week for data kept the focus on central banks and the heightened uncertainty surrounding Ukraine.

The first key event for the week was the release of the RBA February meeting minutes. Following a speech and parliamentary testimony by the Governor as well as the February Statement on Monetary policy, this set of minutes provided little additional insight with respect to the policy outlook. As discussed by our Chief Economist Bill Evans, taken together, recent guidance from the Governor and RBA Board continue to point to a “patient” approach to policy, with two more CPI prints likely to be assessed before an interest rate decision is made. Regarding wages, comfort looks to be growing amongst the Board that momentum is building, with the minutes noting that “the outlook for broader measures of employee earnings growth had been upgraded more substantially than base wages.” This supports our view that we do not need to see the Wage Price Index print above 3.0%yr before the first rate hike. Westpac continues to believe this step will be taken in August after the June CPI report is received in July. We also continue to forecast that the cash rate will reach a peak of 1.75% in early-2024. This tightening cycle is expected to have a material impact on the housing market, with a 14% price decline forecast between late-2022 and end-2024.

The January labour force survey was the sole primary data release for Australia this week. As in prior months, it pointed to robust strength in employment growth and a tight labour market overall, with 13k jobs created in the month and the unemployment rate unchanged at 4.2% despite a 0.1ppt increase in participation. The 8.8% decline in hours worked in the month highlights the impact of omicron; however, the weakness coming in hours rather than headcount signals it is only a transitory shock.

Moving offshore, the key release was the minutes of the FOMC’s January meeting, the tone of which was supportive of our expectation of a measured FOMC rate hiking cycle. The Committee are clearly confident in the economy’s prospects, with ‘maximum’ employment likely achieved and the risk discussion focused on inflation versus activity. Still, there was no evidence of alarm over inflation, with the risks on this front still seen as primarily coming from supply disruptions, global re-opening and US fiscal policy’s temporary support of demand, not the underlying strength of activity. On the latter, the Committee twice referenced “real wage growth in excess of productivity growth” as necessary to stimulate additional sustained inflation pressures.

This is certainly not in view for the US. Deflating annual growth in the Employment Cost Index wage measure at December by headline PCE inflation shows real wages down 0.6%yr in 2021; deflating instead by the CPI at January points to a real wage loss of closer to 2% over the past year. To make up this loss, US nominal wage rates need to grow 5.0%+ in 2022, assuming our CPI forecast of 3.3%yr is correct, and materially more if real wages are to grow “in excess” of productivity.

Two other discussions from the minutes are worth highlighting. With respect to the pace of tightening ahead, the Committee made a specific comparison to the last tightening cycle which began in 2015. The FOMC sees current conditions as warranting “a faster pace” of tightening in 2022; but this still points to only a modest action, with both 2015 and 2016 having seen just one rate hike after which 2017 and 2018 respectively saw three and four hikes (and 2019 rate cuts). Clearly, if the FOMC were considering a 50bp hike at the March meeting and/or the six hikes that the market has priced for 2022, a very different conversation would have been had at the January meeting.

On the balance sheet, it is notable that the Committee again considered ending asset purchases early, but instead chose to let them continue until March (again signalling comfort with the inflation outlook). Subsequently, they outlined that “a faster pace” of run off was likely appropriate ahead than in 2017-19. This speaks to our belief that the Committee will look to run two forms of tightening at the same time in 2022, with a willingness to be more aggressive with the balance sheet given the financial stability concerns associated with this form of easing.

The take home from these discussions is that a measured, conditional fed fund rate hiking cycle is most likely through 2022 and 2023, while remaining aware of the evolution of inflation risks. Our baseline forecast remains one hike per quarter beginning in March, with the fed funds rate peaking at 1.875% in Q3 2023. This should be a stance tight enough to mitigate inflation risks into the medium-term, but which still allows growth to remain at or near trend.

Key Highlights

• USD/JPY failed to surpass the 116.40 resistance and corrected lower.
• It traded below a major bullish trend line with support near 115.25 on the 4-hours chart.
• EUR/USD is still struggling to clear the 1.1400 resistance.
• GBP/USD eyes more upsides above 1.3620.

USD/JPY Technical Analysis

The US Dollar attempted a strong move above 116.00 against the Japanese Yen. However, USD/JPY failed to surpass 116.40 and started a downside correction.

Looking at the 4-hours chart, the pair formed a top near 116.33 and corrected lower. There was a move below the 116.00 and 115.80 support levels. The pair declined below the 50% Fib retracement level of the upward move from the 114.15 swing low to 116.33 high.

Besides, there was a break below a major bullish trend line with support near 115.25 on the same chart. The pair even declined below the 100 simple moving average (red, 4-hours) and the 200 simple moving average (green, 4-hours).

The next key support is near 114.65. It coincides with the 76.4% Fib retracement level of the upward move from the 114.15 swing low to 116.33 high.

Any more losses might send the pair towards 114.20. On the upside, the pair is facing resistance near the 115.50 level. The next major resistance is near the 115.80 level. A close above 115.80 could open the doors for a strong increase.

Looking at EUR/USD, the pair is still struggling to clear the 1.1400 resistance zone. Conversely, GBP/USD seems to be aiming a clear move above 1.3650.

Economic Releases

• UK Retail Sales for Jan 2022 (YoY) - Forecast +8.7%, versus -0.9% previous.
• UK Retail Sales for Jan 2022 (MoM) - Forecast +1.0%, versus -3.7% previous.
• US Existing Home Sales for Jan 2022 (MoM) - Forecast -1.0%, versus -4.6% previous.

The US stock markets continue to struggle with investor sentiment hurt by several factors ranging from the ongoing situation in Ukraine, to surging inflationary pressures around the and policy tightening from the Fed. While Wall Street attempted a recovery after the minutes of the FOMC’s January meeting were released last night, the gains proved to be short-lived. Traders were happy to sell into that spike. Safe-haven gold is on the rise, as investors attempt to protect their purchasing powers from being eroded by inflation damaging the values of fiat currencies.

There’s thus little surprise to see the indices come under selling pressure again. As we warned earlier this week, the S&P 500 failed to reclaim its 200-day moving average yesterday and has consequently retreated further today.

Meanwhile, the technology-heavy and interest-rate-sensitive Nasdaq 100 has turned lower from where it should have:

Source: ThinkMarkets and TradingView.com

As per the chart, the shaded region was support and resistance in the past and this zone has now turned into resistance. A closing breaking below this region should keep the bears in control heading into the business end of the week.

• EURGBP broke support level 0.8350
• Likely to fall to support level 0.8285

EURGBP currency pair recently broke the key support level 0.8350 (low of the previous wave A), intersecting with the 61.8% Fibonacci correction of the previous wave (1).

The breakout of the resistance level 0.8350 should accelerate the active short-term ABC correction (2) from the start of this month.

EURGBP currency pair can be expected to fall further toward the next key support level 0.8285 (low of wave (C), target for the completion of active short-term ABC correction (2)).

• Gold broke key resistance level 1875.00
• Likely to rise to resistance level 1920.00

Gold continues to rise after the earlier breakout of the key resistance level 1875.00, which was set as the likely upward target in earlier forecast of this instrument.

The breakout of the resistance level 1875.00 should accelerate the active short-term impulse waves iii and (iii).

Gold can be expected to rise further toward the next key resistance level 1920.00 (target for the completion of wave (iii), intersecting with the daily up channel from September).

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The debate about whether Bitcoin is a good store of value, and thus, comparable to gold, has been rumbling on for some time. But more recently, Bitcoin and other cryptocurrencies have seen some positive correlation with the US stock market, and in particular, with tech and growth stocks. Bitcoin’s incredible post-pandemic rally came to an abrupt halt in November, and the price went into freefall soon after. The moves mirror closely what’s been happening in equity markets. But now that the cryptocurrency king is heading back up again, it’s not clear whether the bulls are taking the lead from gold’s resurgence or the rebound on Wall Street.

Trading like a risk asset

Over the years, Bitcoin and the other major cryptocurrencies such as Ethereum and Ripple have frequently confounded their critics, becoming increasingly mainstream both as a payment option for consumers and as a worthy asset class among institutional investors. This spectacular growth has come even as cryptocurrencies face tougher scrutiny from regulators amid rising cases of fraud and their use in money laundering.

Bitcoin has skyrocketed by more than 500% since the beginning of 2020, and this after two big corrections, both of which took place in 2021.  The latter started to take shape as the tech-centric Nasdaq neared its peak. The price is currently trending up, recovering from a six-month low of $36,725 it hit on January 24. The upturn coincides with that in US equities - well, sort of. As Bitcoin started to mature in the mid-2010s, a positive correlation began to emerge with stocks in 2016. That correlation strengthened in 2020 and the close relationship with the S&P 500 since the onset of the pandemic is quite striking.

Digital gold?

However, that relationship has weakened again slightly as Bitcoin’s rebound has been notably stronger than Wall Street’s wobbly comeback. Meanwhile, gold has been crawling higher this year as geopolitical risks have resurfaced. Tensions between Russia and Ukraine propelled the precious metal to eight-month highs above $1,890/oz this week.

Bitcoin is often compared to the safe-haven gold, with some cryptocurrency enthusiasts dubbing it as the “digital gold”. However, although there have been periods when Bitcoin has risen in tandem with gold, sometimes even denting bullion’s upside, there are few convincing arguments that cryptos have safe-haven attributes.

A store of value

There can be no doubt about Bitcoin’s status as a store of value. Like precious metals, the supply of Bitcoin is fixed, and it can be stored and retrieved at a later date without deteriorating in value. It also functions as a medium of exchange and doesn’t have fundamental factors determining its price the way other assets such as stocks do.

This attribute is also the reason why some investors have been using Bitcoin as a hedge against inflation over the past year. In contrast, it can be argued that the boost to bullion from inflation hedging has been somewhat restrained compared to previous inflationary episodes.

Still, the question remains about whether Bitcoin is as good a store of value as the traditional haven gold. The recent geopolitical developments in Ukraine suggest otherwise. Although the broader rallies in both gold and cryptos coincide, the precise timings of the major price movements are unrelated.

A lot of upside

In fact, Bitcoin’s largest gains this month have been on the back of the improvement in market risk appetite following some upbeat corporate earnings that brought an end to the January slump on Wall Street. The only distinction here is that the rebound in cryptos appears to be on a more solid footing.

Crypto-specific headlines might have something to do with that. For instance, signs of a pushback against regulators seeking to ban cryptocurrencies have bolstered the uptrend after El Salvador rejected the IMF’s advice to drop Bitcoin as the country’s official currency, while the Russian government appears to have opted to regulate digital currencies rather than outright ban them.

In the meantime, Bitcoin itself has been benefiting from shifting trends within the crypto world, as the very first digital currency has been reasserting its lead over the market lately. Moreover, booming revenue for crypto mining companies despite the recent ban in China has further contributed to the positive sentiment towards Bitcoin.

Another factor to consider here is that a short squeeze triggered by the recent price jumps could have exacerbated the gains in the short term.

Can the rally last?

To sum up, the evidence suggesting that Bitcoin is a proxy for risk is far stronger than the evidence backing its safe haven characteristics. After all, it’s hard to justify that an asset can be considered a safe haven when it’s been so in sync (inversely) with the S&P 500’s fear gauge – the VIX volatility index – lately, not to mention the extreme bouts of volatility that are spurred on by tweets from certain high-profile personalities like Elon Musk.

Over the coming months, when the Federal Reserve is expected to start raising interest rates and there is a more substantial tightening in financial conditions, it will be interesting to see what will Bitcoin align itself more closely with: gold or equities? Either way, there’s an elevated chance the latest upleg could soon hit another stumbling block.

However, in the longer-term, with a growing number of investment managers seeing the value of adding Bitcoin and other cryptocurrencies to their portfolios as a means of diversifying their holdings at the very least, further big rallies cannot be ruled out. Even the push for further regulation of cryptocurrencies could work out in the industry’s favour as this could inadvertently endorse cryptos as a valid asset class.

Markets

Markets don’t have that much to thrive on. The geopolitical “fake news” accusations in both directions lose impact as market worry. Upheaval in the Luhansk region this morning triggered a risk-off spike in thin Asian dealings, but moves are mostly reversed during European dealings. Main equity indices lose around 0.5%-1%. Core bonds are in consolidation modus. We argued before that the second half of February offered some potential relief to this year’s aggressive sell-off. Markets are positioned for a fierce normalization process (especially in the US and the UK) and lack new guidance between last week’s US CPI data and fresh numbers early March (new CPI batches & US payrolls). Pivotal monetary policy meetings are scheduled for March 10 (ECB) and 16 (Fed). US yields lose 1.9 bps (2-yr) to 4.6 bps (7-yr) today with the belly of the curve outperforming the wings. The US 10-yr yield returns below 2% after extensively testing the 2.06% recovery top. First support comes in near 1.9%. Changes on the German curve vary between -1 bp (30-yr) and -2.4 bps (5-yr). 10-yr yield spread changes vs Germany narrow by up to 4 bps for Italy. UK Gilts continue their outperformance at the front end of the curve (2-yr -7.5 bps today). It’s a complete reversal of Monday’s huge underperformance (2-yr: +15 bps). It’s hard to pinpoint a specific driver behind this week’s dynamics as we didn’t see any BoE comments. Markets potentially ran ahead of themselves going into this week’s UK eco data. Labour market numbers and inflation figures confirmed the BoE’s normalization efforts, but printed all in all near consensus. This could have triggered some scaling down of to tight monetary policy bets. The UK currency is in any case unnerved by the lost of interest rate support today. Sterling outperforms the euro and the dollar for a second session straight with EUR/GBP sliding from 0.8375 towards 0.8340. EUR/USD trades choppy around 1.1360. Today’s eco calendar included mixed US housing data (housing starts unexpectedly fell by 4.1% M/M while building permits significantly beat consensus at 0.7% M/M), and unforeseen increase in weekly jobless claims (248k from 225k). The February Philly Fed Business Outlook declined from 23.2 to 16 (vs 20 consensus). Details showed a broad-based moderation (incl. price pressure) with rising employment & workweek exception to the rule.

News Headlines

In a monthly survey conducted by Kantor Sifo Prospera and commissioned by the Swedish Riksnank, Swedish money markets participants slightly upwardly revised their expectations for the CPIF inflation from 2.0% to 2.1% in 5-yr. Expectations for 1-yr and 2-yr were also upwardly revised to respectively 2.4% and 2.1%. Expectations for the repo rate were upwardly revised to 0.1% in 12 months and 0.5% in 24 months. At its policy meeting on February 10, the Riksbank still held an very accommodative monetary policy stance even as CPIF inflation printed at 4.1% in January. The central bank slightly brought forward its indication for a first rate hike but this still is only expected for the second half of 2024. The Swedish koruna lost further ground this week in the wake of last week’s Riksbank meeting. Today’s survey didn’t help. EUR/SEK trades in the 10.60 area.

After reducing the policy rate 500 bps from 19% to 14% between September and December, the Turkish central bank (CBRT) kept is policy rate unchanged for the third consecutive meeting. The outcome was expected even as the headline inflation in January rose further to 48.7%, leaving the real policy rate at an astonishing -35%. In its communiqué the CBRT repeats that current high inflation is still driven by factors that are not supported by economic fundaments. With respect to recent policy measures, the CBRT expects that the comprehensive review of the policy framework that aims to encourage a permanent lirazation will create a foundation for sustainable price stability. The CBRT also hopes that an expected current account surplus in 2022 will be important to contribute to price stability. ‘The Committee expects the disinflation process to start on the back of measures taken and decisively pursued for sustainable price and financial stability along with the decline in inflation owing to the base effect’. The reaction of the lira to the policy decision was limited. The lira eases slightly with EUR/TRY trading near 15.50.

The dollar was deflated in European trading on Thursday and entered the US session in red after traders digested Fed’s minutes of January policy meeting and judged that the central bank’s outlook was less hawkish than expected.

Although the policymakers pointed to the start of post-pandemic tightening cycle, as early as March, there was no consensus about the pace of hiking, as hawks look for initial hike of 0.5% (instead of widely expected 0.25%) and continuation of raising rates on coming meetings, others suggest more cautious approach, with initial hike of 0.25% and reviewing the overall situation in the US economy, as well as inflation rate, ahead of each future policy meeting.

The near-term action pressures pivotal support provided by 10DMA (95.73), also near 50% retracement of 95.12/96.41 upleg, with clear break here to further weaken the structure and risk retest of a higher base at 95.12. Daily MA’s are still mixed, but bearish momentum remains very strong, adding to weaker post-Fed sentiment.

Daily Kijun-sen (96.00) needs to cap the action and keep near-term bears in play.

Res: 96.00; 96.10; 96.27; 96.41.
Sup: 95.65; 95.38; 95.12; 94.87.

ECB Chief Economist Philip Lane said in a speech that "medium-term inflation expectations have been increasing from a low base towards the two per cent inflation target over the last year, even before the energy shock."

"There are several factors indicating that the excessively-low inflation environment that prevailed from 2014 to2019 (a period over which inflation averaged just 0.9 per cent) might not re-emerge even after the pandemic cycle is over," he added.

"If the medium-term inflation dynamic is anticipated to stabilise around the two per cent target, this will permit a gradual normalisation of monetary policy," he said. "Whereas if inflation threatens to persist significantly above the two per cent target over the medium term, a tightening of monetary policy will be required."

Full speech here.