Sample Category Title

Daily Pivots: (S1) 1.2687; (P) 1.2730; (R1) 1.2760; More...

USD/CAD dips mildly today but stays in range of 1.2634/2795 and intraday bias remains neutral. Further rally is mildly in favor with 1.2634 support intact. On the upside, break of 1.2795 will resume the rally from 1.2448 to 1.2963 resistance next. However, break of 1.2634 support 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.

Overall market sentiment is slightly weaker entering into US session. While Russia showed videos of tanks leaving Crimea, NATO questioned de-escalation and said troop buildup was still going on. There is little reaction to much stronger than expected US retail sales. Nevertheless, Canadian Dollar is popped up by higher than expected, surging consumer inflation data. As for today, Canadian Dollar is the strongest one for now, followed by Aussie. Dollar is the weakest, followed by Euro and Sterling. Swiss Franc is quietly firming up slightly while Yen is mixed. Focus will turn to FOMC minutes, but eyes will still be on the Russia-Ukraine developments.

Technically, attention will be on Swiss Franc pairs to gauge if nervousness on war is back. In particular, Break of 1.2465 support in GBP/CHF will at least indicate that rise from 1.2276 has completed at 1.2598. Deeper fall would be seen back to this support level. That would also retain near term bearishness for resuming larger down trend from 1.3070 through 1.2134 low at a later stage.

In Europe, at the time of writing, FTSE is down -0.41%. DAX is down -0.16%. CAC is down -0.25%. Germany 10-year yield is down -0.051 at 0.262. Earlier in Asia, Nikkei rose 2.22%. Hong Kong HSI rose 1.49%. China Shanghai SSE rose 0.57%. Singapore Strait Times rose 0.52%. Japan 10-year JGB yield rose 0.0049 to 0.221.

US retail sales rose 3.8% mom in Jan, ex-auto sales up 3.3% mom

US retail sales rose 3.8% mom to USD 649.8B in January above expectation of 1.8% mom. Ex-auto sales rose 3.3% mom, above expectation of 1.0% mom. Ex-gasoline sales rose 4.2% mom. Ex-auto, ex-gasoline sales rose 3.8% mom. Retail trade rose 4.4% mom.

Total sales for November 21 through January 2022 period were up 16.1% from the same period a year ago.

Import price index rose 2.0% mom in January, above expectation of 1.3% mom.

Canada CPI jumped to 5.1% yoy in Jan, highest since 1991

Canada CPI jumped from 4.8% yoy to 5.1% yoy in January, above expectation of 4.8% yoy. Also, inflation surpassed 5% for the first time since September 1991. On monthly basis, CPI rose 0.9% mom, above expectation of 0.6% mom, highest since January 2017.

Excluding gasoline, CPI rose 4.3% yoy, highest since the introduction of the index in 1999. Prices for services was unchanged at 3.4% yoy. Prices for goods accelerated from 6.8% yoy to 7.2% yoy.

CPI common rose from 2.1% yoy to 2.3% yoy, above expectation of 2.1% yoy. CPI median rose from 3.1% yoy to 3.3% yoy, above expectation of 3.1% yoy. CPI trimmed rose from 3.8% yoy to 4.0% yoy, above expectation of 3.7% yoy.

Also released, manufacturing sales rose 0.7% mom in December. Wholesale sales rose 0.6% mom.

Eurozone industrial production rose 1.2% mom in Dec, EU up 0.7% mom

Eurozone industrial production rose 1.2% mom in December, well above expectation of 0.3% mom. Production of capital goods rose by 2.6%, intermediate goods by 0.5% and non-durable consumer goods by 0.4%, while production of durable consumer goods fell by -0.3% and energy by -0.8%.

EU industrial production rose 0.7% mom. Among Member States for which data are available, the largest monthly increases were registered in Ireland (+10.3%), Lithuania (+6.2%) and Luxembourg (+5.1%). The highest decreases were observed in Czechia (-2.9%), Austria (-1.1%) and Italy (-1.0%).

UK CPI rose to 5.5% yoy in Jan, highest since 1992

UK CPI rose further from 5.4% yoy to 5.5% yoy in January, matched expectations. That's the highest level in the National Statistics series since January 1997. It was last higher in the historical modelled series in March 1992, which as at 7.1%. CPI core rose from 4.2% yoy to 4.3% yoy, above expectation of 4.3% yoy.

Also released, PPI input came in at 0.9% mom, 13.6% yoy, versus expectation of 0.7% mom, 14.2% yoy. PPI output was at 1.2% mom, 9.9% yoy, versus expectation of 0.6% mom, 9.4% yoy. PPI output core was at 1.1% mom, 0.7% yoy, versus expectation of 0.7% mom, 9.0% yoy.

BoJ Kuroda: Basic approach to allow 10-yr JGB yield to move 25 bps up-down 0%

Speaking in the parliament, BoJ Governor Haruhiko Kuroda said there is no plan to change the band for 10-year JGB yield to fluctuate in. He added, "our basic approach is to buy a sufficient amount of bonds to allow 10-year JGB to move 25 basis points up and down each around our 0% target."

"How much JGBs BoJ will buy to defend its yield target depends on market conditions at the time," he said. "BoJ's fixed-rate bond-buying offer was made in light of such unusual market situation. If market conditions become unusual again, BoJ will of course use tools such as fixed-rate market operation."

Australia Westpac leading index turned positive, signalling above trend growth

Australia Westpac-Melbourne Institute leading index rose from -0.1% to 0.4% in December. That's the first positive, above trend, read on the since Since Delta outbreak last August. The index signalled that growth outlook has improved with above trend growth over the next three to nine months.

Westpac expects contraction in spending in January due to Omicron, and zero growth in GDP in Q1. But the economy is expected to bounce back strongly over the rest of 2022, with a solid 5.5% growth for the year overall.

Westpac also continues to expect interest rate hike by RBA before August meeting.

USD/CAD Mid-Day Outlook

Daily Pivots: (S1) 1.2687; (P) 1.2730; (R1) 1.2760; More...

USD/CAD dips mildly today but stays in range of 1.2634/2795 and intraday bias remains neutral. Further rally is mildly in favor with 1.2634 support intact. On the upside, break of 1.2795 will resume the rally from 1.2448 to 1.2963 resistance next. However, break of 1.2634 support 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.

Economic Indicators Update

US retail sales rose 3.8% mom to USD 649.8B in January above expectation of 1.8% mom. Ex-auto sales rose 3.3% mom, above expectation of 1.0% mom. Ex-gasoline sales rose 4.2% mom. Ex-auto, ex-gasoline sales rose 3.8% mom. Retail trade rose 4.4% mom.

Total sales for November 21 through January 2022 period were up 16.1% from the same period a year ago.

Full release here.

Canada CPI jumped from 4.8% yoy to 5.1% yoy in January, above expectation of 4.8% yoy. Also, inflation surpassed 5% for the first time since September 1991. On monthly basis, CPI rose 0.9% mom, above expectation of 0.6% mom, highest since January 2017.

Excluding gasoline, CPI rose 4.3% yoy, highest since the introduction of the index in 1999. Prices for services was unchanged at 3.4% yoy. Prices for goods accelerated from 6.8% yoy to 7.2% yoy.

CPI common rose from 2.1% yoy to 2.3% yoy, above expectation of 2.1% yoy. CPI median rose from 3.1% yoy to 3.3% yoy, above expectation of 3.1% yoy. CPI trimmed rose from 3.8% yoy to 4.0% yoy, above expectation of 3.7% yoy.

Full release here.

BTCUSD (Bitcoin) pivoted nicely near the 41,474 support region on Tuesday, signaling that the rebound off the 32,950 low and, more recently, the bullish trendline breakout has further to go.

The base overlaps with the 23.6% Fibonacci retracement of the 68,999 – 32,950 downtrend and the 50-day simple moving average (SMA). Hence, any further extensions above this floor may keep bullish momentum alive, especially as the MACD is stepping higher in the positive region and its red signal line. The RSI is reflecting an improving bias as well after rejecting any declines below its 50 neutral mark.

The 45,000 mark is currently on target, while within a breathing distance, the 38.2% Fibonacci of 46,725 could also cap the rally, preventing any acceleration towards the key resistance formed between the 200-day SMA and the 50% Fibonacci of 50,968. If the bulls manage to knock down that wall, the spotlight will immediately turn to the 54,000 – 55,212 region.

Alternatively, a pullback below 41,474, where the 20- and 50-day SMAs are set to post a bullish cross, could immediately halt around the 39,275 restrictive region. Lower, traders will pay special attention to the 36,000 – 32,950 zone and the broken descending trendline, which could ideally switch from resistance to support within the same region. Should selling forces intensify, the door will open for the 30,000 level.

Summarizing, buyers are expected to add more upside pressure to BTCUSD in the short term, likely bringing the 45,000 – 46,725 band under examination.

UK short-term bond yields may struggle to keep up with inflation after January headline CPI surprised to the upside. If the Bank of England fails to deliver a 50 bps hike in March, GBP/USD could be in real trouble.

Earlier in February I pointed out how high expectations for Bank of England (BoE) policy tightening this year may contribute negatively to GBP/USD from then onwards. Flash forward to Wednesday’s higher-than-expected 5.5% y/y UK January CPI print and my concerns have only grown. UK-2-year government bond yields, already well above pre-pandemic levels, risk failing to keep pace with inflation.

UK CPI vs UK yields

Furthermore, economic theory doesn’t necessarily favour currencies from countries that are running high levels of inflation over the long term. Granted, on a relative basis US headline CPI ran at 7.5% in January versus 5.5% for the UK, but the US economy, based on quarterly GDP figures, has as also has surpassed pre-pandemic levels by more much than the UK. In other words, the Fed has more justification on both growth and inflation grounds to be hiking aggressively.

Growing expectations of a 50 bps hike from the BoE, versus 25 bps when the central bank next meets in March, puts the value of GBP/USD at risk should the BoE ultimately disappoint. Households in the UK are already coming under pressure from negative real wage growth and big upward swing in April utility bills. This could force the BoE to go lower rather than higher. If the BoE does disappoint, interest rate markets could easily take that as a sign that the BoE has lost the grip on inflation. That could prove bad for GBP/USD.

• Signs of de-escalation in the Ukraine crisis spark relief rally
• Stock markets and euro storm back, gold and oil prices retreat
• Fed minutes and US retail sales eyed - is the dollar rally exhausted?

Risk appetite comes back 

A sense of optimism has returned to global markets following reports that Russia has withdrawn some forces from the border with Ukraine. Equity markets came back swinging as traders priced out geopolitical risk and loaded up on riskier assets again, betting that the peak of the storm had passed. 

In the FX space, the signs of de-escalation translated into a stronger euro amid hopes that Europe won’t be forced to impose sanctions on Russia and cut off its own energy supply in the process. The euro advanced the most against the defensive Japanese yen, which suffered a double whammy as safe haven demand faded and global bond yields edged higher.

The situation remains fluid and sentiment can turn on a dime, but for now, financial markets are trading like we are out of the danger zone. Judging by the size of the relief rally, some geopolitical premium is still baked into riskier assets, which suggests there’s scope for the recovery to continue in case the wind continues to blow in the direction of peace.

Commodities cool off 

In the commodity sphere, gold prices came off the boil as the perceived risk of an invasion declined. Real Treasury yields have started to grind back higher, reducing the appeal of non-interest-bearing assets like bullion. This is where the real battle begins for gold. 

The precious metal absorbed the spike in real yields without even a scratch in recent weeks amid rising demand for portfolio protection, but now that geopolitical fears are starting to subside, we’ll find out what the fallout from tighter monetary policy is. If bullion can slice above the $1880 region in this environment, it would be a strong sign that the path of least resistance is higher.

Crude oil prices came under pressure too after Putin said some troops were being withdrawn. There were also some encouraging signs in the Iran talks after the EU’s foreign policy chief said that “we are in the last steps of the negotiation”. The supply side of the equation is therefore looking more bearish as US shale producers are also ramping up production. 

That said, markets are very hungry for oil right now. Futures contracts are still in extreme backwardation, a pattern that indicates traders are willing to pay more for near-term supply. As such, some modest increase in production might not break the uptrend entirely, but rather slow it down.

US events coming up

The US dollar will be in the spotlight today when the latest retail sales numbers and the minutes of the most recent Fed meeting hit the markets. Traders are betting the Fed will take a sledgehammer to crush inflation with six and a half rate increases already priced in for the year, so every release is crucial.

The worrisome part is that the dollar hasn’t been able to capitalize properly on positive data surprises recently. Take last week’s inflation numbers. One extra rate hike was priced into bond markets in the aftermath but the dollar barely rose, until fears of armed conflict in Ukraine sent investors into the reserve currency’s safety.

When a currency cannot rally on good news, that’s usually a sign of exhaustion in the trend. Hence, today’s releases will be especially important. If retail sales exceed expectations for instance and the dollar cannot stage a lasting rally in response, it would be another sign that the uptrend is losing power.

Finally, the earnings season will enter the final stretch with Nvidia, Applied Materials, Rio Tinto, Shopify, and many others releasing their quarterly results today.

Canada’s CPI report looms

Inflation remains the bane of the economy for many industrialized nations, and Canada has not been immune to this trend. CPI took a step backwards in December, with a reading of -0.1% m/m. However, inflation is expected to have jumped in January, with a consensus of a strong gain of 0.6%. A reading within expectations would indicate that high inflation remains alive and well and will put pressure on the Bank of Canada to take aggressive action in order to curb inflation.

BoC Governor Tiff Macklem has said that more rate hikes are coming in order to lower inflation to the central bank’s 2% target, and there are high expectations that the BoC will match the Federal Reserve in March and raise rates by 25 basis points. Macklem is still singing a tune that inflation is transitory and will ease in the second half of the year. Still, with inflation galloping at a 30-year high and consumers feeling the pinch of higher prices, the BoC may have to raise rates several times before inflation is brought down.

The world remains focused on the crisis at the Ukraine/Russia border, with fears that a Russian invasion could be imminent. Moscow has apparently moved some troops away from the border but President Biden said that this has not been verified and warned that an invasion remains “distinctly possible”. Biden has warned Russia that it would face severe consequences if it invades, and the ball is squarely in Moscow’s court as to what happens next. The US dollar has taken a pause from recent gains, but investors aren’t about to snap up riskier assets until Russia lowers the tensions.

USD/CAD Technical

• USD/CAD faces resistance at 1.2781 and 1.2828
•  1.2661 is under pressure in support and could be tested during the day. Below, there is support at 1.2588

The pound has edged higher today after annual inflation in the UK surged to its highest level in 30 years. The bad news is that price pressures are likely to intensify even more, before falling back. The pound’s somewhat muted response suggests investors are not sure whether the impact of the Bank of England’s response in terms of policy tightening will outweigh the negative impact falling real wages will have on the economy. Still, the upcoming rate hikes should help support the pound, especially against weaker currencies like the Japanese yen. Not only does the Bank of Japan remain one of the most dovish central banks out there, but as an oil consumer nation, rising crude prices are clearly negative for the Japanese economy.

So, the GBP/JPY should remain fundamentally supported.

Source: ThinkMarkets and TradingView.com

The GBP/JPY has been making higher lows and higher highs in recent months. With price holding above both the short-term 21-day exponential moving average as well as the longer term 200-day simple moving average, the technical outlook remains objectively positive. Thus, I would favour looking for bullish trades on this pair. I reckon we will soon see a breakout above last year’s high of 158.20ish.

UK CPI highest since 1992

The pound’s latest gains came after data revealed this morning that consumer prices in the UK rose to an annual pace of 5.5% in January, its highest level since March 1992. The data beat expectations, while other measures of inflation, such as the RPI (7.8% y/y) also topped forecasts. The sharp rise in energy bills that will hit consumers in April means price pressures are only likely to exacerbate.

Key economic data coming up this week

Wednesday

• CPI estimate Canada
• US retail sales, industrial productions and FOMC meeting minutes

• Australian employment data
• FedSpeak: FOMC members Bullard and Mester

• Retail sales data from UK and Canada
• FedSpeak: FOMC members Waller and Williams

Stock markets are a little flat on Wednesday as we await the Fed minutes and digest more inflation data from China and the UK.

We saw a strong rebound on Tuesday as some Russian troops completed military drills near the Ukrainian border and returned to their normal bases in what was the first de-escalation in the region in weeks. It came at a time when various world leaders were warning about the threat of invasion this week, something Russia repeatedly denied.

Friday's warnings carried an additional urgency that triggered a sell-off late in the day and saw oil, gas, and gold rally. We've since seen some of those positions being unwound as the threat of conflict appears to have reduced. But with the threat level still relatively high, there's still a certain amount of risk premium in the markets. Especially with NATO and Ukraine suggesting they aren't seeing evidence of troops withdrawing yet.

We're basically drifting from one crisis to another at the minute; from soaring inflation and higher interest rates to deteriorating living standards and now the prospect of conflict in Ukraine, which in turn exacerbates the first two. With tensions easing on the border, attention has quickly shifted back to inflation following some more disappointing figures this morning.

Pressure intensifying on the BoE

It seems a long time since we saw an inflation print that wasn't above the consensus, or central bank estimates, which is fueling further concerns about interest rates and the cost of living crisis. While inflation is expected to peak in April, the road back is becoming ever-more perilous with every above-consensus reading. The peak is now likely to be higher again than many anticipated which probably means more rate hikes and a further squeeze on households and businesses.

Ultimately, the economy will suffer further even if many are better able to absorb higher prices as a result of savings built up over the last couple of years. That may encourage the Bank of England to be cautious in raising rates in the second half of the year as inflation falls but markets are clearly not of that view. Another five hikes are heavily priced in this year, on top of the two consecutive increases in December and February, which would take Bank Rate to 1.75%, the highest since the start of 2009.

Chinese inflation dips, paving the way for further rate cuts

China on the other hand is more focused on supporting the domestic economy, with inflation running well below target and slipping further to 0.9% in January. Producer prices remain high at 9.1% but have been on a downward trajectory in recent months which will allow the central bank to continue to cut rates this year and further shield the economy from the various headwinds it faces including the pandemic and property market turbulence.

Fed minutes to confirm hawkish evolution

I'm not sure what we'll learn from the Fed minutes later today that we're not already aware of, with numerous policymakers expressing increasingly hawkish views in recent weeks. Few have been as hawkish as James Bullard who's called for a full percentage point of increases before July and raised the prospect of inter-meeting hikes. I expect the minutes will reflect the ongoing hawkish evolution at the central bank but it shouldn't shift the dial as far as markets are concerned, with six hikes already priced in.

Oil edging higher again as NATO questions Russian withdrawals

Oil prices are trending higher again on Wednesday, despite tensions in Ukraine appearing to ease. They spiked late on Friday and at the start of the week as the perceived risk of a Russian invasion increased, threatening to impact supplies in an already extremely tight market.

While crude has pulled back from the highs as Russian troops began leaving the border - NATO remains unconvinced by those assurances - the market remains extremely tight and prices had been on an upward trajectory prior to the escalation. The softening of tensions may have only delayed the march to $100, rather than preventing it. API reported a small drawdown last week which is roughly in line with what's expected from the EIA report later today.

Gold remains supported as inflation continues to beat expectations

Gold is trading a little higher again today and above $1,850 where it has dipped below over the last 24 hours. This is the first big test of support, with it having been a major barrier of resistance in January. If it can hold above here, we could see it target yesterday's highs again in the coming days and weeks even as the risk of a Russian invasion declines.

The yellow metal continues to be supported by rapidly rising inflation even as markets price in more and more rate hikes from central banks. Another above-consensus reading from the UK this morning shows the trend is not improving as we near the peak over the next couple of months. Gold could remain well supported for a while yet.

A major breakout coming for Bitcoin?

Bitcoin continues to look very healthy after weathering the geopolitical storm well before benefiting from the improvement in risk appetite on Tuesday. Once again it finds itself trading a little shy of $45,500 where it ran into resistance last week after repeatedly seeing support there back in December. A move above here will be a big psychological boost and could propel bitcoin higher. Of course, risk appetite remains important, especially that linked to inflation and interest rates, which could continue to be a drag if anxiety remains in the broader markets.