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Key Highlights

• USD/JPY started a fresh increase towards the 116.50 level.
• A major bullish trend line is forming with support near 115.60 on the 4-hours chart.
• EUR/USD is consolidating below the main 1.1380 resistance zone.
• The US nonfarm payrolls could increase 400K in Dec 2021, up from 210K.

USD/JPY Technical Analysis

The US Dollar started a major increase above the 114.50 resistance against the Japanese Yen. USD/JPY even broke the 115.00 level to move into a positive zone.

Looking at the 4-hours chart, the pair settled above the 115.00 level, the 100 simple moving average (red, 4-hours) and the 200 simple moving average (green, 4-hours).

The pair even climbed above the 115.50 and 116.00 levels. It traded as high as 116.34 before it started a downside correction. It tested the 23.6% Fib retracement level of the upward move from the 113.13 swing low to 116.34 high.

There is also a major bullish trend line forming with support near 115.60 on the same chart. The next major support is near the 114.75 level.

The 50% Fib retracement level of the upward move from the 113.13 swing low to 116.34 high is near the 114.75 level. Any more losses might send the pair towards the 114.00 level.

On the upside, the pair is facing resistance near 116.40 and 116.50. The next major resistance is near the 1.3620 level. A close above 1.3620 could open the doors for a steady increase.

On the downside, an immediate support is near the 1.3480 level. There is also a key rising channel forming with support near 1.3475 on the same chart.

Looking at EUR/USD, the pair is still consolidating below the 1.1380 resistance zone. Besides, GBP/USD remained well bid near the 1.3500 level.

Economic Releases

• Euro Zone CPI for Dec 2021 (YoY) (Prelim) - Forecast +4.7%, versus +4.9% previous.
• Euro Zone Core CPI for Dec 2021 (YoY) (Prelim) - Forecast +2.5%, versus +2.6% previous.
• US nonfarm payrolls for Dec 2021 – Forecast 400K, versus 210K previous.
• US Unemployment Rate for Dec 2021 - Forecast 4.1%, versus 4.2% previous.
• Canada’s employment Change payrolls for Dec 2021 – Forecast 27.5K, versus 153.7K previous.
• Canada’s Unemployment Rate for Dec 2021 - Forecast 6.0%, versus 6.0% previous.

This has been one hell of a start to a new year if you are into volatility. For investors in expensive US technology and small cap stocks, as well as Bitcoin and gold, it has probably not been a happy new year at all.

In a bid to keep the U.S. economy from overheating amid high inflation and near-full employment, the FOMC indicated in their December policy sitting that the outlook “could warrant a potentially faster pace of policy rate normalization,” according to the minutes of that meeting.

So, paradoxically, it is high levels of inflation that has derailed the rally for both gold and Bitcoin. What investors in these assets need to see is a sharp drop in inflation to deter the Fed from tightening too fast. If that doesn’t happen then we may well see further struggles in both assets down the line.

Gold just can’t catch a break. After struggling throughout last year to attract fresh buyers, the start of this year has been equally poor. With the Fed potentially on course to tighten its policy more aggressively, causing renewed strength in bond yields, gold bulls are finding it difficult to justify buying aggressively right now.

The metal was unable to break above that $1830 key resistance level yet again as the sellers stepped in after the FOMC’s hawkish December meeting minutes were released last night. The selling has since gathered pace, causing the metal to dip to low $1790s, before bouncing back a little.

What bullish gold traders need to see is a clean break above $1830 to tip the balance back in their favour. Until that happens, proceed with a bit of caution even if gold is testing a key short-term support here around $1793 to $1800:

If the above-mentioned support gives way, then I would expect a sharp acceleration in the downtrend in the near-term outlook.

Of course, Bitcoin is a different animal and is less sensitive to traditional macro developments. The ongoing sell-off may attract long term investors to buy the dip as the crypto tests this long-term support zone between $40K to $43K (shaded):

Even so, this could be a challenging year for crypto bulls as the bullish momentum has not there for a couple of months now.

• EURAUD broke key resistance level 1.5700
• Likely to rise to resistance level 1.5865

EURAUD currency pair recently broke key resistance level 1.5700 (which has been reversing the price from December).

The breakout of the resistance level 1.5700 accelerated the active short-term impulse waves 1 and (3).

Given the rising euro bullishness seen today – EURAUD currency pair can be expected to rise further toward the next resistance level 1.5865 (which stopped the previous wave B last month).

WTI prices continue to ascend and reach new weekly highs for the third consecutive week. Oil prices have been rising since the start of December possibly signaling some bullish fundamentals are currently unfolding. Through this report we aim to present the key fundamentals currently running the Oil market and how they can affect the commodity’s price. Towards the end we will present a technical analysis that will cover for the recent price action and levels involved.

On the 5th of January the EIA released its weekly Crude Oil Stockpiles figure. The reading is among the top monitored by Oil traders thus its significance is in most cases mirrored with price reaction. Upon release the indicator displayed a drawdown of -2.14M barrels which initially sent WTI prices lower yet the commodity regained ground and stabilized shortly. This was the 6th consecutive weekly drawdown by the EIA a fact that overall could be sending a bullish message to traders. On a similar note on the 4th of January the American Petroleum Institute reported its inventory levels of US crude oil with a large drawdown of -6.43M barrels being released. In the following minutes of the release, WTI’s price gained support as this was the largest among the last 6 consecutive drawdowns. In the US, active Oil rigs continue to be on the rise and are currently at 480 as indicated by the U.S. Baker Hughes Oil Rig Count during the past Friday. In our view active Oil rigs are heading to 500 which can also be used as a bullish sign. Overall the readings for the past days seem to be in line with the upward movement by WTI prices.

Moving to the OPEC front, during the group’s 24th OPEC and non-OPEC Ministerial Meeting the decision to adjust upward the monthly overall production by 0.4 mb/d starting on February 2022, was reconfirmed. The minor increase in supply by the group does not seem to impress traders but seems to motivate some buying interest for the time being. From this decision the OPEC group along with its distinguished partners like Russia seems to be sending some indirect messages that are truly worth mentioning. The current circumstances taking place around the world with the new variant dominating media headlines, is still keeping the OPEC plus group in a rather conservative stance, not willing to allow for excess supply to be inserted in the market. Evidently demand has improved compared to the same time in the past year as this is the reason prices have surged. In the beginning of January 2021 WTI prices were approximately trading at $50 per barrel which is significantly lower than the $77 per barrel valued today. Yet the fact that lockdowns are still a part of the global strategy to overcome the pandemic, the impact on the Oil market can be detrimental. Even currently, Oil demand could be on the back foot as the Omicron variant reels. Thus the OPEC plus group is forced to restrict output.

As we start the New Year Oil traders focus could be shifting to some long term view on the Oil markets that can possibly make it easier for them to form a trading strategy. 2022 may be a year that can possibly focus on other geopolitical matters in the Oil market that remain unresolved like the ongoing Iranian nuclear negotiations likely to be closely monitored by OPEC. In the short term we may continue to see Oil prices remaining at higher levels as demand may remain elevated possibly countering supply which is also expected to rise. Finally please note the higher energy prices observed in the last part of the previous year until the present moment have created many problems around the world. Inflation levels surging globally, energy crunch in China and the current turbulence in Kazakhstan are all related to higher energy prices.

Technical Analysis

WTI daily chart

WTI continues to be in an ascending momentum that has commenced on the 2nd of December and remains intact. After stabilization at the (S1) 76.30 support level that was seen as a resistance, the price action has recently broken higher making the case for the (R1) 80.00 line to come into play. Above the (R1) we tend to note the (R2) 82.75 level that was reached for the last time in early November. Even higher the (R3) 85.00 line was briefly approached on the 25th of October and remains the most recent peak for WTI. If the commodity makes a turn downwards then the (S1) 76.30 level can be re tested. The (S2) 73.00 level remains the most possible stop if the selling is to persist further while the (S3) 69.15 level at the end can as be used as a support as it was on the 20th and 21st of December. The RSI indicator below our chart seems to be steadily climbing but has yet to reach the 70 level, This can signal some bearish tendencies in the short term. However, as the trend in our opinion remains upwards, the commodity continues to trade in a larger sideways motion between the (R3) and the (S3).

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Markets

Investors still ponder the consequences of the ‘amended guidance’ from yesterday’s Fed minutes. If omicron doesn’t derail the recovery, a return to monetary ‘normality’ might be the market narrative for 2022. For the Fed, and probably also for other central banks, it means faster rate hikes than anticipated until now and a (gradual) removal of the liquidity support from the CB’s balance sheet. Follow-through price action intraday lifted US yields by up to 4 bps across the curve, although the move lost momentum as US investors joined. The 2-y yield currently rises to 3.5 bps. The 30-y gains 2 bps. The recent flattening tendency isn’t completely over, but the debate on a reduction of the balance sheet tempers the relative attractiveness of the longer end of the curve. European interest rates join the boarder intraday rise but gains remain modest given the moves in the US yesterday. German yields are rising between 1 bp (30-y) and 3 bpseco  (5-y). After yesterday’s amended Fed guidance, signs of growth holding well above trend might be at least as important to assess the pace of further (Fed) normalization as is the case for inflation data. US weekly jobless claims printed slightly higher than expected at 207 000, but don’t change the picture with tomorrow’s US payrolls next key reference for markets. The US services  ISM, came in below expectations (62 vs 67 expected) but leaves no significant mark on trading. German preliminary HICP eased slightly less than expected from 6.0% Y/Y to 5.7%. The way back lower to the 2.0% target remains a very long journey. For now, peripheral bonds also hold relatively resilient despite the prospect of faster global tightening (10-y Italian spread + 2 bps). The rise in (real) yields also triggered a correction on European equity markets with regional indices losing 1%. US indices open marginally higher after yesterday’s sell-off. Oil is extending gains north of $80 p/b.

Yesterday’s message from the Fed Minutes had far less impact on FX. The dollar is treading water. The DXY TW index is even losing a few ticks (96.1). EUR/USD gains marginally (1.1320). Remarkably, the yen isn’t hurt by the rise in US real yields and even profits from a hesitant risk sentiment. USD/JPY hovers in the upper half of the 115 big figure. Admittedly, it’s too early to call a trend reversal, too. The European safe haven currency shows a different reaction, with EUR/CHF extending yesterday’s rebound (1.039). A rise in core (real) yields in theory is a negative for the likes of CE currencies. However, the Czech National bank, the Hungarian national bank and the National Bank of Poland apparently convinced investors on their anti-inflation policy. The zloty (EUR/PLN 4.5575), the forint (EUR/HUF359.8) and the Czech koruna (EUR/CZK 24.52), after a cautious start, are all recording nice intraday gains, setting or testing multi-month strongest levels against the euro.

News Headlines

The Hungarian central bank kept its weekly deposit rate unchanged at 4% following seven consecutive hikes and coming from 1.8% on November 11. The recent strengthening of the forint away from the EUR/HUF 370 resistance gave the MNB some breathing space. The central bank officially convenes next on January 25 and now has better prospects to get to that deadline without having to widen the interest rate corridor again on an ad hoc meeting. The Hungarian marginal lending rate, the de facto cap for the 1-week deposit rate, currently stands at 4.4%. The forint retains its momentum with EUR/HUF changing hands at 360 for the first time since early November.

The ruling Turkish AK Party submitted a bill to legislators granting the Ministry of Treasury and Finance the power to issue specially designed bonds. These could be used to pay lira deposit holders additional interest should the currency depreciate again and are part of Erdogan’s plan to curb the lira’s freefall. Erdogan at the end of last year guaranteed that returns on TRY-denominated deposits wouldn’t fall short of bank interest rates. The special bonds can’t be traded on the bond market, but banks can use them as collateral to borrow from the central bank via repurchase agreements. Erdogan’s save the lira plan initially sent EUR/TRY down from 20 to 12, but the currency restarted its depreciating trend afterwards, trading currently at EUR/TRY 15.50.

The euro is showing little movement, as it trades just above the 1.13 line.

German Factory Orders recovered in November, with a robust gain of 3.7% m/m. This follows a sharp decline of -5.8% m/m in October. Although factory orders are up, the manufacturing sector continues to grapple with supply bottlenecks which are hampering growth. Earlier this week, German Manufacturing PMI for December came in at 57.4, unchanged from November and at its lowest level since January 2021. The PMI indicates expansion but is significantly lower than the mid-60s readings we saw in Q2 and Q3.

The FOMC minutes indicated that committee members viewed inflation risks to the upside, and agreed that tapering should be accelerated due to inflationary pressures and the strong recovery. Members did not provide a lift-off date for a rate hike, but the minutes stated that they were open to raising rates “sooner or at a faster pace” than previously anticipated. The markets have priced in a March hike at around 60%, with three rate hikes expected in 2022.

In the US, the markets are awaiting Friday’s nonfarm payroll report. The ADP employment report surprised to the upside, with a December reading of 807 thousand new jobs, double the consensus of 400 thousand. The huge gain caused Goldman Sachs to upwardly revise its forecast by 50 thousand to 500 thousand and some analysts are projecting a print north of the 1-million mark. Still, it should be remembered that the ADP report is not all that reliable an indicator for nonfarm payrolls. The consensus for the NFP stands at 424 thousand, and if the read comes in below expectations, we could see the US dollar falter, as a weak NFP could push delay lift-off for a Fed rate hike.

 EUR/USD Technical

• EUR/USD has support at 1.1303. Below, there is support at 1.1232
• There is resistance at 1.1456 and 1.1415

Canada recorded an increase in its merchandise trade surplus to $3.1 billion in November, up from a $2.3 billion surplus in October. Merchandise exports increased at a solid, 3.8% pace (month/month), and imports were up by a lesser 2.4%. In real terms, the picture was still strong, with export volumes up 3.5%, and import volumes up 0.8%.

The increase in exports was broad-based, spanning 8 of the 11 industries. Exports of consumer goods (+9%) contributed the most to the headline increase, driven by a surge in exports of pharmaceutical products. Statistics Canada highlighted that COVID-19-related medications were imported for packing/labelling in Canada, then exported during the same month. Exports of basic and industrial chemical, plastic, and rubber products (+14.7%), energy products (+2.8%), motor vehicles and parts (+4%), and forestry products and building and packaging materials (+6.7%) were also strong.

Imports were up in 6 of the 11 industries. Similar to exports, a 5.2% increase in imports of consumer goods (led by pharmaceutical products) drove the headline increase. Imports of metal and non-metallic mineral products (+7.3%) and basic and industrial, chemical, plastic and rubber products (+7.3%) were also strong.

The B.C. floods were cited in November's international trade report. The impacts were centered in B.C. Exports in the province (on a non-seasonally adjusted basis) declined 7.8%, but the decline was more than offset by an 11% increase in exports in other provinces.

In a separate release, Statistics Canada revealed that services exports were up 2.9% (month/month), whereas imports were up a more modest 0.3%.

Key Implications

Canada's exports and overall trade flows remained resilient in November, despite the disruptions stemming from the devastating floods in British Columbia. Even after controlling for the atypical spike in pharmaceutical products, nominal exports would have remained on a solid footing during the month (+2.8%).

Looking ahead, we are likely to see some volatility in international trade in the coming months. Continued strength in manufacturing sentiment south of the border, alongside robust commodity prices and demand, bode well for exports. However, the global omicron wave may prolong supply chain pressures during the first quarter this year as consumers reorient spending back towards goods. In addition, concerns relating to labour shortages (partly due to a potential increase in employees requiring isolation) may present another bottleneck in the near-term for international trade.

US ISM Services dropped sharply from 69.1 to 62.0 in December, much worse than expectation of 67.2. Looking at some details, business activity/production dropped from 74.6 to 67.7. New orders dropped from 69.7 to 61.5. employment dropped from 56.5 to 54.9. Supplier deliveries dropped from 75.7 to 63.9. Prices rose slightly from 82.3 to 82.5.

ISM said: "The past relationship between the Services PMI® and the overall economy indicates that the Services PMI® for December (62 percent) corresponds to a 4.5-percent increase in real gross domestic product (GDP) on an annualized basis."

Full release here.

Daily Pivots: (S1) 1.1278; (P) 1.1312; (R1) 1.1348; More...

Intraday bias in EUR/USD remains neutral as range trading continues. On the upside, firm break of 1.1385 resistance will resume the rebound from 1.1186. Sustained trading above 55 day EMA (now at 1.1392) will bring stronger rise back to 1.1663 support turned resistance. On the downside, break of 1.1185 will resume larger decline from 1.2348. Next target is 161.8% projection of 1.2265 to 1.1663 from 1.1908 at 1.0934.

In the bigger picture, there are various ways of interpreting the fall from 1.2348 (2021 high). It could be a correction to rise from 1.0635 (2020 low), the fourth leg of a sideway pattern from 1.0339 (2017 low), or resuming long term down trend. In any case, outlook will now stay bearish as long as 1.1703 support turned resistance holds. Sustained break of 61.8% retracement of 1.0635 to 1.2348 at 1.1289 would pave the way back to 1.0635.