Calendar Week 07 – 2022

Last week was a bit of a crazy one, particularly towards the end. The USA inflation numbers printed the highest in 40 years at 7.5%, which the market took as a near certainty of a rate rise. This was reinforced by the US Fed member Bullard voicing extremely hawkish comments later that day. The odds of a rate rise of 50 basis points at the next Fed meeting shot up to 70%. The market was even pricing in a 25% chance of a 25 bp move before the next Fed meeting in March, a chance this week in fact. The 10 year bonds moved above 2% and as the average dividend yield on the S&P500 is roughly 1.4%, the argument to buy stocks at near all time high valuations is hard to sustain when you get a better return by owning the more stable and safe asset of the US Treasury Bond. So stocks got hit and sold off.

 

Russia set to Invade

 

Then Friday came. And with it, headlines, and rumours of an imminent Russian invasion of the Ukraine hit stocks even harder. The bond market also got hit too though as they lost all the gains/moves they made on Thursday. The biggest moves were in the Yen, gold and oil. This makes sense in a time of war that the Japanese Government Bonds and gold are the traditional safe havens. Whilst oil in war times is always the prized asset. Oil pushed higher by 4%, into the mid 90s, a level not seen since 2014. Gold had a 2% rally into the 1860s. If Russia does invade this week, both assets could retest their all time highs over the coming weeks.

 

From an economic view though, things are getting tougher. Stagflation is highly likely as we have inflation exploding higher globally, whilst at the same time the global GDP forecast is shrinking. Lower output with higher prices, a bankers nightmare situation. In this scenario, rate rises wont be for long and the printing of cash will be back to attempt to push growth higher.

 

Currency Guide

 

Back in currency land, the turmoil of the week has created a tricky outlook. From a technical charting perspective there appears some easy setups, in EURUSD, AUDUSD, USDJPY, and NZDUSD in particular are all giving clear signals. The GBPUSD and USDCAD not so much. It is all about the USD and the above conflicting signals or war and rate rises.

The impact of Russia’s invasion is clear on the Euro, as that is their real target – NATO. So I would rather be short Euro than long it. It has set a clear resistance line at 1.1480 and looks to be heading back to 1.12.

War will also be good for oil as mentioned so the CAD should hold up against the USD and the chart is showing that choppy contest. Whilst the GBP too is close to the developments of NW Europe and is choppy, looking lost.

Australia is the leading exporter of liquid gas and as such, it can sometimes be pushed by the oil price. However, technically things look bearish for the Aussie and it looks to be heading for another test of buyers resolve at 0.70.

Kiwi dollar too, looks to have rolled nicely with a fractal high off 0.67 with a view to 0.65.

The USDJPY has produced a lovely double top at 116.30 and buying Yen against any of the majors is the clearest trade this week. With bond markets and the banging of war drums, stocks will continue to get hit and the flow of money into the JGBs should continue to send the Yen higher.