Calendar Week 05 – 2022

It is going to be an interesting year for markets and valuations. The US Fed is staring down the tight rope of raising rates and reducing balance sheet, all the while, keeping asset prices from tanking. Ever since Greenspan introduced the “Fed put” in the 1990’s, the Fed has consistently fed (pun intended) asset prices, and created bubbles everywhere along the way. Alan started with equities, creating the “dot com” bubble, then rotated into mortgages, creating the GFC. Bernanke, Yellen and Powell have all followed suit but done it better, in sense. None of them have had the bubble burst on them like Greenspan had. The ultra-wealthy rely on Powell to maintain the Fed put, which is gonna be hard to keep when inflation – no longer transitory but well established – is spiking globally. The stock market sell off, the worst start to a calendar year since 1939, could well be the bubble bursting. Time and rate rises will tell. That said, the smartest out there – the bond traders – note that the 30 year bond has barely moved, still sitting a smidge under 2%. Meaning that there could be a rate rise, quickly followed by rate cuts. Or, could mean the status quo carries on as is. We will keep watching and updating you as it progresses.

 

Heating commodities market

Meanwhile, the commodities market is beginning to heat up, driven by tensions over NATO as Russia (supported by China) tests the resolve of alliance. It is unlikely a war will happen as Putin pushes for an end to the alliance, however the prospect is sending commodities higher, particularly in energy sector. Oil, coal and gas have all had stellar weeks.

The AUD did tag the $0.70 mark as we discussed last week, and has closed below it. We might see some further falls but I would be looking for price consolidation under it this week. The higher commodity prices should give support for the Aussie, so I see limited downside. With news this week from the RBA and US jobs, I expect the AUDUSD to consolidate under $0.70, then would look to test sellers resolve with a move back to $0.71.

 

European Central Bank meeting this week

The ECB meet this week and whilst not expected to move rates, the following press conference on Thursday will be closely monitored for forward guidance. It too hit our target of $1.12, and like the Aussie, I expect it to remain under this for now. There is not much technical support for it until $1.10, and we could well see that soon. But like AUD I suspect some consolidation and a test of the $1.12 to see if sellers will hold that as the new resistance level.

The Cable has found support at a technical and psychological level of $1.34. With the BoE meeting on Thursday they are expected to raise rates by 25bps to 0.5%. This should give support to the sterling, and I have the initial target at minor resistance of $1.36.

The tricky USDYEN. Found technical support as we expected last week, now seems to be setting up for either a double top if it trades up to $116.30. Or if stocks continue to be bloodied, the yen could sell off from here which would create an extended head and should pattern. November peak being left should and January peak being the head as we currently could be forming a lower high and right shoulder. Either way, I would prefer to be a seller of this pair, when the timing is right.