Calendar Week 34-2022

 

Last week saw the minutes from the RBA and FOMC plus RBNZ raised to 3% and Aussie unemployment fell to 3.4% whilst Aussie wages fell too. Also, a number of Fed Heads continued to push the narrative that rates have a long way to go.

 

The market was largely ignoring the Fed and looking past the rate rises, with some minor dip in inflation numbers, the market was predicting a peak in inflation and rates this year. They have got that wrong. Inflation will not be back in the 2-3% target band anytime soon. It may have peaked but it will take a while to come back down, sometime in 2023. Which means rates have some way to go.

 

Whilst the market ignored Powell, they did not ignore Hartnett from the BoA. He has been the most accurate predictor this year and called the peak of the S&P500 at 4380. On Thursday the peak was 4378, and Friday the sell off that level continued as the market thought seriously about the continued rise in rates. Further to his peak call, Hartnett noted that for every $100 that has gone into the market over the last 18mths only $2 has exited. So whilst people may be bearish they have not yet sold.

 

So on Friday when Fed member Barkin commented that the Feb will fight inflation even if it causes a recession, the market went nuclear. Rates spiked, US dollar spiked and stocks tanked.

 

With major corporations announcing earnings here in Australia, how much impact will rates and inflation have on their bottom dollar will be key for local performance. The Aussie SPI 200 is up 10% from its June lows.

 

Friday seems a long way off and a lot can happen in a week, but Powell will speak from Jackson Hole on Friday and do not expect him to be dovish or support the asset inflation of stocks. A few PMIs from Europe early in the week but the market will be left to its own design until Powell. So trade accordingly.

 

Currency Guidance

 

The US dollar index ran hard into the weekend, and I suspect it will go on to test July highs by the time Powell comes out. The key driver for it is the Euro which is tipped to fall through parity and head towards 0.95. Without major news though, it could easily chop about on its way there.

 

AUDUSD commodity markets ticking higher is not enough for the Aussie as the US dollar dominates all the majors. Technically the Aussie found support at 0.6855 (a fib level). I’d like to think it will hold but I suspect the market will dip and dive, run and jump as we get closer to Jackson Hole.

 

EURUSD we wrote last week that the Euro would head back to parity and we are 39 pips from it now. Expect the market to trade 1.00 this week but also do not be surprised if it bounces off it for a short period.

 

GBPUSD inflation indeed hit double figures and pound was hammered. I see more downside for it but against the Greenback it might create a double bottom.

 

USDJPY a little surprised by the Yen weakness, but perhaps that is linked to the surprising stock market strength. Technically it is back on trend but there is not much more upside for it in this run.

 

USDCAD yuk. Why would you bother trying to trade this.