Calendar Week 35-2022
Stocks got hammered on Friday with a weak PCE Index and hawkish Fed head. I said during the week that Powell was unlikely to go against his peers and suggest a more accommodative policy stance. Stocks were looking for this “Powell Pivot” and when they didn’t get it, seemed surprised and punished those buyers.
Powell’s 8-minute speech reiterated that rates will be higher for longer and is willing to accept economic pain to drive inflation (and hold it) down to their 2% target.
Bond markets bottomed early August from a sell off that began in June as even the smart bond market looked for a peak in rates. However, for the last 3 weeks bonds have been tracking higher. So, the foolish money, in stocks, had no reason to be buying for as long as they did.
The big moves on Friday were mostly in stocks and safe haven asset. The USD is now the safe haven of choice, or US treasuries to be more precise. Yen, gold and crypto’s have lost their shine with the latter 2 not producing a yield anyway. With the large turn around in sentiment, bonds barely budged (US 10yr +0.3%) but the dollar certainly did. Most of that was from selling in the Euro.
The Fed have indicated they might slow down the pace of the hikes but September raise is almost foregone conclusion. The only debate now is whether the Sep 22nd meeting will raise by 50 or 75 basis points. J-Pow said that that decision will be data dependant. Between now and the FOMC meeting we will get to see Jobs (2nd) and Inflation (13th) numbers, and the market will be watching them keenly and volatility will spike on those figures.
Currency Guidance
USD – The US dollar index did test July highs and failed of it, however post Powell there is a dollar bid on again. The forces driving it are threefold, higher rates, safe haven bid and selling all things European. So whilst technically momentum indicators suggest little upside, the technical picture means little when sentiment (and panic) drives the market. If the sell off in stocks continues then US$ should blast past July highs.
AUD – Technically the Aussie produced a higher low, which is the first warning sign the downtrend is over. However with commodity markets tracking sideways and a red hot US dollar I would be looking for this to re-test July lows. It lost value to all its peers bar the Kiwi dollar on Friday, but I do not expect that to last long and would look to fade the Euro or Pound against the Aussie when the technical picture presents itself this week.
EUR – German Bunds had a big jump on (+7.1%) as their economy expanded fractionally, and this gave the Euro a relief rally. With the energy crisis deepening and recession on their doorstep, I would not be buying the Euro but looking at this rally for an opportunity to get short. The USD, JPY and AUD would be my picks to sell the Euro against.
GBP – Whilst it outperformed the commodity currencies (AUD, CAD, NZD, NOK) it lost ground to safe haven currencies (USD, JPY, CHF) and even the Euro. And like the Euro I would fade this currency too, the GBPJPY is looking the most attractive to trade.
JPY – Played third fiddle for the safe haven flow as US Treasuries and German Bunds took most of it, but it did gain ground against the commodity currencies. If panic sets in the stock market and selling snowballs, the JGB buyers will push the Yen higher. Technically I like the AUD and GBP to trade the Yen against this week.
