Calendar Week 26-2022
FX markets trod water last week as bonds weakened somewhat but the big story was the aggressive bounce in stocks on Friday. There was no major data or headlines for the stocks to run higher from, but there seems to be two major drivers for it. One is a short squeeze, second is the timing of the Fed.
The Fed Dot Plot showed them expecting to raise rates through to September, halting in October with another push in December and February. The Fed then looked to lower rates in October 2023. However, the smart money guys in bonds have a different trajectory. Bonds see hikes peaking in October and rather than pushing in February they see the Fed actually dropping rates early 2023 as a recession starts to bite. This brings the timeline considerably faster and earlier than the Fed predictions.
So it would seem to us that the stock market is looking at the recession as an opportunity of fresh cheaper funding and perhaps more quantitative easing. This is the lifeblood for stocks and has been since 2008.
Outside of that scenario, which is highly likely, we see the commodity market also pricing in a recession with copper dropping like a stone. It may have found a temporary floor on Friday but it is a good “bellwether” for economic conditions. Soft commodities were also in free fall last week, which is good news for inflation and the grocery shopping list.
Also good news from China over the weekend as covid restrictions are further eased and the country starts to get back to work.
Economic calendar ahead is subdued with just a few talking heads mid-week, otherwise the market will be left to its own designs this week.
Currency Guidance
AUDUSD spent the week flip flopping as it consolidated above 0.69. Expecting the USD to weaken this week with the dollar index fading into the high 102’s, giving the AUD a chance to push and test 0.71. Don’t look for long term buying in the AUD though, see it more as an opportunity to find a short position.
EURUSD also consolidated and from a technical view point seems to have created a inverse head and shoulder pattern. However with fragmentation concerns, war and energy supplies, getting long the Euro would be a tricky undertaking this week.
GBPUSD there is resistance for the cable around 1.2440 area and it may get up there with the greenback weakness. With the shambolic political scene in the UK right now I would see that as a place to fade the sterling lower.
USDJPY broke above 135.30 and spent some time above it before falling back under as the Yen found some buying. However it is more like a dead cat bounce for the Yen and I see this as a good opportunity to fade it against a stronger currency. Problem is finding one, perhaps the CAD.
USDCAD looks to have turned and heading back across the range. Did stop on minor support zone circa 1.29 and a full push to the bottom of the range to 1.25 would require a significantly weaker USD and or a booming Loonie. Either scenario are hard to see this week, but I have been wrong many times before and could be on this too.
NZDUSD has minor resistance at 0.64 and larger at 0.65. Look to potentially fade it if the sellers are visible from those levels.
