Trade ideas & Daily market report January 20th 2022
- Risk appetite recovered to some extent on Wednesday, although there was still an important element of caution.
- US bond yields edged lower on the day which provided some limited relief.
- Wall Street equities, however, dipped sharply in late trading amid underlying unease over Fed tightening prospects.
- A small cut in Chinese interest rates helped underpin confidence in Asia on Thursday.
- The dollar drifted lower as yields retreated, although moves were limited.
- EUR/USD advanced to 1.1350 as German benchmark yields broke above 0.0%.
- Sterling posted limited net gains with EUR/GBP at fresh 23-month lows near 0.8310 before a correction.
- The Australian dollar posted net gains, boosted by a strong jobs report.
- The Canadian dollar failed to hold intra-day gains with profit taking after strong gains.
- Oil prices corrected from fresh 7-year high after a strong run of gains.
- Precious metals posted strong gains as a dip in US yields triggered short covering.
The Euro-zone current account surplus widened to EUR24bn for November from EUR19bn the previous month with a 12-month surplus of EUR320bn and 2.7% of GDP. There were, however, further portfolio outflows from the Euro-zone with a reversal in these flows needed to provide longer-term Euro support.
The Euro was resilient ahead of Wednesday’s New York open with a slight net gain as commodity currencies posted an advance against the US currency.
The German 10-year bond yield also moved above 0.0% for the first time since May 2019 which provided an element of support for the single currency as markets also considered the potential for a less accommodative ECB policy within the next few months.
Markets will continue to monitor rhetoric from ECB officials closely with scope for the bank to push back against an increase in money-market rates.
The dollar edged lower as yields declined with EUR/USD testing the 1.1350 area. Relatively narrow ranges prevailed during the US session with the dollar unable to gain significant traction, although commodity currencies weakened as equities moved lower with EUR/USD settling just below 1.1350.
The US Philly Fed business confidence data will be monitored on Thursday, especially after a much weaker than expected New York survey earlier this week. Narrow ranges again prevailed on Thursday with EUR/USD still close to 1.1350 amid a mixed tone in commodity currencies.
US housing starts increased to an annual rate of 1.70mn for December from 1.68mn previously and above consensus forecasts of 1.65mn. Building permits increased strongly to 1.87mn from 1.72mn and above expectations of 1.70mn previously.
US Treasuries secured some respite in early US trading with the 10-year yield retreating from 2-year highs. There were net gains in equities which helped underpin risk appetite and curbed yen demand to some extent, although USD/JPY was unable to make headway and edged lower with a retreat to near 114.25.
Equities dipped sharply late in the US session, although the dollar was able to avoid further selling.
China announced a further easing of monetary policy on Thursday with the 1-year prime loan rate cut to 3.7% from 3.8% while the 5-year rate was reduced to 4.6% from 4.65%. The cut helped underpin risk appetite and futures secured a recovery, although Chinese equities were unable to respond and President Biden stated it was too early to remove tariffs on China.
Overall, USD/JPY recovered to near 114.50 in early Europe while EUR/JPY advanced to near 130.0.
Sterling was unable to make further initial gains following the latest UK inflation data, but the currency held a firm tone, especially with stronger expectations that the Bank of England would sanction a further interest rate increase at the February policy meeting.
The UK currency gained an element of support from a firmer tone surrounding risk appetite even though there was still significant caution.
Although there was a strong focus on political drama surrounding Prime Minister Johnson, the announcement that coronavirus restrictions in England would be eased provided some support for UK markets and UK equities were resilient which maintained expectations of investment inflows.
In testimony to Treasury Select Committee, Bank of England Governor Bailey stated that the labour market is very tight and that the bank was seeing some evidence of second-round inflation effects. Bailey also stated that inflation would take longer than expected to decline than had been expected two months ago, especially with concerns that energy prices would not start to decline until the second half of 2023.
Sterling failed to make further headway into the European close, but GBP/USD held above 1.3600 on expectations of a February rate hike. EUR/GBP dipped to fresh 23-month lows just below 0.8315 before a limited recovery. GBP/USD held above 1.3600 on Thursday with EUR/GBP around 0.8330.
The Swiss franc held firm on Wednesday with an absence of selling pressure as markets continued to monitor trends in risk appetite, bond yields and central bank policies. A limited retreat in US bond yields helped limit the potential for franc selling with overall equity market trends watched closely.
EUR/CHF was able to avoid further selling pressure, but was capped around the 1.0400 level while USD/CHF was slightly lower and just above 0.9150.
The franc was little changed on Thursday with USD/CHF trading above 0.9150 as markets continued to monitor risk conditions.
AUD/USD + USD/CAD
The Australian dollar secured net gains during Wednesday with support from a softer dollar and gains in equity markets with AUD/USD advancing to highs near 0.7240 before correcting slightly.
Australian labour-market data was stronger than expected with an employment increase of close to 65,000 while the unemployment rate declined to 4.2% from 4.6% and below market expectations of 4.5%.
The data reinforced expectations of a Reserve Bank rate hike this year with AUD/USD testing 0.7250 before settling around 0.7235.
The headline Canadian CP inflation rate edged higher to 4.8% for December from 4.7% previously and in line with expectations while the core rate increased to 4.0% from 3.6%.
The Bank of Canada core rates also moved higher, maintaining pressure for a rate hike, although the Canadian dollar was unable to make further headway amid pressure for a correction.
From lows near 1.2450, USD/CAD settled close to 1.2500 and traded below this level on Thursday around 1.2485.
The Norwegian krone held a firm tone on Wednesday with further support from strength in oil prices.
The Norges Bank will announce is latest policy decision on Thursday with markets expecting the bank will remain on track for a further rate increase in March.
EUR/NOK traded around 9.94 on Thursday with USD/NOK around 9.76.
The Swedish krona regained some ground as risk appetite stabilised during the day, but EUR/SEK held above 10.30.
EUR/SEK traded near 10.33 on Thursday as dovish Riksbank expectations limited support with USD/SEK close to 9.10.
European equities recovered some ground on Wednesday amid a more stable risk environment, although there was still an important element of caution with markets monitoring energy-price trends.
The German DAX index gained 0.25%, although the Spanish market edged lower.
Major UK stocks gained support from strength in the energy and metals complex. Optimism over earnings helped curb unease over inflation and interest rate trends with the FTSE 100 index advancing 0.35%.
US equities lost ground on Wednesday with further unease over the prospect of higher interest rates and there was caution ahead of earnings data. With further selling in the tech sector, the S&P 500 index declined 1.0%.
The Chinese interest rate cut helped underpin sentiment in Asia with US futures rallying.
Japan’s Nikkei 225 index gained 1.1% with a 0.1% gain for the Australian ASX index.
China’s Shanghai index struggled to make headway with a slight loss at the close, but Hong Kong’s Hang Seng index traded sharply higher with a 3.2% advance in late trading amid gains in the property sector after the China rate cut.
In its latest report, the IEA stated that the oil market was likely to return to surplus with the potential for record output for Saudi Arabia and Russia.
Oil prices maintained a notably strong tone with markets not convinced that output targets would be met while short-term outages also provided support.
Overall, WTI posted fresh 7-year highs before being hit by a correction.
WTI settled around $85.75 p/b on Thursday with Brent near $88.25 p/b and below 7-year highs above $89.0 p/b.
Precious metals were supported by a dollar retracement and retreat in US bond yields while market sentiment strengthened during the day.
Gold posted strong gains to 8-week highs just above $1,840 per ounce while silver posted a further robust advance to 8-week highs around $24.20 per ounce.
Metals held firm on Thursday, but with no further advance in early Europe.
Cryptocurrencies were again subjected to choppy trading during Wednesday, but secured net gains amid stabilisation in equity markets and a slightly weaker US dollar.
Bitcoin rallied from lows below $41,300 to highs above $42,500, although with some selling interest on rallies with fresh losses.
Traders expressed some optimism that long-term holdings were being maintained, but crypto assets were unable to make headway on Thursday despite a firmer tone in risk appetite and bitcoin was held around $42,000.
Ether recoveries were held to just above $3,150 before prices drifted lower again with little net change on Thursday as it found support below $3,100.
Major events for the day ahead: (times in GMT)
09.00: Norges Bank rate decision
13.30: US Philly Fed index
13.30: US jobless claims
15.30: US crude oil inventories
07.00 (Fri): UK retail sales