Traders were expected to see a greater upside surprise but the CPI came in only a fraction higher than analyst estimation (8.5% vs. 8.4% expected). USD seesawed a bit but the medium-term bullish trend in the dollar is still intact. Stocks look shaky tough. VIX (the fear index) is trending higher and stocks lower so buy to hold investors are sweating right now. In this report, I provide you with some medium-term VIX and S&P 500 projections. I’ll keep you posted via Telegraph when I see new opportunities emerging. Heads up for the US PPI release later on today. By reading further, you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
The way I have structured my analysis is that I will post trade ideas when I see them but when now apparent trade ideas stand out at the time of writing the analysis I will provide you with analysis and key price levels on markets that are worth putting on a watchlist. As soon as something catches my eye I will update you on our Telegram channel.
I tend to include Target 1 (T1) and Target 2 (T2) levels (or ranges) so that you have an idea of how far the market would probably move if price action supports my trade ideas. The target one is a high probability target while the next target is further away and therefore there’s a greater risk that the market doesn’t reach the level. While I don’t provide investment advice my analysis helps you in your own market analysis and then you can decide how to trade the markets. If you need help more help with your trading join me at the next live analysis webinar here: www.TIOmarkets.com/webinars I will show you live how to analyse the markets and identify trading opportunities.
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EURAUD dropped to my T1 at 1.4570 and almost touched the T2 level at 1.4476.
EURGBP hit my measured move target (0.8325) on the downside. I said yesterday the EUR was weakish against the major competitors, so I was expecting the support to break which opened up the way for the market to move to my target level.
VIX, or the fear index, as it’s also known is now trending higher in the weekly timeframe. The index broke out of a bearish channel in November last year after which the S&P 500 index (later SPX) for a month or so. Now SPX is trending lower while VIX makes higher highs and higher lows. How far should we expect VIX to rally and what might it mean for SPX? If we make a projection using trend channels it looks likely that VIX could exceed the recent highs sometime between April 25th and September 6th. This obviously only a very rough estimation based on extrapolation of the current data but it gives us an idea of the steepness of the decline in stocks. If this projection turns out to be correct this would take VIX to the 33.13 – 38.00 range, a zone that turned the fear index lower (and stocks higher) the last time. If we use the same method to estimate the likely values for SPX we are provided with a range of 3747 – 4091 for the same period. This would imply a significant downside risk (10% – 18%) for the US stock market. This raises the question of whether such a decline in asset values would turn the Fed hawks into doves again. An almost 20% drop in SPX would make the Fed worried about the inverse wealth effect and thus make it likely that the balance sheet reduction and rate hikes would be forgotten for a while. Please keep in mind that this is only one potential scenario. The decline in stocks could be steeper or not so steep or could reverse. It’s important to follow the markets on daily basis and update our analysis when we get more information.
AUDUSD has broken the 0.7442 support. Below this level, my T1 is at 0.7406 and T2 at 0.7363. Alternative scenario: AUDUSD rallies above 0.7442 and moves to the 0.7460 – 0.7470 range. I shared this trade idea in Telegram earlier today. Sometimes it’s not possible to wait for the morning report to be ready and this is why I recommend you will follow the TIOmarkets Telegram channel too.
GBPAUD created a bearish candle yesterday in the daily chart. This makes me want to amend my trade idea of looking for long trades above the 1.7432 support. The pair is now trading above the level so the idea is still valid but target levels need to be lower. So, as long as the market trades above 1.7432 I look for long signals with my T1 level at 1.7550 and T2 at 1.7620. The alternative scenario is that the support (1.7432) is broken decisively and the market declines to 1.7371.
Macro Drivers for the USD As the most followed, invested and traded markets for risky assets are priced in the USD it is helpful to understand what macroeconomic factors impact the other side of the equation, the USD. Whether we are trading EURUSD, XAUUSD or US equity CFDs the factors impacting the dollar, the nominator in the equation, have a significant role in the formation of all medium to long-term price action. The following table summarises the most important fundamentals.
|The Federal Reserve||Fed has started tapering and expects it to end in the summer of 2022. The central bank was forced to change its views on inflation being transitional inflation traders expect the first hike in June 2022 (the probability of a hike is 80.9% at the time of writing this).|
|Stimulus||The US lawmakers have authorised approximately five trillion dollars of economic stimulus since the beginning of the pandemic. Now, US Congress has passed a $1.2 trillion infrastructure spending plan.|
|Yields||In Q3 and Q4 2021 the benchmark 10-year US Treasury yield ranged between 1.1720% and 1.6830%. The hottest inflation readings since 1982 have pushed the 10 yr. yield higher as bonds have been selling off.|
|Employment||The December non-farm payrolls increased by 199K instead of 400K expected by the analyst consensus while the unemployment rate was a positive surprise at 3.9% (4.1% expected). Average hourly earnings came in at 0.6% (0.4% expected) moving the annual rate to 4.7% (4.2% expected).|
|Inflation||The annual headline inflation reading for December at 7% (6.8% previous) is the highest CPI print in almost 40 years. The core CPI (all items less food and energy) moved to 5.5 per cent y/y (4.9% previous) This was the biggest annual increase in CPI since 1982.|
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The Next Main Risk Events
- JPY – BOJ Gov Kuroda Speaks
- USD – PPI and Core PPI
- CAD – BOC Monetary Policy Report
- CAD – BOC Rate Statement
- CAD – Overnight Rate
- CAD – BOC Press Conference
- USD – 30-y Bond Auction
- AUD – Employment Change
- AUD – Unemployment Rate
For more information and details see the TIOmarkets economic calendar here.
Chief Market Analyst
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