USD moved sharply up yesterday as US Treasury yields jumped substantially higher. The benchmark 10-year T-bond yielded 1.63% at the close of bond trading yesterday after the previous close before the break for the New Year was 1.52%. Bond traders adjusted to the expectation that the Fed is probably going to counter rising inflation with a faster pace of taper than expected earlier and took some risk off the table. Yesterday’s robust moves in the bond market didn’t, however, impact the target rate probabilities substantially. Traders are still betting that the Fed will hike the rates in June and give it a 91.8% probability (previously 91.2%). By reading further you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
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USD Index (DXA) moved sharply higher yesterday as US Treasury yields jumped higher. The benchmark 10-year T-bond yielded 1.63% at the close of bond trading yesterday after the previous close before the break for the New Year was 1.52%. Bond traders adjusted to the expectation that the Fed is probably going to counter rising inflation with a faster pace of taper than expected earlier. Yesterday’s robust moves in the bond market didn’t impact the target rate probabilities substantially. Traders are still betting that the Fed will hike the rates in June and give it a 91.8% probability (previously 91.2%).
USD Index rallied to the upper end of the bearish trend channel we talked about yesterday and now the index is trading well above it. Yesterday’s strong move higher has made traders bet that the dollar might have more demand so we might be in for more USD strength. If the market sustains the rally the next key resistance levels to conquer are 96.38, 96.63 and 96.87. Should the dollar fall again, the next key support levels are 95.53 and 94.95.
NZDUSD took quite a beating yesterday as the USD rallied. The NZDUSD pair had failed to penetrate the 0.6859 resistance level last week and now that the greenback got a boost from the rising yields NZD was hammered lower. Yesterday’s candle not only closed way below the previous lows (bearish) but the range of the candle was approximately 1.5 times greater than the 14-period ATR preceding the sell-off. Lots of stops must have been triggered as the decline was so steep. NZDUSD tried to rally but the low of a bull channel in 8h cheat resisted the move. If NZDUSD manages to rally back inside the channel the 0.6814 – 0.6820 area (20-period SMA, 23.6% Fibo-level) is a key resistance area.
If the FOMC minutes suggest the Fed is going to be more aggressive in their fight against inflation there should be more bidders for the dollar and pressure on the NZD. In such a scenario, the levels near the most recent swing low at 0.6702 could come into play. If however, the Fed’s minute indicate that the central bank isn’t hawkish enough and bond traders don’t push the prices lower (yields higher) we could see the NZD recovering well.
Gold was one of the markets that suffered from the yield rally yesterday. No sustained buying in gold is likely to happen and technical levels get broken easily when the fundamentals or trader’s perception of fundamentals change. This time it was the bond traders preparing just in case the FOMC minutes were going to be more hawkish than earlier predicted. In other words, they took some risk off the table ahead of the meeting by selling inventory. This pushed the yields sharply higher and gold sharply lower.
We said yesterday that if there’s no sustained buying above the 1820.14 support the price of gold could retrace to levels between the moving averages. This is exactly where the down move paused yesterday. Now gold is trading above the SMA(50) and below the SMA(20). Now, like with all the other markets, it’s the FOMC minutes and the bond market together with the dollar that will impact the future of gold prices. Technically, the price is still bullish above the 1784.82 level and it could have support from investors that see it as an inflation hedge. The nearest key support and resistance levels are 1784.82, 1789.37, 1798.33 and 1831.66.
DAX has been trending higher with the US stock indices. Currently, in a 2h timeframe chart, DAX is trading near the upper end of a price channel and has started to react from it. DAX is in an uptrend and so are the US indices that are highly correlated with DAX but as we all know this doesn’t mean the markets can’t correct lower from time to time. Corrections create trading opportunities for both the bulls and the bears. Therefore, let’s map out the key price levels in DAX. The nearest support is at 16070 but that’s pretty close to the channel high. While a support level is a support level until it’s broken we need to understand that it’s pretty close to the channel high and that S&P 500 is trading at all-time highs. Rising yields weigh down the finance dependent technology stocks and with technology being the biggest sector in the S&P 500 index we might see it slowing down if the rise in yields continues.
This together with the fact that we have the FOMC minutes release nearing could make it vulnerable to corrections (small or slightly bigger). Therefore, we can’t rule out the possibility of DAX testing the next support level at 15978. That’s where we have the SMA(20) and the 38.2% Fibo-level. A key price level, therefore. Should that level be violated the next key area to focus on is the 15880 – 15930 range (channel low and the SMA(50)).
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||Payrolls increased by 210K in November. This was a massive disappointment after the analyst consensus had predicted strong jobs growth of 553K.|
|Inflation||The annual headline inflation reading for November at 6.8% (6.2% previous) is the highest CPI print in almost 40 years. The core CPI (all items less food and energy) moved to 4.9 per cent y/y (4.6% previous) This was in line with market expectations and was the biggest annual increase in core consumer prices since June 1991.|
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The Next Main Risk Events
- EUR – Spanish Unemployment Change
- USOIL – OPEC-JMMC Meetings
- USD – ISM Manufacturing PMI
- USD – JOLTS Job Openings
- USD – ADP Non-Farm Employment Change
- CAD – Building Permits m/m
- USD – FOMC Meeting Minutes
For more information and details see the TIOmarkets economic calendar here.
Market News & Facts
- OPEC not expected to deviate from earlier output plans
- Biden: US to act decisively if Russia attacks Ukraine
- Trading in Evergrande shares halted in Hong Kong
- US Durable Goods Orders m/m 2.5% (1.9% expected)
- US Core PCE inflation 0.5% (0.4% expected)
- US Final GDP 2.3% (2.1% expected)
- US CB Consumer Confidence 115.8 (111.1)
- Canadian Retail Sales m/m 1.6% (1.0% expected)
- Canadian Core Retail Sales m/m 1.3% (1.6% expected)
- RBA Minutes: Omicron not likely to derail recovery
- German IFO Business Climate 94.7 (95.3 expected
- UK retail sales 1.4% (0.8% expected)
- Surprise 0.25% rate hike from the BOE (0.10% expected)
Chief Market Analyst
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