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The Weekly Close Out

Luke Suddards
Research Strategist
Mar 31, 2022
Curve inversions and peace on the horizon? Read below to find out more.

Dollar Index (DXY):

The greenback was in the green as traders made their way through Monday. A weaker yuan over lockdown fears, high beta currencies like GBP, AUD and NZD lower as well as JPY reeling all added upside for the DXY. The December 2022 Fed Fund Futures contract priced in 8.5 hikes. The dollar benefited from this punchy move in rates. Well Turnaround Tuesday certainly arrived with a bang! An FT article implying Russia’s demands seemed to be softening as they row back on their demands for demilitarization of Ukraine and if NATO ambitions were to be dropped by Ukraine then security guarantees can be given as well as the prospect of joining the EU. This began the bid into risk-assets late Monday evening and this was followed through on Tuesday when ceasefire rhetoric hit the wires.

Russian Defence Minister stated on Tuesday that to bring about constructive dialogue that Russia would be withdrawing its forces from Kyiv and Chernihiv and drastically reducing its military operations. However, the US and Ukraine see this as a potential strategic manoeuvre to concentrate its military forces in the East. We could also see a meeting take place between Putin and Zelensky as some seem to think. I still think there is a long way to go before the market can price a complete blue sky scenario. DXY suffered, sliding just below 98 intraday as the euro surged.

The other big story of Tuesday was also the brief 2s10s yield curve inversion, which historically has had a lead time of roughly 19 months until a recession envelopes the economy. However, far more credence is being given (Jerome Powell) to the spread between the 3-month yield in 18 months time and today’s 3-month rate (which has steepened substantially, allowing the Fed to feel vindicated with their aggressive hiking cycle). Without getting too academic in this note, a 2018 Fed research paper indicated that this spread has more predictive power than other spreads such as the 2s10s. The rationale for this is due to the term premium which can distort longer dated yields, while the shorter time frame for the 18m3m3m spread provides a cleaner picture of market expectations on Fed rate policy.

Private payrolls data out mid-week came in 5k higher than expectations of 450k as we approach Non-Farm Fridays (490k exp). Average hourly earnings will be the other key number to look out for given its feed through into wage pressures (5.5% exp). The Fed’s preferred inflation metric, the PCE Core Deflator printed at 5.4% vs 5.5% exp and above last month’s print of 5.2%. These are pre-invasion numbers so likely are a bit stale.


(Source: Bloomberg - Past performance is not indicative of future performance.)

DXY breakout initially to the topside of the triangle structure has been reversed towards 98. This looks to have some support for the bulls. With end of month/quarter flows out the way we may see the dollar either continue to move higher off this level or break it to the downside. 97 would be the next zone for the bears to target and comes in just below the 50-day SMA. On the upside another test of 99 and beyond there the previous highs, shy of the 100 mark.


The euro struggled against the dollar as the week commenced despite traders now pricing in 5.5 10bps hikes by the end of this year or just over 2 25bps hikes. Another factor to consider dragging the euro lower could be the eurozone’s export competitiveness eroding as JPY depreciates substantially. The beaten up euro loved the ceasefire talk and optimism and rocketed higher as a result. German 2-year yields surged too as the market priced in further tightening from the ECB and have now turned positive for the first time since 2014. Spain (9.8%) and Germany’s (7.6%) punchy harmonised inflation numbers out Wednesday led to markets pricing in further rate rises as we progress through the year. 62bps were priced by December 2022 and just under 50bps by October. So essentially the market was seeing a high probability of two 25bps hikes from the ECB by October – aggressive to say the least. This provided a boost to the euro. Since Wednesday pricing has shifted down a touch. We’ll have to see what happens after the euro wide inflation numbers are released today. 6.6% YoY headline and 3.1% YoY core expected, the risks are certainly to the upside after those numbers from Spain and Germany above.


(Source: Bloomberg - Past performance is not indicative of future performance.)

EURUSD galloped higher towards the 1.12 level, where it tagged the 50-day SMA and reversed lower. That will be a key level for bulls to clear to continue the uptrend. The RSI is close to the 62.55 level, which has led to rallies running out of steam previously. 1.11 (21-day EMA just below) on the downside will be watched as a price support if we see a sell-off.


It looks like we may be seeing the first clues of the BoE becoming more concerned on the growth outlook and not just the inflation picture. Governor Bailey spoke at a conference on Monday and stated the softer guidance on rates reflected the high level of uncertainty. I also think the description of the shock sounded quite negative – the UK economy is faced with a historic hit to real incomes that will take its toll on growth as the energy shock exceeds that of the 1970s. This was enough to see GBP lower against the dollar and euro. Sterling, failed to capitalize on the European asset positive news and languished below the 1.31 area. Wednesday saw a strong rally in GBP without any particular fundamental news, likely following in the footsteps of the euro. Thursday’s Q4 GDP data was better than expected and the current account’s deficit was half the forecasted number. Another important factor to bear in mind for GBPUSD as we enter April is the positive seasonality. Since 2010, GBP has appreciated around 1.5% against the dollar with a hit rate of over 80%.


(Source: Bloomberg - Past performance is not indicative of future performance.)

GBPUSD is struggling to follow through from the 1.32 level after it’s last breach. Price is now languishing around the low 1.31s where the 23.6% Fibonacci level also happens to be. 1.32 has fairly strong resistance and the 21-day EMA adds to that. The RSI is in no man’s land. The downside level to watch is the previous swing low of 1.31.


I had to do a double take on my charts on Monday morning as the USDJPY traded like a meme stock, surging higher. What caused the sudden surge - two things in my opinion. 1) The BOJ announcing for a 2nd time that they’d buy an unlimited amount of JGBs at the fixed rate of 0.25% 2) Mr Yen aka, Sakakibara, who has a wealth of experience with JPY FX intervention during his tenure as a Vice Finance Minister and still holds close ties to policy makers, stated that the correct policy decision would be intervention around 130 (new line in the sand?). It must also be noted that Japanese retail traders had amassed their biggest net long JPY position on record and would have been squeezed during the precipitous rise in USDJPY. The BOJ are in a tough position and faced with a trade-off – they have a much larger proportion of debt to GDP and as a result need to keep a lid on those servicing costs, but this supressing of yields moving higher hits the yen hard.

The Ministry of Finance would be the ones to watch as they would perform any direct FX interventions, the BOJ rather controls short-term rates and YCC. Kuroda so far doesn’t seem fazed by the rapid depreciation and sees it as a +ve for the Japanese economy. I also saw that there has been a substantial uptick in call option volume, which could lead to some delta hedging squeeze dynamics playing out.

Tuesday saw the yen mount a comeback against the dollar as positive news regarding Russia and Ukraine lead to oil selling-off and this reduced inflationary pressures which led to a repricing in US yields lower. Given JPY’s close correlation with US yields, I’m not surprised by this move in USDJPY. Additionally, Japan Chief Cabinet Secretary Matsuno informed markets that the government will take appropriate steps on FX policies based on international agreements, with close communication with currency authorities in the US, etc. The jawboning has begun it seems. The BoJ’s summary of opinions didn’t provide any fresh surprises for USDJPY. Wednesday saw a continuation of the move lower in USDJPY as US yields declined further. Friday’s NFP print could get US yields moving and given USDJPYs high beta to US yields this event is one to watch for this cross.


(Source: Bloomberg - Past performance is not indicative of future performance.)

There is a some mini support just above the 121 level (38.2% Fib), which if broken could take us down to the 120 area (21-day EMA and 50% Fib). On the upside, the zone to watch is 122.5. The RSI has fallen from extreme overbought to now slightly below overbought.


The yellow metal was put on offer as the dollar strengthened and crude fell, taking some of the heat out of inflation pressures. A FT article released late in the US session also drew in more sellers as it was reported Russia wants Ukraine to abandon its NATO ambitions and in exchange it will receive security guarantees, the prospect of joining the EU and doesn’t have to demilitarize. Risk assets saw a strong bid on this and consequently gold’s thesis weakened. Gold didn’t like the de-escalation news and promptly dropped below the $1900 level (pre-invasion zone) and tagged its 50-day SMA. Similarly to crude, bulls came back in for a nibble and pushed price higher by around $20. Gold certainly enjoyed the weaker dollar and news that Russian forces were being reorganized to focus on the Donbas region as Wednesday’s session got underway. Gold’s reaction to the US jobs report will be interesting, further tightening prospects through real yields could lead to a weak close into the weekend.


(Source: Bloomberg - Past performance is not indicative of future performance.)

Price continues to struggle to get its head above the 21-day EMA and the 23.6% Fib level. Rangebound price action seems to be the play on the yellow metal until the next catalyst. On the downside, the pre-invasion level of $1900 in conjunction with the 50-day SMA will be key for buyers to defend to stem a deeper sell-off. A move above $1950 would have important implications psychologically.

Crude Oil:

Crude found sellers as the week got underway driven by demand and supply side factors. On the demand side the imposition of the lockdown in Shanghai concerned crude bulls in relation to demand destruction as China (largest crude importer in the world) sticks to its zero covid policy. Fears of additional supply hit oil markets as reports hit the wires that Iran nuclear agreement is close with the Iranian Foreign Minister informing reporters that UK, France and Germany are happy with the draft. The US has not given the green light just yet. Additionally, a 3-day temporary ceasefire between the Houthis and Saudi Arabia has been implemented. Like gold above, oil was caught by the FT article and pushed to the $110 region. Oil traded like a meme stock on Tuesday gyrating between wide highs and lows. The positive ceasefire chatter led to strong selling initially, but as the US session came to a close crude bulls managed to push price above the $110 level. Oil’s price mid-week reflected scepticism regarding the ceasefire talks and continued its bounce. The larger than expected US inventory draw and the news of a reorganization of Russian forces towards Donbas will have helped keep the black liquid bid.

Oil was weaker going into the OPEC+ meeting as reports hit the wires that US President Joe Biden could release 180mln barrels from its strategic reserves. OPEC+ delivered a 432k bpd increase for the month of May. The next meeting will take place on May 5. Late in the European session yesterday the US announced the reserve release, an extra 1mln bpd for the next 6 months. The Houthi and Saudi Arabia truce ended yesterday too.


Source: Bloomberg - Past performance is not indicative of future performance.)

Price still remains above the 50-day SMA and the bias is therefore for up trending price action. $110 seems to be a fulcrum where price is magnetized currently. On the downside, sell-offs should find some stickiness around the $100 level which is just below the 50-day SMA at $102.5. On the upside, $120 could cap gains.

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