A quiet start to the markets this morning, but ADP in the US session should light a fire under the US dollar if we get a good number. Analysts predict 405K which is lower than the previous months 534K so anything close to 500K would be seen as a positive. The US dollar is treading water and we could be ultimately waiting for the NFP numbers later this week.
Market participants are pricing in three 25bps rate hikes by the end of this year, and as I laid out yesterday this is likely to happen around the summer months. The current moves in the US Treasury markets are marking a more aggressive pace of tightening policy in the US. US bond issuance in December was lower year-on-year and this would usually mean that there would be greater demand for the remaining issuance. However, if the Fed taper more aggressively the reduction in QE sucking the binds out of the system may mean that there is more supply than the banks require. This could also be one of the reasons we are seeing US treasury yields rising.
The rising yields have been good for the USDJPY as the monetary policy differential widens. The dollar, as noted yesterday, should expect to hold up against its lower-yielding peers, most notably the EUR and JPY, though today the relative strength of the greenback is very low. Yesterday the USDJPY broke out of the December range and pushed on towards the 116.50 price level. This morning we are seeing a pullback to the breakout level of 115.50 where I expected support to be found.
The US dollar index still looks to be in a bull flag but until we test the $97 price level we should be patient on expecting any long-term trend USD bullishness across the other pairs.
The EURUSD makes up most of the US dollar index, so some weakening data out of the European Union or a more Dovish note from the ECB could be the catalyst needed for a EURUSD sell-off. Today’s Final Services PMI’s from Italy, France, and Germany all came in under analysts’ expectations. So, a strong US ADP number later today could also push the EURUSD lower in the afternoon.
As markets look around the world and see Omicron a less of a threat, the next question is which sectors will do better in this new economic environment? The rally yesterday was distinctly cyclical, with hospitality, travel, and energy stocks leading the way higher. Big tech was clearly side-lined and will to some degree suffer from a tightening of policy. Employment is obviously an issue with employees having to stay away from places of work for many reasons around the current phase of the pandemic.
In the overnight session, the Japanese Consumer Confidence Index (seasonally adjusted series) in December 2021 was 39.1, down 0.1 points from the previous month. The category of the Consumer Perception Indices (seasonally adjusted series), which are comprised of the Consumer Confidence Index in December which brought the index down was Employment: 41.5 (down 1.4 from the previous month). The other categories were marginally up or flat.
The forex heatmap shows a decline in the commodity pairs with the CAD weaker and comparably so to the USD. Different provinces in Canada are going into lockdowns so this will be economically damaging, and ultimately bad for the Canadian dollar, though PM Justin Trudeau said that businesses and people affected should reach out for government assistance programs.
The price of WTI crude futures held at $76.5 a barrel after OPEC+ agreed to keep up the pace of supply growth. There will be a moderate and short-lived impact on fuel demand because of the omicron variant, but major oil producers have assured that they will increase production by 400,000 barrels per day in February. Due to pressure from the US to boost supply and the lack of new Covid restrictions, this move was widely expected. We should keep an eye on the rising fuel stockpiles in the US as these raised concerns of declining demand in the world’s biggest oil consumer.
As I have already mentioned there will be US ADP non-farm employment numbers and then later the FOMC meeting minutes, which the markets will pick over to see how likely these 3 rate hikes are based on the FOMC discussions.