Weekly analysis

The European Commission negotiated on behalf of all the EU countries with the vaccine manufacturers and succeeded in buying the jabs cheaply, holding the drug companies to account and obtaining enough to vaccinate the whole of the EU.

Unfortunately, side effects included delays in delivery, bickering between the EU states and a slower vaccination program than either the US or the UK. The result: a weaker Euro on the likelihood that the EU economy will recover more slowly from the slump caused by the pandemic than other nations and regions. Moreover, that’s a perception that will likely persist for many more months and that, in turn, will likely mean the Euro weakens further.  

As the chart above shows, the Euro has been climbing against the Yen for months now; indeed EUR/JPY has been advancing since the start of the pandemic, which is remarkable given that the Yen was once seen as a safe haven. There has only been one safe haven over the past year and that, of course, has been the US Dollar.

In the end of the first quarter, there were signs that the Yen was coming back into go-to currencies for traders seeking havens and that suggests it could well strengthen in the second quarter if the global economic recovery fails to emerge at quite the optimistic rate the markets seem to be expecting.

So, putting together a weak Euro with a stronger Yen, there is plenty of scope for EUR/JPY to weaken if  like me  you think the recovery will be rather bumpier than current market pricing implies.

One of the contributing factors to the heady gyrations is the Fed not sufficiently addressing the issue of the US Treasury needing to draw down its account at the Fed from the current $1.6+ trillion to $120 billion, which creates all manner of havoc at the shortest end of the curve as banks and others in the financial system run out of places to park this money in “risk free” assets like t-bills,
Something was a bit of loud statement at the time from the Powell Fed that the market did not pick up on was his observation this week at testimony before Congress that all of the rise in treasury yields of late was merely a reflection of rising optimism for the economic outlook. What about the scary levels of treasury issuance?

The additional damage may not need be significant if the Fed first: moves both makes the technical moves need to avoid further system risk linked to the US treasury’s monumental shift of liquidity, but also second: provide some obvious hint that it will only allow yields to go so high before stepping in with yield curve control There is the irony and the chicken and egg question – the Fed may first need some more damage before it has the coverage to do something as drastic as yield curve control. So if the first move is merely the technical one on money markets to deal with liquidity issues and no hint at yield-curve-control, we could get dragged through the mud of a bigger traditional risk off move here for a while. Let’s make no mistake: yield curve control is a must, or the Fed will have no chance of seeing its inflation and employment targets met. In the beginning, we may only see this in baby steps, like a promise to cap two- or three year yields (the latter like Australia’s RBA). That would likely be enough for a while, even if the Fed would like have to shift to five years and longer if rising yields persist and this continues to plague risk appetite. 

This reversal in EURUSD is an ugly one for the bulls, coming as it did just after the pair had spiked through a major resistance level just below 1.2200. A weak close  would point to a test of the 1.2000 and possibly the even more important existential level for the uptrend at 1.1900.  Already with this latest burst higher in yields spreading to Europe earlier this week, we saw ECB President Lagarde out declaring that that the central bank is vigilant on the need to watch yields.

The Japanese yen seems the most sensitive to US yield moves, and the USDJPY consolidation was very tight relative to the size of the prior range and the size of the move in other JPY crosses. If US yields poke back higher, the big 110.00 area in USDJPY could come under fire  the last level that bars the way to 115.00 there. On the flip-side, if rising yields go away as a threat for a time and the “Asian malaise” that is showing signs of moving into US equities as well, both the USD and the JPY could add on to their recent strength. 

So far, in USDJPY has been very shallow and now we have the pair looking back toward the cycle highs. The 110.00 level a bit higher continues to look important as the approximate current top of the years-old descending channel, but also as a psychological level of  note and the last area before the more well-defined 114.50 area  Japan’s financial year end is March 31.

Britain's rapid vaccination campaign and nationwide lockdown have yielded a sharp drop in COVID-19 infections, hospitalizations, and deaths, raising hopes for a quicker return to normality.
The promise of a slow exit from the lockdown is that it will allow vaccinating more people and also diminish the chances of having yet another shuttering of the economy.
GBP/USD is also weighed down by fresh dollar strength, stemming from higher US yields. Expectations of stronger growth  perhaps even overheating due to stimulus  is pushing investors away from US Treasuries. So far, the central bank has seen it is as a healthy sign of recovery.
Powell is set to testify before Congress on Tuesday and his prepared remarks may be released already on Monday. If he reiterates the bank's willingness to do more and opens the door to expanded bond-buying, yields could fall and the dollar could rise. While he is unlikely to commit to new and imminent stimulus, Powell's commitment to do more may provide the next leg higher for GBP/USD. 

Pound/dollar continues benefiting from upside momentum on the four-hour chart and also trades well above the 50, 100 and 200 Simple Moving Averages. The recent dip pushed the Relative Strength Index away from the 70 level thus further out from overbought conditions.

The fresh multi-year high of 1.4052 is the first resistance level to watch. It is followed by 1.4145, 1.4255 and 1.4370, all date back to 2018.

Support awaits at the daily low of 1.3980, then by 1.3950 and 1.39, which served as stepping stones on the way up.

The Bank of England meeting came and went with lack of concern on the steep backup in longer term yields of late suggests that the bank retains the same comfort that fiscal stimulus is sufficiently strong in the UK to overwhelm any concern about longer rates rising. EURGBP champing at the bit for more declines – are we set for a run all the way to 0.8300? The market is getting more aggressive in pricing in BoE hikes than Fed hikes for the late 2022 time frame. Local resistance at 1.4000 in GBPUSD quite clear-cut for whether that pair can press higher.

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A combination of factors prompted some follow-through selling around USD/CAD.

The risk-on mood continued weighing on the safe-haven USD and exerted downward pressure.

Rallying crude oil prices underpinned the loonie and further contributed to the offered tone.

The USD/CAD pair remained depressed through the week and was last seen trading around the 1.2650 region, just above multi-week lows.

The pair edged lower on the first day of a new trading week and extended Friday's intraday fall of around 85-90 pips from the 1.2765 area. The downtick was sponsored by a combination of factors, though lacked any strong follow-through and the USD/CAD pair, so far, has managed to hold above multi-week lows support around the 1.2660 region.

The progress in the coronavirus vaccinations and hopes for a massive US fiscal stimulus plan has been fueling the optimism about a strong global economic recovery. This, in turn, remained supportive of the underlying bullish sentiment as depicted by the continuation of a rally in the equity markets  and dented the US dollar's safe-haven status.

A strong pickup in crude oil prices underpinned the commodity-linked loonie and exerted some pressure on the USD/CAD pair. Oil prices remained well supported by hopes that easing of lockdown restrictions will lift the global fuel demand and got an additional boost from rising fears of heightened tensions in the Middle East.

Crude oil  +7% rally in the week to March 9 that was partly driven by a temporary risk spike following the attempted attack on Saudi oil installations, only triggered a small 2.8k lots net increase in the combined crude oil long in WTI (+7.6k) and Brent (-4.8k). During the past four weeks a 12% rally in crude oil has triggered no additional increase in the combined net long which currently stands at a 2-1/2-year high at 731k lots. While rising US bond yields and the stronger dollar has lowered investment appetite, these developments also support our view that crude oil has reached a level beyond which can be hard to justify given current fundamentals. 

A two-week record draw in US fuel stocks, following the Texas freeze disruption, helped attract net buying in both gasoline and distillates. A natural gas price slump on warmer weather driving less demand triggered a 14% reduction in the net long to 284k lots.
Speculators cut bullish commodity bets for a second week with rising yields and a stronger dollar triggering some risk adversity. The combined net long across 24 major futures contracts was reduced by 4% to 2.6 million lots, representing a nominal value of $129.2 billion.

A strong week for the energy sector with crude oil trading higher by 8% while natural gas surged by 17% on the outlook for cold weather and an unusually big weekly reduction in stocks. Brent crude oil meanwhile is marching toward resistance at $60/b, the 61.8% retracement of the 2018 peak to the 2020 low, driven by a tightening market on expectations that OPEC+ is committed to supporting further price gains by restraining global supplies even as demand outlook improves as the vaccine-led recovery in global mobility increases.

Silver’s go it alone rally, inspired by conspiracy theories and ill-informed traders in the group on Reddit, almost ended before it began. After failing to break above $30/oz, now a double top, the trade idea crumbled fast. But unfortunately not before having sucked 3,500 tons of new investments into exchange-traded funds, most of which are now under water.

Without strong support from gold, which instead drifted lower in response to a stronger dollar and rising bond yields, the rally was doomed to fail. Not least given the lack of fundamental reasons for the gold-silver ratio (Ticker: XAUXAG) moving to a seven-year low at this point in the cycle. 

While premiums for silver coins and small bars due to strong retail demand has been rising, thereby forcing unfortunate buyers into paying a huge and potentially loss-making premium above the prevailing spot, the LBMA in London reported that one billion ounces or 28,350 tons of silver traded in the London spot market on Monday.

Despite the recent setback, we maintain a bullish view on precious metals but given the current focus on a post-pandemic growth sprint, demand for safe havens has faded. 

Fed Chair Powell failed to signal a sufficient level of concern on rising US treasury yields yesterday to soothe this market, which threw another tantrum, sending treasuries lower and yields soaring, and sending equities into a new tailspin while the US dollar went nearly straight up. The Fed will eventually act, but only once financial conditions are sufficiently dire to give him the cover to do so, as he can argue that sharply weaker financial conditions would feed through to Main Street USA and present disinflationary and labor market risks. The Fed may be happy for some measure of speculative froth to come out of this market rather than to be seen riding too quickly to the rescue. 

The Bank of Japan’s Kuroda made comments rejecting the notion in a parliamentary hearing that the BoJ is ready to expand the range of trading for Japanese government bonds. The 10-year yield was smashed back lower to around 0.07% after rising as high as 0.15% recently. 

USDJPY upside action accelerated again overnight as BoJ Governor Kuroda rejected the notion that the Japanese yield curve should be allowed to lift, which smashed long JGB yields back lower. To me, the pace of recent gains in USDJPY is getting to be too much too fast and will inevitably hit a brick wall at some point down the road – either once the Fed steps in with something to counteract the move in yields, or, perhaps more likely in the near term, when the move higher simply exhausts itself of its own accord. A reversal in all JPY crosses would prove most climactic if asset markets tank badly and finally trigger a bid into bonds. But for now, traders shouldn’t dare step in front of an onrushing train and should consider JPY call option strategies for any contrarian trading notions to the present trend  with a measure of patience and building a position over multiple sessions. Next big round level is 110 here.

The medium term setup is still clear that the pair had a nice orderly consolidation that tested just below the 38.2% retracement of the large rally wave from late last year (1.2050 ), which is the tactical support for remounting a charge on the highs for the cycle, and if we avoid an uglier deleveraging event here, the EURUSD higher trade is a less volatile way to trade for a resumption of the USD bear market, adding possibly EM and commodity dollar trades to the mix next week if those recovery smartly versus the USD into the close of the day and week today and into early next week. The key upside objective to take out is the 1.2200 area for the bulls.

Data wise, European figures were generally discouraging. German published the IFO Business Climate, which contracted to 90.1 in January, while the GFK Consumer Confidence Survey resulted at -15.6 in February, much worse than anticipated. Inflation in the country picked up modestly in January, as it printed at 1.0% YoY, according to preliminary estimates. Also, the economy grew 0.1% QoQ in the last quarter of the year, better than anticipated but way below the previous 8.5%. 

On the other hand, US data was mostly upbeat. Durable Goods Orders were the only down note, as they rose by a modest 0.2% in January. Q4 Gross Domestic Product resulted at 4.0%, beating expectations, while weekly unemployment claims continued shrinking, down to 875K in the week ended January 22.

Still, macroeconomic figures indicate shy economic progress. It seems that investors still believe that growth will return in the second half of the year.

The Federal Reserve announced its latest decision on monetary policy, and as widely estimated, they left rates and bond-buying programs unchanged. The central bank reiterated that the “path of the economy would depend significantly on the course of the virus, including progress on vaccinations,” while adding that the pace of the recovery in economic activity and employment has moderated in recent months. A generally dovish statement maintained markets in risk-off mode.

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