Chris Weston, Head of Research for Pepperstone offers his weekly analysis of what’s brewing in the Forex markets.
The S&P500 gained 1.9% on Friday, bringing the loss on the week to 1%. The index closed at its absolute session highs, with 93% of stocks closed higher. The bulls need the index to break 3950, which could set off a trend, and looking at the net short position in the Commodity Futures Trading Commision report. if Friday’s rally follows-through then we could see some systematic players cover shorts, propelling the market higher. Don’t discount the impact that may have on options market makers too, and the need to buy back delta hedges, pushing the S&P500 index higher
US Earning Season begins
US earnings trickle in this week, with 14% of the S&P500’s market cap reporting. I’d imagine Netflix and Tesla will get a workout from clients. 12,230 is the range high and the level to watch in the Nasdaq. A break here could have big implications. If the market falls, I’ll flip to a short bias on the Nasdaq through 11,400.
European markets
EU equity markets have held in, but this week we have political issues in Italy, and a decision regarding Nord Stream 1 (NS1) from Russia. This has the potential to inject some huge volatility in EU equities. As we discussed in the article on the Nord Stream 1 decision, the market almost sees this as binary and could see relief, or clear worry, depending on what the Russians do once maintenance has finished on Thursday. The outcome could be a headline fest to navigate.
The USD rallied against all G10 FX last week (except the SEK and CHF) with the USDX stopping shy of 109. The USD is clearly at the epicentre of markets and economics at present and a falling USD would be welcome music for equity and commodity bulls. It’s hard to say the recession trade is fully priced in but much now relies on the USD and how it could impact European Markets., Europe is especially sensitive now as the European Central Bank’s (ECB) balance sheet is increasing at a clip, due to the assets it holds being priced in EUR. This is feeding into further EUR weakness.
This dynamic makes this week’s ECB meeting big viewing. The Central Bank could use a stronger EUR but hiking interest rates by 50bp is a tough option, especially if Russia does not turn on the flow in NS1. They also need to offer a credible plan for dealing with the blow-out in Italian and Greek bond yields. But, leaving policy too loose could have implications too. As far as central bank consideration goes, the ECBs job is as tough as it gets.
Currency pairs
EURUSD traded into 0.9952 last week but has since pushed back about parity level and Pepperstone clients are modestly net long here (59% of positions are long). With NS1 and the ECB in play, it’s no surprise that EUR implied volatility is high. Movement is expected. Personally, I’d be far more convinced to turn less bearish if the 3-day moving average crossed above the 8-day moving average. With a binary volume event on the horizon, if the Russians turn on the taps sufficiently, we could see 1.0200 by Friday’s close. If the Russians delay the flow, then we could be trading sub-0.9800.
USDJPY may have seen its highs. I like this pair lower in the very short-term, and on the 4hr chart, I see a moving average bearish crossover (3s & 8s) and the rate of change (5) is lower. With the Fed blackout period in play (there are no more scheduled Fed speakers until the FOMC meeting) and limited tier 1 US data due this week, the US bond markets (a key driver of the USD) will focus on external factors like NS1 and the ECB. I like USDJPY into 137.50 but have a limited conviction on that call.
Commodities remain a core focus too, with wheat having its worst week in a decade falling 12.6%. Brent Crude is trading at the levels it was sitting at just prior to the Ukraine invasion. It is now trading within a falling wedge pattern where an upside break could make for a more bullish run. A break below $95.50 would clearly be positive for risk assets, with US 1-yr inflation expectations having recently fallen from 6.37% in March to 3.60%. I do sit in the camp that last week’s 9.1% June CPI print will mark the peak in inflation, although it will likely be a long road back to more manageable levels.
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