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War or rate hikes, it’s very clear that investors are worried about the former. Sentiment took a deep dive on Friday on worries over an imminent Russian invasion of Ukraine. WTI crude oil surged to new 7-year high while Gold also soared before weekly close, while stocks took a heavy beating. In the background, markets are raising their bets on aggressive Fed tightening. But that would take a back seat for now until the Russia/Ukraine situation de-escalates.
The weekly currency heatmap couldn’t really reflect the sharp turn on Friday. Aussie was the strongest for the week followed by Kiwi. Euro was the worst, followed by Yen and Dollar. However, it should be noted that Yen and Swiss Franc had sharp rallies before close and would remain strong on geopolitical risks. Euro and commodity currencies could extend their late weakness too.
WTI oil and gold surged on Russia-Ukraine escalations
Investors were in deep worry that a Russian invasion of Ukraine could begin any time. US urged their citizens to leave Ukraine right away, and that was followed by a wave of other nations including the UK, Japan, Latvia, Norway, Netherlands, Australia and New Zealand, etc.
“We continue to see signs of Russian escalation, including new forces arriving at the Ukrainian border,” US national security adviser Jake Sullivan warned. “We are in the window when an invasion could begin at any time.”
WTI crude oil surged to as high as 94.88, to resume its medium term up trend. Further rise should be seen to 61.8% projection of 82.42 to 93.52 from 88.66 at 95.51 next. Break there will target 100% projection at 99.76. That is, 100 handle could be quickly reached if the Russia-Ukraine situation worsens further.
Gold also surged through 1853.70 resistance and hit as high as 1865.26. Now it looks like the rise from 1682.60 is resuming too. Break of 1877.05 will target 100% projection of 1682.60 to 1877.05 from 1752.12 at 1946.57. Firm break of this projection level will indicate further upside acceleration, and affirm the case that Gold is already in a medium term up trend.
Yen and Franc jumped on Friday on risk aversion
In the currency markets Yen and Swiss Franc staged strong rallies towards the end of Friday’s session. USD/JPY’s break of 115.31 support suggests that rebound from 113.46 has completed with three waves up to 116.33, after rejection by 116.34 high. Deeper fall is now in favor back to 113.46/114.14 support zone.
Near term outlook won’t be that bad as long as 113.46 support holds. In this case, price actions from 116.34 are just developing into a sideway pattern, which should be completed within a near-term time scale. However, firm break of 113.46 would open up deeper correction to 38.2% retracement of 102.58 to 116.34 at 111.08, which should last much longer.
EUR/CHF also dropped sharply after hedging higher to 1.0610. Strong break of 4 hour 55 EMA is already a sign of near term weakness. Immediate focus will be on 1.0439 support. Firm break there should confirm rejection by 38.2% retracement of 1.1149 to 1.0298 at 1.0623. Deeper fall would be seen back to retest 1.0298 low. Such development will also keep medium term outlook bearish for resuming the larger down trend through 1.0298.
94% chance of a 50bps Fed hike in March after CPI
In the background, a “less imminent” risk is of course intensified expectation of aggressive Fed rate hikes. After data showed US CPI rose more than expected to 40-year high. Bets on a 50bps hike in March surged. There were even talks that FOMC could hold an emergency meeting between now and March 15/16, to deliver an interest rate hike. Though, the latter panic move is rather unlikely.
Anyway, Fed funds futures now indicate 93.8% chance of a 50bps hike to bring federal funds rate to 0.50-0.75% in March, up from 33.7% just a week ago.
Going forward, there’s 95% chance of a 25bps hike in May to 0.75-1.00%, 96% chance of another 25bps hike to 1.00-1.25% in June, 60% chance of a 25bps hike again to 1.25-1.50% in July. The next hike could be delivered in September or November, followed by another one in December and next January. That is, by the end of the year, federal funds rate could reach 1.50-1.75% or even 1.75-2.00%.
S&P 500 more rejected by 55 day EMA
Stocks were indeed rather resilient to rate hike speculations, but was then knocked down more by war worries. S&P 500 was rejected twice by 55 day EMA and that was a near term bearish development. Though, outlook wouldn’t be too bad if SPX could defend 4278.94 support, which is close to 55 week EMA. There is chance that price action from 4818.62 are merely a sideway consolidation pattern.
However, firm break of 4278.94 will open up deeper medium term scale correction to 38.2% retracement of 2191.86 to 4818.62 at 3815.19 at least, before forming a bottom.
10-year yield breached 2%, more upside ahead
10-year yield’s break of 2% handle was also a talking point last week. For now, we’d expect recent up trend to continue higher. The real test is in 2.159/87 cluster level. This represents 61.8% retracement of 3.248 to 0.398 at 2.159, and 61.8% projection of 0.398 to 1.765 from 1.343 at 2.187. This level is not expected to be taken out decisively, unless markets believe that inflation would spiral out of control of Fed’s hands.
At the same time, we’re not expecting a break of 1.743 support even in case of retreat. But of course, that’s based on the assumption that a full-blown war would not take place.
USD/CAD Weekly Outlook
USD/CAD stayed in sideway consolidation last week and outlook is unchanged. Initial bias remains neutral this week first. Further rise remains mildly in favor. On the upside, break of 1.2795 will resume the rally from 1.2448 to 1.2963 resistance next. However, break of 1.2634 support will turn bias back to the downside for 1.2448 support instead.
In the bigger picture, focus stays on 38.2% retracement of 1.4667 (2020 high) to 1.2005 (2021 low) at 1.3022. Sustained break there should confirm that the down trend from 1.4667 has completed after defending 1.2061 long term cluster support. Further rise would then be seen towards 61.8% retracement at 1.3650. However, rejection by 1.3022 will maintain medium term bearishness. Break of 1.2005 will resume the down trend from 1.4667 and that carries larger bearish implications too.
In the longer term picture, we’re viewing price actions from 1.4689 as a consolidation pattern. Thus, up trend from 0.9506 (2007 low) is still expected to resume at a later stage. This will remain the favored case as long as 1.2061 support holds, which is close to 50% retracement of 0.9406 to 1.4689 at 1.2048. However, firm break of 1.2061 support will argue that USD/CAD has already started a long term down trend. Next target is 61.8% retracement of 0.9406 to 1.4689 at 1.1424.
