Date Tuesday 23rd February 2021
Direction

As we come to the end of the earnings season markets are fighting for direction balancing the yield story with the longer-term view of the dollar and continued concerns that equities are now overpriced.

Drivers

As countries start to look at a roadmap to reopen their economies, markets continue to focus on the move higher in real yields.  They are looking at the composition of the move (ie. is it driven by nominals or break evens) and what does this mean for the macro picture?  However, despite the move higher in ten-year US real yields, the DXY is actually modestly lower.

In the meantime, the G10 focus over the past week has been the outperformance in AUD, with numerous reasons highlighted for this, including dividend conversions from miners and higher bulk and base metals.  With Australian yields also moving higher than that of US yields, that has provided further support to the currency.

Elsewhere, we note that the EUR has lagged the move higher, partly due to covid restrictions as well as the vaccine roll out in Europe starting off slowly (Germany having only achieved Covid-19 inoculation in less than 4% of its population vs 13% in the US and 26% in the UK)

USDJPY has also been tricky, paring back its gains after briefly breaching 106 and now retracing to around 105.50 despite higher nominal US Treasury yields.

Equities potentially may have weighed on USDJPY, with S&P down 0.8 per cent (NDX down 2.6%), with equities focused on the implications of higher real yields and comments from US Treasury Secretary Yellen noting that a capital gains tax hike might be worth considering.

With yields having risen sharply of late, ECB’s Lagarde noted that the ECB will closely be monitoring long-term nominal bond yields.

Numbers to watch
  • USDJPY has also been tricky, paring back its gains after briefly breaching 106 and now retracing to around 105.50 despite higher nominal US Treasury yields.

Market Updates

EURUSD The euro surged above the 200-SMA as the US Dollar fell ahead of Fed Powell’s testimony with euro bulls now attempting to break the 1.2175 resistance with the expectation that Powell will downplay the increase in prices and risks of inflation and reiterate that accommodative monetary policy is still needed. We remain with our long bias and expect the EURUSD to hit 1.2215 in today’s session.

GBPUSD Our buy the dips strategy worked perfectly on the Pound yesterday, as the pair broke past the 1.40 psychological resistance level, courtesy of UK’s successful vaccination program. With today’s upbeat UK job figures, the Cable will resume its bullish trend, expecting a break above 1.41 and head towards 1.4150.

USDJPY Initially, the USDJPY shot higher yesterday above ¥105.80 but quickly reversed course dropping sharply below the 200-period SMA and below the ¥105 level as rising yields have put quite a bit of pressure on this pair to go higher. Today, markets in Japan are closed for the Emperor’s Birthday holiday, therefore we expect reduced volume in Japanese Yen trading, while technical indicators favour a rebound towards crossing near-term and long-term moving averages around ¥105.35.

FTSE 100 – Britain’s FTSE100 closed slightly lower yesterday, but the index looks like it is set to rebound this morning as the government prepares to release details of its planned path out of Covid-19 lockdowns despite UK unemployment rates, released moments ago, showing a modest uptick from the 5% level to 5.1% for the first time since the Brexit referendum in 2016. From a technical perspective, the UK benchmark hovers around the 200-period SMA therefore an hourly close above this key indicator will favour higher prints with 6700 as next resistance, while a close below it will trigger weakness towards the 6580-support level.

DOW JONES – Wall Street stocks closed mostly lower yesterday as investors dumped growth stocks like Microsoft, Apple, Tesla, Nvidia, and Alphabet, preferring more value-driven companies like Disney, Visa, MasterCard, Exxon, Chevron, which in turn pushed the Dow Jones Index slightly higher and back above the 200-period SMA, while the Nasdaq Composite saw out of the session 2.45% weaker. Today, traders will focus on Fed Chair Powell, who will deliver his semi-annual testimony on the state of the US economy before the Senate Banking Committee, with comments on rates and inflation potentially determining the market’s direction as the index is now back above old resistance turned support at 31470 and the 31720 level is now the new key resistance.

DAX 30 German stocks finished lower yesterday with the DAX30 hitting both our support levels at 13900 and 13800 despite the business climate index rising to 92.4 in February from 90.3 in January. However, gains in cyclicals helped offset earlier weakness, as rising bond yields and inflation are prompting investors to dump interest rate-sensitive stocks and turn to more value-driven stocks. Today, technical indicators signal more weakness ahead, as the blue-chip index remains below the 200-period SMA, and the RSI points lower suggesting the selling is not over yet.

GOLD Gold hit our long resistance targets at 1800 and 1815 as investors focus on stimulus and Fed Powell’s testimony to the Senate today, for any shift in tone and for further policy guidance. Inflation concerns should keep the yellow metal well supported despite fast rising crypto market that Citigroup warned may be eating into the metal’s demand.

USOILWTI Crude oil continued to push higher, gaining 5.50% in yesterday’s session, and closing above $62pbl, as US production struggled to fully restart and some analysts estimating that the pandemic caused supply glut will be drained by the summer. API weekly crude inventory data expected today with technical indicators favouring further upside as $62 support level holds.

 

 

 

 

Rony Nehme

Rony Nehme

Chief Market Analyst at SquaredFinancial

Rony has over twenty years of experience in financial planning and professional proprietary trading in the equity and currency markets. Prior to joining SquaredFinancial, Rony educated and coached numerous traders helping them find their edge and arming them with proven trading methodologies to successfully battle the markets. Rony obtained a B.S. in Finance from Concordia University in Montreal, and his professional designations include Certified Financial Planner CFP® obtained from the Canadian Securities Institute.

 

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