Primus Weekly - 8th February

Hi Everyone,

The markets have shrugged off the recent volatility event and taken a step higher once again with S&P 500 rising 4.65%, Nasdaq-100 5.25% while Russell 2000 was up 7.7% last week. All these indexes reached another all-time-high. Risk-on sentiment has been prevailing since last week when President Biden’s stimulus package was approved with votes 51:50 in the Senate and the U.S. reached a milestone of 40 doses of COVID-19 vaccine administered.

Biden’s plan to revitalize the U.S. economy has been endorsed by the Senate, voting along the party lines, with a unified opposition from Republicans. Vice President Harris casted her first tiebreaking vote to move forward with approving the U$1.9 trillion spending package. This means that the U.S. growth targets are around 4-5% in 2021 – among the highest in the developed world. On top of fiscal spending, the U.S. economy is also expected to benefit from the re-opening of the economy at the back of the expedited vaccination program. With 40 million people vaccinated, translating into 12% of the population, it would take around 10 months to cover 75% of the population with two-dose vaccine, reported by Bloomberg. Among large developed countries, the U.S is only second to the U.K who has vaccinated 17% of the population. European Union is a laggard with only around 3% of the population having received a two-dose vaccine. The divergence in vaccination progress, combined with faster relative growth expectation, has supported USD against its major counterparts. The US dollar, measured by DXY, broke the 50-period moving average last week, an important resistance level, and is trading now near 91.0. EURUSD is also near 2-month lows of 1.2038, finding support near the 100-day moving average of 1.19600. Also, USDJPY continued trending higher, reaching 105.50 levels, which were last seen in November 2020. Price has been stopped by 200-day moving average but there seems to be energy in the trend which might support further bullish momentum. The strong dollar is expected to exert pressure on risk assets with equities and commodities being the likely victims. But also, emerging countries’ currencies and credit can be expected to take a nosedive, should USD continue to march higher. The reflationary trade that started to show signs of emergence will be forced to take a pause with strong USD and therefore dollar strength is not to be ignored.

Despite US dollar testing levels last seen in 2020 and therefore adding pressure to commodities, we have seen a spectacular rise in oil price in the recent week. Price has shot up to 57.4, levels last seen a year ago. Oil was one of the main beneficiaries of reinflation trade that was supported by vaccine news, Biden’s presidency but also the Blue Wave in Congress. Stockpiles accumulated in Q1 last year are becoming thin, and with the increased demand from China we have seen prices reaching 12-month high. OPEC and its allies have contributed to the shrinking stockpiles – cuts were agreed in April 2020 and since then 2.1 billion barrels of oil have been held back, WSJ reports. In addition, American oil companies have cut back production in 2020 which is presumed to continue with the new and greener administration at the helm at the White House. The final push has come from extraordinary weather conditions prevalent in the northern hemisphere – polar vortex daunting North Asia since late 2020 arrived to North America and Europe in January, bringing freezing temperatures, excess snowfall and with that an increased demand for heating and energy. Higher oil price is expected to push cost inflation up and we could start seeing signs of that already in January 2021 data. CPI data will be the key data point in 2021 with most central banks having committed keeping interest rates low. Once we see inflation picking up, they might withdraw from their commitment, causing havoc in asset and currency markets. .

Have a great trading week ahead!

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In The Spotlight

 

DateCurrencyEventPrevious Consensus 
WednesdayNZDMonetary Policy Statement, interest rate decision0.25%0.25%
WednesdayCNYChina CPI (YoY)0.20%-0.20%
WednesdayUSDUS CPI (YoY)1.6%1.6%
WednesdayGBPBoE ‘s Governor Bailey’s speech
ThursdayUSDInitial Jobless Claims779 *813 *
FridayGBPGDP (QoQ)16.0%-2.0%
FridayUSDMichigan Consumer Sentiment7979

* In USD millions

Impact

  • China CPI (Jan YoY)

Inflation measures the rise in consumer prices in an economy over a certain period of time. Higher inflation means that consumer

prices have grown compared to the previous period. Higher than expected rate may be both positive or negative for CNY as the

market does not like inflation expectations too far off from consensus. Generally, both high and negative inflation are bearish for currency, while positive and low inflation, in line with expectations, is bullish

  • UK Gross Domestic Product YoY

GDP data shows the monetary value of all the goods and services produced in the U.K. Economy is expected to contract in Q4, as well as for 2020 as a whole.  A negative number indicates a contraction of economic activity while a positive number shows an expansion. A better than expected GDP growth is generally positive for GBP, whilst a print below expectations tends to be negative.

Market Sentiment

EURUSD has moved to lower levels, last seen in December 2020. Price has found support near 100-day moving average, while 8-day moving average is offering resistance. Short- and medium-term momentum indicators are bearish, while 200-day moving average is below the price. EURUSD seems to be achieving lower highs and lower lows, characteristic of bearish trend. RSI of 42.4 is currently neutral, while stochastic of 18.8 indicates oversold levels. ADX of 23.1 is rising, and hence potentially indicating that energy is moving the momentum forward. DMI- of 22.9 dominates DMI+ of 10.4, signaling bearish momentum.

Support: 1.19600
Resistance: 1.20500

The took a step higher after BoE message of no imminent negative interest rates. Price is still hovering near swing highs of 1.37000, supported by 8-day and 21-day moving average, indicating a bullish momentum is intact short-term. Also, 200-day moving average is well below the price, signaling bullish long-term trend. RSI of 57.1 and stochastic of 66.2 are both neutral. ADX of 8.4 is stable and not giving a quality signal. DMI+ and DMI- are both 16.0 and therefore not giving an indication about the trend.

Support: 1.36900

Resistance: 1.37300

USDJPY forceful move higher last week was spectacular – price has been testing upper Bollinger Band levels, and is currently attempting to break 200-day moving average. Short- and medium-term momentum indicators support bullish momentum, while RSI of 71.3 and stochastic of 91.1 indicate overbought levels. ADX of 27.9 signals that the energy in the momentum is moderate, while DMI+ of 31.8 dominating DMI- of 8.7 signals bullish momentum.

Support: 105.00

Resistance: 105.60

XAUUSD broke below lower Bollinger Band support levels and is now attempting to climb higher. Short- and long-term moving averages support bearish trend, while the death cross is rather imminent on the daily chart. RSI of 37.4 is neutral while stochastic of 28.4 is also neutral. ADX of 24.1 is rising and potentially indicating energy in the momentum. DMI- of 30.4 dominates DMI+ of 13.8 and signaling bearish momentum.

Support: 1,807.50

Resistance: 1,825.87

Kaia Parv, CFA, is an experienced Portfolio and Investment Manager with exposure to both public and private markets. Before joining FXPRIMUS, Kaia was a Senior Investment Associate at EFA Group and a Vice President in Bank of America Merrill Lynch.

Any opinions, news, research, analyses, prices or other information contained here are provided as general market commentary and do not constitute investment advice. FXPRIMUS does not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.

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