• NZD/USD remains on track to close sharply lower on Friday.
  • US Dollar Index rose to its highest level since late December.
  • Market mood remains sour after mixed data releases from US.

The NZD/USD pair came under strong bearish pressure during the American trading hours on Friday and touched its lowest level since late December at 0.7119. With the markets going into a consolidation phase ahead of the weekend, the pair recovered a portion of its losses and was last seen losing 0.8% on the day at 0.7153.

USD capitalizes on safe-haven flows

A negative shift witnessed in market sentiment in the second half of the day caused the risk-sensitive to kiwi to weaken against its rivals while boosting the demand for safe-haven greenback.

The data published by the US Census Burea showed on Friday that Retail Sales in December declined by 0.7%. Additionally, the University of Michigan’s Consumer Sentiment Index dropped to 79.2 in January’s preliminary reading and came in worse than the market expectation of 80.

Pressured by the disappointing data releases, Wall Street’s main indexes opened in the negative territory and pushed lower. At the moment, the US Dollar Index is up 0.46% on the day at 90.65 and the S&P 500 Index is losing 0.5%.

With Friday’s decline, NZD/USD remains on track to finish the week in the negative territory after closing the previous two weeks higher.

Technical levels to watch for

 

  • WTI has been on the back foot on Friday dropping from the high $53.80s to around $52.00.
  • Demand concerns amid further lockdown restrictions in Europe, coupled with other global risk-off factors have weighed.

The front-month futures contract for the American benchmark for sweet light crude oil, West Texas Intermediary (WTI), has been on the back foot on the final trading day of the week. In early Friday Asia Pacific trade, WTI futures climbed as high as $53.81, not even 10 cents from the 11-month highs set earlier in the week at $53.90, but have seen substantial downside since then (in fitting with other risk assets). WTI has dropped all the way back to the $52.00 level and printed lows at $51.82. At present, front-month WTI futures trade around $1.50 or close to 3% lower on the day.

Demand concerns

European equity markets just closed with significant losses on Friday (Stoxx 600 -1.0%), weighed by news that distribution of the Pfizer vaccine on the continent will temporarily slow as the company upgrades its European production facilities is being cited as one factor that weighed on sentiment. Moreover, lockdown concerns are also there, with Italy set to toughen lockdown restrictions and Germany look likely to follow suit. Meanwhile, in a blow to airlines, UK PM Boris Johnson just announced the closure of all international travel corridors (i.e. country from which people can enter the UK without a Covid-19 test), amid fears of allowing in international variants.

The above-noted news seems to have weighed on crude oil markets through the channels of 1) concerns that the economic hit caused by lockdown will damage demand for fuel and 2) through WTI correlation to global equity markets (stocks are also lower elsewhere, such as in the USA).

US equity markets are also lower in what seems to be a “sell the fact” reaction to the announcement of US President-elect Joe Biden’s stimulus plan announcement (he announced a $1.9T “rescue” package including a $1400 top-up stimulus cheque for each American, as expected). This, combined with Biden’s “hawkish” tone on taxes (Biden impressed the need for all Americans to pay their fair share) is also being cited as weighing on sentiment and crude oil markets.

Markets still bullish

Note that despite recent downside (WTI has now slipped more than 3% from highs monthly highs close to $54.00), banks are still making bullish calls; JP Morgan is the latest to join the chorus and the bank expects prices overshooting $60 in the near term as the physical market moves into a deficit. With an additional 1M barrel per day in voluntary production cuts from the Saudi Arabians to take effect in February through March, and then expectations for a subsequent strong global rebound in economic activity as the Northern Hemisphere enters summer and major economies approach herd immunity versus the virus, most analysts agree that the risk of under-supplied markets in 2021 is far greater than oversupplied, thus the high degree of bullishness amongst most market participants.

 

Analysts from Danske Bank keep their expectations for further strength in the Japanese yen. They forecast USD/JPY at 103.00 in a month, 102.00 in three months and at 100.00 in twelve months. 

Key Quotes: 

“To take JPY towards 110, we would need a material change in US nominal rates and/or global commodity prices. However, oversupply in the oil market remains a relevant factor, which limits upside risks to oil and thus downside risk to JPY (Japan is a net importer). We do not see US 10Y rising much above 1%, currently.”

“Moves in global risk aversion, commodities and domestic fiscal response have thrown USD/JPY back and forth. Notably, nominal US interest rates have remained largely unchanged amid rising inflation expectations and oil prices have consolidated. In turn, the JPY has been left to an ‘Asia factor’ and the decline in real rates, which has been USD negative. These factors are thus USD negative/JPY positive. Recently, rising real rates have led USD/JPY to go from 103 to 104.”

“We keep our expectations for further JPY strength. This strength is not due to a negative view on global risk sentiment but rather that we expect Asian outperformance to help JPY versus USD. Thus, the key risk to our profile becomes a shock that steepens the US yield curve and/or raises oil prices into the high USD60s per barrel for Brent. Jointly, on the back of this, we see little upside risk for EUR/JPY.”
 

British Prime Minister Boris Johnson said on Friday that there are some tentative early signs that the pressure with respect to coronavirus infections might be slightly easing in London, as reported by Reuters.

With respects to ending the lockdown, “we’ve got to vaccinate most vulnerable groups, then we will think about what steps to take to lift restrictions, will also depend on where the disease is,” Johnson explained.

Meanwhile, British Chief Medical Officer Chris Whitty noted that they are expecting peaks over the next week or ten days in terms of new people in the hospitals. “The general principle that things are going to improve in the spring, I still think that is likely,” Whitty added.

Market reaction

The GBP/USD pair showed no immediate reaction to these remarks and was last seen losing 0.65% on a daily basis at 1.3600.

While it may be too early to argue in favor of a sustained move lower in the EUR/USD pair, analysts at Rabobank retain their view that fundamentals in both the US and Europe have likely altered sufficiently to trigger a pullback to the 1.20 area.

Key Quotes: 

“If the ECB continues to face more issues than the Fed is raising inflation expectations, this could prevent a significant and sustained dip in the value of EUR/USD in the months ahead.”

“Without a significant change in real interest rates in favour of the USD, it is difficult to call for a sustained reversal in the value of the greenback. This may only come if US inflation surprises on the downside or if US nominal rates rise noticeably. In view of the ongoing concerns of Fed Chair Powell about the labour market, his assurances that rate hikes are still a way off and that any tapering of the QE programme would be flagged long in advance, there would seem little prospect of a change in policy from the Fed in the coming months. That said, the market has been positioned long of the EUR and short of the USD and fundamentals have altered. Given the Biden reflation trade and the prospect of a change in direction of political leadership in Europe this year investors may lack the will to continue pressing the EUR/USD exchange rate higher.”

“We see scope for corrective activity to lead to a dip to EUR/USD1.20 in the current quarter before pushing back to 1.22 on a 6-month view.”
 

Analysts at MUFG Bank, see the EUR/JPY pair moving to the downside. They have a trade idea of shorting the pair at 125.70 with a target at 123.00 and a stop-loss at 127.30.

Key Quotes:

“After hitting an intra-day high of close to 127.50 on 7th January, the pair has fallen back sharply. It has been part of broadbased correction lower for the EUR after it was one of the best performing currencies last year. We still see scope for the EUR sell off to extend further in the near-term.”

“Seasonal factors are also in play. January tends to be one of the worst months of the calendar year for the EUR and often follows strong performance in December. The recent rise in European political risk could support the short-term correction for the EUR as well.”

“The ECB is scheduled to meet in the week ahead. We do not expect further policy easing after action in December. The ECB will be pleased though that the EUR has at least lost some upward although it remains at stronger levels which remains a concern.”

“The JPY could benefit from the reversal trade at the start of this year. It has one of the worst performers in December. We do not expect the JPY to weaken materially following next week’s BoJ policy meeting.”
 

Data released on Friday showed an unexpected decline in retail sales (-0.7% vs 0.0). According to analysts at Wells Fargo, point out declines were broadly based, and add that a standout was e-commerce, posting the biggest monthly decline since the pandemic began.

Key Quotes: 

“Holiday sales finished soft, but on the heels of solid goods spending earlier this year, the annual increase for holiday sales was 8.7%, just shy of our 9.0% forecast. We will publish a full summary of holiday sales subsequent to this report.”

“E-commerce slowed sharply with non-store retailers posting a 5.8% monthly drop—the biggest decline of the post-pandemic period.”

“The stimulus checks and jobless benefits that were part of the CARES Act last year resulted in an unprecedented surge in disposable income and record savings.”

The US economy is expected to grow by 2.5% and 6.2% in the fourth quarter of 2020 and the first quarter of 2021, respectively, the Federal Reserve Bank of New York’s latest Nowcasting Report showed on Friday. 

“News from this week’s data releases increased the nowcast for 2020:Q4 by 0.3 percentage point and increased the nowcast for 2021:Q1 by 0.7 percentage point,” the NY Fed explained in its publication. “Positive surprises from industrial production and capacity utilization data were only partially offset by a negative surprise from retail sales data in both quarters.”

Market reaction

The US Dollar Index largely ignored this report and was last seen gaining 0.45% on the day at 90.63.

  • US dollar moves higher supported by risk aversion.
  • USD/CAD erases weekly losses, faces resistance at the 20-day SMA.

The USD/CAD rose to 1.2765, reaching the highest level in three days. It represents a sharp reversal after reaching on Thursday at 1.2623, the lowest intraday level since 2018.

A rally of the US dollar triggered the move in USD/CAD. The greenback gained momentum as equity prices in Wall Street tumbled to the lowest in more than a week. During the last hour, main indexes trimmed losses favoring a small retreat in USD/CAD to 1.2735.

Crude oil prices are falling sharply. The WTI barrel drops by 3% at $52.00. Gold tumbles to $1820. The VIX hit one-week highs before pulling back.

Ahead of a long weekend in the US, the DXY is up by 0.45% about to post the highest close in a month. Lower US yields, neither weaker-than-expected US economic data weighed on the greenback.

From a technical perspective, the USD/CAD continues to move with a dominant bearish bias. In the very short-term, the pair failed for the second week in a row to remain under 1.2650, showing some difficulties on the downside. The recovery of the dollar is facing resistance at the 20-day moving average at 1.2755; the next resistance stands near 1.2790. A daily close above 1.2800 would point to further gains.

Technical levels