3rd February 2022 - Bears look an opportunity in the deceleration of the bullish daily correction

Market Headlines

US equities recovered further following recent Fed comments that tightening will probably be gradual. The S&P500 is up 0.7%, and bond yields and the US dollar are lower. The US dollar index is down 0.5% on the day. EUR rose from 1.1270 to 1.1330. USD/JPY fell from 114.80 to 114.16. AUD initially rose from 0.7130 to 0.7159 before retreating to 0.7118. Underperformer NZD initially rose from 0.6630 to 0.6662 before retreating to 0.6624. AUD/NZD ground slightly higher, from 1.0740 to 1.0765.

US 2yr treasury yields fell from 1.18% 1.14%, while the 10yr yield fell from 1.81% to 1.74%, the disappointing ADP payroll report perhaps weighing on yields. Markets continue to fully price the first Fed funds rate hike to be in March 2022. Australian 3yr government bond yields (futures) fell from 1.42% to 1.37%, while the 10yr yield fell from 1.94% to 1.89%. Markets fully price the first RBA rate hike to be in July 2022.

Commodities, Brent crude oil futures fell 0.1% to $89, copper rose 1.2%, and gold rose 0.4%.

Overnight Currency Range

AUD/USD 0.7118 0.7160

EUR/USD 1.1267 1.133

GBP/USD 1.3521 1.3588

USD/JPY 114.15 114.80

NZD/USD 0.6624 0.6661

USD/CAD 1.2650 1.2706

USD/CNH 6.3573 6.3748

AUD/JPY 81.35 81.99

AUD/NZD 1.0735 1.0767

AUD Thoughts

Another busier day ahead highlighted by the monetary policy decisions from the ECB and the BOE.

Markets don’t expect that Christine Lagarde’s ECB will give up the transitory inflation narrative that easily, especially in the context of wholesale natural gas prices that have stabilized at much lower levels since December (EUR 77 per MWh today vs. 132 at the peak in December, on the Netherlands TTF market). He also notes that in the latest IFO survey out yesterday, Germany's retailers saw a 'considerable easing' of supply-chain issues in January, coming subsequent to the end of the Christmas buying season. Earlier in the evening the BOE is widely expected to increase rates from .25% to .50% on the back of some improving domestic and global data.

AUD/USD remained in a tight 0.7118/.7160 range overnight. Offering interest remains above 0.7200 while demand should materialise as we approach the 0.7050 region.

Event Risk Data Today

Aust: December’s Dwelling approvals are expected to lift given the effects from unwinding HomeBuilder have ended (f/c: 3.0%). The trade surplus is anticipated to narrow in December as reopening demand lifts both import prices and volumes (f/c: $8.3bn).

NZ: ANZ commodity prices should lift in January as dairy prices continue to surge.

Japan: The final release of January’s Nikkei services PMI will confirm the impact of omicron on the sector.

EUR/UK: The ECB is anticipated to leave policy unchanged; their February meeting communications will provide an update on the Council’s views surrounding COVID and inflation. Meanwhile, the Bank of England is expected to lift rates by another 25bps to 0.50% in order to combat ongoing inflation risks. The final release of January’s Markit services PMIs for both the UK and Euro Area are also due.

US: Non-Farm productivity is expected to rebound in Q4 but will likely remain volatile for the foreseeable future (market f/c: 3.9%). Initial jobless claims are expected to gradually decline after the January omicron up-tick (market f/c: 245k). January’s ISM non-manufacturing PMI and Markit services PMI will highlight the strength of the sector despite omicron disruptions. Meanwhile, factory orders and durable goods orders are anticipated to indicate slowing capital investment in December due to uncertainties over supply and growth (market f/c: -0.4% and -0.9% respectively).

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