The US dollar traded higher against all the other major currencies on Monday and Tuesday, Asian session, at a time when EU and US shares climbed higher. Perhaps investors remained optimistic that full-scale lockdowns can be averted, despite record COVID infections. As for the dollar, it may have rebounded on Fed hike expectations. As for today, major OPEC and non-OPEC members meet to decide on oil production.
USD Gains, Equities March North, OPEC+ to Decide on Oil Production
The US dollar traded higher against all the other major currencies on Monday and during the Asian session Tuesday. It gained the most ground versus AUD, NZD, and JPY in that order.
The strengthening of the dollar and the weakening of the risk-linked Aussie and Kiwi suggest that markets may have traded in a risk-off fashion yesterday and today in Asia. However, the weakening of the yen points otherwise. Therefore, in order to clear things up, we prefer to turn our gaze to the equity world. There, major EU and US indices were a sea of green, with risk-appetite softening today in Asia.
Monday was the first working day of 2022 for many traders around the globe, who may have decided to resume their activity by increasing their risk exposure. Why? Perhaps, for the same reasons they led equities higher during the end of 2021. While the surge in Omicron covid cases continues to impact travel and public services around the globe, its milder nature keeps market participants optimistic that full-scale lockdowns could be averted. The fact that Tesla rallied 10% on record quarterly deliveries may have also helped Wall Street, especially Nasdaq.
So, why is the dollar up in a risk-on environment? In our view, the US dollar is strengthening as market participants maintain expectations of several interest rate increases by the Fed this year. According to its latest “dot plot”, the Committee itself anticipates three quarter-point lift-offs by the end of 2022. US Treasury yields also moved higher, adding to the view that the US dollar is supported by rate-hike expectations. But if market expectations on interest rates remain high, why equities continue to march north? Interest rate hikes negatively affect profitability of firms. Maybe because equity traders have already digested the idea of a higher-rate trading environment this year, or because they prefer to focus on the fact that economies around the globe wills stay open, despite record coronavirus infections.
As for today, market participants may turn their attention to the energy market, as we have a meeting between major OPEC and non-OPEC oil producing nations. Despite the fast-surging covid cases lately, the group is not expected to alter its existing policy, as most governments around the globe dismissed the chance of a full-scale lockdown due to the new variant being less deadly than the previous ones. Indeed, on Sunday, the group said that it expects the impact on the oil market from the Omicron strain to be mild and temporary, keeping the door open for a further increase in output. Therefore, we expect the alliance to continue raising output targets by 400k bpd each month, as previously agreed. Oil prices could gain somewhat if indeed the group officially confirms the view that demand will probably not be affected. The Loonie could gain as well, but its traders may also wait for Canada’s employment data, due out on Friday, before deciding on bigger positions.
USD/JPY – Technical Outlook
USD/JPY traded higher yesterday, breaking the peak of November 24th, at 115.52, and entering territories last tested in the beginning of 2017. Overall, the pair continues to trade above the upside support line drawn from the low of December 3rd, but also above another steeper line, taken from the low of December 20th. So, with that in mind, we will consider the short-term picture to be positive.
We believe that the break above the 115.52 may have opened the way towards the high of January 10th, 2017, at 116.33. The bulls may decide to take a break after testing that zone, thereby allowing a corrective setback. However, as long as that setback remains above the upside line taken from the low of December 20th, we will see decent chances for another rebound and a break above 116.33. This could pave the way towards the high of January 11th, 2017, at 116.92.
We will start examining the case of a decent correction lower if we see a clear break below the 114.95 zone, marked by the low of January 3rd. This could initially pave the way towards the low of December 29th, at 114.65, the break of which could aim for the 114.50 barrier, or the upside line taken from the low of December 3rd.
WTI Crude Oil – Technical Outlook
WTI crude oil trade higher yesterday, after hitting support at 74.27. In the bigger picture, the price remains between that level and the 77.45 barrier, marked by the highs of December 29th and 30th, but also above a prior downside resistance line taken from the high of November 1st. In our view, this paints a cautiously positive picture.
We will get more confident with regards to the upside if we see a break above 78.05, marked by the high of November 22nd. This could initially pave the way towards the round figure of 80.00, which is also marked as a resistance by the high of November 24th, the break of which could carry extensions towards the high of November 16th, at 81.75. If that barrier is not able to stop the advance either, we could see the bulls climbing towards the high of November 9th, at 85.00.
On the downside, we would like to see a clear dip below 69.35 before examining whether the bears are back in control. This could confirm the liquid’s return back below the downside line taken from the high of November 1st and may see scope for declines towards the low of December 3rd, at 66.05. Another break, below 66.05, could extend the fall towards the low of December 2nd, at 62.90.
As for the Rest of Today’s Events
We get the UK final manufacturing PMI for December, which is expected to confirm its preliminary estimate, and the US ISM manufacturing index, which is expected to have slid somewhat.
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