Risk On Prevails, US and Canada Jobs Data in Focus

Equities continued to march north on Thursday and during the Asian session Friday, perhaps due to hopes that Congress Democrats in the US could pass Biden’s spending package without Republican support, as well as due to another batch of upbeat earnings. In the FX world, the pound was the main gainer as the BoE stood pat and pushed back the idea of negative interest rates. As for today, focus may fall on the US and Canadian employment reports for January.

US Stimulus Hopes and Upbeat Earnings Keep Sentiment Supported

The US dollar traded higher against all but one of the other G10 currencies on Thursday and during the Asian session Friday. It gained the most versus SEK, NZD, EUR and CHF in that order, while it gained the least ground versus CAD. The greenback underperformed only against GBP.

The weakening of the safe haven franc, combined with the relative strength of the Canadian dollar, suggests that markets traded in a risk-on fashion yesterday and today in Asia. However, the weakening of the risk-linked Kiwi points otherwise. Thus, in order to get a clearer picture with regards to the broader market sentiment, we prefer to turn our gaze to the equity world. There, all but one of the EU and US indices traded in the green, with the S&P 500 and Nasdaq hitting fresh record highs. The only exception was UK’s FTSE 100, which slid 0.06%, perhaps due to a strengthening pound. The positive investor morale rolled over into the Asian session today, with Japan’s Nikkei 225 and China’s Shanghai Composite gaining 1.54% and 0.42% respectively.

Hopes that Congress Democrats in the US could pass Joe Biden’s USD 1.9trln spending package without Republican support, as well as another batch of upbeat earnings, may have been the drivers behind the further improvement in the overall investor morale. The fact that the number of Americans filing new applications for unemployment benefits decreased further last week, may have also helped. All this adds further credence to our view that risk appetite is likely to stay supported for a while more.

However, the inverse correlation between equities and the US dollar seems to have been fading, with the greenback set for its best week in three months. The US currency may have lost its safe-haven status as US data is now suggesting that the US economy is performing better than many may have expected. With the pace of vaccinations being faster than other economies, the dollar may continue to outperform most of its G10 peers for a while more. The big question though is whether its latest recovery is just a corrective phase of its prevailing downtrend, or whether this is indeed a trend reversal. We believe that it is too early to answer that question and that only time will tell.

Nasdaq 100 — Technical Outlook

This week, Nasdaq 100 manged to recover all the losses made during last week. The index not only reached the highest point of January, at 13607, but also overcame it and, this morning, the cash index is hitting a new all-time high. For now, we will take a positive approach.

If the price continues to trade above that 13607 hurdle, there is a good chance we could see further advances, as more bulls might join in. Given that Nasdaq 100 is now in uncharted territory, we will aim for levels like 13800, or for the psychological 14000 zone.

In order to shift our attention to some lower areas, we would prefer to wait for a drop below 13355 hurdle, marked by yesterday’s low. This way, the bulls might get spooked from the field temporarily, allowing more bears to join in. The index could drop to the 13311 zone, or to the 13174 area, marked by the inside swing high of January 29th. Initially, Nasdaq 100 may stall there for a while, or even correct back up a bit. However, if the price stays somewhere below the 13355 barrier, another slide could be possible. If so, the index might overcome the 13174 obstacle this time and target the 13031 level, marked by an intraday swing high of January 29th.

GBP Rallies as BoE Pushes Back the Idea of Negative Rates

Staying in the FX world, the British pound was the main gainer among the G10s, coming under strong buying interest after the BoE kept its policy unchanged and pushed back the idea of negative interest rates. The central bank said that British banks will need at least six months to prepare for a shift into negative interest rates, but that doesn’t mean that the central bank is intended to set a negative rate at some point in the future. It was just concluded that it would be appropriate to start preparations in order to provide the capability to do so if necessary.

As for our view, with the Brexit saga taking the back seat and the probability of negative interest rates falling further, we see the case for the pound to continue performing well, especially with the UK going further ahead in the covid vaccination race. Given that we believe that market appetite is likely to stay supported, the pound may perform better against the safe-havens yen and franc.

US and Canadian Employment Reports in Focus

As for today, the main event on the economic agenda may be the US employment report for January. Nonfarm payrolls are expected to have rebounded 50k after falling 140k in December, while the unemployment rate is forecast to have held steady at 6.7%. Average hourly earnings are anticipated to have slowed to +0.3% mom from +0.8%, but barring any major deviations to the prior monthly prints, this will leave the yoy rate unchanged at 5.1%.

Last week, the Fed decided to keep its monetary policy settings unchanged, with the only material change in the statement being the part saying that “the pace of the recovery in economic activity and employment has moderated in recent months”. At the press conference following the decision, Powell stated that it’s too early to focus on tapering dates, adding that monetary policy should stay highly accommodative. Although an improvement from December, this is unlikely to take off the table the likelihood of the Fed acting again if necessary. In any case, an improved report may allow US equities and the greenback to continue gaining for a while more.

At the same time with the US employment report, we get jobs data for January from Canada as well. The unemployment rate is forecast to have risen to 8.9% from 8.6%, while the net change in employment is expected to show that the economy has lost 55k jobs after losing 62.6k in December.

At its prior meeting, the BoC decided to keep interest rates and the pace of its QE purchases unchanged, disappointing those expecting a small cut or even a re-increase in QE. Officials also noted that “As the Governing Council gains confidence in the strength of the recovery, the pace of net purchases of Government of Canada bonds will be adjusted as required”, which suggests that the next policy step for BoC may be tapering QE. However, another soft employment report is unlikely to suggest that such a move may be on cards in the months to come. It could even push back expectations on that front, something that may prove negative for the Canadian dollar.

USD/CAD — Technical Outlook

From the short-term perspective, looking at the technical picture of USD/CAD on our 4-hour chart, we can see that the pair is coiling up, as it trades inside a symmetrical triangle pattern. The rate may continue moving for some time more inside that formation and that is why we will wait for a violation of one of its sides, before examining the next directional move.

If the pair pops above the upper side of the aforementioned triangle and climbs above the 1.2845 barrier, marked by yesterday’s high, that may attract more buyers into the game, potentially opening the door to some higher areas. USD/CAD could then travel to the 1.2881 hurdle, which is the highest point of January, where the pair may stall for a bit. That said, if the buying is still strong, the next possible resistance level to consider, could be at 1.2934. That level is marked by the high of December 22nd.

Alternatively, if USD/CAD breaks through the lower side of the triangle and then drops below the 1.2777 zone, marked by yesterday’s low, that may set the stage for further declines, as more sellers might see at as a good opportunity to step in. The rate might then slide to the 1.2737 obstacle, a break of which could send the pair to the 1.2685 level, marked by the low of January 26th.

As for the Rest of Today’s Events

Apart from the US and Canadian employment reports, we also get the US and Canadian trade balances for December, as well as Canada’s Ivey PMI for January. Both deficits are expected to have narrowed somewhat, while no forecast is available for the Ivey PMI.

We also have three speakers on the schedule and those are: BoE Governor Andrew Bailey, ECB Vice President Luis de Guindos and ECB Chair of the Supervisory Board Andrea Enria.

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