Stagflation Fears Continue to Dominate the Markets

The US dollar continued to gain against all the other major currencies, while equities kept drifting south, perhaps due to reports that the US and its Western allies could proceed with a ban on Russian oil imports. This pushed oil prices further north and intensified “stagflation” fears.

EQUITIES FALL FURTHER ON RUSSIA OIL BAN HEADLINES, NASDAQ ENTERS BEAR MARKET

The US dollar kept drifting north against the other major currencies on Monday and during the Asian session Tuesday. It gained the most versus AUD and NZD, while it lost the least ground against EUR.

Although the euro fought back against its US counterpart, this was after it tumbled more on Friday, which suggests that yesterday’s stabilization may have been just a short-covering effect. With the crisis in Ukraine showing no signs of easing, investors continued to trade in a risk-off manner, and this is evident, not only by the USD strength, but also by the fact that major EU and US indices continued to tumble, with the negative appetite rolling into the Asian session today as well.

Oil prices opened the week with a strong positive gap, and although they corrected lower, the retreat was short-lived and another rebound followed. This was due to headlines and reports that the US and its Western allies weigh a ban on importing Russian oil. This raises more fears over further acceleration in inflation around the globe, but with the conflict more likely to affect global economies as well, especially in Europe, how central banks may respond remains a riddle. This is what we call “stagflation”.

With the Europe expected to be affected the most, we don’t believe that the falls in the euro and the pound are over. We see decent chances for those currencies to continue drifting south. At the same time, the US dollar and other safe havens, like the yen, may stay supported. As for equities, with some indices officially into correction territory and Nasdaq confirming a bear market today, we still believe that the path of least resistance is to the downside.

But what about the risk-linked Aussie, Kiwi, and Loonie? As commodity-linked currencies, they’ve been receiving support from rising energy and commodity prices, despite the broader risk aversion. However, usually, fears of slowing growth around the globe weigh on those currencies, and this is what may have happened yesterday. Having said all that, the technical charts still point to uptrends and thus, for now, we would consider yesterday’s setback as a corrective wave within the broader upside path.

NASDAQ 100 — TECHNICAL OUTLOOK

The Nasdaq 100 cash index traded lower yesterday, and today it looks to be heading towards the low of February 24th, at 13020. Overall, the index remains below the downside resistance line drawn from the high of February 2nd, and thus, we would consider the near-term outlook to still be negative.

However, in order to get confident on more declines, we would like to see a clear dip below 12920, a support marked by the low of May 13th, 2021. This will confirm a forthcoming lower low on the 4-hour and daily charts and may pave the way towards the low of March 25th, 2021, at 12625. If that barrier doesn’t hold, then we could see extensions towards the low of March 5th, at 12215.

On the upside, we would like to see a clear and decisive recovery above the 14680 zone before we abandon the bearish case. This may confirm the break above the aforementioned downside line taken from the high of February 2nd, and may see scope for advances towards the 15060 zone, marked by the peak of February 9th. If the rise continues, the next stop could be at 15275 or 15365, the highs of February 2nd and January 19th respectively, which if don’t hold either, then the bulls could climb towards the 15650 zone, marked by the high of January 17th.

AUD/USD — TECHNICAL OUTLOOK

AUD/USD entered a tumbling mode yesterday, after hitting resistance at 0.7440. The rate is now testing the 0.7280 zone, and looks like it may continue lower, but it still stays well above the upside line drawn from the low of January 28th. Thus, we will treat the retreat, or any extensions of it, as a corrective phase in the broader upside trend.

The bulls could take charge again from near the 0.7237 barrier, marked by the low of March 1st, or from near the aforementioned upside line. A potential rebound could allow advances towards today’s highest point — until now — at 0.7350, the break of which could carry extensions towards the 0.7440 zone, hit yesterday.

The outlook could turn bearish upon a dip below 0.7142. Such a move could confirm the break below the upside line drawn from the low of January 28th, and initially target the lows of February 24th and 14th, at 0.7095 and 0.7085, respectively. If they don’t hold either, then we may see declines towards the low of February 4th, at 0.7050, or the low of February 1st, at 0.7033. Slightly lower lies the 0.7007, marked by an intraday swing high formed on January 28th, which could also get tested.

AS FOR TODAY’S EVENTS

During the European session, Germany releases its industrial production data for January, while from the Eurozone as a whole, we get the final estimate of Q4 GDP, as well as the employment change for that quarter. Germany’s IP is expected to have rebounded 0.5% mom after sliding 0.3% in December, while Eurozone’s GDP is expected to confirm its second estimate of +0.3% qoq. No forecast is currently available for the employment change.

Later in the day, we get trade data for January from both the US and Canada. The US trade deficit is expected to have widened to USD 87.10bn from 80.70bn, while Canada’s CAD 0.14bn deficit is anticipated to have turned into a 2.00bn surplus.

As for tomorrow, Asian time, Japan’s final GDP for Q4, as well as China’s CPI an PPI rates for February, are coming out. Japan’s qoq growth rate is expected to be revised up to +1.4% from +1.3%, while both the Chinese rates are expected to have slid somewhat. Specifically, the CPI is anticipated to have ticked down to +0.8% yoy from +0.9%, while the PPI is forecast to have slid to +8.7% form +9.1%.

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Originally published at https://www.jfdbank.com.

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