Just as the world is concerned and confused with the newly discovered Omicron, Fed Chair Jerome Powell stirred up the markets further, by talking up faster tapering. The biggest reactions were found in US treasury yields on strong safe-haven flows. Major stocks indexes also turned sharply lower, solidifying the case of medium term correction.
In the currency markets, Swiss Franc and Yen ended as the biggest winners followed by Dollar. Australian Dollar was the worst, followed by New Zealand Dollar and then Sterling. Current developments suggest that for the near term, there will be more downside in stocks and more so in yield. Yen and Swiss Franc would likely to outshone the others.
Market pricing in over 50% chance of Fed hike in May
Fed Chair Jerome Powell surprised the markets by delivering a much more hawkish than expected testimony last week. He acknowledged that inflation pressures “have spread much more broadly” and that “the threat of persistently higher inflation has grown”. More importantly, he added that FOMC is “going to have a conversation at our next meeting about accelerating the taper and ending our asset purchases a few months early”. His comments were then echoed by a chorus of Fedspeaks.
Omicron is clearly a source of huge uncertainty. If would probably take a few more weeks before clearly know how infectious it is, and how fatal it is, and how effective the current vaccines are against it. On the economic side, it seems that markets are seeing Omicron as an inflationary factor, rather than disinflationary, prolonging supply chain disruptions. That could be in-line with Fed policymakers’ thoughts too.
Anyways, as indicate by Fed fund futures, markets are pricing in slightly more than 50% chance of a Fed hike or more at the May 4 2022 meeting. That’s notably higher than just 27% a month ago.
DOW and NASDAQ extending medium term correction
While US stocks tumbled sharply last week, the development isn’t that disastrous for now. Major indexes are merely in rather common medium term scale corrections. DOW is seen as correcting the rise from 26143 to 36565. Such correction would target 38.2% retracement of 26143 to 36565 at 32584 before completion, unless it can rebound back above 55 day EMA (now at 35295) quickly.
Similarly, NASDAQ should now be corrective the rise from 10822 to 16212. Deeper fall should be seen to 38.2% retracement of 10822 to 16212 at 14153. Additional support with be provided by 14175 and 14181 to contain downside to complete the correction.
However, it should be noted that sustained break of these two fibonacci levels will a a strong warning of some more bearish developments.
Steep falls in US yields suggest flight-to-safety sentiment
US treasury yields in the long end tumbled sharply last week, indicate clear flight-to-safety sentiment. As yields would likely continue southwards, that will also take Yen pairs together.
To our surprise, 10-year yield tumbled through 1.415 near term support very decisively. The development confirmed completion of rebound from 1.128 at 1.1693. Corrective pattern from 1.765 is now in its third leg which could extend to 1.128, or even to 50% retracement of 0.398 to 1.765 at 1.081 before bottoming.
30-year yield even broke through 1.1780 support with power to close at 1.678, resuming the whole decline from 2.5050. TYX might now target 100% projection of 2.505 to 1.780 from 2.177 at 1.452, which is close to 61.8% retracement of 0.837 to 2.505 at 1.474, before bottoming.
Dollar index still holding above 95.51 support as consolidations continued
Dollar index extended the consolidation from 96.94 last week but holds above 95.51 support. The development still supports the view that it’s in a near term consolidation pattern only, and recent up trend would resume sooner rather then later, to 61.8% retracement of 102.99 to 89.20 at 97.72.
However, downside risk is growing. Firm break of 95.51 will bring deeper pull back to 55 day EMA (now at 94.73), or even further to 55 week EMA (now at 93.27) before bottoming.
Still, long term outlook remains bullish as we’re seeing corrective pattern from 103.82 (2016 high) as completed with three waves to 89.20 after hitting channel support. Hence, the pull back from 96.94 should be relatively “shallow” from medium term perspective.
AUD/JPY accelerated lower as medium term correction took shape
AUD/JPY was among the biggest losers last week together with AUD/CHF. The downside acceleration from 86.24 affirms the case that it’s already correcting whole up trend from 59.85 (2020 low). Deeper decline is expected as long as 81.46 resistance holds, to 38.2% retracement of 59.85 to 86.24 at 71.65.
While the decline from 86.24 may extend even for the medium term, the long term outlook isn’t too bearish for now. We’d holding on to the view that fall from 105.42 (2013 low) is a three wave corrective move that has completed at 59.85. Rise from 59.85 should be a long term rise in the same degree. Hence, the zone between 73.12 support and 61.8% retracement of 59.85 to 86.24 at 69.93 would be the place for accumulation for long term positions.
GBP/CHF broke 1.2259 key support as a BoE hawk turned cautious
Sterling took a dive after a known BoE hawk took a turn to a more cautious stance. He noted in a speech that “policy is not on auto pilot”. He added. “The pace, and scale, of any monetary policy changes will depend on economic developments and the outlook”. “In particular, at the December meeting, a key consideration for me will be the possible economic effects of the new Omicron Covid variant, and the potential costs and benefits of waiting to see more data on this before – if necessary – adjusting policy,” he said.
GBP/CHF finally took out 1.2259 key resistance turned support last week, with some downside acceleration too. The development now suggests that whole rise from 1.1107 (2020 low) has completed with three waves up to 1.3070. Near term outlook will remain bearish as long as 1.2549 resistance holds, for 61.8% retracement of 1.1107 to 1.3070 at 1.1857
Also, it should be noted that GBP/CHF was rejected by falling 55 month EMA, keeping the long term outlook bearish. That is, a break of 1.1107 low to resume whole down trend from 2.7328 (2000 high) is plausible.
EUR/CHF’s down trend extended last week and hit as low as 1.3074. Initial bias remains on the downside this week. Current fall from 1.1149 would target 161.8% projection of 1.1149 to 1.0694 from 1.0936 at 1.0200 next. On the upside, break of 1.0511 resistance is needed to indicate short term bottoming. Otherwise, outlook will stay bearish in case of recovery.
In the bigger picture, long term down trend from 1.2004 (2018 high) is now extending. Next target is 61.8% projection of 1.2004 to 1.0505 to 1.1149 at 1.0223. On the upside, break of 1.0694 support turned resistance is needed to be the first sign of medium term bottoming. Otherwise, outlook will remain bearish even in case of rebound.
In the long term picture, rejection by 55 month EMA (now at 1.1015) maintains long term bearishness. Down trend from 1.2004 is now in progress for 61.8% projection of 1.2004 to 1.0505 to 1.1149 at 1.0223. Firm break there will target 100% projection at 0.9650.