Daily Market Outlook, May 16, 2022

Overnight Headlines

  • Goldman Sachs Cut US Growth Forecasts For 2022, 2023
  • McConnell Sees Wednesday Senate Vote On Ukraine Bill
  • China Keeps Key Rate Unchanged Amid Sharp Slowdown
  • China Economy Cools Sharply In April As Lockdowns Bite
  • Shanghai Official: Aim For Return To Normal Life In June
  • EU Consider Gas Price Cap In Supply Disruption Scenario
  • EU Growth, Inflation Outlooks Worsens On Energy Crisis
  • BoE’s Bailey Set For Tough Grilling Over Inflation Record
  • UK PM To Sign Off On Plans To Scrap Part Of NI Protocol
  • NATO Prepares To Add Finland, Sweden To Its Defences
  • Food Problem Piling Up As India Restricts Wheat Exports
  • Hedge Funds Lower Bets On US Stocks As Losses Surge

The Day Ahead

  • Reports on the weekend indicating China will relax come COVID restrictions in Shanghai are likely to boost sentiment as the restrictions have severely impacted China's economic growth trajectory and worsened supply chains problems that were already stressed by the war in Ukraine.
  • Last week’s GDP release for March showed that the UK economy had suffered a sequential monthly slowdown in activity across the first quarter. In March alone, the economy was judged to have contracted, having stagnated in February. In part, the moderation is likely to be a reflection of the sharp rise in the cost of living, which is set to worsen in the coming months and quarters. However, with inflation set to rise further in the coming months, the Bank of England’s Monetary Policy Committee continues to face a significant challenge in setting the appropriate monetary policy stance. Later today, Bailey and three MPC colleagues (Ramsden, Haskel and Saunders) testify to a House of Commons Committee about their latest policy decision.
  • Markets will be looking for clues on the likelihood of further interest rate increases and most immediately whether another rate hike is likely in June. BoE policymakers seem likely to once again emphasise that market expectations of further significant rate rises are excessive but may be reluctant to offer more on their immediate policy intentions.
  • Data wise, today’s economic calendar is limited to the US Empire State manufacturing survey for May and the Eurozone trade data for March. While supply chain issues are likely to result in the headline measure of the Empire survey dropping month on month. However, the extent to which reports of cooling demand are behind the moderation in output will be closely watched.
  • Elsewhere, ECB speakers Panetta and Lane are scheduled to speak. In recent weeks, speculation that the ECB could follow other central banks in raising interest rates has increased. Such that, interest rate markets currently envisage the ECB’s deposit rate (currently set at -0.50%) as potentially being positive by the end of the year with the first hike expected in July (a possibility flagged by ECB President Lagarde last week). The extent to which such a view is shared by other members of the governing council will be closely watched by markets.
  • Early tomorrow morning, the ONS will release the latest UK labour market report, which is expected to show a fall in employment in the three months to March, although the unemployment rate is forecast to hold at 3.8%. However, with the level of unfilled job vacancies still close to record highs, the market overall still seems very tight. That points to ongoing domestic inflation risks from accelerating wage growth.
  • There will be plenty of Federal Reserve comments this week, with a long list of speakers including Fed Chair Jerome Powell. Other speakers include New York Fed President Williams, St Louis Fed President Bullard (very hawkish), Philadelphia President Harker, Chicago Fed President Evans, and Cleveland Fed President Mester.
  • Investors will focus on the bond market's reaction to Fed comments. The 10-year Treasury yield topped out at 3.20% last Monday and some analysts believe the move lower from that level provided the equity market enough oxygen to rally on Friday

CFTC Data

(Reuters Data)

  • USD spec long to Nov '21 high in May 4-10 period.; $IDX +0.43%
  • EUR flips to long; specs +22,907 contracts now +16,529, EUR$ +0.1% in period
  • $JPY +0.23% in period, specs -9,660 contracts now short 110,454
  • GBP specs -5,785 contract now -79,598; US-UK rate diff, Brexit weigh on GBP$
  • AUD, CAD specs sell 13,198, 14,436 respectively; CAD flips to slight short
  • BTC specs buying dip, long grows by 315 contracts to +703

FX Options Expiring 10am New York Cut

  • AUD/USD: 0.6880 (731M), 0.7000 (380M), 0.7150 (274M)
  • USD/CAD: 1.2825 (440M), 1.3000 (400M), 1.3015 (237M)
  • NZD/USD: 0.6360 (215M)

Technical & Trade Views

EURUSD Bias: Bearish below 1.07 Bullish above

  • EUR/USD opened 1.0405 after rising 0.28% Friday when risk assets rebounded
  • Mood darkened in Asia following weaker than expected China data
  • EUR/USD eased to 1.0394 before settling around 1.0395 into the afternoon
  • EUR/USD trending south with short & medium term VWAP’s bearish
  • A break above 1.0580 daily VWAP needed to ease bearish pressure
  • 2017 low 1.0340 targeted by bears, break will put parity in play

GBPUSD Bias: Bearish below 1.26 Bullish above.

  • Short lived early gains, as risk appetite reverses
  • -0.2%, at the base of a 1.2235-1.2296 range - solid flow through the session
  • Bid with risk after Friday's bounce, then reversed after China data missed
  • Small businesses lending dries up as economic outlook darkens
  • Using "Brexit freedoms" in finance could erode policy that protects users
  • 20 day VWAP fall, as the strong bearish setup remains in place
  • 1.2156 NY low and Asia's 1.2296 high are initial support and resistance

USDJPY Bias: Bullish above 127 Bearish below

  • USD/JPY still prone to spec-inspired swoons, up into Tokyo fix, then down
  • USD/JPY 129.15 late NY to 129.67 into Tokyo fix, off since to 128.70 EBS
  • Market still heavy, Japanese importer, other bids from 128.70, trail down
  • Market seen heavy above 129.50 for now, wider 127.54-131.35 range for now
  • US yields off after early bounce, Tsy 10s to 2.953% before ease to 2.886%
  • Tokyo risk mood better, Nikkei +0.3% @26,509, AXJ bourses mixed
  • JPY crosses mirror USD/JPY moves, bid early, off post-Tokyo fix, market thin

AUDUSD Bias: Bullish above .7200 Bearish below

  • AUD/USD opened 0.6935 after rising 1.17% Friday when risk assets rallied
  • AUD/JPY buying out of Tokyo sent the AUD/USD up to 0.6960 at one stage
  • AUD/USD eased after the AUD/JPY flows dried up and slipped back to 0.6930
  • China retail sales and IP badly missed expectations and AUD/USD fell again
  • E-minis were up 0.4% early and fell to -0.85% after the China data
  • AUD/USD stalled around 0.6900 before falling to 0.6873
  • Support at Friday's 0.6859 low and the trend low made on Thursday at 0.6829
  • AUD/USD sellers tipped at 0.6960/75 with resistance 0.7010