Markets Repriced But Still Vurnerable

Markets will continue to be dominated by the Ukraine/Russia debacle in the coming week. Investors will remain focused on the length of sanctions announced against Russia, particularly from the EU. Inevitably, risk will fluctuate around war headlines. In the latest headlines, there have been mentions of “nuclear” arms and agreed “talks” between the two countries. Those will remain critical areas of focus for traders.

Heightened risk sentiment will likely place economic events of the week backstage regarding market impact. However, several key releases will most probably offer short-term opportunities in more than a handful of assets.

RBA expected to hold again

The RBA kicks the week off in international markets but is expected to keep rates on hold on Tuesday. Following the end of its QE program while inflationary pressures increase policy is more complex for the RBA as markets are not pricing in a hike before July. But Governor Low was vocal about the deviation between the RBA and markets, so hikes remain on the agenda for earlier or later dates. Investor focus should glue to the bank’s wage growth and GDP growth outlook. Improvements there could spell an earlier hike. Contrary, any deterioration from expectations would be seen as a delay in hikes. Australia reports its GDP data on Wednesday.

Aussie has accelerated higher over the past four weeks due to its proxy with crude oil. Above its 50-week average at 82.50 against the yen, the pair is more bullish than its US dollar pair as the latter only crossed above its 200-week average. If RBA is hawkish, AUDJPY could find resistance at 83.55 and 84.29. But a dovish or neutral RBA could be bearish as safe-haven demand might increase further. The first support lies at 82.54, with the second at the 82 round level.

ECB could face further headwinds

Considering the latest PMI figures in the EU, the ECB is faced with the same issue as the RBA: persistent inflation pressures. In fact, the EU’s dependence on Russia for gas poses a more significant threat to the bank and the EU’s economy. German year-on-year inflation is expected to rise from 4.9% to 5.1% on Tuesday with these indications in mind. The consensus for EU’s CPI is identical; economists expect an increase of 0.2%, from 5.1% to 5.3%. In Europe’s case, price pressures could continue to exacerbate due to material supply issues despite Omicron-led impact deteriorating. Rising inflation in Germany and the EU would add further pressure on the ECB to normalize policy faster but imply a more hawkish narrative from the bank.

Euro seems to have found a bottom at $1.11 for now as the Ukrainian conflict has benefited its dollar counterpart. Resistance can be observed at $1.12. If inflation numbers disappoint, the pair could break the first support level and head towards a fresh multiyear low near 1.1020. In the opposite direction, $1.1272 might be the top following a positive CPI print.

BoC to step up its game

Central bank policy will shift from RBA to BoC on Wednesday as the latter is expected to deliver a hike, albeit marginal. The labor market has been tightening in Canada, and inflation has also been seen at 30-year highs and persistent. BoC is one of the few to respond to the data. In its last meeting, the bank admitted it would hike if it weren’t for Omicron’s weigh on activity, but it also mentioned the recovery remained “robust.” Although highly unlikely, the most bullish case would be a 50-basis points hike. It seems markets have made their best on the 25-basis hike already.

USDCAD seems somewhat mixed on a larger scale, but the impact of BoC also seems priced in. Last week, the pair soared to $1.2877 to only reverse course down to 1.27. Although the move was partially owed to crude’s trajectory, there is an evident mismatch in correlation, suggesting traders took action ahead of the BoC meeting.

If BoC hikes 25-basis points, the impact will likely be marginal and quickly absorbed to the support mentioned above. A double hike could strengthen the loonie further, making the 200-day average at 1.2627 the next significant support following a potential break below the 50-day average at 1.2627. On the flip side, 1.2877 seems to be a well-defended top, with interim resistance at 1.28. The interim levels may be reached after Canada’s GDP release due on Tuesday.

NFP

The US will report January’s non-farm payroll, unemployment, and wage numbers on Friday. Economists have forecast NFP figures to show a drop to 350k, unemployment to flatten at 4%, and average hourly earnings to subside from 0.7% to 0.5% month-on-month. However, the most recent private figures, the current market consensus is already up to 381k. With Omicron deteriorating, the dollar could see further strength coming it’s way. This could add additional pressure on US indices.

Judging from its recent relief, the SP500 has remained susceptible to war headlines as the latest updates showed sanctions are not that harsh. At 4296, the index has outer support and resistance at 4100 and 4500 levels, while internal levels lie at 4220 and 4387. However, markets will likely move until Friday, with 3968 and 4677 at play. Come Friday, and if the job numbers are positive, it would probably be seen as a bad event for stocks as the Fed is tracking the market closely to decide on policy hikes.

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