The US dollar traded higher against all the other major currencies on Monday and Tuesday, Asian session, at a time when EU and US shares climbed higher. Perhaps investors remained optimistic that full-scale lockdowns can be averted, despite record COVID infections.
As for the dollar, it may have rebounded on Fed hike expectations. As for today, major OPEC and non-OPEC members meet to decide on oil production.
US Dollar Gains, Equities March North, OPEC+ to Decide on Oil Production
The US dollar traded higher against all the other major currencies on Monday and during the Asian session Tuesday. It gained the most ground versus AUD, NZD, and JPY in that order.
The strengthening of the dollar and the weakening of the risk-linked Aussie and Kiwi suggest that markets may have traded in a risk-off fashion yesterday and today in Asia. However, the weakening of the yen points otherwise.
Therefore, we prefer to turn our gaze to the equity world to clear things up. Major EU and US indices were a sea of green, with risk-appetite softening today in Asia.
Monday was the first working day of 2022 for many traders around the globe, who may have decided to resume their activity by increasing their risk exposure. Why? Perhaps, for the same reasons, they led equities higher during the end of 2021.
While the surge in Omicron COVID cases continues to impact travel and public services around the globe, its milder nature keeps market participants optimistic that full-scale lockdowns could be averted. The fact that Tesla (NASDAQ:TSLA) rallied 10% on record quarterly deliveries may have also helped Wall Street, especially the NASDAQ.
So, why is the dollar up in a risk-on environment? In our view, the US dollar is strengthening as market participants maintain expectations of several interest rate increases by the Fed this year. According to its latest “dot plot,” the Committee itself anticipates three quarter-point lift-offs by the end of 2022.
US Treasury yields also moved higher, adding to the view that rate-hike expectations support the US dollar. But if market expectations on interest rates remain high, why do equities continue to march north? Interest rate hikes negatively affect the profitability of firms.
Maybe because equity traders have already digested the idea of a higher-rate trading environment this year, or because they prefer to focus on the fact that economies around the globe will stay open, despite record coronavirus infections.
As for today, market participants may turn their attention to the energy market, as we have a meeting between major OPEC and non-OPEC oil-producing nations. Despite the fast-surging COVID cases lately, the group is not expected to alter its existing policy, as most governments around the globe dismissed the chance of a full-scale lockdown due to the new variant being less deadly than the previous ones.
Indeed, on Sunday, the group said that it expects the impact on the oil market from the Omicron strain to be mild and temporary, keeping the door open for a further increase in output. Therefore, as previously agreed, we expect the alliance to continue raising output targets by 400k BPD each month.
Oil prices could gain somewhat if indeed the group officially confirms the view that demand will probably not be affected. The Loonie could gain as well, but its traders may also wait for Canada’s employment data, due out on Friday, before deciding on bigger positions.
USD/JPY – Technical Outlook
USD/JPY traded higher yesterday, breaking the peak of Nov. 24, at 115.52, and entering territories last tested at the beginning of 2017. Overall, the pair continues to trade above the upside support line drawn from the low of Dec. 3 and above another steeper line, taken from Dec. 20. So, we will consider the short-term picture to be positive with that in mind.
We believe that the break above 115.52 may have led towards the high of Jan. 10, 2017, at 116.33. The bulls may decide to take a break after testing that zone, thereby allowing a corrective setback. However, as long as that setback remains above the upside line taken from the low of Dec. 20, we will see decent chances for another rebound and a break above 116.33. This could pave the way towards the high of Jan. 11, 2017, at 116.92.
We will start examining the case of a decent correction lower if we see a clear break below the 114.95 zone, marked by the low of Jan. 3. This could initially pave the way towards the low of Dec. 29, at 114.65, the break of which could aim for the 114.50 barrier or the upside line taken from the low of Dec. 3.
WTI Crude Oil – Technical Outlook
WTI crude oil trade higher yesterday, after hitting support at 74.27. In the bigger picture, the price remains between that level and the 77.45 barrier, marked by the highs of Dec. 29 and 30 and above a prior downside resistance line taken from the high of Nov. 1. In our view, this paints a cautiously optimistic picture.
We will get more confident about the upside if we see a break above 78.05, marked by the high of Nov. 22. This could initially pave the way towards the round figure of 80.00, which is also marked as resistance by the high of Nov. 24, the break of which could carry extensions towards the high of Nov. 16, at 81.75. If that barrier cannot stop the advance either, we could see the bulls climbing towards the high of Nov. 9, at 85.00.
On the downside, we would like to see an apparent dip below 69.35 before examining whether the bears are back in control. This could confirm the liquid’s return below the downside line taken from the high of Nov. 1 and may see scope for declines towards the low of Dec. 3, at 66.05. Another break, below 66.05, could extend the fall towards the low of Dec. 2, at 62.90.
Elsewhere
We get the UK final manufacturing PMI for December, which is expected to confirm its preliminary estimate, and the US ISM manufacturing index, which is expected to slide somewhat.