Market Analyst - HotForex
This week, Fed chair Powell’s successful attempt to convince markets that the punch bowl of monetary stimulus isn’t going to be taken away anytime soon, even in the face of rising inflation. While admitting that USDIndex prices are “somewhat elevated” and that there would be a brief surge in price pressures as the economy opens up from Covid restrictions, he argued that the Fed should be able to anchor expectations to prevent a higher inflationary process from taking root.
Overall, Powell’s House testimony, while largely repeat of the Senate testimony the day before, seemed to have greater impact damping down yields, taking away a bit that reflation trade story that we have seen recently. However, inflation is allowed to run higher (more than in former cycles under the prevailing policy rubric), without accompanying monetary tightening, is bearish for the USD, as it implies loosening in the real interest rates and in real Treasury yields, at least in so far as it contrasts the circumstance in other economies, as appears to be the case. Hence the story continued, with USD under pressure, while once again commodities and commodity-related currencies remained the gainers of the week and the month, despite today’s firmness!
USOil prices hit new 13-month highs, showing a near 31% gain on the year so far, which marks a substantial improvement the terms of trade of the Canadian economy. The USDCAD has posted a 3-year low, CADJPY traded above the 85.00 level for the first time since March 201, aided lower by a narrowing in the US yield advantage over the Canadian yields over the last day at the 10-year and other maturities, alongside another rise in oil prices to new 13-month highs.
The supply-gap oil supercycle theses remain strong in market narratives, with many predicting prices at $100, underpinned by demand stimulation caused by the upcoming massive stimulus in the US and EU. The anticipation of a return to societal norms on the back of Covid vaccination programs, and the lifting of travel restrictions, go hand-in-hand with this view. We harbor doubts about this, but for now, it is likely to remain in the ascendant. Rising US supply and potential for a weakening in discipline amid the OPEC+ group to maintain supply quotas may offset rising demand. In terms of known unknown’ risks, to use epistemological phraseology, include new more transmissible SARS-Cov2 coronavirus variants that prove resistant to current vaccinations, or perhaps another clash between Saudi Arabia and Russia on oil production quotas. The OPEC+ group meets on March 3rd-4th to decide on April quotas, with Moscow reportedly calling for a relaxation.
The USOIL holds firm so far above the $63 level after closing yesterday above our latest daily up fractal and 7-day Resistance at $62.20. The momentum indicators are flashing green, unable to spoil this 5-month rally. The MACD extents lines northwards with an increasing slope since October, the RSI posting higher lower, suggesting that momentum remains in bulls favor and any pullback is a correction of the trend.
The intraday outlook at the same time is mixed, as RSI, MACD, and Stochastics are aligned lower. This however is just an indication for intraday pullbacks before another attempt higher. Key resistance will be 2020 high at 63.60, which could strengthen the possibility of a return to 2- or even 3-years highs (next Resistance 2019 at 66.60). A fall could not fear bulls as long as the asset sustains above the 20-day SMA which coincides with the bottom line of the 5-month channel, at a $57-58.60 area.
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