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Powell slows yield rise, helps risky assets

January 12,2022 07:34:35

Overnight Headlines

*Wall Street closes higher after Powell testimony eases investors’ concerns

*Brent crude heads towards $84 after biggest one-day gain this year

*China’s Omicron outbreak bad news for global supply chains

*Dollar swoons as Powell soothes policy fears, CPI test looms

US equities continued their rebound as dip buyers again took a liking to battered growth stocks. Tech and consumer discretionary led the way, defensives and value lagged. The Nasdaq enjoyed its biggest rise in three weeks bouncing 1.4%. The S&P500 was up 0.9% and the Dow closed higher by 0.5%. Asian markets are following Wall Street’s lead with the Hang Seng bouncing 2%. Futures are firmly in the green.

USD weakened versus most of its peers as bond yields came off their recent highs above 1.80%. The DXY remained capped below 96 for a third consecutive day. EUR reversed Monday’s losses and hit the highest level in a week. GBP touched the highest level since early November at 1.3645 and closed above trendline resistance. USD/JPY posted its first gain after four losing sessions. USD/CAD broke down below 1.26 as risk sentiment improved.

Market Thoughts –Benign Powell calms markets into CPI

Fed Chair Powell reassured the Senate and more importantly investors that the world’s most important central bank would be able to bring down inflation and do it without much damage to the economy. Powell did not comment on the timing of the first rate hike but he reaffirmed that policymakers expected inflation to peak in the middle of the year. This suggests that aggressive rate hikes may not be necessary.

We get the release of US CPI later today where the headline is expected to reach 7% y/y and core 5.4% y/y. However, the latter is forecast to decline from 0.8% m/m to 0.4% m/m. This lower m/m number shouldn’t change the markets pricing of the Fed. Many analysts see risks skewed to the upside as underlying price increases have been higher than estimated for several months. DXY is sat at the bottom of the recent range with 95.51 as support.

Chart of the Day – USD/CAD falls through support

The dollar selloff combined with better risk sentiment and oil holding its biggest gain this year to push USD/CAD below its 100-day SMA. This level tracked closely to recent lows around 1.2610 and now becomes resistance.

Seasonal trends are typically less supportive of CAD early in the year. But the slide below previous December support could see the move lower continue. The 200-day SMA is at 1.2499. Much will depend on the bumper CPI data while we also get more weekly oil figures this afternoon.

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