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Dollar Tops the Nasdaq 100 Next Week as Rate Speculation Dominates Focus

Dollar Tops the Nasdaq 100 Next Week as Rate Speculation Dominates Focus

John Kicklighter,
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QQQ Nasdaq 100 ETF, Russia, Dollar, USDJPY, EURJPY and GBPCAD Talking Points

  • The Trade Perspective: EURJPY Bearish Below 134; EURUSD Bullish Above 1.0800; GBPCAD Bullish Above 1.6500
  • The West’s sanctions on Russia for the invasion of Ukraine are piling up and unintentionally pushing inflation pressures to further extremes
  • Rate speculation will likely be this week’s top fundamental theme with a particular focus on the Dollar, Euro and Canadian Dollar
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What Will Drive Markets This Week?

Risk trends don’t arise from nothing. It is true that speculative momentum can be self-sustaining once rolling, but the initial charge for of a systemic ‘risk on’ or ‘risk off’ move generally starts with an event or theme. Despite what most technicians would believe, the most common catalyst for meaningful market movement starts from a fundamental matter – and we have plenty of that to go around at the moment. Between the ongoing Russian-Ukraine war, rampant inflation, downgraded growth forecasts and threat of aggressive central bank tightening on the immediate horizon; there is plenty to traction on which to draw. In the holiday-shortened week ahead, I believe monetary policy (both actions and speculation) will be the dominant theme. That said, the implications for traditional risk assets is not favorable. Over the past 13 years, monetary policy has been exceptionally expansive and has essentially become a building block for the markets to reach the heights they currently occupy. Keep that in mind with risk benchmarks like the QQQ Nasdaq 100 ETF. There is still reasonable debate over whether we have seen a ‘bear market bounce’ through March or whether the upswing is a return the prevailing trend. However, I am watching this popular vehicle in particular considering it occupies a more pointed risk position relative to a similar benchmark like the Dow (or DIA ETF). The Nasdaq to Dow ratio experienced a sharp decline this past week, speaking to the erosion of confidence even if baseline measures are not showing the bleeding.

Chart of QQQ Nasdaq 100 ETF with 100-Day SMA and Volume (Daily)

Chart Created on Tradingview Platform

As always, the week ahead holds both unscheduled and planned event risk. It is difficult to prepare for the former, but there are a few matters for which we know there is a significant probability of volatility. In particular, the situation in Ukraine is something that continues to unfold. A long-overdue ceasefire and earnest negotiations would be the best outcome and it would likely generate a risk-oriented ‘relief rally’. In the absence of that breakthrough, I will continue to monitor the possible fallout of foreign investment in the country as a possible spark of financial crisis – we would do well to assess the bank earnings (and their investor calls) to see what kind of exposure is mentioned. Yet, the most prolific global fallout from the ongoing war is the boost to inflation pressures. There is a remarkable amount of inflation-oriented event risk ahead – interspersed with some high profile releases like Singapore 1Q GDP (the first major economy to report), UK and Aussie employment numbers as well as a range of Chinese economic data.

Calendar of Major Economic Events

Chart Created by John Kicklighter

Monetary Policy: The Big Picture

For systemic weight, the monetary policy perspective can be evaluated in two means: the collective influence on sentiment and relative performance. Most currency traders tend to focus on the latter and neglect the former. In general, there has been an assumption around global monetary policy such that it is assume that there will always be a so-called ‘central bank put’. That references the major players’ (Fed, ECB, BOJ, etc) propensity to respond to financial and economic hardship with more support. That said, the conditions have changed; and the policymakers are making a concerted effort to warn that the well is not limitless. If the central banks continue to tighten even if the markets throw a fit, it will only exacerbate the rebalancing effort. This theme should follow closely the actions of rate changes as well as speculation around subsequent changes to benchmark rates. However, I believe that the greatest weight in subsequent months of market movement will be found through changes to stimulus programs (eg QE). The Fed is just one major central bank that has warned ‘quantitative tightening’ is on the horizon. Will others like the ECB announce the same?

Chart of Major Macroeconomic Events

Calendar Created by John Kicklighter

Speaking of the Federal Reserve, the world’s largest central bank is not due to deliberate on its policy mix again until May 4th, but the market will be evaluating the group’s path through 2022 nonetheless. There is an entire financial industry built around the forecast of US interest rate expectations, and speculation is following this channel to its full potential. In the week ahead, we have consumer inflation expectation, the official CPI release and upstream price pressure gauges (factory and export). All of those readings will feed into the full anticipation for 2022 monetary policy potential. Heading into the new week, the market is pricing in a remarkable 216 basis points (bp) of tightening through the end of the year. That matches the forecasted pace of the Bank of Canada (BOC) and Reserve Bank of New Zealand (RBNZ). That contributes a lot to the lift of the Greenback, but the 7-day run through Friday of the DXY likely draws more on the intense probabilities of 50 bp rate hikes at the next three meetings (91 percent for the May 4th gathering). Expectations are exceptionally hawkish as is, so the greater potential is perhaps a moderation of expectations ahead.

Chart of DXY Dollar Index with 100-Day SMA and Consecutive Candle Count (Daily)

Chart Created on Tradingview Platform

Key Monetary Policy Events to Track Ahead

I will be watching monetary policy from a global risk perspective through the coming week and have an eye on Fed rate speculation, but there are key event for which traders should be acutely aware for volatility potential. There are a range of interest rate decisions on tap, including the South Korean bank which is expected to hike 25bps and the Turkish group for which the outlook is murky. That said, a principal player is the European Central Bank (ECB) which will announce its policies and view on Thursday. This very dovish player is not expected to change rates or its stimulus program, but that is already expected. Instead, we will be parsing their rhetoric to see what the timeline is for tightening will be later this year. Swaps are pricing in approximately 60bps of hikes through the end of the year, but there were reports that the group was discussing a ‘crisis tool’ to combat any jumps in bond yields – which are already rising. Just how dovish the ECB can be is going to be interesting potential for the likes of EURCHF and EURJPY. I am particularly fond of the short-term breakout/down potential of the latter.

Chart of EURJPY with 100-Day SMA Overlaid with GER-JPN 2-Year Spread and Correlations (Daily)

Chart Created on Tradingview Platform

The other major central bank on tap this week is the Bank of Canada (BOC). Markets have priced in a 50bp hike for this meeting following the group’s move earlier this year. Given that the BOC has the same 216 bps priced in through the rest of 2022 as the Fed and RBNZ, this is panning out to be one of the most hawkish players in the majors. Naturally, the Canadian Dollar has rallied in anticipation of this outcome. However, what happens to the market should the central bank meet expectations and throttle the tempo that follows? While there is good reason to forecast such an aggressive path ahead, there is greater potential to even a modest disappointment. This could be a remarkable volatility response to very hawkish counterparts (USDCAD and NZDCAD), but I will be looking to pairs where the counterpart has been deflated perhaps more aggressively than is warranted given the fundamental outlook. That is why GBPCAD looks interesting to me. After the aggressive six-week slide, there is reversal potential – but it is reasonable to wait for the event risk and the technical break to occur before taking a definitive view.

GBPCAD with 20-Day Moving Average (Daily))

Chart Created on Tradingview Platform

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