The Week Ahead – Turning the corner

AUDUSD rallies on increased risk appetite

The Australian dollar rallies as the market remains risk-on. The US dollar’s softness may continue to provide tailwinds despite lacklustre domestic data. Australia’s retail sales saw its biggest drop in over two years in December as the economy is feeling the pinch of the tightening. Extended declines in house prices would further erode consumer sentiment. Still, the full impact of last year’s rate hikes is yet to be seen, signs of a noticeable slowdown may prompt traders to pare back their peak rate expectations. A 25 bp hike has been priced in for the upcoming meeting. The pair is heading towards 0.7280 with 0.6880 as the first support.

USDCAD struggles as Canada’s economy shows resilience

The Canadian dollar inches higher as its economy may avoid a mild recession. Cooling inflation has so far given the BoC leeway to pause its monetary tightening. As major central banks are entering the later stage of their hike cycle, market participants would shift their focus to the actual economic impact. Both growth and employment in Canada have proven to be resilient despite a rapid climb in borrowing costs. If the prophesied recession never materialises, the growth-sensitive loonie would be in a better position to surf a new wave of risk-taking. November’s low of 1.3230 is a critical floor and 1.3500 an immediate resistance.

UKOIL softens on demand uncertainty

Brent crude slips as the demand outlook remains muddy. The EU is looking to impose a price cap on Russian oil. However, the cap may have limited effect as the International Energy Agency stated that it does not expect a major disruption. Demand uncertainty seems to be dictating the price dynamics. Despite a pickup in Chinese economic momentum, hopes that China’s re-opening would be a game-changer are yet to become reality. Instead, a drop in the country’s imports in January, partially due to the Lunar New Year holidays, has kept traders on their toes. The commodity is still trading in the 75.00-89.00 range.

SPX 500 rallies as Fed nods at disinflation

The S&P 500 extended gains after the Fed acknowledged that inflation has peaked. The market barely flinched after the latest rate increase, suggesting that investors are now looking beyond the current tightening cycle. Easing price pressure has made ‘disinflation’ the new trendy word on Wall Street, which in conjunction with robust economic fundamentals indicate that a soft landing might be actually achievable. With peak rate expectations now below 5%, improved sentiment may carry equities higher especially if the CPI stays in a downtrend. The index is challenging last August’ high of 4320 and 4000 is the closest support.

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