Yen Trading Higher as Risk Aversion Spreads from US

Yen is trading as the second strongest one for today, next to New Zealand Dollar, as risk aversions spread from the US to Asia. There were continuous rhetorics from Trump’s administration against Fed’s rate hikes. But the fact that Dollar and yields are weak argues that the free fall in stocks is due to some more fundamental challenges of the economy. And there has been clear flow from stocks to bonds in the US, Germany and Japan. Investors are clearly worried about a global slowdown. For today, Euro is the weakest one, followed by Dollar and Swiss Franc.

Technically, EUR/JPY is now pressing 127.61 support and break there will at least bring a retest on 126.63 support, with prospect of resuming recent decline from 133.12 to 124.89 support next. USD/CHF is also eyeing 0.9911 minor support and break will likely resume choppy correction from 1.0128 for 0.9862 low again. AUD/USD might now consolidate above 0.7153 temporary low but outlook will stay bearish as long as 0.7246 minor resistance holds. EUR/USD, GBP/USD and USD/CAD are staying in consolidation in familiar range.

In other markets, DOW dropped -507 pts or -2.11% to 23592.98. S&P 500 declined -54.01 pts or -2.08% to 2545.94. NASDAQ lost -156.93 pts or -2.27% to 6753.73. Nikkei closed down -1.64% at 21115.45. At the time of writing, Singapore Strait Times is down -2.05%, Hong Kong HSI is down -1.03% and China Shanghai SSE is down -0.82%. In bond markets, US 10 year yield dropped -0.034 to 2.857. Yield curve is inverted between 2-year (2.696) and 3-year (2.683). 5-year yield is not far away at 2.692. Japan 10 year JGB yield is down -0.0126 at 0.024.

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White House Navarro: Fed shouldn’t even hike this week

White House trade advisor Peter Navarro said Fed shouldn’t raise interest rate, even this week. He said it’s “not because the economy’s slowing down, but because the economy’s growing without inflation”. Trump also blast Fed for “even considering yet another interest rate hike”. Whether Fed should or shouldn’t continue with rate hike is one question, they’ve got enough seasoned economists there to make their own judgement. But noting that Dollar and yield declined, there is apparently no linkage between Fed’s hike to the stock market crash.

RBA minutes hint on prospect of dovish shift

Minutes of the December 4 RBA meeting maintained the same tone that “the next move in the cash rate was more likely to be an increase than a decrease”. But at the same time “there was no strong case for a near-term adjustment in monetary policy”.

For RBA, the “central scenario remained for steady growth in consumption, supported by continued strength in labour market conditions and a gradual pick-up in wages growth”. Also, “further falls in the unemployment rate were likely”. But it should be emphasized that was based on “expectation that the economy would continue to grow above trend”.

Also, the meeting took place before release of Q3 GDP, which showed merely 2.8%. That’s clearly lower than RBA’s own projection of 2.0%. And 2.8% could merely be described as being around trend, not above trend. Thus there is prospect of a dovish shift in RBA’s upcoming forecast in February Monetary Policy Statement.

Japan cabinet office lowered growth and inflation forecast, but consumption offers a bright spot

Japan Cabinet Office lowered fiscal 2018 and 2019 growth forecast notably in the new economic projections. The move was due to impact from natural disaster as well as increasing downside risks from US-China trade war. Inflation forecasts was also revised lower. Though, private consumption is expected to pick up down the road, providing a bright spot.

For fiscal 2018, which ends in March, growth is now expected to grow 0.9%, sharply lower from prior projection of 1.5%. For fiscal 2019, growth is projected to be at 1.3%, also down from prior projection of 1.5%.

On inflation, core CPI is projected to rise 1.0% in fiscal 2018, revised down from prior forecast of 1.1%. For fiscal 2019, core CPI is expected to climb slightly to 1.1%, also revised down from prior estimate of 1.5%.

In other projections, capital expenditure is forecast to rise 3.6% in fiscal 2018, then slow to 2.7% in fiscal 2019. Private consumption is expected to rise 0.7% in fiscal 2018 and accelerate to 1.2% in fiscal 2019.

China Xi pledged reform and open up markets, with no specifics

At the 40th anniversary of market liberalization, Chinese President Xi Jinping used one and a half hour to delivered some high level promises but failed to deliver any specifics. He said “we must, unswervingly, reinforce the development of the state economy while, unswervingly, encouraging, supporting and guiding the development of the non-state economy”.

He added that “Every step of reform and opening up is not easy. In the future, we will be inevitably faced with all sorts of risks and challenges, and even unimaginable tempestuous storms.” But he also emphasized that “opening brings progress while closure leads to backwardness.”

Brexit deal vote again in week of Jan 14

UK Prime Minister Theresa May told the parliament yesterday that her Brexit agreement is “not everyone’s perfect deal” but a “compromise”. But she warned that “if we let the perfect be the enemy of the good then we risk leaving the EU with no deal”. And she emphasized that “avoiding no deal is only possible if we can reach an agreement or if we abandon Brexit entirely.” She al repeated that EU had offered “further clarifications” on the Irish backstop and she’s seeking “further political and legal assurances”. On the timing of the vote, May said debate on the Brexit deal with resume in the week beginning Monday January 7. Vote will be held in the following week, that is, the week beginning January 14.

Opposition Labor leader Jeremy Corbyn lodged a motion of no-confidence in May for delaying the Brexit deal vote as “this is unacceptable in any way whatsoever”. Corbyn also criticized May as the architect of a constitutional crisis, “leading the most shambolic and chaotic government in modern British history”. But the results of such vote would be non-binding, even if it takes place.

On the data front

New Zealand ANZ Business Confidence rose to -24.1 in December, up from -37.1. Looking ahead, Germany Ifo business climate is the main focus in European session. Later in the day, Canada will release manufacturing sales. US will release housing starts and building permits.

EUR/JPY Daily Outlook

Daily Pivots: (S1) 127.73; (P) 128.16; (R1) 128.46; More….

EUR/JPY’s recovery attempt was rejected by 4 hour 55 EMA and focus is back on 127.61 support. Break there will resume the fall from 130.14 and target 126.63 support first. Break there will then resume the whole decline from 133.12 to 124.08/89 support zone. Overall, consolidation from 126.63 could still extend. But even in case of another strong recovery, outlook will stay bearish as long as 130.14 resistance holds.

In the bigger picture, as long as 124.08 key resistance turn supported holds, larger up trend from 109.03 (2016 low) could still resume. Firm break of 137.49 structural resistance will target 141.04/149.76 resistance zone next. However, decisive break of 124.08 will argue that such rise from 109.03 has completed and turn outlook bearish. In that case, deeper fall would be seen to 61.8% retracement of 109.03 to 137.49 at 119.90.

Economic Indicators Update

GMTCcyEventsActualForecastPreviousRevised
0:00NZDANZ Business Confidence Dec-24.1-37.1
0:30AUDRBA Meeting Minutes
9:00EURGerman IFO Business Climate Dec101.7102
9:00EURGerman IFO Current Assessment Dec104.9105.4
9:00EURGerman IFO Expectations Dec98.298.7
13:30CADManufacturing Sales M/M Oct0.30%0.20%
13:30USDHousing Starts Nov1.23M1.23M
13:30USDBuilding Permits Nov1.27M1.26M