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Yen Jumps as Asian Markets in Deep Selloff to Start the New Year

Yen surges broadly while Australian Dollar is pressured as Asian markets start the new year with deep selloff. Hong Kong HSI is quickly down over -2.3% in initial trading. China Shanghai SSE is down -1.0% and Singapore Strait Times is down -0.48%. Japan is still on holiday. Canadian and Dollar are the relatively firmer ones but look vulnerable. European majors are steadily in range. More volatility will likely be seen as a load of economic data will be featured in the holiday shortened week.

Technically, USD/JPY’s decline extended to as low as 109.51 so far. The break of 109.76 support carries bearish implications and opens up further fall back to 104.62 low. EUR/JPY also breaks 125.52 support to resume recent decline towards 124.08 key support level. GBP/JPY is also heading back to 139.29 key support. Talking about the Pound, it would be noted that despite Monday’s rally attempt, GBP/USD was held by 1.2811 near term resistance EUR/GBP was also kept by 0.8931 support. There is no committed buying in Sterling yet.

Two more things to note. Firstly, US yield curve inversion worsened quite seriously by the end of 2018. It’s clearly inverted from 1-year (2.619) to 2-year (2.504) and then 3-year (2.462). 5-year yield at 2.511 is way below 1 year yield. 6-month yield at 2.486 isn’t too far away. Secondly fed funds futures are now pricing just around 2.5% chance of a Fed hike in march to 2.50-2.75%. And there’s just around 11% chance of a rate hike in 1H. It looks like investors are expecting something rather ugly ahead in 2019.

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Democrats to offer a deal to end government shutdown without border wall

The partial US government shutdown is now in its second week. Democrats, who will take control over House with 36-seat majority, plan to vote on a two-part package on Thursday, intending to break the deadlock. One part of the package include a bundle of six measures worth USD 265B for funding non homeland security agencies through September 30. The second part include funding for the Department of Homeland Security through February 8, and provide $1.3 billion for border fencing and $300 million for other border security items including technology and cameras. But there won’t be funding for the border wall that Trump demanded and shut down the government for.

Democrat leaders Nancy Pelosi and Chuck Schumer said in a joint statement that “While President Trump drags the nation into Week Two of the Trump Shutdown and sits in the White House and tweets, without offering any plan that can pass both chambers of Congress, Democrats are taking action to lead our country out of this mess.”

The fate of the Democrats’ package is rather uncertain in the Republican controlled Senate. spokesman for Senate Republican leader Mitch McConnell already said “It’s simple: The Senate is not going to send something to the president that he won’t sign.”

But Trump himself hinted that he might want to make a deal. He tweeted that “Border Security and the Wall ‘thing’ and Shutdown is not where Nancy Pelosi wanted to start her tenure as Speaker! Let’s make a deal?”

China Xi to Trump: History has proven cooperation is best for both sides

In his New Year address, Chinese President Xi Jinping reminded US President Donald Trump that “history has proved that cooperation is the best choice for both sides.” Xi added that “I attach great importance to the development of China-U.S. relations and am willing to work with President Trump to summarize the experience of the development of China-U.S. relations and implement the consensus we have reached in a joint effort to advance China-U.S. relations featuring coordination, cooperation and stability so as to better benefit the two peoples as well as the people of the rest of the world.”

The official Xinhua new agency also echoed in the commentary that “At a time when the world is undergoing unprecedentedly profound changes and is fraught with risks and uncertainties, the global community expects even closer collaboration between the two largest economies.”

Trump tweeted on December 29 that “Just had a long and very good call with President Xi of China. Deal is moving along very well. If made, it will be very comprehensive, covering all subjects, areas and points of dispute. Big progress being made!”. China’s state media also said Xi believed both sides wanted “stable progress”, and China-US ties had reached a “vital stage” on its 40th anniversary.

It’s believed that Deputy U.S. Trade Representative Jeffrey Gerrish will lead a delegation including Treasury Under Secretary for International Affairs David Malpass, to travel to China in the week of January 7 for face-to-face meeting on trade negotiations.

UK PM May urged support to her Brexit deal to turn a corner

UK Prime Minister Theresa May continued to sell her Brexit agreement in her New Year message. He said that “the Brexit deal I have negotiated delivers on the vote of the British people and in the next few weeks MPs will have an important decision to make.” She emphasized that “if parliament backs a deal, Britain can turn a corner.”

May added that “the referendum in 2016 was divisive but we all want the best for our country and 2019 can be the year we put our differences aside and move forward together, into a strong new relationship with our European neighbors and out into the world as a globally trading nation,” And, “we have all we need to thrive and if we come together in 2019 I know we can make a success of what lies ahead.”

MPs are expected to re-start the debate on the Brexit agreement in the week of January 7 and a Commons vote is scheduled for the week of January 14. In the coming days, a focus will be on what further political and even legally assurances the EU will give regarding the non-permanent nature of the Irish backstop.

China Caixin PMI manufacturing in first contraction since 2017, greater downward pressure ahead

The Caixin China PMI manufacturing dropped to 49.7 in December, down from 50.2 and missed expectation of 50.3. That’s also the first contractionary reading since May 2017.

Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group, noted in the release that “external demand remained subdued due to the trade frictions between China and the U.S., while domestic demand weakened more notably”. And, “it is looking increasingly likely that the Chinese economy may come under greater downward pressure.”

Busy calendar ahead

As usual, the first economic calendar is usually rather busy and important in the first week of the year. UK will release PMIs. Eurozone will release CPI flash. And the US will release ISM manufacturing and non-farm payrolls Canada will also release job data. Here are some highlights for the short week.

  • Wednesday: China Caixin PMI manufacturing; Eurozone PMI manufacturing final; UK PMI manufacturing
  • Thursday: Swiss PMI manufacturing; Eurozone M3; UK PMI construction; US ADP employment, jobless claims, ISM manufacturing, construction spending
  • Friday: Eurozone PMI services final, PPI, CPI flash; Germany unemployment; UK PMI services; Canada employment; US Non-farm payrolls

USD/JPY Daily Outlook

Daily Pivots: (S1) 109.53; (P) 109.73; (R1) 109.93; More..

USD/JPY’s decline from 114.45 resumed and reaches as low as 109.37 so far. The break of 109.76 support also carries larger bearish implications. Intraday bias is now on the downside for 61.8% retracement of 104.62 to 114.54 at 118.40 first. Sustained break there will pave the way to retest 114.54 low next. On the upside, break of 111.40 resistance is needed to indicate short term bottoming. Otherwise, near term outlook will remain bearish in case of recovery.

In the bigger picture, price actions from 125.85 (2015 high) are seen as a long term corrective pattern, no change in this view. Apparently, such corrective pattern is not completed yet. Break of 109.76 support suggests that another medium term down leg has started, targeting 98.97/104.62 support zone. For now, we’d expect strong support from there to contain downside to bring rebound.

Economic Indicators Update

01:45CNYCaixin PMI Manufacturing Dec49.750.350.2
08:45EURItaly Manufacturing PMI Dec48.448.6
08:50EURFrance Manufacturing PMI Dec F49.749.7
08:55EURGermany Manufacturing PMI Dec F51.551.5
09:00EUREurozone Manufacturing PMI Dec F51.451.4
09:30GBPPMI Manufacturing Dec52.653.1
14:30CADManufacturing PMI Dec54.9
14:45USDManufacturing PMI Dec F53.953.9
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