Yen in Driving Seat after Currency Flash Crash, Australian Dollar Suffers

Market overviews

Yen is trading as the strongest one for today after what many described as “currency crash”. Key levels in many Yen crosses were breached. or even broken. In particular, USD/JPY just hold on to 2017 low at 104.62 after hitting 104.69. AUD/JPY even breached 72.39 (2016 low) and hit lowest since 2009. When yen crosses pared back some of the losses after the spike, outlook is now clearly bearish for most of them and more downside is expected.

Staying in the currency markets, for now, Swiss Franc is the second strongest one for today, followed by Euro. But Dollar and Canada are the next strongest for the week. Australian Dollar is the worst performing one on China slowdown worry, for both the day and the week. Sterling is the second weakest for today and third weakest for the week on Brexit uncertainties.

While there is extreme volatility in the currency markets, stocks were relatively calm though. DOW again staged an impressive comeback overnight. It initially dipped to as log as 22928.59 but closed up 18.78pts or 0.08% at 23346.24. S&P 500 rose 0.13% and NASDAQ gained 0.46%. In Asia, Japan is still on holiday. China Shanghai SSE is currently flat. Hong Kong HSI is down -0.44% while Singapore Strait Times is down -0.73% only.

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However, after Apple’s cutting of revenue outlook DOW futures is currently down over -300 pts in Asia. It looks like US stock will be under pressure again. US treasury will be another key factor to watch ahead. 30-year yield finally closed below 3% handle at 2.982 overnight, down -0.038. 10-year yield dropped -0.025 to 2.661. More importantly, after the Apple’s news, 10-year yield is now down to 2.620 in Asia. It’s very close to 1-year yield at 2.616.

Currency flash crash on Apple, China and AUD/JPY squeeze

“Currency Crash” occupies a lot of headline in Asian session today after Yen spikes higher during the “thin” period of the markets while Aussie was squeezed lower. To put it into perspective, USD/JPY hit as low as 104.69 comparing to yesterday’s high at 109.72. EUR/JPY hit as low as 118.62 comparing to yesterday’s high at 125.85. GBP/JPY hit as low as 131.51 comparing to yesterday’s high at 139.92. And most seriously, AUD/JPY hit as low as 70.27 comparing to yesterday’s high at 77.34, and hit lowest since 2009.

The main fundamental trigger of the crash is believed to be Apple’s cutting of its sales forecasts amid China slowdown. It’s the tech giant’s first cut in revenue outlook in almost two decades. CEO Time Cook said the company expects around USD 84B in Q4, sharply lower from prior estimate of USD 89B to USD 93B. Cook also warned that in a statement to investor that “while we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China.”

The crash in Yen crosses is described by some as “flash”. The exaggeration is seen as result of AUD/JPY liquidity vacuum as market dislocation at a short period of thin market. Aussie should at least be part of the problem as AUD/USD also breached 2016 low at 0.6826. And most apparently, even AUD/NZD spiked to as low as 1.0107 and is now back in Wednesday’s range.

Trump: Dec stock decline just a little glitch

Trump said the decline in stock markets in December was just a “little glitch” and the US markets will be good when the trade deals kick in. He told reporters at a Cabinet meeting that “we had a little glitch in the stock market last month.” And, “it’s going to go up once we settle trade issues, and once a couple of other things happen.” He repeated that “We need a little help from the Fed … but we’re going to be good. The trade deals are kicking in.” Also, Trump repeated his upbeat message regarding trade talks with China and said they are “coming along very well, we’ll see what happens.”

On the data front

Swiss PM manufacturing, Eurozone M3 and UK PMI construction will be released in European session. But major focuses will be on US data. ADP job report, jobless claims, construction spending and ISM will be released. We’ll see whether these data could support investor sentiments, or worsen them.

USD/JPY Daily Outlook

Daily Pivots: (S1) 108.48; (P) 109.11; (R1) 109.52; More..

USD/JPY’s fall accelerates to as low as 104.69 before recovering ahead of 104.62 low. For now, intraday bias remains on the downside despite the current recovery. Decisive break of 104.62 will target 100% projection of 118.65 to 104.62 from 114.54 at 100.51, which is close to 100 psychological level. On the upside, break of 109.46 minor resistance is needed to indicate short term bottoming. Otherwise, outlook will remain bearish even though the current recovery might extend.

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. Fall from 114.54 is seen as another medium term down leg, 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

GMT Ccy Events Actual Forecast Previous Revised
08:30 CHF PMI Manufacturing Dec 56.9 57.7
09:00 EUR Eurozone M3 Money Supply Y/Y Nov 3.80% 3.90%
09:30 GBP UK Construction PMI Dec 52.9 53.4
12:30 USD Challenger Job Cuts Y/Y Dec 51.50%
13:15 USD ADP Employment Change Dec 175k 179k
13:30 USD Initial Jobless Claims (DEC 29) 215K 216K
15:00 USD Construction Spending M/M Nov 0.40% -0.10%
15:00 USD ISM Manufacturing Dec 58.4 59.3
15:00 USD ISM Prices Paid Dec 58 60.7
15:00 USD ISM Employment Dec 58.4