Middle East Tensions Push Yen, Franc and Oil Higher

Yen and Swiss Franc jump sharply as markets turned from strong risk appetite to risk aversion. Despite record closes in US stocks, Asian markets tumble on fresh geopolitical tensions in Middle East. Oil prices also skyrocket together with gold, while treasury yields tumble. In the currency markets, Australian and New Zealand Dollar are the weakest ones, but Euro and Sterling are not too far away.

Technically, the most important development overnight was the break of a key near term support in USD/JPY. Its rebound from 104.45 could have completed at 109.72 already. Further fall is now likely to 107.70 fibonacci level first, then 106.48. EUR/JPY should at least attempt to test 119.99 key near term support. EUR/GBP’s breach of 0.8476 minor support yesterday was probably a false break. GBP/JPY’s break of 142.42 argues that recent recovery has completed. GBP/USD is pressing 1.3105 and break will align the outlook with GBP/JPY.

In Asia, Japan remains on holiday. Hong Kong HSI is down -0.17%. China Shanghai SSE is down -0.30%. Singapore Strait Times is down -0.52%. Overnight, DOW rose 1.16%. S&P 500 rose 0.84%. NASDAQ rose 1.33%. All were new records. 10-year yield dropped -0.037 to 1.882.

Oil surges after Iranian top general killed by US air strike

WTI oil price surges sharply and breaches 63.04 resistance. Recent rally accelerates abruptly on news that US air strike killed top Iranian commander, Qassem Soleimani, the general who led the Revolutionary Guards’ Quds force. “This strike was aimed at deterring future Iranian attack plans,” the Pentagon said in a statement. Ahmed al-Assadi, a spokesman for Iraq’s Popular Mobilisation Forces (PMF) said “the American and Israeli enemy is responsible for killing the mujahideen Abu Mahdi al-Muhandis and Qassem Soleimani.”

There is no clear follow through buying above 63 handle yet. As WTI will enter into key resistance of 63.04/66.49 on the next rise, we’ remain cautious on topping there. Meanwhile, break of 60.46 support will be a sign of rejection by the mentioned resistance zone. In this case, WTI should then at least have a pull back to 55 day EMA (now at 58.43).

PBoC official said China has room to cut RRR further

In an article, a PBoC official said that adjustment in the reserve requirement ratio was for providing “long-term, stable liquidity” to the real economy. It’s not a sign towards loose monetary policy. The article was first published in December, released again by the China Bond magazine via it’s Wechat account yesterday. that came a day after PBoC announced fresh RRR cut on Wednesday.

Ruan Jianhong, head of the Statistics and Analysis Department at the People’s Bank of China (PBOC), said, “from an international perspective, China’s current required reserve ratio (RRR) is still relatively high and has relatively big room to adjust”. Along with other monetary policy tools, RRR adjustments “can provide long-term, stable liquidity to the real economy.”

“In recent years, PBOC has been reducing RRRs successively. But this doesn’t mean PBOC is shifting toward a looser monetary policy. Rather, the moves are aimed at supplementing liquidity to the overall economy in an efficient, low-cost manner,” She added.

Looking ahead

In European session, Swiss will release SVME PMI. Germany will release unemployment and CPI. UK will release construction PMI, mortgage approvals and M4 money supply. Eurozone will release M3 money supply. Later in the day, US will release ISM manufacturing, construction spending and FOMC minutes.

GBP/JPY Daily Outlook

Daily Pivots: (S1) 141.86; (P) 143.02; (R1) 143.76; More…

GBP/JPY’s break of 142.42 minor support suggests that recovery from 141.15 has completed at 144.36. Intraday bias back on the downside. Break of 141.15 will extend the corrective fall from 147.95 to 38.2% retracement of 126.54 to 147.95 at 139.77. On the upside, above 144.36 will turn bias back to the upside for retesting 147.95.

In the bigger picture, rise from 126.54 could either be the third leg of the consolidation pattern from 122.75 (2016 low), or the start of a new up trend. In either case, further rally is expected as long as 139.31 support holds, into 148.87/156.59 resistance zone. Reaction from there should reveal which case it should be in. Rejection from there will extend long term range trading. Decisive break of 156.69 will carry long term bullish implications.

Economic Indicators Update