Good morning and Welcome to the first market commentary for the year!
Summary: The Dollar Index extended losses in thin holiday-affected trading yesterday to finish 0.3% lower at 96.15. Most of the move came in the USD/JPY which plummeted to close at 109.70 (110.30 Monday). Major markets were closed for New Year’s Day. The benchmark US 10-year bond yield slumped 4 basis points to 2.68%, it’s lowest level since January 26, 2018. Stock futures rallied following President Trump’s tweet that “big progress” is being made with China on trade following his phone call with his Chinese counterpart Xi-Jinping. Brent Crude Oil prices rose in limited trade, up 1.8% to $54.15 ($53.55 Monday).
- US Ten-year Bond yield – slumped to 2.68% from 2.72%, a low not seen since late January 2018. While a lot of the buying of Treasuries (which push yields lower) may have been the result of position-adjusting in thin markets, 2018 was supposed to be a year of bond bears. Perhaps their positioning got overcrowded. Ten-year yields hit a high of 3.23% in November.
- USD/JPY – This currency pair was the most active in thin, choppy trade. The slump in the US 10-year yield saw traders dump their US Dollar longs against the Japanese currency. In our last report for 2018 we highlighted Saxo Bank/Bloomberg’s latest Commitment of Traders/CFTC report which saw net speculative JPY short bets increase to -JPY 102,771 contracts which were near 12-month highs.
- AUD/USD – The Aussie was little-changed as risk appetite remained poor. AUD/USD finished with modest gains at 0.7057 from 0.7040 on Monday. With an overall weaker Greenback, we see the Aussie holding above 70 cents with chances of grinding back to 0.72 cents.
On the Lookout: With most financial centres back today expect a tentative start with markets consolidating. Any follow-through from Trump’s tweet on trade will be closely monitored. The only major data release on Monday was China’s Manufacturing and non-Manufacturing PMI data (Monday). One cancelled out the other with Manufacturing PMI missing forecasts at 49.4 against 50.0 Non-Manufacturing PMI beat expectations. Today sees China’s Caixin Manufacturing PMI for December.
On the European front, the news that Italy’s parliament approved the budget deficit boosted the Euro. Today sees Euro area Manufacturing PMI’s from Italy, France and Germany, and the Euro-Zone. The UK releases its Manufacturing PMI data as well. The holiday-shortened week finishes with a bang – Friday’s US Payrolls. With more volatility in store. Happy days!
Trading Perspective: Any improvement in risk appetite will see stocks move higher initially with the US Dollar lower. However, this would see US yields stabilise which would provide the Greenback with some support. The USD/JPY has led currency markets as we ended 2018 and this currency pair will take the lead for the initial part of this month. We want to look at speculative market positioning as well in both currencies and treasuries as we start the new year. Volatility is here to stay.
- USD/JPY – The Dollar plummeted to a low of 109.635 on the US 10-year yield drop. Immediate support can be found at 109.50. The next support level lies at 109.10 followed by 108.50. Initial resistance lies at 110.00 followed by 110.40. Look for some consolidation at current levels as risk appetite improves. We see a likely range today of 109.60-110.20.
- AUD/USD – The Aussie has led risk currencies lower since Christmas time. The Australian Dollar has also dropped against the other Majors and currencies of its trading partners. The antipodean currency has managed to hold on to the 0.70 cent handle and given the current market environment, we should see further stability for the Aussie. Speculative market positioning remains short of Aussie bets and the next likely move is higher. Immediate support lies at 0.7030 followed by 0.7000. Immediate resistance can be found at 0.7070 (overnight high) and then 0.7110. Likely range today 0.7040-0.7120. Emerging Market currencies extended their climb against the Greenback, which is a positive sign for the Aussie. USD/SGD closed at 1.3635 from 1.3660 Monday.
- EUR/USD – The Single currency has had a quiet few days with liquidity particularly thin in Europe. The Euro closed little-changed at 1.1460 from 1.1443 on Monday. With a weaker overall US Dollar, expect the Euro to consolidate its gains with 1.1500 the next target. Euro area PMIs are due later today but the big mover with be the US Payrolls data on Friday. Market positioning remains short of Euro bets. Immediate resistance can be found at 1.1470 and then 1.1510. Immediate support lies at 1.1420 and then 1.1380.
- USD/CAD – Like the Aussie, the Canadian Dollar, or Loonie as many Canadian traders refer to it, has suffered with the market’s poor risk appetite as well as the drop in Oil prices and related resources. USD/CAD has continued to move north despite an overall lower Greenback against the other Majors. USD/CAD finished 2018 at 1.3645 from 1.3490 before Christmas. Canada also reports on its Employment data on Friday. Canada’s economy has suffered with its trade friction with the US slowing in many areas. The settling of Oil prices though should benefit the Loonie. USD/CAD has immediate resistance at 1.3665 (overnight high), followed by 1.3700. Immediate support can be found at 1.3610 followed by 1.3580. Look for a drift lower in this currency pair with a generally softer US Dollar.
Happy trading all.