Yen Outperforms, Dollar Lower as Risk-Off Sentiment Prevails

Summary: The Yen led all currencies higher against the beleaguered US Dollar following the Fed’s 4th rate hike this year. Investors chose to focus on Jerome Powell’s post-FOMC meet speech where he highlighted “downside risks and international economic challenges”. The threat of a US government showdown, which is nothing new, added to the risk-off sentiment. The Dollar Index (USD/DXY) slid 0.70% to 96.268 (97.04 yesterday). USD/JPY plummeted to 111.15, down 1.14% while the Euro jumped 0.72%. The Aussie closed flat, as did the Kiwi and other risk currencies. The Bank of Japan and Bank of England left interest rates unchanged.
The DOW plummeted 2.3% to lows not seen since October 2017. The S&P 500 extended its drop to 16-month lows.

Fed Reserve Economic Research Chart – 10-2 Year Bond Yield Spread -12/21/2018

The yield on the US 10-year bond rose 2 basis points to 2.78%. The 2-year treasury climbed four basis points to 2.67%. The 2-year/10-year bond spread narrowed to 11 basis points close to an eleven-year low. Many believe an inversion would lead to a recession.

  • USD/JPY – Once again the Japanese currency outperformed, given the market’s extended risk-off stance. The BOJ left its interest rate unchanged and kept its ultra-low rate policy. The Dollar slumped to an overnight low of 110.812 before rallying to close the New York session at 111.20.
  • EUR/USD – The single currency jumped to an overnight high of 1.14858 from 1.1372 yesterday, settling to close 0.72% up at 1.1471. A broadly weaker Greenback lifted the Euro. Reports that Italy struck a deal with the EU on its sticky budget also supported EUR/USD.
  • AUD/USD The Aussie finished little-changed versus the weaker Dollar after jumping to 0.71487 overnight. As risk sentiment soured so did the Oz. The antipodean currency slid to 0.7120 little-changed from yesterday’s 0.7115. Yesterday’s Employment report was mixed with a gain in full-time jobs negated by a higher unemployment rate.
  • US S&P 500 – This Wall Street stock index tumbled to a 16-month low at 2,441 (2,498 yesterday) before settling currently at 2482, 0.83% down. Trade was choppy and volatile.

On the Lookout: Market in Asia will attempt to settle today ahead of next week’s Christmas holidays. With most financial centres closing between the 24th-27th, expect liquidity to thin amidst dwindling volumes. Today sees a few economic data releases.
The UK releases its final Q3 GDP figure as well as the Current Account and Public Sector Borrowing New Borrowing. Canada reports on its November Headline, Core Retail Sales and GDP. The US releases its Final Q3 GDP plus Headline and Core Durable Goods Orders data (November).
US Treasury Secretary Steve Mnuchin said the stock market’s plunge following the rate hike and Powell’s announcement was “completely overblown” in a CNBC report. Former FOMC member and ex-NY Fed President William Dudley said yesterday’s Fed rate hike was the “right thing to do”. Expect more comments from various officials to calm market sentiment.

Trading Perspective: The US Dollar has begun its long-overdue correction. Market positioning has been long Dollar bets against most currencies for some time. The Yen and Euro appreciated most last night and will be leading the movement for the rest of their peers. But as all traders know, nothing moves in a straight line. Expect some consolidation today with the Dollar holding current levels.
The yield on the US 10-year bond climbed 2 basis points. Other global yields were mostly lower or flat. This should provide the Greenback with some support today.

FXCM USD JPY 1 Year Chart – 12/21/2018
  1. USD/JPY – Historically this currency has the tendency to be the most volatile of the Majors in December. That’s because Tokyo is the only financial centre open on Christmas and Boxing Day. While this is not always the case, the recent attempt of USD/JPY and Cross/JPY to break-out make it a candidate this year. The overnight low traded of 110.812 is strong support (110.80) and should hold today. The next support level is found at 110.30. Immediate resistance lies at 111.50 followed by 111.90. Look to sell rallies with a likely range today between 110.90-111.60. Japan’s 10year JGB yield was unchanged at 0.02% as the BOJ maintained its ultra-loose policy. Which will provide the Greenback support.
  2. EUR/USD – the single currency jumped to 1.4858 lifted by the weaker overall US Dollar and the positive Italian budget news. The Euro has been building a base, grinding higher over the past few days. For today expect 1.1485-1.1500 to cap any rallies. The 1.1510 is a big resistance level. Immediate support lies at 1.1430 and 1.1400. Germany 10-year Bund yields were one basis point lower to 0.23%. This will keep a lid on the Euro for now. Look to buy dips within a 1.1430-1.1480 range.
  3. AUD/USD – the Aussie is stuck between a rock and a hard place. And looks like its headed no-where. Yesterday’s Australian Employment saw a total of 37,000 full-time jobs created, beating a forecast of +20,000 jobs. However, the Unemployment rate rose to 5.1% from 5.0% as more people looked for jobs. At the end of the day, it’s the risk-off stance of the market that kept a lid on the Aussie. Don’t forget that the speculative market is still short of Aussie. AUD/USD has immediate support today at 0.7080 (overnight low 0.70859). The next support level lies at 0.7050. Immediate resistance on the day can be found at 0.7125 and 0.7145. Look to trade a range on this puppy between 0.7085-0.7135.

 Wishing all readers a Happy Christmas and happy trading too.