Daily Market Outlook, January 6, 2022
Overnight Headlines
- China Services Activity Increases Solidly During December - PMI
- Japan Service Sector Expands At Softer Pace In December - PMI
- Australia Service Sector Expansion Continues As Price Pressures Rise
- BoJ's Stealth Taper: Bond Pile Shrinks For 1st Time Under Kuroda
- BoJ Seen Raising FY22 CPI Forecast To Low 1% Range - Nikkei
- Citi Flags Sharp Slowdown Risk For Australia As Omicron Rages
- Dollar Near 5Year High To Yen As U.S. Yields Surge On Hawkish Fed
- Bitcoin Declines To Lowest Level Since December’s Flash Crash
- Japan Benchmark 10 Year Yield Rises To Highest Since April 2021
- Oil Falls On Tighter U.S. Monetary Policy, China Demand Angst
- Asia Tech Stocks Extend Global Rout On Concerns Over Rate Hikes
- Toshiba Shareholder Calls For Meeting To Vote On Break-Up Plan
- AMC, Gamestop Lead Meme Stocks To Lowest Close Since January
The Day Ahead
- A firm risk-off move has seen Asian equities move decisively lower this morning, following the tone set by Wall Street yesterday. The drop in risk sentiment follows the release of a ‘hawkish’ set of Fed minutes last night. These showed that at its last meeting in mid-December, the Committee discussed the possibility of having to raise interest rates sooner and by more than market participants generally expected. Moreover, the prospect of the Fed reducing its balance sheet, shortly after interest rates started being raised, was also debated.
- On the data front, the China Caixin services PMI for December came in better than expected, at 53.1 from 52.1, and against market expectations for a drop to 51.7. Meanwhile, German factory orders rose by a stronger-than-expected 3.7%m/m in November.
- Today’s final reading of the UK services PMI for December is expected to confirm the sharp moderation in activity captured by the ‘flash’ survey estimate last month. The headline measure of the survey dropped to 53.2 from November’s reading of 58.5 to record its lowest level since February of last year. In fact, there is a risk that the December outturn could be revised lower today, given that the update will include responses collected later in the month, potentially capturing more of the negative effects on activity due to the imposition of further restrictions in response to the Omicron Covid variant.
- In contrast, the December US services ISM report is expected to show that US service-sector expansion remained robust as 2021 drew to a close. Having reached an all-time high of 69.1 in November, we expect the December ISM services index to have moderated to 68.5 a level still consistent with strong growth in the sector. While strong demand has been a supporting factor for the sector in recent months, ongoing supply-side challenges are likely to remain a key concern in the year ahead.
- Meanwhile, following yesterday’s stronger-than-expected US ADP private payrolls report and the hawkish Fed minutes, today’s comments from Fed members Daly and Bullard will attract interest. The Federal Reserve’s last policy meeting, on the 14-15 December, saw the pace of asset purchases tapering accelerated, and the word ‘transitory’ to describe inflation, dropped. The updated ‘dot plot’ also showed policymakers expecting three interest rate rises in 2022 with further increases forecast for subsequent years.
- In the Euro area, attention will be on December German CPI inflation. Since June, the annual rate has been on an uptrend in Germany, rising to 6.0%y/y in November, but it is likely to have moderated in December, with expectations centred on an easing to 5.6%. January German CPI inflation is likely to soften further as changes to the sales tax drop out of the annual comparison.
- Following the release of the December Fed Minutes, interest rate markets now see an 80% chance of a March US rate hike, which has led to a broad strengthening of the US$.
G10 FX Options Expiries for 10AM New York Cut
(Hedging effect can often draw spot toward strikes pre expiry if nearby (P) Puts (C) Calls )
USDJPY - 115.50/60 1.19bn (970m C). 115.00 925m. 114.00 405m. 113.60/70 1.26bn (664m C). 113.40/50 1.98bn (1.21bn P).
EURUSD - 1.1560/70 1.14bn (617m C). 1.1420 638m. 1.1400 418m. 1.1350/60 526m. 1.1330/40 854m. 1.1290/1.1300 1.91bn (1.03bn P). 1.1250/70 2.31bn (1.88bn P). 1.1210/30 2.31bn (P).
GBPUSD - 1.3500 409m.
AUDUSD - 0.7050 480m. 0.7020 589m.
USDCAD - 1.2780/90 818m. 1.2620/30 426m.
EURNOK - 9.75 450m.
USDCNH - 6.40 655m. 6.36 480m.
Technical & Trade Views
EURUSD Bias: Bearish below 1.15 Bullish above
- EUR/USD static but factors weighing are growing
- Risk of four 25bp U.S. hikes in 2022 has grown rapidly
- ADP shocked higher and strong NFP's may lead to hikes happening sooner
- EUR/USD is static at the base of a big decline (techs are bearish)
- Traders have no bets on a drop, unlike USD longs elsewhereIMM/FX
- Unlike Fed ECB is determined to hold rates down, rate gap set to widen
- Lack of downside cover (spot and option) risks big readjustment
- Swiss intervention likely trapping EUR/USD, unlikely to last
- EUR/USD 1.1387-1.1186 EBS since Nov 16
- EUR/USD 1.1225-1.1387 since Nov 30
- After lengthy absence SNB has been actively supporting EUR/CHF
- Intervention underpins EUR/USD, then reserve rebalancing weighs
- Top and tailing affect for EUR/USD which suppresses volatility
- EUR/USD vol has slumped 7.3 to 5.3 since SNB returned
- SNB may be forced to abandon its FX policy.
GBPUSD Bias: Bearish below 1.36 Bullish above.
- Eases with risk post FOMC, amid a sea of red ink
- -0.1% with risk currencies a touch lower with risk after the hawkish FOMC
- Trades towards the base of a 1.3539-1.3557 range with consistent flow
- UK 2021 new car sales 29% below pre-pandemic levels
- Shortage of chips likely to continue in UK car market in 2022
- Charts; 5, 10 & 21 day moving averages and 21 day Bollinger bands climb
- Momentum studies rise - a strong positive trending setup
- Sustained 1.3580 break would target 1.3834 Oct/Nov range high
- Close below 1.3486 10 DMA a base this week, would undermine topside bias
USDJPY Bias: Bullish above 112.50 Bearish below
- Soft above key support, as risk appetite sours
- Off 0.2%, as risk sours in Asia, as the dust settles on the hawkish FOMC
- Soft stocks, Nikkei -2.1%, AsiaxJ -0.9%, Brent -1.2%, London copper -0.5%
- Charts; 5, 10 & 21 day moving averages climb, horizontal Tenkan, Kijun lines
- Momentum studies conflict - overall the bullish trending setup hangs in
- Targets a test of the 118.60/66 Jan 2017 and Dec 2016 highs longer term
- Close below 115.52 November and 2021 high needed to undermine topside bias
- Asian 115.82-116.18 range is initial support and resistance
- Yen shorts vulnerable should Wall Street slide
AUDUSD Bias: Bearish below 0.7250 Bullish above
- AUD/USD sellers dig in, eyeing bearish trend channel nearby
- Remains under pressure in gloomy Asian session
- AUD/USD opened -0.22% at 0.7222 after reversing lower on hawkish Fed minutes
- Risk assets in Asia fell in sympathy with Wall Street's slide
- AUD/USD traded as low as 0.7200 and is around 0.7205 into the afternoon
- Helping to cushion AUD fall was a 3.85% rise in Dalian iron ore
- AUD/USD support is at the 21-day MA at 0.7194 and Jan 3 low at 0.7184
- A break below 0.7180 would suggest a top in place for a probe lower
- Resistance is at the 100-day MA at 0.7287 and break would ease the pressure
- Rising US yields and fragile risk appetite will likely cap AUD rallies
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Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!