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by Charalambos Pissouros

Risk Sentiment Deteriorates Further, AUD Reacts Little to RBA Minutes

Although the dollar did not attract any safe-haven flows, risk sentiment continued to deteriorate on Monday amid increased concerns over global economic growth. Major EU and US indices were a sea of red, with the negative sentiment rolling into the Asian session Tuesday. As for the dollar, it may have slid on profit taking ahead of tomorrow’s FOMC decision. Once again, the RBA minutes were a non-event for Aussie traders, who may keep their gaze locked on changes in the broader market sentiment.

Risk Appetite Continues to Fade Amid Global Growth Worries

The dollar traded lower against most of the other G10 currencies on Monday. It outperformed only NOK and CAD, which may have come under pressure due to the slide in oil prices. The main gainers against the greenback were NZD, JPY and CHF in that order, with NZD rallying after New Zealand’s ANZ business confidence index for December rose to -24.1 from -37.1 in November. This means that only a net 24.1% of companies expect business conditions to deteriorate in the coming 12 months compared to 37.1% previously.

USD performance G10 currencies

Although the dollar traded on the back foot on Monday, the performance of the equity markets suggests that risk appetite continued to deteriorate. Major EU and US indices were a sea of red yesterday, with the negative sentiment rolling into the Asian day Tuesday. Both Japan’s Nikkei 225 and China’s Shanghai Composite index ended their sessions 1.77% and 0.82% down respectively.

Once again, the driver behind the risk-off mood may be concerns over slowing global economic growth. On Friday, following the weak Chinese data which added to evidence that the US-China trade conflict continued to take a toll on Chinese growth, Eurozone’s preliminary PMIs for December disappointed as well, with the bloc’s composite index hitting its lowest since November 2014. The disappointment in the PMIs may have increased concerns over the bloc’s economic performance, with investors perhaps raising bets that, if data continue to come in on the soft side, Draghi and co. will change their language around the economic outlook at the turn of the year, noting that the risks have shifted to the downside. Investors may have been spooked further on Monday, after Asos, a UK online fashion retailer, issued an unexpected profit warning, with its shares crashing 37.5%, another sign of weak consumer sentiment. On top of that, data showed that Eurozone’s headline CPI for November was revised down, while the US National Association of Home Builders (NAHB) housing market index fell to its lowest in three and a half years.

Now back to the dollar. The US currency stood tall on Friday, maybe due to safe-haven inflows, but that wasn’t the case yesterday. Perhaps USD-traders have chosen to lock some profits ahead of tomorrow’s FOMC rate decision. The market assigns a nearly 70% chance for the Committee to push the hiking button and thus, if this is the case, market attention will quickly turn to the updated economic projections, and especially the new “dot plot”. Investors will be eager to see whether growth concerns will prompt Fed officials to revise down their projections, and if so, by how much.

Nasdaq 100 – Technical Outlook

Once again, the Nasdaq 100, together with the other equity markets, has sold off yesterday. Looking at the daily chart of the Nasdaq 100 cash index, we can see that last night, the technology index found good support near the 6393.75 level, which is the year’s opening price. Given that the S&P 500 and the Dow Jones Industrial Average are already deeply in the red for the year, Nasdaq 100 in a way, is the last hope for the bulls. But if the sellers are here to stay for a little longer, then further declines could be possible. Even though we could see some recovery, still, that could be short-lived, and the index might sell off again.

Another drop below the support area at the 6440 level could open the door for the bears to drive Nasdaq 100 further down, where the next potential support could be around the 6296 hurdle, marked by the low of the 4th of April. If this zone is not able to withhold the bear-pressure, a break of it may increase the chances of Nasdaq moving towards the 6162 obstacle, which was the lowest point of this year.

Alternatively, if Nasdaq 100 reverses and moves above the 6532 resistance, this could be quickly picked up by the bulls, as we could see the hope back in their eyes. The index could then travel higher to the next potential area of resistance at the 6632 hurdle, marked by yesterday’s high, a break of which might be a much better confirmation of seeing more upside moves. This where we could get a bit more comfortable in targeting the 6720 obstacle, a break of which could lead the index to the 6868 barrier, which is the high of the 12th of December. Because there is a short-term downside resistance line, taken from the high of the 17th of October, that’s running near that barrier, the upside for the price might still be limited.

Nasdaq 100 cash index daily chart technical analysis

Aussie Stays Unphased After RBA Minutes

Although the Australian dollar gained somewhat against its US counterpart, it was among the main losers following the opening yesterday, perhaps dragged lower by the negative market sentiment.

Overnight, the RBA published the minutes from its latest policy gathering, but once again the Aussie stayed unphased as the minutes contained no surprises. They painted the same picture as the meeting statement, confirming that officials expect the current record-low level of interest rates to continue supporting economic growth, help further reduce the unemployment rate, and lift inflation. According to the minutes, members continued to agree that the next move in interest rates is likely to be up rather than down.

With this Bank expected to start raising rates in 2020, the Aussie is likely to continue being driven by changes in the broader market sentiment. As we noted several times in the past, among currency pairs, one of our favorite gauges of investors’ morale is AUD/JPY, which alongside global stock indices, has been also in a slide mode recently. During periods of uncertainty, investors abandon riskier assets, like the commodity-linked Aussie, and seek shelter in safe havens, like the yen. Thus, more fears and concerns over a global economic slowdown could keep AUD/JPY under selling interest, while the opposite could be true, if US and China manage to put an end to their trade conflict, a truce equity markets are likely to cheer about.

Although the US dollar is not part of this equation, AUD/JPY has the potential to react to the FOMC decision tomorrow as well. According to the Fed funds futures, the market is nearly pricing in only 1 Fed hike throughout 2019. Thus, if the new “dot plot” is revised down to that number, equity investors are likely to smile again, and alongside stock indices, AUD/JPY could also gain. On the other hand, although still a downside revision, projections of 2 hikes next year would still be above market consensus and may result in the opposite market reaction.

AUD/JPY – Technical Outlook

With the current risk-off mood in the markets, AUD/JPY continues to travel south for the winter. The pair has now broken the short-term tentative upside support line, drawn from the low of the 26th of October. For now, looking at the 4-hour chart, it seems there could be more downside, at least in the short run.

A break below the 80.73 hurdle could invite even more bears to the table and the rate could then fall towards the next potential area of support at 80.40, which acted as strong resistance throughout the second half of October. This time, that area could play the part of being a good support level. That said, if the sentiment still remains bearish, we could see that barrier getting broken, where AUD/JPY might move further down towards the psychological 80.00 zone, or even the 79.80 obstacle, marked by the low of the 31st of October.

On the upside, in order to get comfortable with seeing AUD/JPY moving back up again, we would wait until it gets back above the aforementioned upside support line and breaks above the 81.50 hurdle, marked by yesterday’s high. This is when we may see more bulls joining in and the rate could get lifted to the 81.95 area, a break of which might lead to a re-test of the 82.20 level. This was the highest point of last week. 

AUD/JPY 4-hour chart technical analysis

As for Today’s Events

During the European day, we get the German Ifo survey for December. Expectations are for both the current assessment and business expectations indices to have declined to 104.9 and 98.3 from 105.4 and 98.7 respectively, which would drag the business climate index down to 101.8 from 102.0. That said, having in mind the ZEW results, which showed that the current conditions index fell, but the economic sentiment one rose, we see the risks surrounding the Ifo business expectations index as tilted somewhat to the upside.

Later in the day, in the US, building permits and housing starts, both for November, are due to be released. Both are expected to have declined fractionally from the previous month.

With regards to the energy market, we have the American Petroleum Institute (API) weekly crude oil inventory report, but as usual, no forecast is available.

As for tonight, during the Asian morning Wednesday, New Zealand’s current account balance for Q3 and Japan’s trade balance for November are scheduled to be released.

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