EU indices closed in negative territory yesterday, but the US ones managed to rebound, perhaps due to the fact that , although the WHO (World Health Organization) declared the virus as a global emergency, its director said that the measures taken by Beijing would “reverse the tide”. In the UK, the pound rallied as the BoE stayed sidelined, disappointing those expecting a rate cut.
The dollar traded mixed against the other G10 currencies on Thursday and during the Asian morning Friday. It gained against NZD, AUD, JPY and SEK in that order, while it lost a lot against GBP, and little versus CHF and EUR. The greenback was found virtually unchanged against CAD and NOK.
The performance in the FX world paints a blurry picture with regards to market sentiment. On the one hand, Aussie and Kiwi remained on the back foot, which combined with a strong franc suggests a risk-off environment. On the other hand, the yen was found among the losers. Thus, we will turn our gaze to the equity world.
Major EU indices took the torch from the Asian ones, posting declines due to concerns regarding the Chinese coronavirus. That said, sentiment rebounded during the US session, with all three indices closing in the green. This may have been due to the fact that, although the WHO (World Health Organization) declared the virus as a global emergency, its director said that the measures taken by Beijing would “reverse the tide”, comments that served as a relief for investors, despite the number of deaths and cases keep increasing. Asian bourses were more mixed, with Japan’s Nikkei 225 gaining 0.99%, and Hong Kong’s Hang Seng sliding 0.28%. Under normal circumstances, Chinese markets would have opened today, but China has extended the holidays until February 2nd.
Despite the relief bounce we saw yesterday, our view has not changed. We are still reluctant to trust a long-lasting recovery in investors’ appetite. We still don’t know when all this will end, and what will be the economic effects. Yesterday, we got the official Chinese PMIs for January, which came in close to expectations, suggesting that the virus did not leave any marks, at least during the first days of its outbreak. The survey collects data up until the 20th of the month, so the aftermath effect may be reflected on the February indices. For now, we would consider yesterday’s rebound as a corrective move. Anything suggesting to a faster spreading may revive fears that the undertaken measures are not enough, despite WHO’s director suggesting so. Eventually, this may hurt market sentiment again, with equities and risk-linked currencies, like the Aussie and the Kiwi, turning back down, as investors seek shelter in safe havens, like the franc and the yen.
NZD/JPY is trading below two short-term tentative downside lines: a slightly steeper one taken from the high of January 24th and a flatter one drawn from the high of January 17th. From the near-term perspective, as long as the rate stays below the steeper downside line, we will aim for lower areas straight away. But if the pair moves above that line, there could be a chance for a bit of a short-term correction before another leg of selling, hence why we will take a cautiously-bearish approach for now.
As mentioned above, if the steeper downside line holds and the pair slides below the current low of this week, at 70.40, this would confirm a forthcoming lower low and more bears could join in. NZD/JPY may then fall to the 70.16 obstacle, a break of which might clear the path to the low of November 25th, at 69.64.
On the other hand, if the aforementioned steeper downside line breaks and the rate climbs above the 70.93 barrier, which previously acted as a good area of support on January 28th, this may attract a few more buyers into the arena and help NZD/JPY to make its way to the 71.31 zone, which is an intraday swing high of January 29th. Initially, the rate might stall around there for a bit, or even retrace back down again. That said, if the pair continues to balance above the 70.93 area, it could move up again. If this time the 71.31 barrier fails to withstand the bull pressure and breaks, such a move might clear the way to the 71.52 level, marked by the high of January 28th, or to the previously-discussed short-term downside resistance line taken from the high of January 17th.
The British pound was the main gainer among the G10s yesterday, coming under strong buying interest after the Bank of England decided to keep rates on hold. Remember that heading into the meeting, according to the CME MPC futures, there was a 45% chance for the Bank to deliver a rate cut. Even some of those who called for no action, said that it would be a close call, perhaps with more members joining the dissenters. The vote was again 7-2, with those voting for a decrease being the usual suspects: Haskel and Saunders.
The statement had a more dovish flavor than the previous one, with the Committee dropping its “gradual tightening” wording, this time noting that “if the economy recovers broadly in line with the MPC's latest projections, some modest tightening of policy may be needed to maintain inflation sustainably at the target.” What’s more, they also said that “Policy may need to reinforce the expected recovery in UK GDP growth should the more positive signals from recent indicators of global and domestic activity not be sustained or should indicators of domestic prices remain relatively weak.”
This means that they acknowledged the improvement in the preliminary PMIs for January, but it is up to hard data to confirm the improvement. Upcoming data will be critical as to how the Bank will act in the upcoming gatherings, with inflation taking the 1st place on the list. The dovish shift barely bothered GBP traders, who rushed to buy pounds after officials disappointed those expecting a cut.
Tonight, the UK officially leaves the EU, which, for now, means that the UK will no longer have a say on EU decisions. Given that the UK Parliament has already approved the Withdrawal bill, and that the markets have already turned their attention to the transition period, we don’t expect any major market reaction. The pound may continue enjoying some gains due to the BoE’s decision, but we expect it to slowly start being driven by UK data releases (as they will shape expectations over the BoE’s future plans), as well as by headlines surrounding the transition period.
With UK PM Boris Johnson insisting that any trade agreement with the EU has to be found before December, and EU Commission President Ursula von der Leyen saying that it would be “basically impossible” to agree on everything by then, the risk of a disorderly exit at the end of the year remains well on the table. Adding to the uncertainty, UK finance minister Sajid Javid has recently said that Britain will not commit to sticking to EU rules during the transition period, something that could make the road towards a trade deal even bumpier. Thus, even though we would like to stay bullish on the pound for a while more, it would be premature to call for a healthy longer-term uptrend.
Yesterday, GBP/CAD had a strong uplift, which established a new high for January, at around 1.7334. From there, the pair made a small retracement back down, but still remains well above its short-term tentative upside support line drawn from the low January 20th. Although there is a possibility to see a bit more correction lower, if the rate continues to float above that upside line, we will stay positive, at least in the near term.
A small drop could bring the pair to the 1.7230 support zone, marked by an intraday high of January 21st, or it may even test aforementioned upside line. If that line provides decent support, GBP/CAD could rebound and travel back to its key resistance area between the 1.7305 and 1.7334 levels. If the 1.7334 barrier gets broken, this would confirm a forthcoming higher high and could clear the path to the 1.7427 hurdle, marked by the low of December 16th.
Alternatively, if the rate breaks the aforementioned upside line and falls below the 1.7154 zone, which is yesterday’s low, this could make the bulls worry, as such a move might increase the pair’s chances of further drift south. That said, for us to get a bit more comfortable with further declines, a drop below this week’s low, at 1.7100 area, would be needed. If that happens, more sellers could see an opportunity to step in and drive GBP/CAD to the 1.7037 hurdle, a break of which could clear the path to January’s low, at 1.6918.
During the European day, Eurozone’s preliminary CPIs for January and the preliminary GDP for Q4 are coming out. The headline CPI rate is expected to have ticked up to +1.4% yoy from +1.3%, bit the core rate is anticipated to have ticked down to +1.2% yoy from +1.3%. With regards to the 1st estimate of Q4 GDP, it is expected to show that the Eurozone economy grew 0.2% qoq, the same pace as in Q3.
We get GDP data from Canada as well. Specifically, we get the monthly rate for November, which is expected to have rebounded 0.1% mom, after sliding by the same percentage in October. From the US, we have personal income and spending, as well as the core PCE index, all for December. Both income and spending are expected to have slowed to +0.3% mom, from +0.5% and +0.4% respectively, while the yoy rate of the core PCE index, the Fed’s favorite inflation gauge is anticipated to have held steady at +1.6% yoy, below the Committee’s objective of 2%.
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