Bond markets loosened their grip on sentiment on Thursday, with the US yield curve lower and dragging the USD lower with it. USD/CHF snapped its 12-day winning streak and pulled back from the 0.92 handle, AUD/USD recouped all of Wednesday’s losses and closed above 64c and EUR/USD closed back above 1.06 (just). Wall Street bounced from cycle lows in an apparent short squeeze. The question now is whether it was a 1-day reprieve, or there is more juice in the risk-off tank. Today’s US PCE inflation data could answer that question.
Market Summary:
- The US dollar index posted a bearish engulfing candle and pulled back towards the March high, a likely pivotal area over the near-term
- AUD/USD to fully recoup Thursday’s losses and closed back above 0.64. There was a lot of excitement above its break to a fresh YTD low on Wednesday, but its move above 64c once again shows its resilience and reminds us why it is called ‘the batter’. More importantly, what will the record level of near-short exposure make of this development?
- USD/CHF snap a 12-day winning streak around 0.9200
- USD/JPY hasn’t quite managed to test 150 – the level which triggered the MOF to instruct the BOJ to intervene in October. I suspect a move above it will more likely trigger some harsh words from officials over actual intervention, but the hesitancy for USD/JPY to blast through it this time around suggests traders remain wary. Besides, the speed of the rise to 150 is slower than it was last October, and it is speed which concerns the BOJ over its precise level
- Wall Street also rallied from its cycle lows which saw the S&P 500 bounce further key support (the October trendline and 200-day EMA).
- We can stop short of calling it a risk-off rally with oil pulling back aggressively from its highs and closing back below 92 (likely from profit taking as markets retraced earlier moves)
- With key US inflation report scheduled for today, we may find price action is limited up to the event. But it may answer the question as to whether yesterday’s apparent short squeeze was a one day event of if there’s more juice left in the tank.
Events in focus (AEDT):
- Public holiday in China
- 09:30 – Tokyo CPI (a good leading indicator for Japan’s nationwide CPI)
- 09:50 – Japan’s industrial output (preliminary), retail sales, unemployment, jobs/applications ratio
- 11:30 – Australian private/housing credit, broad money supply
- 15:00 – Japan’s consumer confidence, construction orders, housing starts
- 16:0 – German import prices, retail sales
- 16:00 – UK GDP, busine investment
- 19:00 – Eurozone HICP inflation
- 22:30 – US PCE inflation
- 00:00 – US University of Michigan Consumer Sentiment (final)
- 11:30 – (Saturday) China’s manufacturing, services, composite PMI (NBS)
ASX 200 at a glance:
- The ASX 200 is set for a positive open with SPI 200 futures rising 0.64% overnight and a stronger lead from Wall Street
- We outlined the near-term bullish case for the ASX 200 in Thursday’s report, due to its resilience above 7,000 in recent sessions and volume analysis
- 7100, 7130 and 7200 are key resistance levels for bulls to target or bears consider fading into
AUD/USD technical analysis (daily chart):
AUD/USD produced a bullish engulfing candle on the daily chart as it once again defied bears with a sustainable break below 64c. With it now back within the 64c-65c range, the contrarian in me suspect its wants to return to the highs of that range. Furthermore, net-short exposure to AUD futures reached a record low last week and if the US delivers a soft inflation report today then it could scale back hawkish Fed bets and potentially catapult risk assets (ad therefore the Aussie).
AUD/USD technical analysis (1-hour chart):
AUD/USD produced a sharp reversal higher following its false break of the September low. Its rally also broke a bearish retracement line, and prices look now they want tap the weekly pivot point. This may not provide an adequate reward to risk ratio for bulls, but dips towards 64c may provide a better opportunity for bulls assuming a run for 65c. Whilst the risk of a hot US inflation report could weigh on AUD/USD, the contrarian in me is placing extra emphasis on the false break of the September low at a time traders are net-short by a record level (so moves higher could trigger a short squeeze and more impressive rally compared to downside potential).
