Although the US dollar continued to slide yesterday, it lost the most ground against the safe-havens yen and franc this time around, while equities turned south, as several Fed officials added to the likelihood of a March rate increase, and also left the door open for more lift-offs than previously assumed.
Risky Assets Slide, Havens Surge on Hawkish Fed Remarks
The US dollar continued trading lower against all the other major currencies yesterday and today in Asia. However, this time around the main gainers were JPY and CHF, while the currencies that eked out the least gains were AUD and CAD.
Despite a weaker dollar, the strengthening of the Japanese yen and the Swiss franc, combined with the relative weakening of the risk-linked Aussie and Kiwi, suggests that markets may have turned back to risk-off at some point yesterday. Indeed, turning our gaze to the equity world, we see that, although the majority of EU indices closed in positive territory, Wall Street tumbled, with the tech-heavy Nasdaq losing the most (2.51%). The negative appetite rolled over into the Asia session today as well.
The main market driver was once again comments surrounding the Fed’s future course of action with regards to monetary policy. Yesterday, while testifying before the Senate Banking Committee on her nomination as Fed Vice Chair, Governor Brainard said the Fed “has projected several rate hikes over the course of the year,” and that they will be able to start doing son “as soon as our purchases are terminated,” referring to QE tapering which is scheduled to end in March. Given her dovish views ahead of her nomination, very few participants may have been anticipating a more hawkish speech than the one Fed Chair Powell delivered on Tuesday. On top of that, in a separate event, Chicago Fed President Charles Evans said that the current projection of three hikes this year is “a good opening bit,” but added that “it could be four if the data don’t improve quickly enough.” Philadelphia Fed President Harker also talked about a March lift-off, after San Francisco Fed President Mary Daly has done so on Wednesday.
Yes, Fed Chair Powell also declared willingness for tighter policy when he testified on Tuesday, but he refrained from commenting on a specific timeline, while he mentioned that officials would need some time before agreeing on the process of balance sheet reduction. That’s why stocks edged north in the aftermath and continued doing so the following day as well. This time, remarks were more hawkish, with several policymakers supporting a March hike, and mentioning the prospect of four hikes by the end of the year. That’s why equities slid. But why did the dollar kept sliding instead of rebounding? To be honest, this appears to be a mystery for us. Maybe because there were some key technical breaks in the last couple of days of the US dollar against its major counterparts. For example, EUR/USD exited the sideways range it had been trading within since November 26th, and then, it emerged above the downside resistance line drawn from the high of May 25th. It could also be that market participants are afraid that if rates rise too fast this year, they will probably slow down later. In any case, with Fed officials entering a “blackout” period next week ahead of their January 25-26 policy meeting, we believe that the dollar’s faith will depend on economic data. Numbers pointing to a stellar economic performance may eventually encourage participants to start buying greenbacks again.
DAX – Technical Outlook
The German DAX cash index traded lower yesterday after it hit resistance near the 16075 barrier, marked by the high of January 12th. However, the declined was paused near the 15860 zone and then, the index rebounded somewhat. Overall, DAX has yet to confirm a forthcoming lower low and thus, we are reluctant to call for further declines for now. Also, with the ECB among the major central banks which are expected to refrain from pushing the hike button this year, we see decent chances for a rebound.
A clear break above 16155 could confirm the case and may encourage participants to push the action towards the record peak of 16300, hit on November 19th, and approached on January 5th. If they are not willing to stop there and decide to enter the uncharted territory, we could see them climbing to the psychological number of 16500.
In order to start examining larger declines, we would like to see a clear dip below 15665, a support marked by the low of December 27th. Such a move would confirm a forthcoming lower low and may allow declines towards the 15520 zone, marked by the inside swing high of December 21st, the break of which could target the low of the day after, at 15425. If there are no buyers to be found there, a break lower could extend the fall towards the low of December 21st, at 15300.
USD/JPY – Technical Outlook
USD/JPY fell sharply the last couple of days, breaking below the upside support line drawn from the low of December 3rd. The fall was temporarily paused today near the 113.63, after the test of which, the rate rebounded somewhat. In our view, the latest sharp fall and the break below the upside support line, may have switched the short-term picture to negative, at least for now.
Even if the rebound continues for a while more, we see decent chances for the bears to take charge again from near the 114.22 zone. They could dive for another test near the 113.63 level, the break of which would confirm a forthcoming lower low and may initially target the 113.30 territory, which acted as a strong support between December 8th and 20th. If they are not willing to stop there either, we could see the fall extending towards the low of December 6th, at 112.85.
We will start considering the bullish case again upon a break above the 115.45 barrier, and the downside line taken from the high of January 4th. This could initially target the high of January 11th, at 115.70, the break of which could carry extensions towards the peak of January 7th. If the bulls are not willing to stop there either, we could see them targeting the high of January 4th, at 116.33.
As for Today’s Events
During the early EU session, we already got the UK monthly GDP for November, as well as the industrial and manufacturing production rates for the month. The GDP accelerated to +0.9% mom from +0.2%, while both the IP and MP rates increases by much more than anticipated. In our view, this adds some credence to market expectations over another rate hike by the BoE very soon, and some more throughout the year.
In the US, ahead of the opening bell, the earnings season kicks off with Q4 results from several large banks, including JPMorgan Chase, Citigroup, and Wells Fargo.
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