Japan: Business sentiment holds steady
Q4 Tankan reports have been released. These reports are quarterly business confidence polls issued by the Bank of Japan. The data from this report is then used to formulate the country’s monetary policy. 11’000 firms have been asked to assess the Japanese economic conditions with the results showing a slightly better economic sentiment than the previous quarter.
Please note that Tankan’s sentiment indexes are a set of surveys that represent the difference between those who say that conditions are good and those who say conditions are poor. A positive reading means optimists outnumber pessimists. More specifically, Tankan Small and Large Non-Manufacturing Index printed better at 25, a result which was better than expected as a weak yen boosted tourism on the island. In addition Small & Large Manufacturing Index printed in unchanged.
Consequently, Japanese business confidence remains at a decent level thanks to the decline in oil prices and optimistic capital spending, which should increase by 10.85 next year according to the survey. As a result, Friday's BoJ meeting should not disclose any surprises as business sentiment holds steady. Yet, the Yen was weakened this morning on the Tankan release as markets priced in better data. Nonetheless, we remain bearish on the JPY as long as there is significant evidence that inflation is back.
Fed to hike but milieu of risk events have traders nervous
Baring a massive shock, it’s highly likely the Fed will raise rates by 25bp this week. With scant exception, the move has been universally broadcasted and widely pricing in. Therefore, investors will be focused on the Fed’s forecasts, dots and tone. Given the deflationary impact of asset prices currently adjusting to the US hiking cycle; USD strengthen, oil / commodities falling and generally weakness in global demand data on uncertainty, we anticipate a dovish, gradual steepening strategy will be communicated. This suggests that moving forward; the direction of the USD will be data-dependent. The recent fall in oil prices should only increase the deflationary forces at work in the US, which has created a noticeable outlook divergence between the Fed and the market. We are at the dovish-end of spectrum calculating only two 25bp hikes in 2015, bringing the target range for the Fed Funds rate to 0.75 - 1.00% by year-end. This would suggest that USD appreciation will be limited, unless US data improves or external price shock materializes. We see the risks mostly probable in interest rate yields adjustment. Emerging markets are vulnerable as prolonged weak commodity prices and capital outflows take their toll. Also, highlighted by the closing of Third Avenue high yield bond fund, the spread between high yields and treasury continues to spread, has sparked (credible) fears of a credit crisis. While the first public “shoot across the bow”, Third Avenue blow-up emphasizes the growing risk of a rapid debt liquidation (corporate and EM sovereign). Realized FX EM volatility has spiked in the last two day as end of year liquidity conditions have decrease and milieu of risk events have investors nervous.
The Risk Today
EUR/USD has consolidated lower but the short-term momentum is now bullish. Hourly resistance can be found at 1.1043 (09/12/2015). Hourly support lies at 1.0796 (07/12/2015 low). Stronger support lies at 1.0524 (03/12/2015 low). Expected to target resistance at 1.1096. In the longer term, the technical structure favours a bearish bias as long as resistance holds. Key resistance is located region at 1.1453 (range high) and 1.1640 (11/11/2005 low) is likely to cap any price appreciation. The current technical deteriorations favours a gradual decline towards the support at 1.0504 (21/03/2003 low).
GBP/USD's medium-term downside momentum remains lively. Yet, the short-term momentum is bullish. . Hourly resistance is given at 1.5242 (13/12/2015 high). Stronger resistance can be found at 1.5336 (19/11/2015 high). Hourly support can be found at 1.4985 (02/12/2015 low). Expected to bounce back at upper bound implied by the downtrend channel. The long-term technical pattern is negative and favours a further decline towards the key support at 1.5089 , as long as prices remain below the resistance at 1.5340/64 (04/11/2015 low see also the 200 day moving average). However, the general oversold conditions and the recent pick-up in buying interest pave the way for a rebound.
USD/JPY keeps on weakening. Hourly support at 121.08 (09/12/2015 low) has been broken. Stronger stronger support can be found at 120.07 (28/10/2015 low). Hourly resistance still lies at 123.76 (18/11/2015 high). Expected to pursue declining momentum toward support at 120.07. A long-term bullish bias is favored as long as the strong support at 115.57 (16/12/2014 low) holds. A gradual rise towards the major resistance at 135.15 (01/02/2002 high) is favored. A key support can be found at 116.18 (24/08/2015 low).
USD/CHF is heading downwards toward hourly support at 0.9876 (27/10/2015 low) while hourly resistance is given at 1.0034 (04/12/2015 high). Expected to show further decline. In the long-term, the pair has broken resistance at 0.9448 and key resistance at 0.9957 suggesting further uptrend. Key support can be found 0.8986 (30/01/2015 low). As long as these levels hold, a long term bullish bias is favoured.
