Despite Wall Street staging a comeback late in its trading session, the rest of the financial world traded in a risk-off manner, with the main driver being bets over a faster rate path by the Fed. Geopolitical tensions in Ukraine may have also hurt the broader investor morale.
EU Shares Tumble, and Despite Wall Street Rebounding, Asia Trades South as Well
The US Dollar traded higher against all but one of the other major currencies on Monday and during the Asian session Tuesday. It gained the most versus CAD, NZD, and GBP, while it lost ground only versus JPY.
The strengthening of the yen and the US dollar, combined with the weakening of the risk-linked Loonie and Kiwi, and lately the pound, suggests that markets may have continued to trade in a risk-off fashion yesterday and today in Asia.
Indeed, turning our gaze to the equity world, we see that European shares kept falling, with the selloff rolling into the opening of the US session. Yes, Wall Street tumbled initially, but all three of its leading indices staged a comeback later in the session to finish in positive waters. That said, the selling resumed during the Asian session today, with all the indices under our radar falling more than 1.5%.
It seems that bets that the Fed could eventually proceed with a faster-than-previous-thought rate path continue to be the main reason behind the tumble in equities. This could be the case at least until the outcome of tomorrow’s Fed decision is publicly known. But if this is the case, why did US indices close in positive territory? Perhaps some participants found prices attractive and decided to jump back into the action.
Geopolitical developments may have intensified the flight to safety. NATO said it was putting forces on standby and reinforcing eastern Europe with more ships and fighter jets in response to Russia’s military build-up at Ukraine’s borders. US President Biden weighed options for boosting the US military in the region.
With all that in mind, despite some participants finding equities attractive as such low prices, we stick to our guns that risk-aversion could continue to prevail, at least until the Fed makes its decision known tomorrow. We do expect a hawkish outcome following several policymakers’ remarks lately.
However, with such elevated bets over future rate hikes, we see ample room for disappointment. Anything suggesting that policymakers may not proceed as fast as the market currently anticipates could result in a rebound in equities and a pullback in the US dollar and other safe-havens.
Coming back to the FX sphere, the Aussie, despite being a risk-linked currency, was not among the three significant losers. It was the fourth one, and the reason why it did not underperform that much may have been Australia’s higher-than-expected CPIs, released overnight.
Remember, yesterday, we said that, following Australia’s better-than-expected jobs data last week, accelerating inflation may allow investors to maintain bets over rate increases by the RBA this year, despite the Bank itself holding the view that something like that is unlikely.
However, we also said that even if the Aussie strengthens at the time of the release due to elevated expectations over a faster rate path by the Fed, we didn’t expect a long-lasting recovery. It seems that this has been the case, and up until tomorrow, market participants may sell some more Aussies, especially against safe-havens, like the Japanese yen.
DJIA – Technical Outlook
The Dow Jones Industrial Average cash index traded lower yesterday but hit support near 33135, and then it rebounded strongly to find resistance near 34525. However, overall, the index remains below the downside resistance line drawn from the high of Jan. 13, and thus, we would still see a negative short-term picture.
We believe that the bears could retake charge soon, perhaps allowing Dow to fall back near the 33135 barrier, and if they are strong enough to overcome it, a forthcoming lower low will be confirmed on both the 4-hour and daily charts. Something like that could see scope for extensions towards the 3203 territory, marked by the low of Mar. 25.
To abandon the bearish case, we would like to see a clear rebound back above the high of Jan. 21, at 34900. This could confirm the break above the aforementioned downside line and encourage advances towards the 35500 zone or the 35630 barrier, marked by the peak of Jan. 20 and the inside swing low of Jan. 14.
If neither barrier can stop the recovery, we may see investors aiming for the 36000 figure, marked by the high of Jan. 18.
AUD/JPY – Technical Outlook
AUD/JPY traded higher after Australia’s CPIs were released, but the advance remained limited near the 81.80 level, from where the bears retook charge. In our view, the overall picture remains negative, as the rate continues to print lower highs and lower lows below the downside resistance line drawn from the high of Jan. 5.
If the bears are willing to stay behind the wheel, we could soon see them rechallenging the 80.70 area hit yesterday. A break lower would confirm a forthcoming lower low and may carry extensions towards the low of Dec. 20, at 80.25. Another break below 80.25 could pave the way towards the 79.85 zone, marked by the low of Dec. 6.
We will start examining a bullish scenario if we see a strong rebound above 83.00, marked by the high of Jan. 20. The rate will be well above the downside line taken from the high of Jan. 5, and thus, the bulls may initially target the 83.36 barrier, marked by the high of Jan. 10, or the 83.75 hurdle, marked by the peak of Jan. 13.
If they are unwilling to stop there, we may see them climbing towards the 84.30 territory, defined as resistance by the high of Jan. 5.
Elsewhere
During the European session, the German Ifo survey for January is due to be released, while later, from the US, we have the CB consumer confidence index for the month. With regards to the German survey, the current assessment index is expected to have declined to 96.1 from 96.9, while the business expectations one is forecast to have inched up to 93.0 from 92.6.
This is likely to leave the business climate index unchanged at 94.7. In the US, the CB index is anticipated to have slid somewhat, to 111.8 from 115.8.