Time to stop drinking the ‘Kool-Aid’?

The question we have is whether markets are still too positive? The virus keeps spreading, data is sliding, and mutant variants may be immune to the vaccine.  As we end the week, we have to hope that the stimulus packages keep working and trust in the science!

We still feel that we have seen the peak of optimism to start the year and that risk sentiment should pull back to match the deteriorating virus situation and disappointing vaccine roll out.

After strong New Zealand CPI this morning NZD now has a good story for further strength which supports the bullish technical indicators. Over the coming months an important question will be which central banks begin to exit the extreme monetary measures first. So far RBNZ looks like the front runner given New Zealand’s firm control of the virus and increasing inflation.

Looking at the numbers the New Zealand CPI was 1.4% YoY vs 1.1% exp. Business Manufacturing PMI was weak at 48.7 vs 55.3 prior.  This has led to local banks ANZ and Westpac removing their calls for negative rates in New Zealand and instead expect rates to remain at 0.25%.  Australia Services PMI 55.8 vs 57 exp, Manufacturing PMI 57.2 vs 55.7 exp.  Retail Sales MoM was weak at -4.2%. 

In other markets the Japan CPI YoY -1.2% vs -1.3%.  The deflation affirms the real yield advantage that JPY currently has in G10 which should continue to put upwards pressure on the currency.  UK Consumer Spending fell sharply in January.  Spending in the seven days to 14 January was down 35% compared to pre-pandemic levels.  A larger fall than what was registered during the second UK lockdown.

UK Retail Sales just released missed at 0.3% for December vs 1.2% expected and -3.8% previous.  Core retail sales stripping out auto fuel came in at 0.4% MOM vs 0.8% expected and -2.6% previous.  On an annualized basis for December +2.9% vs 4% expected and 2.4% prior.  Core retail sales +6.4% vs 7% expected and 5.6% previous.   

We have the UK PMI’s later this am will give an even better picture of the current environment.  The ECB held policy unchanged with Lagarde suggesting that the EU economy is headed for a double dip recession.

Countries are already taking more and more moves to limit international travel so expect this to weigh on oil.  Short CADJPY below 82.20 and long USDCAD make sense.

Following on from this data the AUDNZD lower is the cleanest expression of this as trading against the USD or JPY is dominated by risk sentiment and volatile USD price action.  The weak Australia Retail Sales this morning may also put a cap on AUD for now.

JPY longs also make sense both from a haven standpoint and relatively high real yields compared to G10 at the moment.

Our overview and outlook of the key trading pairs and indices is as follows

EURUSD – The US Dollar keeps finding support amid souring market mood and higher US bond yields, putting pressure on the single currency. Meanwhile, Lagarde sounded slightly more hawkish on the Pandemic Emergency Purchase Program (PEPP), after saying that the ECB may not need to exhaust the €1.85 trillion PEPP. Looking ahead, the bulls need to gather enough momentum to push price above the 200-period SMA, otherwise technically speaking further upside will be limited triggering a reversal lower.

GBPUSD – The Cable drops below 1.37 after UK Retail Sales missed expectations. Broad-based US dollar rebound amid downbeat market mood and higher bond yields also weigh on the pair. Additionally, signs that lockdown restrictions will be extended in the UK until the summer kept a lid on further gains. Technically speaking, the 1.37 level should act as resistance going forward triggering some profit-booking towards key support at 1.3615.

USDJPY – USD/JPY traded alongside US Treasury yields which pushed the Dollar higher against the anti-risk Japanese yen. Meanwhile, the Bank of Japan had a monetary policy where they downwardly reviewed fiscal year’s growth to -5.6% from -5.5%. Governor Haruhiko Kuroda moreover said that it was too early to consider an exit from the ongoing “powerful” monetary stimulus. Today, the Dollar will follow the bond yields higher if momentum remains to the upside targeting ¥103.80.

FTSE 100 – Stocks in London don't appear to be moving much with a slightly negative bias expected today as concerns about extended lockdowns weigh on optimism. Today's economic calendar is set to showcase the damage done during the holidays with manufacturing PMI expected to slide to 53.5 in January from 57.5. Services PMI is expected to fall to 45.2 from 49.4. If the FTSE100 breaches the 6700 support the move will trigger further downside with 6670 and 6620 as targets.

DOW JONES – The Dow failed to break above 31300 and as mentioned yesterday, the index therefore slipped into tight declines despite jobless claims rising to only 900k - well below the prior week’s jump to 965k. United Airlines led the declines down 5% after reporting a deeper than expected fourth-quarter loss. Today, the 200-period moving average around 31000 should provide some support but if cracked the move will trigger accelerated selling with 30800 as target.

DAX 30 – A bullish start yesterday had seen the DAX surge on the opening, but the 14000-resistance proved resilient, and the German benchmark ended up giving back earlier gains following cautious comments from ECB President Lagarde. Looking ahead, private sector PMIs for January will be a gauge for the markets today. Extended lockdown measures may suggest a slower than expected pickup in economic recovery in 2021 so expect some volatility today between 13800 and 14000 support and resistance levels.

GOLD – Better than expected Initial Jobless along with higher US10 yields weighed down on the yellow metal, hitting our short support target at 1860, as we look for an hourly close below 1860 to confirm bearish momentum with 1850 as the next support target, coinciding with the 200 period SMA. All eyes on Manufacturing and Services PMI data out of the US. If it's weaker than expected this will spark safe-haven demand with $1880 / oz. as target.

USOIL – WTI Crude Oil hit our short support target at $52.60 in early trade today as tighter restrictions in China weighed down on global demand with UK lockdowns now expected to last into the summer. EIA inventories along with Baker Hughes rig count data to be released out of the US today with technical indicators favouring further downside as oil is now printing below the 200-period SMA on the hourly chart. Our target is the key support at $51.80 / $51.60.