• US yields steering the US dollar lower, global equities on thin-ice. 
  • Chinese stimulus measures have not been enough to satisfy markets.
  • Commodity complex bleeding out on key week for the Aussie.
  • Central banks a key focus while coronavirus headlines keep markets on edge.

At the end of the week, markets were concentrated on the inversion of the curve yet again and the US dollar plummetted below the 98 handle, ending -51%. 

Bond markets in the driving seat

The bond markets have been a critical theme at the start of this year with a fickle outlook for the global economy and the reflation trade. US yields have been in a southerly decline since October 2018. The 10-year yield has crumbled from 3.25% to Sep 2019 lows of 1.4280%. We saw 1.50% last week. Markets are concerned over the health of the world economies, endless geopolitical risks and how the stimulus measures from Chinese authorities will not be sufficient enough to prevent contagion. On top of all that, the coronavirus has not been helpful – it has severely undermined the positive impact of the phase one trade deal. The coronavirus headlines will keep markets on edge while it continues to spread throughout the world. 

USD/JPY continues to bleed out

Consequently, we are seeing a top formation in global equity markets and the S&P 500 benchmark is testing a critical support level for the third time this year.  This has lead USD/JPY lower within its 52 week's range of between 104.45 and 112.40. While below resistance 109.20/60, bears have the Jan low of 107.65 in focus. 

Chinese authorities stepping up the pace of stimulus measures

Reuters reports that "China’s central bank said it will inject 1.2 trillion yuan ($174 billion) worth of liquidity into the markets via reverse repo operations on Monday as its stock markets prepare to reopen amid an outbreak of a new coronavirus." 

The People’s Bank of China made the announcement in a statement on Sunday, adding the total liquidity in the banking system will be 900 billion yuan higher than the same period in 2019 after the injection.

In the same vein, China's securities regulator has notified brokerages to suspend short-selling of sticks form Feb 3rd, according to the 21st Century Business Herald. 

Brexit-day hysteria and BoE sent GBP on a tear

As for sterling, it has made a remarkable comeback since the surprise negative turn on the 24th Jan despite an improvement in the UK PMI composite which should have been a supportive case for the Bank of England staying on hold in the least. However, below 52 was still not good enough to convince markets and it took a hawkish outcome at the BoE to satisfy investors, taking GBP/USD from below the 1.30 hande to a high of 1.3209 on Brexit day. Perhaps we are in the throes of a final clear out of stale buy stops before the real challenges now lay ahead for the UK as the focus now turns more clearly from the "Brexit deal" to a "trade partnership" with the EU.

USD/CAD has been on fire

The Canadian data has worsened and the BOC flipped dovish at its recent meeting where they markedly lowered their near-term projections. However, USD/CAD has reached a key technical level on the charts and could be due a bearish correction to 1.32 and then 1.3170 structures. While Friday's industry-level GDP report was a touch better than expected, the markets will likely conine to count on the BOC easing. 1.33 will be on the radar so long as the growth impact from supply chain disruptions of 2019-nCoV unfolds, WT remains anchored on global growth fears and risk appetite keeps the commodity-FX complex in check. For the week ahead, the jobs data will be a focus. 
Speaking of the commodity complex, its a huge week for the Aussie with the Reserve Bank of Australia on the cards. We also have the Chinese Caixin Manufacturing PMI for Jan. 

Key events schedule

  • 3rd Feb: EU trade negotiation mandate PM Johnson speech, ISM Surveys (Jan) Manufacturing, Non-Manufacturing. 
  • 4th Feb: RBA Board Meeting.
  • 7th Feb: China trade data, US Nonfarm Payrolls and Canadian Employment. 

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