Biden’s Inauguration, BoC Policy Decision

Today, the spotlight may fall on Joe Biden’s inauguration as the 46th US President, as there is the risk for Trump’s supporters to proceed with more violent protests. Apart from that, we also have a BoC monetary policy meeting on today’s agenda, and it would be interesting to see whether officials will decide to re-increase their QE purchases.

Biden to Become the 46th US President

The US dollar continued to trade lower against all but one of the other G10 currencies on Tuesday and during the Asian session Wednesday. It lost the most ground versus SEK, NOK, EUR, and GBP in that order, while it was found virtually unchanged against NZD.

The weakening of the US dollar suggests that markets continued trading in a risk-on fashion yesterday. However, the fact that the safe-havens CHF and JPY strengthened somewhat raises questions on that front. Thus, in order to get a clearer picture with regards to the broader investor morale, we prefer to turn our gaze to the equity world. There, major EU indices slid somewhat, but Wall Street’s main indices traded in the green, with Nasdaq gaining the most (1.53%). After being closed on Monday for the Martin Luther King Day, perhaps this was a catchup with markets elsewhere. It could also be a reaction to comments by US Treasury Secretary nominee Janet Yellen. At her confirmation hearing, Yellen said that the benefits of a big spending package outweigh the costs of a higher debt burden. The upbeat appetite rolled over into the Asian session as well. Although Japan’s Nikkei 225 slid 0.38%, China’s Shanghai Composite, Hong Kong’s Hang Seng and South Korea’s KOSPI gained 0.47%, 0.90%, and 0.71% respectively.

As for today, market participants may lock their gaze on Joe Biden’s inauguration as the 46th US President. Usually, such events pass unnoticed by the markets, as who will be the next President is already known well before. However, this time, there is the risk for Trump’s supporters to proceed with more violent protests, as they still refuse to accept that the outcome of the elections was fair and clear. In such a case, a risk-off wave may be possible, resulting in corrective moves in most markets. However, we stick to our guns that the path of least resistance for risk-linked assets remains to the upside. We repeat that the vaccinations, the US spending package, the monetary-policy support around the globe, and a softer stance on global trade by Biden, are a cocktail of developments that may keep the broader appetite supported in the first months of 2021.

DJIA — Technical Outlook

Looking at the DJIA’s cash index on our 4-hour chart, we can see that, overall, it continues to balance above a short-term tentative upside support line drawn from the low of December 21st. However, the price seems to be struggling, so far, to stay above the psychological 31000 mark. But despite that, the near-term outlook still remains more to the upside, as the RSI continues to float above 50 and the MACD is close to zero and points slightly higher.

If the price rebounds from the 30852 area once again, it could make its way back to the 31078 zone, marked by the current highest point of this week. If that area gets broken and DJIA continues to move higher, the next possible resistance area might be seen somewhere in between the 31225 and 31255 levels. Those levels mark the highs of January 14th and the all-time high, which was hit on January 8th, respectively.

On the downside, if the price breaks the aforementioned upside line and then slides below the 30550 hurdle, marked by an intraday swing high of January 6th, that may open the door for further declines, as the course of the short-term trend may change. DJIA could then travel to the 30270 obstacle, a break of which might lead to a test of the 30058 level, marked by an intraday swing low of January 4th.

Will the BoC Re-increase its QE Purchases?

Apart from Biden’s inauguration, we also have a BoC meeting on today’s agenda. After scaling back its QE purchases in October, the BoC decided to keep its policy unchanged in December, noting that the rebound in the global and Canadian economies has unfolded largely as the Bank anticipated in its October Monetary Policy Report. Officials acknowledged that the positive vaccine news is providing some reassurance but added that the pace and breadth of the global rollout of vaccinations remain uncertain. Overall, the language was on the neutral side.

However, with inflation still well below the Bank’s objective of 2%, and the latest employment report revealing that the Canadian economy has lost 62.6k jobs, we see a decent likelihood for the Bank to re-increase its QE purchases at this gathering, something that could hurt the Canadian dollar. That said, we don’t expect this to last for long. We still believe that the overall path of this commodity currency will depend on developments surrounding the broader sentiment. As we already noted, we see risk appetite improving in 2021, at least in the first months, something that could prove supportive for oil prices and thereby for the Canadian dollar. For the Loonie to tumble and stay under selling interest for a while, BoC policymakers may have to surprise the markets with a rate cut. Nonetheless, we believe that the chances for something like that are minimal as officials themselves have said that 0.25% is the lower effective bound.

CAD/JPY — Technical Outlook

CAD/JPY continues to trade above a short-term tentative upside support line drawn from the low of December 22nd. At the same time, since yesterday, we can see that the pair is coiling up and possibly forming a bullish pennant. Of course, this paints a more positive near-term picture, however, to get excited with higher areas, we would prefer to wait for a push above yesterday’s high first, which is at 81.79. Until then, we will take a somewhat positive approach.

If the rate accelerates and overcomes the 81.79 barrier, this will confirm a forthcoming higher high, potentially inviting more bulls into the field. The pair could then rise to the 82.02 obstacle, a break of which might set the stage for a push to the 82.19 level. That level marks the current highest point of January.

In order to shift our attention to some lower areas, we would first like to see a violation of the previously mentioned upside line and then a rate-drop below 81.08, which is the current lowest point of this week. At the same time CAD/JPY would be placed below the 200 EMA on our 4-hour chart, what some sellers may also see as a good opportunity to step in. The rate could fall to the 80.81 obstacle, a break of which might set the stage for a push to the 80.55 level, marked by the current lowest point of January.

As for the Rest of Today’s Events

During the early European morning, we already got the UK CPIs for December. Both the headline and core rates rose more than anticipated, but stayed notably below the BoE’s objective of 2%, which suggests that the prospect of the Bank increasing the pace of its QE purchases at some point soon is not off the table. In any case, this is something the Bank already noted that it stands ready to do. Thus, it will not come as a major surprise if it happens.

Later in the day, we have Eurozone’s final CPIs for December, and the Canadian inflation prints for the same month. Eurozone’s figures are expected to confirm their preliminary estimates. In Canada, the headline CPI rate is forecast to have held steady at +1.0%, while no forecast is available for the core one. In any case, we don’t expect Loonie traders to pay much attention to the inflation data as their gaze may be locked on the BoC decision, due later in the day.

As for tonight, during the Asian session Thursday, the central bank torch will be passed to the BoJ. When it last met, this Bank announced no changes to its major monetary policy settings, but extended its funding support program to firms, that was introduced earlier this year in response to the coronavirus pandemic. The only factor we see as tempting Japanese officials to hit the easing button is the weakening of the US dollar against the Japanese yen. However, the recent rebound in USD/JPY may have provided some comfort. With the BoJ’s policy already being extremely loose, we believe that policymakers may wait for things to worsen much more before they decide to ease further.

Australia’s employment report for December is also due to be released. The unemployment rate is expected to have ticked down to 6.7% from 6.8%, while the net change in employment is forecast to show that the economy has gained 50k jobs after adding 90k in November. At its December meeting, the RBA stood pat repeating that they are prepared to do more if necessary. That said, with the Bank noting that the Australian economic recovery is underway, and that recent data have generally been better than expected, we don’t believe that a slowdown in jobs’ growth will be the trigger for more easing. After all, a slowdown following the 178.8k and 90k job gains in October and November appears more than normal to us. Japan’s trade balance for December is also coming out and expectations are for the nation’s surplus to have increased to JPY 942.8bn from JPY 366.1bn.

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