On the first trading day of the new decade, investors returned to their desks in a risk-on mode. The positive mood was carried on from Tuesday, when US President Trump said that a “Phase One” deal with China will be signed on January 15th, and was boosted further after the PBOC cut its RRR by 50bps. The pound was the main gainer among the G10 currencies, but with concerns over the Brexit transition period still on the table, we cannot trust a healthy and lasting recovery.
EQUITIES REBOUND ON TRADE RHETORIC, PBOC CUT; GBP THE MAIN G10 GAINER
The dollar traded mixed on the last day of 2019 and during the 1st trading day of the new decade. It gained slightly against CHF, NZD, SEK and AUD, while it underperformed versus GBP, CAD and NOK. The greenback was found virtually unchanged against JPY and EUR.
Although not clear by the performance in the FX sphere, the equity world suggests that market sentiment turned back to risk-on at some point during the last US session of 2019, something that rolled over during the first Asian session of 2020. Indeed, all the EU indices that were open on the 31st, continued pulling back, but all three of the US ones rebounded, gaining nearly 0.30% each. Appetite was supported today as well, with most Asian bourses trading in green territory and most EU futures opening higher.
What may have incentivized investors to resume stock purchases, even on the last day of the year, may have been US President Donald Trump’s comments that a “Phase One” trade deal with China would be signed on January 15th. Morale was boosted further today after the PBOC, China’s central bank, announced a 50bps cut in the Reserve Requirement Ratio effective on January 6th, releasing around 800bn. Easy money means cheap borrowing, something that could help boost the domestic economy.
As for our view, the broader market sentiment could remain supported for a while on the easing trade tensions between China and the US, but we are reluctant to call for a long lasting recovery as there are several downside risks ahead of us in the new year. A final deal between the world’s two largest economies is yet to be agreed, while the US may be now ready to turn its guns against the EU. Remember that recently, US Trade Representative Robert Lighthizer noted that the increasing trade deficit with the Union “can’t continue”. “There are a lot of barriers to trade there and there are a lot of other problems that we have to address”, he added.
What’s more, we have the uncertainty surrounding the US election this year, while, although the UK Parliament approved the deal agreed between PM Johnson and the EU, there are still concerns over the transition period. Remember that UK PM Johnson has set a hard deadline of December 2020 for reaching a new trade deal with the EU, which has brought the risk of a disorderly exit back on the table. The pound was the main gainer on Tuesday, but any headlines or developments suggesting that it would be a hard task for the two sides to find common ground on trade may prompt GBP-traders to abandon the currency.
DAX — TECHNICAL OUTLOOK
Looking at the DAX 30 technical picture on the daily chart, we can see that the index continues to trade above its medium-term tentative upside support line drawn from the low of August 15th. That said, our oscillators, the RSI and the MACD are seen to be trending lower from around the beginning of November. This way, the oscillators with price are forming a negative divergence, but this may still not stop the bulls from possibly jumping back in again. Nevertheless, we will take a cautiously-bullish approach, for now, and wait for a clear break above one of our key resistance barriers first, before examining a potential move higher.
A push above the 13317 barrier, marked by Monday’s high would place the index into positive territory for the week, this way allowing some more of the potential buyers to join in. We will then target the 13457 hurdle, which is the highest point of December, a break of which could clear the path for DAX 30 to drift further north. The next possible resistance level to consider might be near 13600, which is currently the all-time high.
Alternatively, if the price breaks the aforementioned upside support line and falls below the 12884 support zone, marked by the low of December 10th, this could spook the buyers from the field and push the index even more to the downside. At the same time, the price would be placed below the 100-day EMA as well. DAX 30 could slide to the 12793 obstacle, or all the way to the 12648 area, which is the near the lows of October 21st and 23rd. The index might get a hold-up around there, or even correct back up a bit. That said, if it stays below the 100-day EMA, we will continue aiming lower. The index might get driven back all the way to the 12648 obstacle, a break of which could set the stage for a test of the 12525 level, marked by the high of October 11th.
GBP/CAD — TECHNICAL OUTLOOK
Although, this week, GBP/CAD managed to recover some of its losses made from mid-December, the rate is now struggling to overcome the 1.7221 barrier, which is near the highs of December 19th and 20th. It also seems that the pair is finding it hard right now to push above the 200 EMA on the 4-hour chart. Thus, for now, we will take a neutral stance and wait for a clear break through one of our levels first, before examining a further short-term directional move.
A drop back below the 1.7100 hurdle, which is the low of December 31st, could attract a few more sellers and the pair may end up getting pushed to the psychological 1.7000 zone, which is near the lows of December 24th and 27th. If this time that zone surrenders to the bears, its break may lead GBP/CAD further south, potentially targeting the 1.6920 level, or even the 1.6850 area, which is marked by the low of November 7th.
On the other hand, if the rate is able to bypass the previously-mentioned 1.7221 barrier, this could give some hope to the bulls, as such a move could increase the pair’s chances of drifting higher. We will then examine a move to the 1.7280 hurdle, or to the 1.7426 level, marked by the low of December 16th.
AS FOR TODAY’S EVENTS
During the European morning, we get the final manufacturing PMIs for December from several Eurozone nations and the bloc as a whole. As it is the case most of the times, the final prints are expected to confirm their preliminary estimates. The final UK manufacturing index for the month is also coming out and is expected to be revised slightly up, to 47.6 from 47.4.
From the US, we get the minutes from the latest FOMC gathering. At its last meeting for 2019, the Committee decided to keep interest rates unchanged, reiterating that “the current stance of monetary policy is appropriate to support sustained expansion of economic activity.” With regards to the new “dot plot”, it pointed to no action in 2020, one hike in 2021 and another one in 2022. However, at the press conference, Chair Powell said that “In order to move rates up, I would want to see inflation that’s persistent and that’s significant”. With market participants now pricing in a cut in January 2021, it would be interesting to see whether more members share Powell’s view, or whether indeed a hike in 2021 could materialize as the dot plot suggested. The final US Markit manufacturing PMI for December and the initial jobless claims for last week are also coming out.
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Originally published at https://www.jfdbank.com on January 2, 2020.