It is interesting to see the risk appetite still improving, but this also coming as a dollar rally is finding its legs. Treasury yields appear to be generating upside traction again as the US 10 year rises towards 2.80% again and the 2 year pushes through to three week highs. Yield differentials have turned back in favour of a near term dollar rebound continuing, however there are some key pivot levels to overcome for the dollar to decisively breakout. Watch for EUR/USD below $1.1300, gold below $1276 as two key factors. Although US markets are closed on Monday for Martin Luther King Day, this trend is one to keep an eye on in the coming days. Wall Street continues to accelerate higher as fears of a sharp slowdown in corporate earnings growth seem to have been overplayed. US earnings season has started well, at least for now. Perhaps the calls of the dollar’s demise have come a little premature? However, given the shift in emphasis towards a less hawkish stance across all the recent Fed speakers, focusing more on data dependence in monetary policy, focus on the US numbers will be elevated. This improved risk and stronger dollar is beginning to impact negatively on gold. Away from the US, China’s economic data overnight was broadly in line with market expectations. China GDP growth slipped to 6.4% in 2018 (as forecast) whilst Industrial Production was mildly higher than expected at +5.7% (+5.3% exp), Retail Sales in line at +8.2% and Fixed Asset Investment a shade below at +5.9% (+6.0% exp).
Wall Street closed strongly higher again on Friday with the S&P 500 +1.3%, although the lack of steer due to the public holiday may be an impact today. Asian markets have been broadly positive in response to the Chinese data (Nikkei +0.3%, Shanghai Composite +0.5%). European markets seem to be struggling to replicate this with FTSE futures and DAX futures both a shade lower. In forex, there is a an element of dollar slippage with euro and yen outperformance, but little real direction. In commodities, there is a basis of support forming for gold, whilst oil is a touch higher.
It is Martin Luther King Day public holiday in the US today and a very quiet economic calendar to boot, with no key economic releases today.
Chart of the Day – AUD/JPY
Aussie/Yen is seen as a gauge of market sentiment in the forex world, and with risk appetite seeing a basis of improvement across major markets, we see a key break higher on AUD/JPY. The old breakdown of 78.55 that was seen late in 2018 has been a basis of resistance recently, however, this pivot has been broken in the past couple of sessions (although Friday’s close just shy of 78.75 will have been a shade disappointing. However, this comes with momentum indicators still improving, with the RSI above 50, Stochastics rising in strong configuration and the MACD lines accelerating higher. If initial resistance now at 79.00 can be cleared, there is now a good run higher with upside potential for the pair towards the next key pivot at 80.50. There are a series of higher lows in the past couple of weeks as the recovery has progressed, with 77.75 initial support, whilst the bulls will be looking at the hourly chart which suggests there is an opportunity on any unwind into 78.35/78.55.