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Intermarket:
- SP Futures 3930 (+0.08%)
- EUSTXX 3718 (-0.05%)
- Crude Oil 60.13 (+1.09%)
- US 10YR 1.30(+0.25%)
- EurUsd 1.2088 (-0.13%)
- UsdJpy 105.95 (-0.08%)
- DAX 14047 (-0.03%)
It is all about inflation. US yields continue to climb higher, as rising inflation fears spurred speculation that the Fed may have to speed up policy normalisation. The 10Y Treasury yield rose to 1.33%, the highest in a year, while the 30Y yield jumped to 2.10%. Meanwhile the 2-10Y spread on US Treasury breakeven yields continue to invert, showing how near-term inflation fears are increasing. The main reason for the rise seems to be a broad rise in commodity prices, ranging from crude oil to copper and agriculture products.
USD staged a come-back yesterday on higher yields but also on a surprisingly strong Empire manufacturing print. This suggests that today’s retail sales print may be more influential than previous prints.
Broader market narrative remains largely intact: focus remains on fiscal stimulus and the effect on inflation, accelerated vaccine rollout, improving coronavirus metrics, and stronger economic activity.
Looking ahead: focus today will be on US retail sales. Consensus is for a rebound in January but with wage and job growth slowing, this forecast is dubious. FOMC minutes are also due for release.
Traders will be looking for any mention of tapering.
Matters that Matter:
• RBA Dep Gov Kent: Policy measures continue to place downward pressure on the AUD; AUD is currently at the upper end of range of recent years; have decided to start acquiring foreign currency via FX swaps over longer terms; to make modest changes to how it uses FX swaps; transactions will have no effect on the value of the AUD
•UST Sec Yellen: Discussed with ECB Lagarde on support for strong global recovery, financial stability, addressing climate change; emphasized deepening transatlantic cooperation on economic and financial issues in call; commended on ECB’s swift and decisive response to Covid-19 pandemic, discussed policy tools to foster growth, create jobs in Europe and US
• Fed’s Daly says don’t be fearful about too-high inflation, not focus now
• Fed’s George: Fiscal policy will remain important until pandemic is over
• Biden pushes for pandemic relief in first official trip as president
• Biden says China to face repercussions on human rights
• Germany dashes hopes of businesses for quick reopening of economy
• Bitcoin tops $50,000 as it wins more mainstream acceptance
• Oil retreats on rising U.S. dollar, though Texas supply choked
Majors 1-Day View:
USDJPY
- A rise to fresh 4 month highs in Asia trade at 106.22 has attracted sellers, signals weakening into Europe. As such, the outlook for today is cautiously bearish.
- JPY crosses and Nikkei off on profit-taking
- US Yields firm, but off from highs.
- Talk of flows related to vaccine payments.
EURUSD
• After 4 days of sideways trading, prices posted a bearish engulfing yesterday, switching signals to negative for today.
• Sharp rise in yields drove up USD, weighed on EUR.
• Offers reported at 1.2120.
AUDUSD
• Sellers returned from close to this year’s top on Tuesday, prices giving up gains to close negative on the day. As such, signals are pointing lower for today.
• Nothing new from RBA’s Kent.
• USD strength impacting AU rise.
GBPUSD
• After reaching a fresh trend high at 1.3953 yesterday, prices retreated to post a doji. As such, signals have weakened slightly, but with the trend of higher daily lows still in place, the outlook is cautious and we prefer to sell rallied towards 1.3940.
• Pound Off the highs on USD strength.
• Significant option defence reported ahead of 1.4000 Barriers.
FX Relative ATR Grid
Comment: Volatility expanded on Tuesday, with JPY, NZD and USD exceeding 100% of the 22 Day ATR. Trading conditions are once again favourable with the exception of AUD and CHF.
Relative Strength Grid
Comment: The strongest trends remain visible in GBP (long), JPY crosses (long), AUD pairs (long), CHF pairs (long). The largest flows yesterday were seen in JPY (weakness), GBP (Strength).