23/01/2025 Market Watch

Market Watch: Nervous Calm in Markets

The foreign exchange market has stabilized after recent volatility, showing a cautious calm. The US dollar remains narrowly mixed against G10 currencies, fluctuating within a tight range of +/- 0.15%. Commodity-linked currencies like the Australian and Canadian dollars are softer, while central European currencies and the Mexican peso are gaining traction among emerging markets. Conversely, Asia-Pacific currencies, including the Chinese yuan, are underperforming. The market appears to be in a holding pattern, awaiting potential triggers such as a speech by President Trump at Davos, which could provide new direction.

Equity markets show mixed performances across regions. In Asia-Pacific, Japanese and Taiwanese indices edged higher, while Australian stocks declined. Chinese markets were divided, with the Hang Seng Index retreating. In Europe, the Stoxx 600 extended its gains for the seventh consecutive session, reaching a new record high. However, US index futures suggest a softer opening, with the NASDAQ down nearly 0.5% and the S&P 500 slightly lower by 0.2%.

Bond markets are witnessing firmer yields across the board. Asia-Pacific yields followed the upward trend, and European yields rose modestly by 1-2 basis points. The US 10-year Treasury yield climbed to 4.63%, marking a slight increase for the week.

Commodities are experiencing some consolidation. Gold, which recently reached a high of $2763.50, has pulled back slightly to $2741 before finding new support. Oil prices also showed resilience; March WTI crude briefly dipped to $75 a barrel before recovering to around $75.40 in light trading.

United States of America

The Dollar Index saw a significant rally, climbing 10% from its late September low of around 100.15 to a mid-January high of approximately 110.15. However, the trend has shifted as the index has pulled back, with the five-day moving average dropping below the 20-day moving average. This technical shift highlights a change in the near-term momentum.

As the Dollar Index retraces its gains from the December 6 low of approximately 105.40, it tested the 50% retracement level near 107.80 before recovering to 108.25. Despite this recovery, the market appears indecisive, consolidating within a narrow range of 108.20 to 108.40. A breakout above 108.65 could force short-sellers to reconsider their positions, potentially driving further movement in the dollar.

On the economic calendar, weekly initial jobless claims and the Kansas Fed manufacturing survey are scheduled for release, though neither is expected to significantly impact the market.

Key Points:

• The Dollar Index rallied 10% from late September to mid-January but has since retraced.
• The five-day moving average fell below the 20-day moving average, signaling a near-term trend reversal.
• The index is consolidating between 108.20 and 108.40, with resistance at 108.65.
• Economic data releases today are unlikely to have a major effect on the market.

Australia

The Australian dollar neared its monthly high of $0.6300 yesterday but has so far remained below this level. Despite this, the currency retains a constructive tone, consolidating within yesterday's range and holding above a critical downtrend line. This line, drawn from the highs of last September and early November, was breached earlier in the week. Although the Aussie briefly dipped below it on Tuesday, it managed to recover and close higher, marking its strongest close in over a month.

The downtrend line currently sits near $0.6220, while initial support lies in the $0.6250–$0.6260 range. Notably, today's low of $0.6255 aligns with this support zone. The Australian dollar has also retraced 38.2% of its losses since late November, with the next target—the 50% retracement—at approximately $0.6330. Momentum indicators remain constructive, supporting the possibility of further gains.

Key Points:

• The Australian dollar is consolidating near its monthly high of $0.6300.
• It remains above the downtrend line from September and November highs, now near $0.6220.
• Initial support is found in the $0.6250–$0.6260 range, with today's low at $0.6255.
• The 50% retracement target lies near $0.6330.
• Momentum indicators suggest a positive outlook.

Canada

After sharp price swings earlier in the week, the Canadian dollar has entered a consolidation phase. The US dollar started the week at a low near CAD1.4260, the monthly low, but surged to CAD1.4515 on Tuesday, marking its highest level since March 2020. Yesterday, the US dollar partially retraced Wednesday’s pullback and has firmed further today, trading around CAD1.4400, with nearby resistance at CAD1.4430.

Implied volatility remains elevated, with one-month implied volatility exceeding 8%, compared to a 50-day average of 6.3% and a 100-day average of 5.7%. This reflects heightened uncertainty, driven in part by economic and political factors.

Trade relations between Canada and the US remain critical, as nearly three-quarters of Canada’s exports are directed to the US, accounting for about 20% of its GDP. Roughly half of these exports come from US company affiliates in Canada. Speculation has emerged about potential US tariffs, though exemptions for autos and energy might be considered. Recent tariff increases on Canadian softwood lumber could already be impacting home construction costs, raising concerns about additional tariffs.

Meanwhile, Canada’s November retail sales data is due today, with forecasts pointing to a modest 0.2% increase—the smallest rise in the second half of 2024. Retail sales fell by an average of 0.3% in the first half of the year but averaged a stronger 0.7% in the four months leading up to October.

Key Points:

• The Canadian dollar consolidated after volatile moves, with the US dollar trading near CAD1.4400 and resistance at CAD1.4430.
• One-month implied volatility is elevated above 8%, reflecting market uncertainty.
• Trade relations with the US remain critical, with tariffs on Canadian exports a potential risk.
• Canada’s November retail sales forecast is for a 0.2% rise, the smallest in H2 2024.

China

The Chinese yuan has shown strength against the dollar this month, with Beijing playing a key role in capping the dollar just above CNY7.33 earlier in January. As the broader dollar weakened, it briefly slipped below CNY7.26 on Tuesday. However, for the yuan to push past the key CNY7.25 level, the dollar likely needs to weaken further against major currencies.

The People’s Bank of China (PBOC) has adjusted its dollar reference rate lower in recent sessions, setting it near CNY7.17, which limits the potential for a significant dollar rebound. Against the offshore yuan (CNH), the dollar was initially range-bound between CNY7.18 and CNY7.19 until it broke lower on Monday, testing CNH7.25 on Tuesday. However, the dollar’s downside momentum appears to have eased, with an inside trading day observed on Wednesday.

Today, the dollar edged higher to nearly CNH7.2930, which aligns with the 38.2% retracement of its losses since last Friday’s high. The next resistance levels are at CNH7.3050 (50% retracement) and CNH7.3175 (61.8% retracement).

Key Points:

• The yuan strengthened, with Beijing capping the dollar above CNY7.33 earlier this month.
• The PBOC lowered its dollar reference rate to CNY7.17, reducing the scope for a dollar rebound.
• The dollar broke lower against the offshore yuan on Monday, testing CNH7.25, but downside momentum has weakened.
• Resistance levels for the dollar are at CNH7.2930, CNH7.3050, and CNH7.3175.

Europe

From its late-September high to the January 13 low, the euro experienced a 9.2% decline. A notable retracement level lies at $1.0575 (38.2% of the overall drop). Currently, attention is on retracements from the more recent December 6 high near $1.0630. Yesterday, the euro tested the 61.8% retracement level, slightly below $1.0460.

The short-term trend appears positive, with the five-day moving average crossing above the 20-day moving average on Tuesday. Momentum indicators remain constructive, supporting the euro’s recovery. Today, the euro has traded in a tight range between $1.0390 and $1.0420. However, a move below the $1.0340-$1.0360 zone could signal an end to the upside correction.

Looking ahead, tomorrow’s preliminary January PMI is expected to show a small improvement in the composite index. Despite this, it will likely remain below the 50 threshold that separates expansion from contraction. The January figure is projected at 47.9, marking the third consecutive month in contraction territory.

Key Points:

• The euro declined 9.2% from late September to January 13, with a key retracement level at $1.0575.
• It recently tested the 61.8% retracement from the December 6 high, near $1.0460.
• The five-day moving average has crossed above the 20-day, signaling short-term strength.
• A break below $1.0340-$1.0360 may indicate the correction is over.
• The January PMI composite is expected to improve slightly but remain below the expansion threshold at 47.9.

Japan

Over the past four sessions through Tuesday, the dollar consolidated within a range of JPY155.00 to JPY156.60. Despite rising US rates and a stronger dollar tone, yen volatility has dropped to below 9.5%, its lowest since last July. The dollar briefly climbed to a new high near JPY156.70 before settling firmly. Japanese equities have also advanced for four consecutive sessions, with the yen reaching JPY159.75 today before losing momentum, pulling back to JPY156.20 during the European morning.

The Bank of Japan (BOJ) is widely expected to deliver a 0.25% rate hike tomorrow, a move the markets are prepared for. However, concerns linger that this decision may position the BOJ on hold for the foreseeable future, making the hike appear relatively dovish. Market swaps suggest the next rate adjustment won’t occur until the fourth quarter.

On the trade front, Japan reported a JPY130 billion trade deficit last month, an improvement from November's JPY110.3 billion deficit. This follows the usual seasonal trend, as December trade balances have rarely worsened sequentially over the past two decades. Exports grew by 2.8% year-over-year in December, while imports increased by 1.8%. Notably, Japan achieved a $70 billion trade surplus with the US in 2024, helping to mitigate the overall deficit.

Key Points:

• Dollar-yen traded between JPY155.00 and JPY156.60 for four sessions, with volatility at multi-month lows.
• The dollar hit JPY159.75 today before retreating to JPY156.20.
• The BOJ is expected to raise rates by 0.25%, but markets view the move as dovish with the next hike anticipated in Q4.
• Japan reported a JPY130 billion trade deficit for December, showing improvement from November.
• Exports grew 2.8% year-over-year, while imports rose by 1.8%.
• Japan posted a $70 billion trade surplus with the US in 2024.

United Kingdom

Sterling extended its upward correction to $1.2375 yesterday, briefly surpassing the 20-day moving average and touching the 38.2% retracement of its decline from the December 6 high above $1.28. However, it failed to maintain momentum, closing near $1.2315—the lowest in three sessions. Today, it dipped below $1.2300 before recovering to around $1.2325.

The broader outlook for sterling remains challenged by a weak economic and political environment. Market sentiment suggests the Bank of England is likely to cut interest rates at its February 6 meeting. On the trade front, the UK recorded a modest trade surplus of approximately GBP72 billion with the US last year, and it has so far avoided being targeted by the new US administration for any trade disputes.

Key Points:

• Sterling's upside correction hit $1.2375 but lost momentum, closing at $1.2315 yesterday.
• It dipped below $1.2300 today before recovering to $1.2325.
• The Bank of England is expected to cut rates on February 6.
• The UK recorded a GBP72 billion trade surplus with the US in 2024.
• Sterling remains under pressure due to a weak economic and political backdrop.