- The worst may be behind us as the market gradually realises that nothing justifies the sell-off, which began at the beginning of the year
- The slide of the US index was limited by the fall of commodity currencies
- AUD/USD may remain on the downside as the US dollar appears to have been oversold throughout the past weeks
- Safe haven currencies took advantage of this risk-off environment with USD/JPY continuing to slide further
- We will need to be a significant improvement in risk sentiment before we see USD/CHF trading higher
- We expect that the current increase in US housing starts should further slow, therefore it is likely that the greenback will weaken further against the euro
- For the time being, markets are excluding any Fed action in March and inflation is currently not picking up towards the Fed’s target range of 2%
In spite of an improving risk environment, equity indices kept moving lower during the Asian session as the PBoC set the USD/CNY fixing higher to 6.5237, up 0.16% compared to yesterday. With the exception of mainland Chinese indices, Asian regional were broadly trading in negative territory as fears of another sell-off are still much present. From our standpoint, the worst may be behind us as the market gradually realises that nothing justifies the sell-off, which started at the beginning of the year. Even if it is true that most developed economies send mixed signals, we are still far from being in a recession as it looks more like a temporary slowdown. In Japan the Nikkei fell 1.36% and the Topix settled down 1.13%. In mainland China, equity indices reacted positively to the yuan’s devaluation as the Shanghai and Shenzhen Composite were up 1.08% and 1.42%, respectively. Offshore, Hong Kong’s Hang Seng slipped 0.81%, while in Singapore the STI fell 1.24%. Elsewhere, Thai shares were down 0.80%, in Taiwan the Taiex edged up 0.03%, while in India the Sensex fell 0.67%. European equity futures are mixed this morning as traders struggle to pick a side between bear and bull.
Overnight, the downward shift of the entire US yield curve weighted on the greenback. On the short end of the curve, the 2-year rates fell 2bps to below 0.70%, while on the long end the 10-year slid 3bps to below 1.75% as recession’s fears as still very much present. The US dollar index, which measures the dollar against a basket of currencies, was down 0.20%. The slide of the US index was limited by the fall of the commodity currencies. AUD/USD continued to move lower and stabilised around the $0.71 level, while the loonie fell as much as 0.35% before erasing early session’s losses. From our standpoint, the bias in AUD/USD remains on the downside as the US dollar appears to have been oversold over the past few weeks.
Safe haven currencies took advantage of this risk-off environment as both the Swiss franc and the Japanese yen appreciated against the greenback in overnight trading. USD/JPY continued to slide further, dropping below the 113.50 level, down 0.50%. USD/CHF fell 0.33% during the Asian session as the pair lack the strength to break the 0.99 resistance to the upside. We’ll need to see a significant improvement in the risk sentiment before seeing USD/CHF trading higher.
***Yann Quelenn, market analyst: “Markets too optimistic on housing starts: Housing starts and building permits are on today’s calendar. Economists forecast an increase of 2% m/m of new constructions increasing from the December data where new housing declined by 2.5%. However, building permits are expected to decrease by 0.3% m/m. It is important to notice that the current housing starts number is well below the allowed building permits data which reflects the continuing weakness of the U.S. economy. Yet, markets have priced that January will be the tenth straight month that housing starts are above a million units.
Also of note is that better labour markets as well as a growing trend in wages should normally boost housing market. Good data will help support the acceleration of the U.S. economy and allow the dollar to strengthen further. Yet, we consider that recent data is still not sufficient to trigger a Fed rate hike in March despite the Fed's decision being very dependent on supporting data. For the time being, markets are excluding any Fed action in March and inflation is currently not picking up towards the Fed’s target range of 2%.
Consequently, it is also clear that better labour markets have not spurred inflation as we believe that the reserve army of workers on the sideline is way too big to boost wage growth sustainably. As a result, we expect that the current increase in housing starts should further slow. It is then likely that the greenback should further weaken against the euro.”***
Today traders will be watching CPI report and retail sales from South Africa; jobless claims from the UK; ZEW survey from Switzerland; MBA mortgage application, housing strarts, building permits, PPI industrial production, capacity utilisation and the publication of the minutes of the last FOMC meeting from the US.