AUD/JPY perks up and eyes 102, Nikkei extends decline

Traders continued to price in the prospects of a Trump win and a tapered rate of Fed cuts on Tuesday, seeing the US dollar extended its gains to a 2.5-month high. Although, like the rise of bond yields, gains were marginal. The performance of the dollar was also mixed.

EUR/USD fell 0.5% and closing beneath 1.08, GBP/USD closed flat after a false break of the October 17 low and closed the day with a doji. AUD/USD formed a small bullish inside day and USD/CAD retreated from its two-month high ahead of the Bank of Canada’s cash rate decision, later today. USD/JPY closed marginally above 151, but it might take a surprise catalyst for it be propelled to my 152 target sooner than later, looking at today’s quiet calendar in the APAC session.

BOE member Greene warned to not place too much emphasis on the latest weak CPI figures, and they may be driven by volatile components. Although inflation is deemed to be going the correct way, and is more a question of speed.

ECB President Lagarde said inflation numbers are relatively reassuring and hopes it will come back to target sooner than projected. Holzmann thinks it is coming down faster than projected, and Villeroy thinks there is a risk it could undershoot its 2% target.

Events in focus (AEDT):

We could be in for a particularly quiet APAC session looking at the lack of economic data scheduled on Wednesday. China’s foreign direct investment figures won’t capture any of the latest stimulus figures, so unlikely to move markets in a meaningful way.

We saw the pound fall on Tuesday following dovish comments from BOE governor Bailey, and it could remain under pressure should Breeden read from the same dovish script.

There’s a reasonable chance to expect the Bank of Canada (BOC) to cut their cash rate by 50bp. And that would be their first such sized cut in 15 years, outside of a pandemic. Given the Canadian dollar has been falling on bets of this outcome, the BOC will likely need to deliver a dovish 50bp cut to avoid a countertrend bounce. The RBNZ managed to, so perhaps the BOC can do so as well.

Bonds are getting interesting again given the rise in yields. So the 20-year bond auction could warrant a look to see if demand has been dented, given the recent rise in yields due to inflationary concerns (a potential Trump Presidency and strong US data pointing to even fewer Fed cuts).

• 16:00 – SG CPI
• 21:00 – IMF meetings
• 22:00 – CN foreign direct investment
• 00:00 – BOE Breeden speaks
• 00:45 – BOC interest rate decision
• 01:00 – EU consumer confidence, ECB Lagarde, Lane speaks
• 01:30 – BOC press conference
• 03:00 – FOMC Barkin speaks
• 04:00 – US 20-year bond auction

AUD/JPY technical analysis:

Momentum is finally turning higher on AUD/USD, after a gentle pullback from the cycle highs slowly built a base above the 200 and 100-day EMAs. The rally from the 93.60 low was clean and strong, and the subsequent pullback was shallow (and reminiscent of a bull flat, if not perfect). Prices are also holding above the 100 handle, and dips on lower timeframes remain preferred for a potential rise into 102 and 103.

The 4-hour chart shows resistance was met at the weekly R1 pivot and on track to form a 2-bar bearish reversal. Pullbacks towards 100.5 could appeal to bullish swing traders who anticipate a break above Tuesday’s high, with the weekly R2 and 102 initially in focus.

Nikkei 225 futures technical analysis:

Prices broke to the downside of a bearish triangle, although the 100-day EMA provided support. Still, momentum has realigned with the bearish engulfing candle that marked the October high and took prices back below 40k. And there could be another leg lower waiting.

Prices are consolidating in a tight range beneath the 100-hour EMA (38,622) and weekly S1 pivot (38,640). We might know early after the Tokyo open if bears want to simply drive this towards the 38k handle, near the weekly S2 pivot (38,015). Note the monthly pivot sits at 37,830 and could provide a strong support level.

If prices initially rise, bears could seek to fade into the 38,895 lows or 39,000 handle for the anticipated leg lower to 38k, with an improved reward to risk ratio.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge