IC Markets Asia Fundamental Forecast | 3 January 2024
What happened in the US session?
The final reading for the S&P Global US Manufacturing PMI showed activity declining at a faster pace in December. The index fell from November’s 49.4 to 47.9 as the manufacturing sector continued to contract for the eight consecutive month with new orders falling at a sharper pace amidst weakening demand conditions.
Meanwhile, market optimism on interest rate cuts by the Federal Reserve faded as the US dollar surged against the majority of its peers while the yield on the 10-year Treasury note rebounded to briefly climb above the 4%-threshold – a sign that rate cut expectations in 2024 are diminishing slightly. The dollar index (DXY) broke above 102 and is likely to stay elevated today as the recent sell-off appears to be overdone.
What does it mean for the Asia Session?
The DXY was trading around 102.15 as Asian markets came online while spot gold prices found support around $2,060/oz after pulling back overnight. Meanwhile, crude oil prices tumbled overnight with WTI oil dropping under $71 per barrel.
The Dollar Index (DXY)
Key news events today
ISM Manufacturing PMI (3:00 pm GMT)
JOLTS Job Openings (3:00 pm GMT)
FOMC Meeting Minutes (7:00 pm GMT)
What can we expect from DXY today?
There are three major economic data points that will be released during the US session and all three are likely to have a major impact on financial markets. Should the JOLTS job openings signal further softening of vacancies and the minutes from December’s FOMC meeting highlight further dovish outlook by the Federal Reserve, these events could trigger another round of dollar sell-off. Either way, higher-than-usual volatility is expected later today.
Central Bank Notes:
- The Federal Funds Rate target range remained unchanged at 5.25% to 5.50% for the third meeting in a row.
- The Committee seeks to achieve maximum employment and inflation at the rate of 2.0% over the longer run.
- The Committee will continue to assess additional information and its implications for monetary policy.
- In determining the extent of any additional policy firming that may be appropriate to return inflation to 2.0% over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.
- In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans.
- Next meeting runs from 30 to 31 January 2024.
Next 24 Hours Bias
Medium Bullish
Gold (XAU)
Key news events today
ISM Manufacturing PMI (3:00 pm GMT)
JOLTS Job Openings (3:00 pm GMT)
FOMC Meeting Minutes (7:00 pm GMT)
What can we expect from Gold today?
There are three major economic data points that will be released during the US session and all three are likely to have a major impact on financial markets. Should the JOLTS job openings signal further softening of vacancies and the minutes from December’s FOMC meeting highlight further dovish outlook by the Federal Reserve, these events could trigger another round of dollar sell-off and thus boost gold prices. Either way, higher-than-usual volatility is expected later today.
Next 24 Hours Bias
Weak Bullish
The Australian Dollar (AUD)
Key news events today
No major news events.
What can we expect from AUD today?
The Aussie was one of the weakest performing currencies as it plunged under 0.6800 overnight. It was trading around 0.6760 as Asian markets came online but it could edge higher before resuming the downturn.
Central Bank Notes:
- The RBA kept the cash rate target unchanged at 4.35%, marking the fifth pause out of the last six board meetings.
- Inflation in Australia has passed its peak but is still too high and the progress in bringing inflation back to the target range of 2% to 3% was looking slower than earlier forecast.
- Any further tightening of monetary policy to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks.
- Next meeting is on 6 February 2024.
Next 24 Hours Bias
Medium Bearish
The Kiwi Dollar (NZD)
Key news events today
No major news events.
What can we expect from NZD today?
Along with its Pacific neighbour, the Kiwi dived under 0.6300 as it was one of the weakest performing currencies overnight. It was trading around 0.6250 as Asian markets came online but it could edge higher before resuming the downturn.
Central Bank Notes:
- The Monetary Policy Committee kept the OCR unchanged at 5.50% for the fourth meeting in a row.
- The Committee is confident that the current level of the OCR is restricting demand. However, ongoing excess demand and inflationary pressures are of concern, given the elevated level of core inflation.
- If inflationary pressures were to be stronger than anticipated, the OCR would likely need to increase further.
- The Committee agreed that interest rates will need to remain at a restrictive level for a sustained period of time, so that consumer price inflation returns to target and to support maximum sustainable employment.
- Next meeting is on 28 February 2024.
Next 24 Hours Bias
Medium Bearish
The Japanese Yen (JPY)
Key news events today
No major news events.
What can we expect from JPY today?
Fading market optimism on interest rate cuts by the Federal Reserve caused USD/JPY to surge past 142 overnight. This currency pair pulled back at the start of the Asia session to trade around 141.90 but it could make another attempt to rise above this overnight-high once again today.
Central Bank Notes:
- The Bank will continue with QQE with Yield Curve Control, aiming to achieve the price stability target of 2.0%, as long as it is necessary for maintaining that target in a stable manner.
- The Bank of Japan decided on the following measures:
- Yield curve control: Negative interest rate of -0.1% on policy-rate balances and purchase of Japanese government bonds to keep 10-year JGB yields at around 0% while regarding the upper bound of 1.0% for 10-year JGB yields as a reference in its market operations.
- Inflation expectations have risen moderately with underlying CPI inflation likely to increase gradually towards achieving the price stability target, as the output gap turns positive and as medium- to long-term inflation expectations and wage growth rise.
- Japan’s economy is likely to continue recovering moderately for the time being, supported by factors such as the materialization of pent-up demand, although it is expected to be under downward pressure stemming from a slowdown in the pace of recovery in overseas economies.
- Next meeting is on 23 January 2024.
Next 24 Hours Bias
Medium Bullish
The Euro (EUR)
Key news events today
No major news events.
What can we expect from EUR today?
Fading market optimism on interest rate cuts by the Federal Reserve caused the Euro to nosedive overnight, falling under the threshold of 1.1000. It was trading around 1.0950 as Asian markets came online and it could retrace higher before resuming the downturn.
Central Bank Notes:
- The ECB kept the three key interest rates unchanged for a second consecutive meeting, keeping the main refinancing rate on hold at 4.50%.
- While inflation has dropped in recent months, it is likely to pick up again temporarily in the near term.
- Underlying inflation has eased further but domestic price pressures remain elevated, primarily owing to strong growth in unit labour costs.
- The past interest rate increases continue to be transmitted forcefully to the economy as tighter financing conditions are dampening demand, and this is helping to push down inflation.
- The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction.
- Next meeting is on 25 January 2024.
Next 24 Hours Bias
Medium Bearish
The Swiss Franc (CHF)
Key news events today
Manufacturing PMI (8:30 am GMT)
What can we expect from CHF today?
Manufacturing activity in Switzerland has contracted over the last eleven months with components such as production, orderbook and employment leading the decline for the month of November. December’s estimate of 43.0 points to another month of contraction and a weaker-than-expected reading could provide another boost for USD/CHF.
Central Bank Notes:
- The SNB kept the policy rate unchanged at 1.75% for a second consecutive meeting in December.
- The inflation forecast puts average annual inflation at 2.1% for 2023, 1.9% for
2024 and 1.6% for 2025.
- GDP growth is likely to be weak in the coming quarters; subdued demand from abroad and the tighter financing conditions are having a dampening effect.
- Switzerland’s GDP is likely to grow by around 1% this year. For 2024, the SNB currently expects growth of between 0.5% and 1%.
- Next meeting is on 21 March 2024.
Next 24 Hours Bias
Medium Bullish
The Pound (GBP)
Key news events today
No major news events.
What can we expect from GBP today?
Fading market optimism on interest rate cuts by the Federal Reserve caused the Pound to nosedive overnight, falling under 1.2700. It was trading around 1.2630 at the start of the Asia session and it could retrace higher before resuming the downturn.
Central Bank Notes:
- The Bank of England’s Monetary Policy Committee (MPC) voted by a majority of 6-to-3 to maintain its Official Bank Rate at 5.25%.
- Three members preferred to increase the Bank Rate by 0.25 percentage points to 5.5%.
- CPI inflation remains well above the 2% target, with twelve-month CPI inflation falling sharply from 6.7% in September to 4.6% in October while services price inflation declined to 6.6%.
- The decline in CPI inflation over recent months could largely be attributed to falls in energy, food, and core goods price inflation, as external cost pressures had continued to abate. Services price inflation had remained elevated, however.
- The mean projection for CPI inflation is 2.2% and 1.9% at the two- and three-year horizons respectively.
- Next meeting is on 1 February 2024.
Next 24 Hours Bias
Medium Bearish
The Canadian Dollar (CAD)
Key news events today
No major news events.
What can we expect from CAD today?
Fading market optimism on interest rate cuts by the Federal Reserve caused the USD/CAD to leap above 1.3300 overnight. This currency pair was trading around 1.3330 as Asian markets came online and it should continue to remain elevated today.
Central Bank Notes:
- The Bank of Canada held its target for the overnight rate at 5.0% for the third meeting in a row while continuing its policy of quantitative tightening.
- Canada’s economy stalled through the middle quarters of 2023 with real GDP contracting at a rate of 1.1% in the third quarter, following a growth of 1.4% in the second quarter.
- The slowdown in the economy is reducing inflationary pressures in a broadening range of goods and services prices, leading to the easing of CPI inflation to 3.1% YoY in October.
- The Governing Council is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed and would also like to see further and sustained easing in core inflation.
- Next meeting is on 24 January 2024.
Next 24 Hours Bias
Strong Bullish
Oil
Key news events today
API Crude Oil Stock (9:30 pm GMT)
What can we expect from Oil today?
Crude oil prices tumbled overnight as the US manufacturing section experienced another month of contraction. Weakening demand conditions reinforce a bearish outlook as WTI oil shed over 2% to dive under $71 per barrel. Overhead pressures remain for this commodity and it is likely to slide lower today.
Next 24 Hours Bias
Medium Bearish
