Daily Market Outlook, December 8, 2021

Overnight Headlines

  • BoJ Has No Need To Modify Ultra-Easy Policy, Says Dep Gov Amamiya
  • Japan Manufacturers' Sentiment Rises To 4-Month High In Dec - Tankan
  • China To Tighten Rules For Tech Companies Seeking Foreign Funding
  • House Votes To Approve Bill Setting Up Process For Lifting Debt Limit
  • Shortest-Term Treasuries Rally On Deal To Raise The Debt Limit
  • Yuan Hits Highest Since 2018 As Easing Virus Worry Fuels Risk-On
  • Coffee Hits 10-Year High As Shipping Bottlenecks Squeeze Supply
  • Asian Shares Catch Global Equities Rally Wednesday, But Oil Slips
  • Developer Kaisa Suspends Share Trading As Potential Default Looms
  • Study Suggests Pfizer Vaccine May Only Partially Protect Against Omicron

The Day Ahead

  • US equity markets closed higher for a second day. The positive risk tone continued into the Asian trading session, with the Nikkei for example up by close to 1.5%. There appeared to be cautious optimism in markets about the omicron variant, especially after the US chief medical advisor Anthony Fauci said the new variant “almost certainly is not more severe than delta”.
  • With limited economic data and events in today’s calendar, the focus will remain on the omicron variant, in particular how serious it will be in terms of its impact on health outcomes and on the global economic outlook. The indications are that it is highly transmissible, although there are anecdotal reports of mild symptoms. Scientists caution, however, that it is too early to be confident about its health impact.
  • One interesting aspect of the new variant is its potential impact on central bank policy. For the US central bank, the indications are that it is currently attaching more weight to inflation risks than omicron, especially with headline CPI this Friday set to show a jump up close to 7%. The Fed is expected to announce a quicker pace of tapering at its policy meeting next week, with the process potentially to be completed by March rather than June. That would provide room for the Fed to start increasing interest rates earlier, if necessary. In contrast, the likelihood of a Bank of England rate hike as early as next week has fallen as policymakers await further information on omicron.
  • The European Central Bank, along with the Fed and the BoE, will also provide a policy update next week. With Eurozone inflation gapping up to 4.9%, there looks likely to be lively debate among Governing Council members on whether the current rate of bond-buying is appropriate and on what should replace the Pandemic Emergency Purchase Programme (PEPP) next March. President Lagarde and VP Guindos speak today, but their comments may focus more on financial risks than on monetary policy.
  • The Bank of Canada is expected to leave interest rates unchanged at 0.25% today. Having ended asset purchases, the BoC has indicated that interest rates are likely to rise next year, possibly in the first half.
  • The more positive risk environment led the US 10-year Treasury yield to rise near to 1.50% yesterday, although it is slightly lower overnight. The US dollar has broadly softened, despite quicker-tapering expectations. Oil prices are up, with the Brent crude price moving above $75 a barrel.

G10 FX Options Expiries for 10AM New York Cut

(Hedging effect can often draw spot toward strikes pre expiry if nearby (P) Puts (C) Calls )

EUR/USD: 1.1290-1.1305 (569M), 1.1350 (423M), 1.1400 (250M)

USD/CHF: 0.9175 (250M), 0.9330 (250M)

GBP/USD: 1.3300-10 (437M). AUD/USD: 0.7140-50 (287M)

USD/CAD: 1.2670 (463M)

USD/JPY: 112.25-30 (672M), 113.00-05 (723M), 113.20 (363M)

113.80 (524M), 114.00 (534M), 114.25 (552M)

Technical & Trade Views

EURUSD Bias: Bearish below 1.15 Bullish above

  • EUR/USD bid, EUR/JPY too after early slump
  • EUR/USD better bid in Asia in light trade, 1.1269 to 1.1293 EBS
  • Overall bias remains down however, seen heavy between 1.1300-1.1400
  • Resistance from 1.1293 descending 100-HMA, ascending 200-HMA 1.1297 above
  • Few large nearby option expiries today, 1.1305 E345 mln, 1.1350 E423 mln
  • EUR/JPY from 127.93 post-Tokyo fix to 128.18, back above 128.10 200-HMA
  • Heavy going above 200-HMA yesterday, off after push up to 128.46 EBS
  • Risk on in Tokyo, most of Asia and supportive, Nikkei +1.1% @28,774

GBPUSD Bias: Bearish below 1.36 Bullish above.

  • GBP/USD bid with the softer USD – risk remains buoyant
  • +0.15%, as safe haven USD eases as regional stocks climb, E-mini S&P +0.35%
  • Trades at the top of a 1.3238-1.3254 range with decent morning interest
  • U.S. became UK's biggest finance customer in run up to Brexit
  • UK Gov't financial market strategy post Brexit key for the industry in 2022
  • Charts; 5, 10 & 21 day moving averages fall, 21 day Bollinger bands contract
  • Close above 1.3351 falling 21 day moving average needed to end downtrend
  • Bearish setup targets a test of 1.3166, 38.2% of the 2020-2021 rise
  • Asian 1.3238 low supports, 1.3282 10 DMA which has capped, is resistance

USDJPY Bias: Bullish above 112.50 Bearish below

  • USD/JPY tad soggy, JPY crosses tad better bid, in ranges
  • USD/JPY tad soggy but essentially range-bound pre-US CPI Friday
  • Range 113.36-60, on hold between 113.00-114.00 for now, action light
  • Heaviness felt on push to 113.78 yesterday, bids towards 113.00
  • Option expiries bracket today - 113.00-05 $723 mln, 113.80 $524 mln
  • US yields on higher plane after slump Friday, Treasury 10s @1.461%
  • Tokyo risk-on, Nikkei +1.1% @28,774, E-Minis +0.4% @4703, AXJ mostly up
  • EUR/JPY 127.93-128.18 EBS, GBP/JPY 150.14-52, AUD/JPY 80.66 to 81.09

AUDUSD Bias: Bearish below 0.7250 Bullish above

  • AUD/USD breaks free of near term downtrend; shorts may capitulate
  • AUD/USD leapt out of Bollinger downtrend channel Tues
  • Also reclaims Aug low, gaining solid floor at 0.7107
  • Shorts likely motivated to trim further, spur AUD higher
  • Primary target for longs to take profit is 21 DMA 0.7195
  • But inability to breach that resistance may cue pullback
  • Broad improvement in risk appetite fuels Asia stocks higher