Daily Market Outlook, January 11, 2021

Following last week’s strong gains, Asian equity markets are mixed at the start of the new trading week. Renewed US-China tensions are weighing on markets, with China responding to US restrictions targeting Chinese companies by introducing new rules over the weekend to protect its companies from what it sees as unjustified sanctions. Meanwhile, Nancy Pelosi has said that the House plans to pass a resolution calling on Vice President Pence and the cabinet to remove Donald Trump from office.

Expectations of a sizeable US fiscal stimulus package have increased following the Democrats victory in the two Georgia Senate seats that were up for contention last week. With Joe Biden due to take up presidency later this month, this has effectively handed the Democrats control of Congress and supported a positive risk-on backdrop in financial markets.

This has been further underpinned by hopes that a successful rollout of vaccines will eventually lead to a move towards some semblance of pre-Covid normality. In the UK, a new variant is resulting in a very serious escalation in infections and hospitalisations, but vaccinations are underway. The government is targeting about two million jabs a week to reach about 13 million by mid-February, with the hope that restriction can start to be eased soon after. From today, the UK government is expected to publish daily data on the number of vaccinations administered, which along with infection rates are likely to be used to gauge the timing of future changes in lockdown restrictions.

Near term, meanwhile, speculation of further policy easing from the Bank of England continues with current market pricing factoring a 10bp cut in Bank Rate around the August MPC meeting. Attention will be on Silvana Tenreyro’s speech today on the international evidence on negative interest rates (2pm GMT). Previously, she has indicated an openness to supporting a cut in interest rates below zero, which would more likely stimulate the economy if mitigating measures such as tiering were introduced to offset potential negative effects on the profitability of financial institutions.

Meanwhile, with some US Federal Reserve officials indicating the potential for bond purchases to be tapered later this year, comments from a number of Fed policymakers today will attract some interest. Messrs. Bostic and Kaplan are due to deliver speeches with markets likely to latch onto any comments alluding to the potential for a ‘tapering’ of bond purchases later this year or in early 2022.

Elsewhere, with the calendar void of any key data releases today, outside of the Eurozone Sentix survey, comments from the ECB’s Lagarde and Vasle will be closely watched for clues on the Eurozone monetary policy outlook, ahead of the publication of the December ECB policy meeting minutes on Thursday.

CFTC data covering the New Year period reflect little change in overall FX sentiment, as one might expect, given the holidays. Aggregate positioning shows little significant change for a third consecutive week, in fact, with the well-established net short USD position increasing a bare USD91mn this week to remain near USD31bn. While the EUR remains the largest play against the USD (net EUR longs rose USD75mn to USD21.98bn in the latest week), net JPY longs continue to nudge higher and the USD393mn increase in net JPY longs through Tuesday represents the biggest positioning shift among the major currencies we cover in this report. In fact, the net long of USD6.1bn (equating to a little more than 50k net in contract terms) is the biggest bullish bet on the JPY since late 2016. Net CHF longs remain subdued in broad terms (USD1.3bn in total net exposure) but were pared back USD333mn this week, the second-largest move on the week

G10 FX Options Expiries for 10AM New York Cut

Bigger strike expiries early this week include

EUR/USD: Jan 11 - 1.2295-1.2315 (4.1BLN), Jan 12- 1.22 (1.3Bln), 1.23 (1BLN)

USD/JPY: Jan 12 104.00 (1.2BLN), Jan 13 103.00 (1.2BLN)

GBP/USD: Jan 11 - 1.3700-15 (1.1BLN), Jan 12 - 1.3995-1.4000 (1BLN)

AUD/USD: Jan 11 - 0.7625 (1.2BLN), 0.7725 (1.2BLN)

Technical & Trade Views

EURUSD Bias: Bearish below 1.2265 targeting 1.2050

EURUSD From a technical and trading perspective, failure below 1.22 opens a retest of bids to 1.2050, only a close back through 1.2265 would suggest a false downside break

Flow reports suggest topside offers light through the 1.2200 area and continuing lightly through to the 1.2250 area where the market starts to thicken a little on the offer and the closer the market moves to the 1.2280 area the stronger the offers, a push through the 1.2300 area will likely see stronger offers building with short term sellers likely joining the queue with weak stops on a strong push through the 1.2320-30 areas opening only to the 1.2350 areas. Downside bids getting stronger the closer the market gets to the 1.2120 area with likely stronger congestion through the area and strong stops on a push through the 1.2080 area with very limited bids to support the market through to the 1.20 handle.

GBPUSD Bias: Bullish above 1.35 targeting 1.39

GBPUSD From a technical and trading perspective, as as 1.35 supports then prices can extend higher to test wave 5 upside objectives to 1.3910/80 area

Flow reports suggest light bids around the current levels with weak stops likely on a push through the 1.3490 area with congestion likely in the area to soak up the stops, with strong bids likely to increase the closer to the 1.3440-50 area you get and then strongly congested through to the 1.3400 level. Topside offers light through to the 1.3600 area with weak stops a little thin above the level and stronger offers the closer you get to the 1.3700 area

USDJPY Bias: Bearish below 104 targeting 101.20

USDJPY From a technical and trading perspective, as 104.20 contains upside attempts look for the next leg lower to target 101.20

Flow reports suggest offers through the 104.00 level with likely weak stops on a move to the 104.20 area and the with congestion around the 104.40-60 area and then increasing into the 104.80 level with strong offers through the 105.00 area, Downside bids light through to the 103.00 level before stronger bids start to appear and increase through to the 102.50 area with very little in the way of stops on a dip through with likely increasing bids to the 102.00 areas and likely to see stronger bids continuing from importers

AUDUSD Bias: Bullish above .7600 bullish targeting .8000

AUDUSD From a technical and trading perspective, as .7600 now acts as support, look for target wave 5 upside objective towards .8000. Note .7800 is an interim measured move upside objective that may prompt a profit taking pullback before the uptrend resumes from.7450 trend support

Flow reports suggest topside offers through the 0.7800 area with weak stops likely to be through the 0.7820-30 areas with light offers through to the 0.7850 area before better offers appear on any move for the 79 cents level, Downside bids light through to the 0.7740 area with some light weakness before stronger bids starts to appear through to the 77 cents level with weak stops on a break through the 0.7680 level. to open up a deeper move through to the congested 76 cent level with sentimental values finding the most support.

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