Daily Market Outlook, January 27, 2021

Asian equity markets are mixed this morning. The US Senate voted to go ahead with former President Trump’s impeachment trial yesterday, but 45 Republicans voted against the action suggesting that a conviction is unlikely. Meanwhile, the Biden administration announced that it intends ordering 200 million more vaccine doses.

The number of UK Covid-19 related deaths passed 100,000 yesterday. Reports suggest that the UK government will consider plans today for hotel quarantine for Britons returning from 30 high-risk countries. Chancellor Sunak said he would review support measures for businesses ahead of his 3rd March Budget statement.

Markets today are likely to be primarily focused on this evening’s monetary policy update from the US Federal Reserve. No immediate change in policy is expected but there will be interest in the Fed’s reaction to recent developments and, in particular, whether anything is new is said about its asset purchase programme.

Recent US economic data have been mixed. The Fed in today’s statement is likely to acknowledge some near-term downside risks, but the signs are that vaccine rollout is increasing the Fed’s confidence that economic conditions will improve significantly later this year. Hopes of further fiscal stimulus from the Biden Administration will probably have provided a further boost. Consequently, while the Fed will signal that it still stands ready to offer further support if necessary, the message for now is likely to be that it is standing pat.

Indeed, markets have lately been focusing more on any indications when the Fed will start to cut back on existing stimulus measures. The likely first move would be a ‘tapering’ (i.e. lowering) of the pace of additional asset purchases. Some Fed policymakers have suggested that this may start late this year, prompting a rise in longer-term Treasury yields. The majority, however, including Fed Chair Powell are mindful that any such suggestion may produce a repeat of the so called 2013 ‘taper tantrum’ when Treasury yields soared on the suggestion that QE would be cut back.

Wary that a repeat of this might undermine the economy, the Fed’s message today will probably be that now is not the time to consider tapering. That may provide some near-term assurance to markets. Nevertheless, tapering is an issue that the Fed will eventually need to address.

Today’s data calendar is very light with nothing of note in the UK. In the US, durable goods orders are expected to have risen in December for the 8th consecutive month. That is a sign that manufacturing activity, which is less constrained by social distancing measures, is continuing to rise.

Citi FX Quants preliminary estimate of month-end FX hedge rebalancing flows point to a marginal need to sell USD against all major currencies except JPY by this Friday's fix.

Citi notes equities continued their gains at the start of 2021 while bond indices suffered losses. Although Citi expect foreign needs to hedge gains in U.S. equities will still dominate, likely USD buying by U.S. investors to hedge foreign equity gains and foreign fixed-income investors to reduce U.S. bond hedges largely neutralise the signal. That leaves it short of 0.5 historical standard deviations in all crosses except EUR/USD. The 0.6 standard deviation signal to buy EUR/USD is driven by weak performance of euro area assets, Citi says, which reduces non-European needs to sell EUR, allowing local rebalancing needs to dominate to a greater degree. On the other hand, low assumed hedge ratios among Japanese investors and good performance of Japanese assets tilt the signal for JPY to a sell against USD, suggesting that this month's strongest relative signal is to buy EUR/JPY.

G10 FX Options Expiries for 10AM New York Cut

EUR/USD: 1.2100 (714M), 1.2150 (612M), 1.2200 (1.1BLN), 1.2250 (1.5BLN)

GBP/USD: 1.3700 (281M)

USD/CAD: 1.2600 (940M), 1.2750 (582M), 1.2850 (660M)

NZD/USD: 0.7300 (284M)

USD/JPY: 104.10 (430M), 104.50 (351M), 104.65 (502M)

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Larger Option Pipeline

EUR/USD: Jan29 $1.2070-75(E1.0bln); Feb01 $1.2000(E1.5bln), $1.2220-30(E1.2bln-EUR puts); Feb02 $1.2150(E1.2bln-EUR puts)

USD/JPY: Feb05 Y103.00($1.0bln-USD puts)

USD/CHF: Jan29 Chf0.8800($1.46bln-USD puts)

AUD/USD: Feb02 $0.7600(A$1.1bln)

USD/CNY: Jan29 Cny6.50($1.5bln); Feb02 Cny6.55($1.1bln)

USD/MXN: Jan29 Mxn19.80($1.1bln), Mxn20.00($1.2bln); Feb04 Mxn20.50($1.5bln)

Source: DTCC

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. Downside target achieved expect profit taking pullback to test offers at 1.2150/1.22

Flow reports suggest downside bids into the 1.2050 area with increasing bids into the 1.2000 level with weak stops on any move through into the 1.1980 level with break out stops a possibility, Topside offers through the 1.2100 level light with the topside likely to remain weak through to the 1.2180 area before some stiffness appears through to the 1.2200 level with very little in stops until 1.2220 level and weak stops easily absorbed in stronger resistance.

GBPUSD Bias: Bullish above 1.35 targeting 1.3830/60

GBPUSD From a technical and trading perspective, as as 1.35 supports then prices can extend higher to test interim wave 5 upside objectives to 1.3830/60 area

Flow reports suggest downside bids light through to the 1.3600 area with some stubborn bids in the area and weak stops likely on a dip through however, 1.3550 area likely to see stronger bids and likely to continue in mixed strength to the 1.3500 area. Topside offers light through the 1.3700 level with offers likely to continue through before stronger offers appear around the 1.3750 area and increasing to the 1.3800 area.

USDJPY Bias: Bearish below 104.50 targeting 101.20

USDJPY From a technical and trading perspective, as 104.20/50 contains upside attempts look for the next leg lower to target 101.20

Flow reports suggest light offers increasing through the 104.00 area and continuing through to the 104.20 area, weak stops on the move level and light congestion running through to the 104.50 area and increasing offers then through to the 104.80-105.00 level and stronger offers. Downside bids through to the 103.00 area, a push through the level will likely see bids continuing until a break of the 102.80 area and then a similar pattern through on the 102 handle with 102.50 then providing support.

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 weak bids into the 0.7650 level then steady bids through to the stronger 76 cents level and strong stops through to the 0.7580 level. Topside offers through the 0.7750 area and stronger offers then starting through the 0.7780-0.8020 level before weak stops and stronger offers again appearing this time through the 0.8040-60 level.

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