Risk-on returns in Asia ahead of Fed’s Historic Lift-off

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 16, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Mumbai) - Higher yielding/ risker assets were in demand in Asia this Wednesday after the Asian equities staged a solid bounced, triggering renewed risk-on wave across the financial markets.

    Key headlines in Asia

    BOJ polling firms on wage hike plans – Reuters

    Asian stocks track Wall Street rally, eyes on Fed

    Dominating themes in Asia - centered on JPY, AUD, NZD

    A data-dry Asian session, with markets taking advantage of the renewed risk-on sentiment amid recovery seen in global equities and commodities’ prices. Hence, the higher yielding currencies such as the Antipodes, sterling and the greenback received fresh boost. The AUD/USD pair benefited the most from the persisting favourable risk environment and extended the recovery beyond 0.72 barrier.

    While the Kiwi wavered between gains and losses as the not so impressive GDT auction results released yesterday. Fonterra’s dairy auction results showed that the prices edged slightly higher by 1.9%, although showed a small decline from the previous 3.6% rise. While markets ignored the upbeat NZ current account data which showed that the current account deficit to GDP ratio was the lowest since the Q4 2014.

    On the flip side, USD/JPY also tagged higher, finding solid support from the risk-on rally in the Asian stocks. Moreover, the US dollar halted its corrective slide and jumped back on the bids last hours, which further lifted the major towards 122 handle, recording a 0.19% gain on the day. Meanwhile, markets prefer to hold the US currency in light of the first rate hike by the US Fed in more than nine years.

    On the equities space, Asian indices flew through the roof as investors’ confidence was boosted ahead of the outcome the Fed’s 2-day policy meeting concluding later today. Japan’s benchmark, the Nikkei flies 2.50% to 19,028 while Australia’s S&P ASX index rallies 2.10% to 5,012. The mainland China’s benchmark, the Shanghai Composite gains 0.71% to trade at 3,535, while Hong Kong’s Hang Seng rockets 2.14% to 21,729.

    Heading towards Europe & North America

    An action-packed EUR calendar ahead, with a raft of flash services and manufacturing PMIs from the Euro are economies along with the CPI data from the Euroland likely to be reported. While from the UK docket, we have the employment and wages data.

    The forecast for the EU flash manufacturing PMI shows 52.8 for December, the same as the 52.8 recorded a month ago and the EU's services sector is expected to show a downtick to 54.0 from the final 54.2 reported in November.

    The flash manufacturing PMI for Germany is expected to register a slightly lower 52.7 result compared to the final 52.9 figure recorded in November, while the index for the services sector is projected to show a small downtick to 55.5 from 55.6 recorded in the previous month.

    The UK’s unemployment rate is expected to register 5.3%, the same as in November and the number of unemployed is seen falling by 98,000 to stand at 1.725 million, which would be the lowest level since mid-2008.

    While on the US calendar, we have a flurry of economic events, including the industrial production. Flash manufacturing PMI, housing starts and building permits data. However, the data releases are expected to have little impact on the FX markets as all eyes remain on the crucial Fed rate hike decision scheduled later today.

    Fed verdict – Lift-off finally

    Federal Open Market Committee (FOMC) began its 2-day policy meeting on Tuesday and culminates with an interest rate decision this Wednesday followed shortly by the press conference of Chair Yellen.

    There will be three main points of interest to watch - the policy statement, the Summary of Economic Projections (SEP), and the press conference of the chair.

    Markets have already priced-in a 25 bps hike in the policy rate, so the key focus will be on what the Fed hints about the future path for rates.

    Analyst at BAML noted, "The market appears to be placing a lot of hope in the dots drifting lower, particularly for 2016. The challenge for Yellen will be to find the right balance between 'gradual' and 'data dependent'. But Yellen's ability to explain this nuance to a market that would like a clear sign that the Fed is going to go even more slowly in 2016 may well be tested."

    EUR/USD Technicals

    Valeria Bednarik, Chief Analyst at FXStreet explained, “In the 1 hour chart, the price has extended its decline below all of its moving averages, whilst the technical indicators have barely lost their bearish strength, but hold near oversold levels. In the 4 hours chart, the technical picture is also bearish as the pair broke with a long volume candle below its 20 SMA, while the technical indicators are now in bearish territory. Nevertheless, the market will move on sentiment this Wednesday, and following whatever the US Central Bank decides to do.”

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