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Stephen Innes

However, removing China from the currency manipulator list, a thorny issue for the mainland , eliminates one of the significant obstacles in the way to the next phase of the comprehensive agreement.

On the more one-sided tails for Asian FX, particularly in the more trade/ growth/tech-oriented North. China is expected to toe the line on any weakness in the RMB as we move forward to negotiating Phase Two.

Meanwhile, a more on the nose surprise, like an explicit roadmap for a further rollback in tariffs, could open the way for more definite appreciation where the CNH and the KRW will shine.

The market is more convinced about the direction of travel than it is about the shape and form of the next step of the deal, so market momentum will be critical to sustaining the rally as will trade calming headlines. Of course, none of this would have been made possible without the Fed’s dovish impulse, and given the lack of policy uncertainly as we move through 2020, the “low for longer” narrative will continue to support risk markets.

So far, so good from corporate America with earnings beats from both JPMorgan and Citi. JPMorgan’s net income for 2019 rose 12% after making $8.5 bn in the fourth quarter, far better than the $7.45 bn expected by analysts who submitted forecasts to Bloomberg. Trading revenues rose 56% y/y to $5 bn, led by an 86% rise in fixed income.

Citi, meanwhile, posted quarterly revenue of $18.4 bn, well ahead of the $17.9 bn that Wall Street had expected and up 7% from a year ago.

Oil markets

After falling for the past few sessions, on the continued perception of easing tensions in the Middle East, Oil prices initially moved gingerly higher overnight on trade deal optimism. As well, traders received new bullish fundamental news from the demand side, with Chinese customs data showing crude imports were up 10% in 2019. And despite some base effect in the overall Import/Export data, overall, the data points to the domestic Chinese economy in a continuing uptrend helping sentiment ahead of the signing of a phase 1 trade deal today.

Investors are incredibly concerned about the well documented non-OPEC supplies coming to market in 2020, and those worries came to the fore as oil prices headed lower after a bearish to consensus inventory build was reported early this morning.

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Gold markets

Safe-haven assets are again under pressure, with treasuries weaker across the curve. Gold weakens as risks recede but continue to find buyers on dips, and the thought of resurfacing of threats continues to support prices, but for the next little while, it’s hard to see gold markets trade anything but sideways.

Gold markets eased on the cusp of the “phase one” trade agreement between the US and China as equities are holding firm, and the USD remains stable in G-10.

No impulse for gold from the US CPI data as the inflation trend was broadly neutral for gold. According to the Commerce Department, headline CPI rose 0.2% m-o-m in December, which was just below consensus expectations of 0.3% (Bloomberg). Core CPI rose 0.1% m-o-m, which was also just below consensus expectations of 0.2%

Currency markets

The Euro

With all the demand for Yuan, why isn’t the EUR higher? This is the most asked question from my clients that are for the most part left scratching their heads as to why the USD is not weaker in G-10

US government’s public consultation on EU tariffs has closed, and the Trump administration’s action is imminent, which could end up one of the more significant tail risks for the Euro in months ahead. Bloomberg reported it best that the U.S., EU Square Up for Trade Brawl After Trump’s China Deal,” With that in mind. Europe’s trade chief flew into Washington yesterday for talks; ties have frayed over issues from French tax to aircraft

The Japanese Yen

Overall, nothing has changed, and buying on dips is still the way forward. Expect the buyer in around 109.80 with more interest ahead of 109.50 and only a break of 109.00 to change the current scenario. As for short term dynamic, USDJPY touched 110.22 yesterday on Fixing demand before giving way to export seller as 110 continued to be a fundamental psychological level for both exporters and speculator market participants

I was twitting to my Tokyo based FX trading followers yesterday as everyone was trading USDJPY, which is excellent to see.!! When I was trading forex USDJPY for Sumitomo Bank, there is a well-known but still amazingly persistent tendency for USDJPY to go down in Tokyo, possibly due to exporter and reversion selling and up in New York on speculative demand.

With Japanese investors very much involved again in USDJPY since the turn of 2020. And primary using reversion strategies, so it will be worth keeping an eye on this tendency. The USDJPY massive volumes going through the big Japanese domestic retail brokers very much influence USDJPY in Asia.

Euro Swissy cross

EURCHF spot has seen big selling on the US Treasury’s semi-annual report, which put Switzerland back on the monitoring list for currency manipulation, and gamma continues to go better bid. A lot of market participants are caught long and wrong EURCHF, but stops are thought to be 1.07 level.

The Yuan

The move has run further than most bullish expectations anticipated based on the current level or anticipated level of tariff rollback, suggesting markets could base and probably consolidated in the near term. But equity inflows have caught more than a few traders by surprise. However, yesterday Inflows into the onshore stock market slowed, and if this continues, it may take some pressure off of funding, and USDCNH could gravitate 6.9 level.

With funding, a bit tight due equity inflows, and possible CNH overshoot, as a result, Traders will be on the lookout for potential PBoC injections ahead of the Chinese New Year holidays. Because of the overshoot, profit-taking was always on the cards and provided an excellent level for long USDCNH defensive positioning as the market pivots to phase 2 with stops just below 6.85

The Ringgit

The Ringgit will continue to track the underlying movement of the Yuan, but inflows have dried up a bit on the cusp of the phase one deal as there remains a lot of uncertainty about the road map for step 2 in the trade deal process. But on a positive note, China is expected to toe the line on any weakness in the RMB as we move forward to negotiating Phase Two, which should provide a floor on any MYR weakness

This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader

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