09-Feb-2021

1) Asia Market: Stock Buying Bonanza Reflects Investor Confidence
2) USD/JPY: Repeated Failure Near 200-DMA Warrants Caution For Bulls
3) GBP/USD: Bulls Seize Control, Fresh Multi-Year Tops, And Counting
4) XAU/USD: Gold Surges On Revival Of Reflation Trades, Bullish Breakout Imminent?

1) Asia Market: Stock Buying Bonanza Reflects Investor Confidence

US equities were stronger Monday, the S&P up 0.4% heading into the close and on track for a fresh record high. US10yr yields were unchanged at 1.17%, though 30-year yields lifted through 2% for this first time in a year (albeit briefly).

Indeed, the reflation trade remained fashionably in vogue to start the week, further buoyed by an upbeat set of earnings from the holiday season and vaccine optimism which provides the ultimate recovery safety net that will allow people to participate in all those pre-Covid activities, like the simple pleasures of going to a movie or having a meal out at the local eatery again. But, importantly, these activities will provide a massive boost to economic sectors most beaten down by the virus.

With much of the stimulus fondant (market pricing in 1.7 trn) already wrapped around the Fed’s policy cherry-topped recovery cake, in the wake of yet another exceptional top bill podium performance by Treasury Secretary Yellen over the weekend, the latest stock market buying bonanza could be as much a reflection of investor confidence in the Biden administration to not only steer the economic recovery on an even keel but handle the pandemic.

There’s plenty of good news for US President Joe Biden in a new poll from the Associated Press regarding getting the stimulus package through Congress. About three-quarters of Americans say they have at least some confidence in Biden’s ability to handle the pandemic. Three quarters also say they have a great deal or some confidence in Biden’s ability to manage the White House effectively. That is a decent, bipartisan base on which to build popular support, despite divisions that remain in Congress and the country.

It’s incredible how quickly markets went from fear to focusing back on the positives. There’s a lot of talk about inflation and broad upward movement in asset prices globally. 10-year inflation break-evens have hit their most expansive levels since 2014, helping re-fuel the reflation theme and providing the bid to energy, materials, and financials.

But if there’s a cautionary tale of the tape, volumes are much lighter to start the week, suggesting some prefer to sit out this latest fear of missing out move higher as vaccine concerns continue to linger in the background.

After yesterday’s news that South Africa had halted its rollout of the AstraZeneca vaccine, another speedbump might be emerging in Israel. So, while the vaccine is working, it may not be working as effectively as some rollout plans had expected. While virus incidence and hospitalizations in older Israeli adults have been falling, severe cases of Covid-19 in the under 60 categories have increased. These latest findings suggest mobility restrictions in densely populated areas of the world currently struggling with the old variants may need to be extended.

As equity volatility drops back towards fair value, look for attention to switch back to rising US bond yields. Inflation expectations can act as a positive impulse for equities but are nearing levels where they become headwinds. At the index level, the Hang Seng, Nasdaq, and Emerging Markets have the highest beta to US rates, while Europe is least sensitive.

2) USD/JPY: Repeated Failure Near 200-DMA Warrants Caution For Bulls

The USD/JPY pair continued with its struggle to find acceptance above the very important 200-day SMA and witnessed some selling during the second half of the trading action on Monday. The retracement slide extended through the Asian session on Tuesday and dragged the pair to one-week lows, below the key 105.00 psychological mark. The downfall marked the third consecutive day of a negative move and was exclusively sponsored by the emergence of fresh selling around the US dollar.

Friday’s rather unimpressive US jobs report raised doubts about a relatively faster US economic recovery from COVID-19 and the sustainability of the recent USD rally. This, along with a turnaround in the US Treasury bond yields, exerted some downward pressure on the greenback. It is worth recalling that the yield on the benchmark 10-year government bond shot to the highest level since March 2020 amid developments to fast-track the US President Joe Biden’s proposed $1.9 trillion stimulus package.

With the latest leg down, the pair has now reversed nearly 100 pips from the 105.75 region – touched at the end of the previous week for the first time since October 2020. Bulls largely shrugged off the underlying bullish sentiment in the financial markets, which tends to undermine demand for the safe-haven Japanese yen. The global risk sentiment remained well supported by progress in coronavirus vaccinations, which has been fueling hopes for a strong global economic recovery.

There isn’t any major market-moving economic data due for release on Tuesday from the US. Hence, the US bond yields will play a key role in influencing the USD price dynamics. Apart from this, the broader market risk sentiment will also be looked upon to grab some meaningful trading opportunities.

From a technical perspective, repeated failures near a technically significant moving average could be the first sign of bullish exhaustion. That said, any subsequent pullback is likely to find decent support near a multi-month-old descending trend-line resistance breakpoint. The mentioned resistance-turned-support is pegged near the 104.45 region, which should act as a key pivotal point for short-term traders.

A sustained breakthrough might prompt some technical selling and turn the pair vulnerable to weaken further below the 104.00 mark, towards testing the next major support near the 103.55-50 region. On the flip side, the daily swing highs, around the 105.25 zone, now seems to act as an immediate resistance ahead of the 105.55 supply zone. Bulls might wait for some strong follow-through buying beyond the mentioned hurdle before positioning for any further near-term appreciating move.

3) GBP/USD: Bulls Seize Control, Fresh Multi-Year Tops, And Counting

The GBP/USD pair reversed an intraday slide to the 1.3680 region and finally settled nearly unchanged on the first day of a new trading week. The US dollar was back in demand amid the continuation of the recent upsurge in the US Treasury bond yields. This, in turn, was seen as one of the key factors that exerted some pressure on the major, though the downside remained limited. The British pound was well supported by the fact that the Bank of England pushed back expectations for negative interest rates.

Apart from this, the emergence of some fresh selling around the USD – amid a turnaround in the US bond yields – further extended support and assisted the major to recover early losses. It is worth recalling that investors have been pricing in the prospects for a massive US fiscal stimulus to support the economy. The relation trade, along with the progress in coronavirus vaccination, pushed the yield on the benchmark 10-year government bond to the highest level since March 2020 on Tuesday.

The pair built on the momentum through the Asian session on Tuesday and got an additional boost from better-than-expected BRC Like-For-Like Retail Sales, which rose 7.1% in January as compared to 4.8% in the previous month. The pair strengthened further beyond the 1.3755-60 congestion zone and shot to fresh multi-year tops. In the absence of any major market-moving economic releases, the USD price dynamics will continue to play a key role in influencing the pair’s intraday movement.

From a technical perspective, a sustained move beyond the 1.3755-60 congestion zone confirmed a bullish breakout through a short-term trading range and has set the stage for additional gains. The constructive outlook is further reinforced by the fact that technical indicators on the daily chart are holding in the bullish territory and are still far from being in the overbought zone. Hence, a subsequent move towards the 1.3840 intermediate resistance, en-route the 1.3900 mark, looks a distinct possibility.

On the flip side, the 1.3760-55 resistance breakpoint now seems to act as immediate support. Weakness below the mentioned support could get extended, though might be seen as a buying opportunity around the 1.3700 mark. This, in turn, should help limit the downside near the 1.3670 horizontal support, which should now act as a strong near-term base for the major.

4) XAU/USD: Gold Surges On Revival Of Reflation Trades, Bullish Breakout Imminent?

Gold (XAU/USD) extends its recovery from two-month lows of $1785 into the third straight session on Tuesday, backed by the revival of the reflation trades amid growing optimism on the passage of a $1.9 trillion stimulus package in the US Congress. The reflation trades boost the inflation-hedge while weighing down on the safe-haven US dollar. The greenback also suffers, as investors cast a doubt on the recent rally driven by the US economic optimism. The Bitcoin rally on Tesla’s $1.5 billion investment news also exacerbated the pain in the back, offering extra wind to gold’s bullish reversal.

The prospects of a bigger US fiscal stimulus and the Fed’s continuation of the ultra-easy monetary policy will keep the gold bulls underpinned, as markets look forward to fresh updates on the stimulus front amid a lack of relevant US economic data slated for release on Tuesday. Although the surge in US Treasury yields amid increasing US inflation expectations could likely cap the advance in the yieldless gold.

At the time of writing, gold is battling the bearish 100-simple moving average (SMA) at $1843 while wavering in a falling wedge formation on the four-hour chart.

Acceptance above the latter could expose the falling wedge resistance at $1844. A sustained move higher above that level would confirm the upside break, opening doors for a test of the horizontal 200-SMA barrier at $1863.

The Relative Strength Index (RSI) trades firmer above the midline, allowing room for more gains. The next relevant target for the buyers awaits at the January high of $1875.

On the flip side, the 50-SMA at $1834 could offer immediate support to the XAU bulls, below which the 21-SMA support at $1814 would be put to test.

Further south, Friday’s low of $1792 could be the last resort for the gold buyers.