Asia Day Ahead: US dollar attempt to stabilise, Nikkei 225 weaker ahead of BoJ meeting

Market Recap

The rally in Wall Street took a breather toward the end of last week, as Treasury yields attempted to stabilise following its negative reaction to the recent Federal Reserve (Fed)'s dovish rhetoric. The US two-year yields rose slightly by 7 basis point (bp) while the 10-year yields were largely flat at 3.91%.

After feeding aggressive risk-on sentiments with their validation for rate cuts at the recent meeting, US policymakers are now trying to douse some rate-cut optimism, with New York Fed president John Williams and Atlanta’s Raphael Bostic seemingly guiding for a later timeline of cuts versus what interest rate markets were pricing. Above-target US inflation may drive some caution in policymakers’ verbal cues ahead, but a data-dependent Fed means there may be some shrugging off of Fed’s comments, with dovish bets remaining anchored for the first Fed rate cut as early as March next year.

As we head into the new week, eyes will be on the Bank of Japan (BoJ) meeting on Tuesday, along with the Fed’s preferred measure of inflation, the US core Personal Consumption Expenditures (PCE) price index on Friday. Following the sharp sell-off post-Fed, there may be some attempt for the US dollar to stabilise, with the potential for a near-term bullish divergence on its daily moving average convergence/divergence (MACD). That said, the broader downward trend in the US dollar seems intact, with any upside potentially having to face heavy resistance at the 102.80 level.

Asia Open

Asian stocks look set for a negative open, with Nikkei -1.25%, ASX -0.32% and KOSPI -0.13% at the time of writing. Firmer short-dated Treasury yields, alongside some recovery in the US dollar, may prompt some profit-taking in today’s session, following the more subdued session in Wall Street last Friday.

The economic calendar saw the release of Singapore non-oil domestic exports (NODX) data for November, with its year-on-year growth reverting back into positive territory (1%) after a 13-month long contraction. Month-on-month, exports grew 0.3% versus the 0.2% consensus. Overall, the data may help to reflect some stabilisation in growth conditions, although global demand remain weak, particularly in electronic exports. Further recovery may be on the lookout over the coming months to provide further conviction that the worst may be over.

Ahead of the BoJ meeting, the Nikkei 225 index has been unwinding earlier gains after failing to deliver a fresh year-to-date high upon a retest last month. Broadly, the index remains stuck in a ranging pattern since June this year, with the key resistance at the 34,000 level proving to be a difficult one for buyers to overcome. On the downside, the 32,000 level may be a key support to hold, where the lower edge of its daily Ichimoku cloud stands. Failure to hold the 32,000 level may potentially see the index move to retest the 30,800 level next.

On the watchlist: GBP/AUD retesting head-and-shoulder neckline

After broadly trading on a near-term head-and-shoulder formation, the GBP/AUD is back to retest its neckline support at the 1.887 level last week. For now, the downward bias may remain as the pair struggles to reclaim its Ichimoku cloud on the daily chart ever since its breakdown in September 2023, while its daily relative strength index (RSI) continues to hang below the key 50 level. Any failure for the 1.887 level to hold ahead may pave the way for the pair to retest the 1.841 level next, while the head-and-shoulder formation breakdown may project an eventual price target at the 1.780 level.

Friday: DJIA +0.15%; S&P 500 -0.01%; Nasdaq +0.35%, DAX +0.00%, FTSE -0.95%