Asia Day Ahead: Stronger US data supports US dollar, AUD/USD in focus

Wall Street Wrap

Major US indices failed to follow through with its earlier bounce overnight, with gains stopped short by a slew of stronger US economic data. The downside reaction to stronger data seems to suggest that Federal Reserve (Fed)’s policy outlook remains the overriding theme for markets, which question if the “good news is bad news” mantra is now being brought back to the table.

The US JOLTS were higher than expected (8.1mn vs 7.73 mn consensus), with the second straight month of increase reinforcing a resilient labour market, while ISM services Purchasing Managers' Index (PMI) registered a stronger expansion (54.1 vs 53.5 consensus). Notably, the ramp-up in services activities’ prices may be the largest shocker, with the reacceleration in the prices sub-index to a near two-year high likely to force the Fed on a no-move in rates ahead until further disinflation conviction is seen.

Eyes will now be on the US non-farm payrolls ahead, with caution on whether any stronger job read may trigger further shunning of risks on less dovish Fed views. The biggest risk to markets may be a Fed’s reversion to rate hikes if inflation was perceived to be out of control, but that is not the base case for now. As long as policymakers maintained the view that the rate-cutting cycle will continue, albeit at a slower pace, we will still look to buy any dips with levels to watch for the S&P 500 potentially at the 5,800 level, followed by the 5,635 level.

Arguably, US President-Elect Donald Trump’s overnight press conference may take some blame for putting risk-taking sentiments off as well. Various topics covered under Mexico, Canada, NATO and the Panama Canal reiterate that he will likely come in tough on his policy settings with trading partners, with more volatility than certainty likely to dominate the market mood once he officially takes the top seat.

US dollar finding support as stronger data validates less dovish Fed

In the FX space, stronger economic data has led rate probability to lean slightly into higher rates through 2025. US 10-year Treasury yields notched a 6 basis point (bp) move higher to 4.69%, supporting an in-tandem upmove in the US dollar. Technically, the US dollar trades within a rising wedge pattern, with the formation of another higher low reinforcing buyers broadly in control. Thus far, its daily relative strength index (RSI) has held above its key midline at the 50 level and we may need to see a move below the midline in the likes of July 2024 to suggest any trend reversal.

Asia Open

Sentiments in the Asian session were likely to remain subdued in reaction to higher US Treasury yields and the strength in the US dollar, with the Nikkei -0.68%, ASX +0.26% and KOSPI -0.02% at the time of writing. The losses seem more limited however, potentially as US equity futures showed an attempt to stabilise this morning.

Australia’s inflation data has been the highlight on the economic calendar, with a slight uptick in monthly consumer price index (CPI) indicator to 2.3% (prior 2.1%) weighed against a larger-than-expected fall in its trimmed mean inflation (3.2% from 3.5% prior). While inflation is still above the Reserve Bank of Australia (RBA)’s target, some signs of moderation in the trimmed mean inflation seems to mark a step in the right direction, prompting rate expectations to lean towards a 25 bp rate cut as early as February 2025.

We look towards the AUD/USD, which saw a 0.6% move lower in today’s session after failing to overcome the 0.626 level of resistance on two previous attempts. Recent bounce suggests that it could be nothing more than a short-term corrective move from previous oversold technical conditions. We may need to see a move back above its 6 Jan high at the 0.630 level, potentially alongside a reclaim by its daily RSI of its midline, for buyers’ conviction. Key support to watch for now stands at the 0.616 level, which marked its October 2022 bottom.