Asia Day Ahead: USD/JPY continues its ascent, HSI at six-week low

Asia Open

The Asian session looks set for a slight positive open, with Nikkei +0.65% and ASX +0.42%. Overnight, Wall Street was mixed but broader risk-on sentiments remain intact, with the VIX trending lower while defensives generally lagged.

US October inflation came in line with expectations, with the no-surprise allowing Wall Street to hover around recent highs amid some profit-taking. The lack of a stronger uptick in pricing pressures from October may keep the Federal Reserve (Fed) on track to follow through with another 25 basis point (bp) rate cut in December. Of course, we still have one more job report and another inflation reading closer to the December Fed meeting, which policymakers will take into consideration as well. But for now, Fed’s policy easing seems set to continue.

Sentiments in Asia may find some calm from the fall in short-term bond yields, although the strength in the US dollar will likely be a key overhang for any stronger upside. The USD/JPY found its way to the 155.70 level, heading back into the zone of intervention from the Bank of Japan (BoJ) in April this year. We may expect more hawkish jawboning to follow, but it will likely be hard to stem the yen’s decline without much concrete follow-through.

A bounce in the USD/JPY off its 200-day moving average (MA) and an upward trendline support reflects buyers in firm control. Its daily relative strength index (RSI) continues to trade above its mid-line as well, following an upward break in October this year. Ahead, the 157.66 level will likely be on watch for a retest, followed by the key psychological 160.00 level.

Chinese equities continue to find no love with a Trump 2.0, with the Nasdaq Golden Dragon China Index down more than 1%, effectively unwinding all of its gains since 26 September. The dip in its daily RSI back below its mid-line brings about a near-term bearish bias for now.

It could still be some time before we get more clarity around Trump’s eventual intention on import tariffs. But based off the 2018 trade war, things could get worse for Chinese equities before it gets better. However, the downturn this time may potentially be more limited versus 2018, given still low valuation, anticipation already in place for upcoming tariffs, and likely a quicker reaction on China’s fiscal stimulus front to mitigate any US economic pressures.

Hang Seng Index at its six-week low

Following a brief period of consolidation, the Hang Seng Index (HSI) has broken below the 20,300 level, where a key support confluence is expected to be in place, suggesting strong bearish pressures in the near term. Its daily RSI has also dipped back below its mid-line. Ahead, we may expect a continued drift lower as the uncertainties over US trade policies will likely keep sentiments in a downbeat state. Next line of support could seem to be the 18,527 level.

Attention this week will be on a series of economic data, ranging from retail sales, industrial production and fixed asset investment, which will determine if China’s recent stimulus measures are paying off. Any disappointment from the data will likely raise the pressures for Chinese authorities, who are in a race against time to meet their “around 5%” growth target by the end of this year.