Modest gains in Wall Street, with economic data on watch in Asia: US dollar, AUD/JPY, USD/CAD

Market Recap

Wall Street added modest gains to their recent rallies overnight, as the Chicago Board Options Exchange Volatility Index (VIX) pushed to yet another new low since February 2020 as a reflection of the prevailing risk-on environment. The eye-catching performance may lie in the Russell 2000 index, with buyers successfully defending its 1,800 level to deliver a stellar 2.8% gain overnight.

In terms of sector performance, the financial sector came in as the top-performer (+1.3%). This follows as market participants may deem potential tighter capital requirements as a sign of increased stability in the sector, while any impact on lending activities could be assessed at a later timing. That aided to provide some much-needed reassurances, given the bearish take on US financial banks since March this year, with Financial Select Sector SPDR Fund (XLF) still offering some room to cover from its pre-SVB levels.

US rate bets saw a further lean towards a Federal Reserve (Fed) rate-pause scenario next week (80% probability being priced now), which translates to a slight uptick in Treasury yields overnight. That allowed the US dollar to continue on its near-term consolidation since the start of this week, with sentiments awaiting for a key catalyst to drive further moves. The 105.00 level remains a key resistance to overcome, with any move above this level potentially validating a double-bottom formation.

Asia Open

Asian stocks look set for a positive open, with Nikkei +0.36%, ASX +0.32% and KOSPI +0.48% at the time of writing, largely tracking the positive handover from Wall Street. The Nasdaq Golden Dragon China Index surged 3.8% overnight, riding on investors’ anticipation for more supportive measures from Chinese authorities. That said, the lack of any follow-through on that front could still see optimism fade off, with the Hang Seng Index rejecting a move back above its 200-day moving average (MA) yesterday with a gravestone doji formation.

The economic calendar today will bring focus to Australia’s 1Q GDP growth rate and China’s May trade numbers. With the surprise 25 basis-point (bp) move by the Reserve Bank of Australia (RBA) yesterday, market rate pricing is leaning towards an additional hike in July and a weaker GDP figure may challenge that narrative.

As optimism around China’s reopening fizzles over the past months, current consensus for its May trade figures are pointing to another lacklustre set of readings, which may reinforce its more subdued growth outlook. Exports are expected to fall back into contraction territory at a 0.4% decline from a year ago, while imports could mark its third straight month of year-on-year decline (consensus -8%).

Any positive surprises on that front may rekindle some hopes on China’s reopening, but with markets participants having been accustomed to a low-for-longer growth outlook lately, a more lasting trend of upside surprises may be needed to provide the conviction for Chinese equities.

Following the boost in AUD from the RBA’s hawkish delivery, the AUD/JPY is back to retest the upper trendline of its rising channel pattern, where some resistance may kick in. The upward bias in the pair may remain as its relative strength index (RSI) continues to firm up above the 50-level, which leaves any formation of a higher low in focus in the event of a near-term retracement. Various bounces off its 100-day MA over the past month suggests that it will be a key support line for the pair to watch.

IG client sentiment data revealed that 28.34% of traders are net-long, with further net-short-up build-up than last week. The combination of current sentiment and recent changes may reflect a stronger AUD/JPY-bullish contrarian trading bias.

On the watchlist: USD/CAD on watch ahead of Bank of Canada (BoC) meeting

The USD/CAD has been largely stuck in a wide ranging pattern since October last year, with the pair inching slightly lower ahead of the BoC meeting today. A 54% probability being priced for a rate pause by interest rate futures suggests that the upcoming decision may be a close call, as a renewed uptick in April pricing pressures challenged the central bank’s fight against inflation, coupled with a series of upside surprises in economic data lately. The Citi Economic Surprise Index for Canada has registered its highest reading in three months, which may provide some room for further tightening if needed.

A 25 basis-point move at the upcoming meeting may be deemed a hawkish surprise, which may feed fears of a restart in its tightening process after a four-month pause and be supportive of the CAD. For now, the USD/CAD is back to retest an upward trendline, with an RSI bullish divergence presented on its four-hour chart. Any breakdown of the trendline ahead could pave the way towards the 1.325 level, where its lower consolidation base resides, while on the upside, a move above the 1.350 level may be warranted to support a move towards the 1.365 level.

Source: IG charts

Tuesday: DJIA +0.03%; S&P 500 +0.24%; Nasdaq +0.36%, DAX +0.18%, FTSE +0.37%