Whipsaw market action with US PMI, Fed minutes: US dollar index, AUD/USD, USD/CNH

Market Recap

Traders were in for a wild ride overnight, with some whipsaw market action in US indices pointing to a struggle between buyers and sellers to take control after being forced into a range over the past weeks. Initial weakness was brought on by signs of resilience in the US labour market, with the employment index from the ISM manufacturing Purchasing Managers' Index (PMI) heading into expansionary territory as opposed to an expected contraction (51.4 versus 48.3 forecast). Job opening numbers in November were pulling ahead of expectations as well (10.458mn versus 10mn forecast), suggesting that labour demand remains strong, which may trigger some concerns of more persistent wage pressures ahead of the non-farm payroll release this week.

While the market weakness was quickly overcome with a mid-day rally, the release of the Federal Open Market Committee (FOMC) minutes eventually put a cap on upside into the close. From the minutes, Federal Reserve (Fed) members have seemingly acknowledged that much of the front-loading in rates has been done but are putting on a tough front to display its commitment in fighting inflation to avoid any "misperception" in financial markets. Its call for ‘flexibility’ on rates continues to leave some ambiguity on its terminal rate, which market expectations are still pricing for a more dovish end compared to the previous Fed’s guidance. That leaves the risks of further push-back from policymakers on the table.

Coming after an 8% retracement since November, selling pressure for the US dollar index has seen some easing lately with the more measured declines. Current attempt to defend its 103.50 level is at play and while that may provide some short-term reprieve, the overall downward bias remains with a bearish crossover between its 50-day and 200-day moving averages (MA). Any subsequent breakdown of the 103.50 level could leave the 101.00 level on watch next.

Asia Open

Asian stocks look set for a positive open, with Nikkei +0.62%, ASX +0.21% and KOSPI +0.43% at the time of writing. Despite the positive close in Wall Street, the fade of earlier gains and muted moves in the US equity futures this morning are driving more measured upside in the Asia session. Chinese equities continued to outperform overnight, with the Nasdaq Golden Dragon China Index surging more than 8%. Approval for Ant Group to expand its consumer finance business marked another positive step in easing regulatory risks, with the softer calls for regulatory reforms and greater emphasis on economic growth in focus over the past months. The day ahead will leave China’s Caixin services PMI reading and Singapore’s November retail sales in focus.

Headlines that China is considering a partial end to its ban on imports of Australian coal has lifted the AUD/USD by more than 1.6% yesterday. This came after a retest of a Fibonacci confluence zone at the 0.673 level. The broader risk environment, US dollar moves and the upcoming China’s economic data will be catalysts on watch to sustain further upside. Resistance at the 0.690 level may have to be overcome to provide greater conviction for buyers, where a bearish evening star pattern was formed at that level in mid-December.

On the watchlist: USD/CNH hitting Fibonacci confluence zone but downward bias remain

After struggling to reclaim its key 7.000 level through December, USD/CNH has continued its drift lower to start the new trading year, with Fed’s peak hawkishness and China’s reopening story in focus for driving the pair. A break below its head-and-shoulder pattern provides a longer-term downward bias, with the projection of the breakdown in the neckline pointing to the 6.614 level as an eventual target to look out for. For now, the pair is nearing a key Fibonacci confluence zone at the 6.877 level, which provides some dip buying at the start of the week but any subsequent breakdown of the 6.877 level may be on watch to pave the way towards the 6.715 level next.

Wednesday: DJIA +0.40%; S&P 500 +0.75%; Nasdaq +0.69%, DAX +2.18%, FTSE +0.41%