Initial optimism fades as attention turns to US CPI data: USD/JPY, ASX 200, USD/CNH

Market Recap

Major US indices ended the trading day mixed (DJIA -0.28%; US 500 -0.15%; Nasdaq +0.45%), as initial optimism from US authorities’ intervention eventually faded, with the 7% jump in VIX suggesting that market jitters persist. The combined action to mitigate wider contagion risks may show that US authorities have the depositors’ back, but that still leaves the risks of further bank collapses and other side-effects of tightening policies on investors’ minds. As such, market participants continue to de-risk from the banking sector with the KBW Nasdaq Bank Index down another 12% overnight.

Nevertheless, the fallout has left traders wondering if the Federal Reserve (Fed) will soften its hiking process to avoid further shake-ups, with market pricing for a rate pause in March at a 30% probability. Any such bets will likely have to seek for validation from the upcoming US Consumer Price Index (CPI) data, hence potentially driving some wait-and-see overnight. Should the data deliver another upside surprise, the Fed could be more hand-tied in its policy decision, which could see market expectations reverting to a hawkish recalibration once more.

Recent plunge in Treasury yields has been eye-catching, with the two-year yields unwinding all of its six-month gains over a short span of three days. That said, both the two-year and ten-year yields are currently back at its 200-day moving average (MA), which could see an attempt to stabilise over the coming days. Less hawkish expectations are also weighing on the US dollar, notably with the USD/JPY (大口） retracing from its 200-day MA. That could leave a retest of the 130.80 level on the table. Gold has been a beneficiary of US dollar weakness and falling yields, surging to its highest level in a month. Safe-haven flows may play a part, which could drive a retest of its February peak at the US$1,960 level.

Asia Open

Asian stocks look set for a negative open, with Nikkei -2.28%, ASX -2.01% and KOSPI -2.24% at the time of writing. Concerns of a global economic rout continue to put pressure on the region, which are more value-focused, while indices such as the Straits Times Index has close to 45% of its weightage in banking stocks. Chinese equities had been the outperformer yesterday, with the Hang Seng Index up by 2%. That said, having broken below its 200-day MA last Friday, yesterday’s upmove is just an attempt to retest the key MA line once more and failure to overcome the MA resistance could still leave the near-term downward bias on the table.

For the ASX 200, a key support at the 7,000 level has been breached yesterday, which could prompt the index to set its sight on the 6,874 level next, where a 38.2% Fibonacci retracement resides. Near-term oversold technical conditions in the Relative Strength Index (RSI) could lead to some attempts to stabilise over the coming days but the key 7,000 level will have to be overcome. The index is also trading below its 200-day MA for the first time since November 2022, which provides a bearish bias. Likewise, greater conviction for the bulls may come from a move back above the 200-day MA, which is not presented yet.

On the watchlist: Double-top formation for USD/CNH signals more downside ahead?

The USD/CNH has failed to cross its key 7.000 level on two occasions over the past month, forming a near-term double-top pattern over the past month. Yesterday’s move seems to mark a breach of the neckline at a Fibonacci support confluence around the 6.872 level, with the double-top projection suggesting that the pair may head to retest the 6.715 level next. From the technical indicators, lower highs on both RSI and moving average convergence/divergence (MACD) pointed to moderating upward momentum with a bearish divergence. This week will place focus on the upcoming US CPI and a series of economic data out of China. A lower-than-expected read on US inflation, along with a resilient economic recovery in China, will be on watch to support the narrative for further downside.

Monday: DJIA -0.28%; S&P 500 -0.15%; Nasdaq +0.45%, DAX -3.04%, FTSE -2.58%