Asia Day Ahead: RBA meeting in focus, USD/SGD on inverse head-and-shoulder formation

Market Recap

US Treasury yields found the catalyst for another push higher overnight, as hotter-than-expected US services purchasing managers index (PMI) data joined the recent strong run in economic data to push back against earlier rate cuts. The US two-year yields touched its one-month high, while the 10-year yields head back above the key 4% level to 4.16% as a reflection of some paring in dovish rate bets.

The US dollar firmed as a result by 0.47%, further extending the gap above its 200-day moving average (MA). Ahead, a series of Fedspeak is lined up on the calendar this week and with Federal Reserve (Fed) Chair Jerome Powell dampening the odds of a March rate cut by deeming it ‘unlikely’ at a recent interview, the less dovish tone may potentially be further echoed among policymakers.

For now, the S&P 500 continues to trade within a broad rising channel pattern but resistance may loom at the key psychological 5,000 level, where the upper channel trendline stands. Its daily relative strength index (RSI) continues to display lower highs, which points to abating upward momentum. Given that the big tech earnings are now behind us, sentiments may have to seek for other catalysts to keep the momentum going, especially as we head into February where seasonality towards the latter half tends to be weak.

Asia Open

Asian stocks look set for a negative open, with Nikkei -0.57%, ASX -0.71% and KOSPI -0.85% at the time of writing, as sentiments are challenged with higher US bond yields and a stronger US dollar overnight. The calendar this morning brought weaker-than-expected household spending data out of Japan, coupled with an improving but still below-consensus wage growth for December. The more measured wage increase (1% versus 0.2% previous) may align with the Bank of Japan’s (BoJ) view that conditions are moving in the right direction but may still need more time to assess that the pricing and wage trend will stick.

Ahead, the Reserve Bank of Australia (RBA) meeting may be the key event today. Expectations are for the central bank to keep rates on hold at 4.35% at the upcoming meeting, justified by slowing inflation and downside surprises in growth conditions over the past months.

Market focus will be on whether the recent run in weaker economic data is sufficient to drive any dovish shift in tone around rate outlook, given that markets are looking for two rate cuts in the second half of this year, which needs policymakers’ validation. That said, the likely scenario could be for further wait-and-see at the upcoming meeting, with the central bank potentially maintaining their tightening bias in the statement to offer policy flexibility in case of sticky inflation.

The AUD/USD has displayed a downward bias for now, following the breakdown of a head-and-shoulder neckline at the 0.652 level to start the week. Its 100-day and 200-day MA have also given way, while the pair heads back below its Ichimoku cloud on the daily chart for the first time since November 2023. Further downside may leave the 0.635 level on watch.

On the watchlist: USD/SGD displaying inverse head-and-shoulder formation

An inverse head-and-shoulder formation has been observed on the daily chart of USD/SGD lately, with recent uptick marking the completion of the right shoulder. This comes as the recent run in strong economic data out of US has brought Treasury yields higher on a potentially high for longer rate outlook, which translates to renewed strength in the US dollar.

Ahead, the 1.348 level will serve as immediate resistance to overcome for USD/SGD, where the inverse head-and-shoulder neckline coincides with the pair’s 200-day MA. Overcoming this level could set its sight to retest its October 2023 high at the 1.375 level next.

Monday: DJIA -0.71%; S&P 500 -0.32%; Nasdaq -0.20%, DAX -0.08%, FTSE -0.04%