Market is pricing in a confirmed rate hike by the Fed in December. USD/JPY went very close to 114. Will it go higher? Is it a good time to enter now?
As we approached the final lap of 2016, market is watching very closely as the first and only rate hike by any major central bank in 2016 unfolds itself. USD/JPY made 8-month high at 113.89 and Gold made 9-month low at 1170.80. Together with the recent sharp rise in treasury yields, market is pricing in a 100% chance of rate hike in December. However, in the financial market, nothing is confirmed until it is officially announced. The currency market trades based on expectation, if the expectation is not met or there is a change in expectation, price reverses. The US non-farm payroll will be released this week and this could well be the last hurdle to cross before the FOMC meeting on the 15th December morning. This poses short-term uncertainties and market has reacted at the opening of this week. USD/JPY opened lower and crossed below 112 at the time of writing this article. As long as non-farm payroll gets close to the consensus of 165K, USD/JPY is likely to head back towards 114. If it misses the mark, USD/JPY may retreat further depending on how much is the miss. Gold has a high inverse correlation with the USD/JPY in recent weeks. We expect this relationship to continue until year-end. A rate hike would be a nice finale for the currency market before entering into “hibernation” around the Christmas and New Year period.
On the other hand, this winter in Europe looks gloomy. Italy, the third largest economy in Eurozone, will hold a referendum this coming weekend and it will decide the fate of their Prime Minister Matteo Renzi. Renzi hinted he would quit if the people reject his proposal to constitutional changes. This referendum is also viewed by some as a vote on EU membership. The last poll showed the “No” votes are leading. If Renzi loses, Euro could end the year lower than it first started and remain under pressure until the French presidential election in April 2017. The possibility of “Frexit” will continue weigh down on the Euro for the first few months in 2017.
WTI Oil ended last week almost unchanged. It gapped lower at the start of this week, but recovered within the first few hours. OPEC is holding its 171st meeting in Vienna on 30thNovember. The production deal has been dragging for the whole of 2016 and investors are looking forward to see the details of a confirmed deal. Throughout the year, we saw oil-producing nations flipping back and forth on their words, disagreement among peers on the output level etc., we have reasons to believe the deal would not be attractive enough for the bulls to push WTI back to the $52 level.
USD/JPY – Buy at dip. Market realised pricing in a 100% rate hike may be too early. We do foresee a positive non-farm payroll this week. Consider buying if price retrace near to the 23.6 Fibonacci level.
XAU/USD (Gold) – Slightly bearish. Gold is heading towards 1200. We expect the non-farm payroll to be positive. Consider going Short around 1200 level.
OIL/USD (WTI) – Slightly bullish. We could expect a short term rally if OPEC confirms a deal on 30th November. Consider placing a pending Long order above the resistance around 46.60.
Top News This Week (GMT+8 time zone)
Canada: GDP m/m. Wednesday 30th November, 9.30pm.
We expect figures to come in at 0.1% (previous figure was 0.2%).
UK: Manufacturing PMI. Thursday 1st December, 5.30pm.
We expect figures to come in at 54.1 (previous figure was 54.3).
US: Non-Farm Employment Change. Friday 2nd December, 9.30pm.
We expect figures to come in at 170K (previous figure was 160K).
Fullerton Markets Research Team
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