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Daily Pivots: (S1) 0.7019; (P) 0.7046; (R1) 0.7079; More...

AUD/USD dips to as low as 0.7001 so far but cannot sustain below 0.7020 key support yet. For now, deeper fall is expected as long as 0.7071 minor resistance holds. Sustained break of 0.7020 will resume larger decline from 0.8135 for 0.6826 key support. However, rebound from current level and break of 0.7071 will suggest short term bottoming. Intraday bias will be turned back to the upside for 55 day EMA (now at 0.7180).

In the bigger picture, price actions from 0.7020 are corrective in nature. In case such corrective pattern extends, upside should be limited by 38.2% retracement of 0.8135 to 0.7020 at 0.7446 to bring down trend resumption. Firm break of 0.7020 will extend medium term decline from 0.8135 to retest 0.6826 (2016 low).

The latest PMI data added further evidence that China’s economy is in bad shape. Trade war with the US has not only weakened trade, but also domestic demand. The job market has also deteriorated, suggesting further stimulus is needed to be in place as soon as possible. We expect the central bank to accelerate monetary easing. While further reduction in required reserve ratio is widely expected, we believe PBOC could also reduce the policy rate to support the economy. The government’s fiscal policy would be increasingly accommodative, in the form of increasing spending on infrastructure and cutting taxes.

Focusing on small- and medium- sized firms, Caixin’s manufacturing PMI dropped to 49.7 in December, the first time since May 2017 that the reading has been below 50. The sib-indices also performed poorly. For instance, the “new orders” sub-index also breached 50 for the first time since June 2016, reflecting “decreasing demand in the manufacturing sector”. New orders include both domestic and exports orders. Given the fact that the “new export orders” sub-index, while staying in the contractionary territory, recovered mildly in December, the weakness in “new orders” was driven by domestic demand. Other sub-indices hovered around the 50 level, suggesting the entire manufacturing environment is fragile. As Caixin noted in the accompanying statement, China’s manufacturing sector “faced weakening domestic demand and subdued external demand in December”. Strong incentive to “destock” and decline in the prices of industrial products could “further drag on production”. It is “looking increasingly likely that the Chinese economy may come under greater downward pressure”.

Released over the weekend, the official manufacturing PMI fell to 49.4, a 34-month low and the first time below 50 since June 2016, in December. Looking into details, the weakness was driven by significant decline in the trade-related sub-indices, as well as the production and employment sub- indices. Trade war with the US has caused the trade-related activities to deepen into contraction: The “new export orders” sub-index dropped -0.4 point to 46.6, while the “import” sub- index declined to 45.9 from November’s 47.1, the lowest since August 2012. The “new orders” sub- index fell to 49.7 in December, the lowest since February 2016. This showed weakness was seen in domestic demand. While staying in the expansionary territory, the “production” sub- index fell -1.1 points to 50.8 in December. We don’t feel surprise to see the index entering contractionary territory in 1Q19. The employment sub-index dropped to the lowest level in 30 months.

PBOC inevitably has to accelerate monetary easing, despite the danger of intentisying the debt problems. While further reduction in required reserve ratio is widely expected, we believe the central bank could also reduce the policy rate to support the economy. Expansionary monetary policy would cause renminbi to depreciate severely, something that the Chinese authority does not want to see. However, the officials might be more comfortable to do so in 2019, as the Fed slows down the pace of rate hike. Meanwhile, the government’s fiscal policy would be increasingly accommodative, in the form of increasing spending on infrastructure and cutting taxes, in order to defend the growth target of +6%.

Daily Pivots: (S1) 1.1412; (P) 1.1498; (R1) 1.1550; More.....

At this point, EUR/USD is staying in range of 1.1270/1485 and intraday bias remains neutral. On the upside, break of 1.1485 resistance will revive the case of near term reversal, on bullish convergence condition in daily MACD. Bias will be turned back to the upside for 1.1621 resistance first. Break will target 1.1814 key resistance next. On the downside, break of 1.1270 will, instead, revive the bearish case that down trend from 1.2555 is still in progress. Bias will be turned back to the downside for 1.1186 key fibonacci level.

In the bigger picture, as long as 1.1814 resistance holds, down trend down trend from 1.2555 medium term top is still in progress and should target 61.8% retracement of 1.0339 (2017 low) to 1.2555 at 1.1186 next. Sustained break there will pave the way to retest 1.0339. However, break of 1.1814 will confirm completion of such down trend and turn medium term outlook bullish.

Daily Pivots: (S1) 1.2693; (P) 1.2729; (R1) 1.2783; More....

GBP/USD rebound to as high as 1.2814 but failed to take out 1.2811 resistance decisively. Intraday bias stays neutral first and larger decline remains in favor to resume later. On the downside, below 1.2615 minor support will turn bias to the downside for retesting 1.2476 low first. Break will resume the fall from 1.4376. However, considering bullish convergence condition in daily MACD, firm break of 1.2811 will be an early signal of trend reversal and bring further rally to 1.3174 resistance.

In the bigger picture, whole medium term rebound from 1.1946 (2016 low) should have completed at 1.4376 already, after rejection from 55 month EMA. The structure and momentum of the fall from 1.4376 argues that it's resuming long term down trend from 2.1161 (2007 high). And this will now remain the preferred case as long as 1.3174 structural resistance holds. GBP/USD should target a test on 1.1946 first. Decisive break there will confirm our bearish view.

Daily Pivots: (S1) 0.9807; (P) 0.9825; (R1) 0.9841; More...

USD/CHF's decline from 1.0128 is still in progress for cluster support at 0.9765/8 (61.8% retracement of 0.9541 to 1.0128 at 0.9765, 38.2% retracement of 0.9186 to 1.0128 at 0.9768). We'll look for bottoming signal again there but break of 0.9963 resistance is needed to confirm near term reversal. Otherwise, further decline will remain in favor even in case of recovery. Also, decisive break of 0.9765/8 will pave the way back to 0.9541 support.

In the bigger picture, the deeper than expected fall form 1.0128 argues that medium term rally from 0.9186 might have completed at 1.0128 already, on bearish divergence condition in daily and weekly MACD. Break of 0.9541 key support will confirm this bearish case. More importantly, the corrective three wave structure will in turn argue that long term corrective pattern from 1.0342 (2016 high) is extending. In that case, 0.9186 will be the next target.

STOCKS

Global indices are to be watched carefully, as the New Year could bring erratic moves. Nikkei and Shanghai are closed for today.

Dow Jones (23327.46, +265.06) closed Monday with a rise. It would be crucial to watch the limit of 23400 which if breaks may lead to bullishness in next few session. Support is seen at 21700, the December low.

Dax (10558.96, +177.45) is in an overall bearish trend while below 10900. It may/may not bounce till 10900, but such a bounce may attract fresh selling.

In line with expectation, the Sensex (36254.57, +186.24) and Nifty (10910.10, +47.55) look bullish targeting the immediate resistances at 37000 and 11100-200 respectively.

Kospi(2041.04,+12.60) looks bearish for now, while below 2050.

COMMODITIES

Commodities are more or less stable but could face resistances that could hold and push the prices lower in the near term. View is bearish for the next 1-2 weeks.

Gold (1284.10) and Silver (15.44)are trading higher but has important resistances at 1290 and 15.90-16.0 respectively which are likely to hold and push the commodity prices down in the near term. A corrective dip towards 1270 and15.30-15.00 looks possible in the medium term.

Copper (2.6575) is likely to test 2.60 and trade within 2.60-2.70 for a few sessions.

Brent (53.54) and WTI (45.31) are in a very narrow and sideways movement and could remain so for another 1-23 sessions before a sharp move on either side is seen. For now Brent and Nymex WTI has immediate daily channel resistance at 56 and 47.50 respectively and could come off from there towards 48 and 42 respectively. Near term looks bearish.

FOREX

Currencies are all mixed. While we wait for confirmation of price direction on dollar Index and Euro, the Yen is trading strong and Pound and Aussie seem to be testing crucial levels, a break on either side would decide the future direction for the month. Dollar-Rupee looks bearish.

Dollar Index (96.18) tested 95.65 yesterday before closing at higher levels. Currently trading above 96 again, it would be important to see if the index sustains a rise above 96 and moves up eventually towards 98. Corresponding resistance on the Euro (1.144) near 1.15 is also strong and is likely to hold, pushing Euro down towards 1.13-1.12 in the medium term.

We prefer a rise in Dollar Index above 98 in the medium term and 1.15 to hold on Euro. Any movement against this view would force us to revisit our targets.

Dollar Yen (109.68) has broken below 110 and is bearish for the near term towards 108-107 from where a decent corrective upmove could be seen. At current level, the currency pair is testing 50% retracement levels of the rise from 104.629 (Mar’18) to 114.54 (Oct’18). While the bears are in control, a further fall towards 108-107 is on the cards.

Euro-Yen (125.58) is also down sharply and could re-test the May’18 low of 124.62 on the downside before again bouncing back from there. While we prefer a bounce from 124.62, a break on the downside, if seen could make it vulnerable to a sharp fall in the medium term.

Pound (1.2739) tested weekly resistance at 1.2850 on the upside before coming off from there. While the 3-day and weekly resistance holds, Pound could come off towards 1.24 or even lower in the medium term.

Aussie (0.7042) is trading at very crucial levels. There is horizontal support at current levels coming from Oct’18 and only if that holds, we could see a bounce back towards 0.73 or higher in the medium term. Failure to sustain above current levels could take it lower keeping the 2018-downtrend intact.

Dollar Rupee (69.4575) finally broke below 69.60 confirming near term bearish view as expected. A fall towards 69.20-69.00 is on the cards for the near term while it remains below 69.60.

INTEREST RATES

Further dip in the US 2Yr (2.49%, from 2.52%). The 5Yr (2.51%), 10Y (2.68%) and 30Yr (3.01%) are all trading lower as well. Given the overall bearish sentiment regarding global growth, the market expectations on Fed Fund rates says that the Fed will not raise rates till as far down as October. We expect the current bearish sentiment to remain in play in the near term.

The 10-2Yr Spread (0.19%, down from 0.20%) continues to trade below the important+strong Resistance 0.22%. While so, we may look for a fall back down towards 0.16% in the near term.

The German-US 2yr Spread (-3.12%) can rise towards -3.00% as the US Yields fall further. But there is a strong Resistance there, which could push the Spread down again.

As hinted at, the Indian 10yr GOI (7.422%) is moving up, in a corrective bounce, towards 7.45-50%. The longer term trend points down towards 7.10-00%, but may take a bit of time.

GOLD remains on the offensive with eyes on 1,290 resistance zone. On the downside, support comes in at the 1,270.00 level where a break will turn attention to the 1,260.00 level. Further down, a cut through here will open the door for a move lower towards the 1,250.00 level. Below here if seen could trigger further downside pressure targeting the 1,240.00 level. Conversely, resistance resides at the 1,299.00 level where a break will aim at the 1,310.00 level. A turn above there will expose the 1,320.00 level. Further out, resistance stands at the 1,330.00 level. Its daily RSI is bullish and pointing higher suggesting more strength. All in all, GOLD looks to move further higher.

Activity muted on the first trading day of the year

Asian equity markets started the new year on a negative note, unable to build on Wall Street’s gains on the last trading day of 2018. A holiday in Japan added to the cautious tone as shares smartly reversed a slightly positive open. China shares slid 1.2% as PMI data confirmed a worsening economic slowdown, while the US30 CFD fell 0.44% and the Nas100 index declined 0.41%.

US30USD Daily Chart

On the currency front, trading was just as nervy, with beta-risk currencies like the Australian dollar falling heavily against the US dollar while USD/JPY fell 0.13%. AUD/USD fell 0.64% to 0.7005 while USD/JPY slid to 109.43 as the yen was in safe haven demand.

Drivers for risk appetite lack details

The marginally positive start to trading in 2019 was largely driven on hope, which soon evaporated. Hope for a defrosting of relations between the US and China on the trade front as US representatives head to Beijing for the next round of talks next week. Hopes that the US government shutdown will come to an end as President Trump invited leaders of both parties to a border security briefing on Wednesday (though who would attend and what would be discussed remains murky at best).

China slowdown worsens

Over the holiday period, data out of China showed a deepening in the economic slowdown as the official manufacturing PMI reading lurched into contraction territory in December, the first time since August 2016. The index slumped to 49.4, the lowest since March 2016, and missed economists’ forecasts of a slide to just 49.9 from 50.0 in November.

The Caixin manufacturing PMI reading was released this morning and painted a similar picture. The index slumped to 49.7, the first contraction since May 2017. On a more positive note, the non-manufacturing sector rebounded to 53.8 from 53.4 following two months of declines.

Friday looks set to be a key day

Aside from the monthly US payroll report, which is seen rebounding to +178,000 from November’s +155,000, Fed Chairman Powell will have the opportunity to once again lay out the Fed’s direction for 2019 as he joins former Fed chairs Janet Yellen and Ben Bernanke for a joint discussion. While Fed members are still talking about two or more hikes this year, market pricing has all but priced out any additional hikes this year with Fed fund futures implying no change and a 25 bps cut in 2020. The US 10-year yield has slid back to levels below 2.70%, which were last seen in February.

Daily Pivots: (S1) 109.53; (P) 109.73; (R1) 109.93; More..

USD/JPY's decline from 114.45 resumed and reaches as low as 109.37 so far. The break of 109.76 support also carries larger bearish implications. Intraday bias is now on the downside for 61.8% retracement of 104.62 to 114.54 at 118.40 first. Sustained break there will pave the way to retest 104.62 low next. On the upside, break of 111.40 resistance is needed to indicate short term bottoming. Otherwise, near term outlook will remain bearish in case of recovery.

In the bigger picture, price actions from 125.85 (2015 high) are seen as a long term corrective pattern, no change in this view. Apparently, such corrective pattern is not completed yet. Break of 109.76 support suggests that another medium term down leg has started, targeting 98.97/104.62 support zone. For now, we'd expect strong support from there to contain downside to bring rebound.

Yen surges broadly while Australian Dollar is pressured as Asian markets start the new year with deep selloff. Hong Kong HSI is quickly down over -2.3% in initial trading. China Shanghai SSE is down -1.0% and Singapore Strait Times is down -0.48%. Japan is still on holiday. Canadian and Dollar are the relatively firmer ones but look vulnerable. European majors are steadily in range. More volatility will likely be seen as a load of economic data will be featured in the holiday shortened week.

Technically, USD/JPY's decline extended to as low as 109.51 so far. The break of 109.76 support carries bearish implications and opens up further fall back to 104.62 low. EUR/JPY also breaks 125.52 support to resume recent decline towards 124.08 key support level. GBP/JPY is also heading back to 139.29 key support. Talking about the Pound, it would be noted that despite Monday's rally attempt, GBP/USD was held by 1.2811 near term resistance EUR/GBP was also kept by 0.8931 support. There is no committed buying in Sterling yet.

Two more things to note. Firstly, US yield curve inversion worsened quite seriously by the end of 2018. It's clearly inverted from 1-year (2.619) to 2-year (2.504) and then 3-year (2.462). 5-year yield at 2.511 is way below 1 year yield. 6-month yield at 2.486 isn't too far away. Secondly fed funds futures are now pricing just around 2.5% chance of a Fed hike in march to 2.50-2.75%. And there's just around 11% chance of a rate hike in 1H. It looks like investors are expecting something rather ugly ahead in 2019.

Democrats to offer a deal to end government shutdown without border wall

The partial US government shutdown is now in its second week. Democrats, who will take control over House with 36-seat majority, plan to vote on a two-part package on Thursday, intending to break the deadlock. One part of the package include a bundle of six measures worth USD 265B for funding non homeland security agencies through September 30. The second part include funding for the Department of Homeland Security through February 8, and provide $1.3 billion for border fencing and $300 million for other border security items including technology and cameras. But there won't be funding for the border wall that Trump demanded and shut down the government for.

Democrat leaders Nancy Pelosi and Chuck Schumer said in a joint statement that "While President Trump drags the nation into Week Two of the Trump Shutdown and sits in the White House and tweets, without offering any plan that can pass both chambers of Congress, Democrats are taking action to lead our country out of this mess."

The fate of the Democrats' package is rather uncertain in the Republican controlled Senate. spokesman for Senate Republican leader Mitch McConnell already said "It's simple: The Senate is not going to send something to the president that he won't sign."

But Trump himself hinted that he might want to make a deal. He tweeted that "Border Security and the Wall 'thing' and Shutdown is not where Nancy Pelosi wanted to start her tenure as Speaker! Let's make a deal?"

China Xi to Trump: History has proven cooperation is best for both sides

In his New Year address, Chinese President Xi Jinping reminded US President Donald Trump that "history has proved that cooperation is the best choice for both sides." Xi added that "I attach great importance to the development of China-U.S. relations and am willing to work with President Trump to summarize the experience of the development of China-U.S. relations and implement the consensus we have reached in a joint effort to advance China-U.S. relations featuring coordination, cooperation and stability so as to better benefit the two peoples as well as the people of the rest of the world."

The official Xinhua new agency also echoed in the commentary that "At a time when the world is undergoing unprecedentedly profound changes and is fraught with risks and uncertainties, the global community expects even closer collaboration between the two largest economies."

Trump tweeted on December 29 that "Just had a long and very good call with President Xi of China. Deal is moving along very well. If made, it will be very comprehensive, covering all subjects, areas and points of dispute. Big progress being made!". China's state media also said Xi believed both sides wanted "stable progress", and China-US ties had reached a "vital stage" on its 40th anniversary.

It's believed that Deputy U.S. Trade Representative Jeffrey Gerrish will lead a delegation including Treasury Under Secretary for International Affairs David Malpass, to travel to China in the week of January 7 for face-to-face meeting on trade negotiations.

UK PM May urged support to her Brexit deal to turn a corner

UK Prime Minister Theresa May continued to sell her Brexit agreement in her New Year message. He said that "the Brexit deal I have negotiated delivers on the vote of the British people and in the next few weeks MPs will have an important decision to make." She emphasized that "if parliament backs a deal, Britain can turn a corner."

May added that "the referendum in 2016 was divisive but we all want the best for our country and 2019 can be the year we put our differences aside and move forward together, into a strong new relationship with our European neighbors and out into the world as a globally trading nation," And, "we have all we need to thrive and if we come together in 2019 I know we can make a success of what lies ahead."

MPs are expected to re-start the debate on the Brexit agreement in the week of January 7 and a Commons vote is scheduled for the week of January 14. In the coming days, a focus will be on what further political and even legally assurances the EU will give regarding the non-permanent nature of the Irish backstop.

China Caixin PMI manufacturing in first contraction since 2017, greater downward pressure ahead

The Caixin China PMI manufacturing dropped to 49.7 in December, down from 50.2 and missed expectation of 50.3. That's also the first contractionary reading since May 2017.

Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group, noted in the release that "external demand remained subdued due to the trade frictions between China and the U.S., while domestic demand weakened more notably". And, "it is looking increasingly likely that the Chinese economy may come under greater downward pressure."

Busy calendar ahead

As usual, the first economic calendar is usually rather busy and important in the first week of the year. UK will release PMIs. Eurozone will release CPI flash. And the US will release ISM manufacturing and non-farm payrolls Canada will also release job data. Here are some highlights for the short week.

• Wednesday: China Caixin PMI manufacturing; Eurozone PMI manufacturing final; UK PMI manufacturing
• Thursday: Swiss PMI manufacturing; Eurozone M3; UK PMI construction; US ADP employment, jobless claims, ISM manufacturing, construction spending
• Friday: Eurozone PMI services final, PPI, CPI flash; Germany unemployment; UK PMI services; Canada employment; US Non-farm payrolls

USD/JPY Daily Outlook

Daily Pivots: (S1) 109.53; (P) 109.73; (R1) 109.93; More..

USD/JPY's decline from 114.45 resumed and reaches as low as 109.37 so far. The break of 109.76 support also carries larger bearish implications. Intraday bias is now on the downside for 61.8% retracement of 104.62 to 114.54 at 118.40 first. Sustained break there will pave the way to retest 114.54 low next. On the upside, break of 111.40 resistance is needed to indicate short term bottoming. Otherwise, near term outlook will remain bearish in case of recovery.

In the bigger picture, price actions from 125.85 (2015 high) are seen as a long term corrective pattern, no change in this view. Apparently, such corrective pattern is not completed yet. Break of 109.76 support suggests that another medium term down leg has started, targeting 98.97/104.62 support zone. For now, we'd expect strong support from there to contain downside to bring rebound.

Economic Indicators Update