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Daily Pivots: (S1) 0.9828; (P) 0.9892; (R1) 0.9944; More...

USD/CHF breached 0.9848 support but recovered quickly. At this point, we'd still expect strong support from 0.9848 to complete the corrective fall from 1.0128 to bring rebound. On the upside, break of 0.9989 will turn bias back to the upside for retesting 1.0128 high. However, sustained break of 0.9848 will bring deeper fall to 61.8% retracement of 0.9541 to 1.0128 at 0.9765.

In the bigger picture, current development suggests that the medium term rally from 0.9186 hasn't completed yet. Break of 1.0128 will target 1.0342 key resistance next (2016 high). On the downside, firm break of 0.9848 support will dampen this bullish view and turn focus back to 0.9541 key support instead.

The euro is correcting lower against the US dollar after the recent rally higher found strong technical resistance from the pairs 100-day moving average. Intraday buyers need to defend the important 1.1430 support level in order to keep short-term bullish momentum intact. A breach of the 1.1430 support level will likely provoke technical selling towards at least the 1.1410 level.

The EURUSD pair is strongly bullish while trading above the 1.1430 level, key technical resistance is found at the 1.1480 and 1.1550 levels.

If the EURUSD pair trades below the 1.1430 level, sellers are likely to test towards the 1.1410 and 1.1390 support levels.

The recent strong move higher in Bitcoin is approaching critical resistance, with the BTCUSD pair currently trading firmly above the $4,000 level. Buyers now need to break the $4,400 resistance level in order to trigger a large bullish inverted head and shoulders pattern. If price moves back under the $4,000 support level, the BTCUSD pair could revisit the important $3,300 level.

The BTCUSD pair strongly bullish while trading above the $4,400 level, key resistance is found at the $5,000 and $5,800 levels.

If the BTCUSD pair fails at current levels, sellers may test towards the $3,500 and $3,300 support levels.

The US dollar remains under downside pressure against the Japanese yen, with the risk-sensitive pair trading at its weakest level since October this year. The USDJPY pair may have reached its short-term bearish objective, as the latest decline extended below the 111.00 level. Technically, the MACD and RSI indicators on the four-hour time frame have reached extremely oversold levels.

The USDJPY pair is strongly bearish while trading below the 111.30 level, key technical support is found at the 111.00 and 110.50 levels.

If USDJPY buyers move price above the 111.30 level, a technical correction towards the 111.70 and 112.00 levels remains possible.

Yesterday, the price of crude oil dropped to a 17-month low as traders worried that higher interest rates would lead to lower growth. This came after the Federal Reserve raised interest rates and pointed to two more hikes in the coming year. The price then rose slightly during the American session after Donald Trump announced that American troops will leave Syria, a move traders fear will bring more chaos to the region. In the Asian session, the price eased a bit as traders looked ahead to US, France, and UK GDP numbers expected later today.

Yesterday, US stocks continued to decline after a series of mixed news. Important information included the Fed rate hike followed by fears of a government shutdown. Investors were also concerned about US relations with China after the country charged two Chinese officials with government espionage. The Dow, S&P, and NASDAQ ended the day down by 464, 40, and 108 points respectively making December declines the worst in more than 20 years.

After major gains yesterday, the Japanese yen declined against the USD in the Asian session. This came after Japan released the national inflation numbers. In November, inflation rose by an annualized rate of 0.8%, which was lower than October’s gain of 1.4%. On a YoY basis, the core CPI rose by 0.9%, which was lower than the expected 1.0%. These numbers are the reason why the Bank of Japan has been hesitant about raising rates.

EUR/USD

The EUR/USD pair declined during the Asian session to a low of 1.1445. This decline came after the sharp rise seen yesterday. This price is along the 14-day moving average but lower than the 28-day EMA. The Average Directional Index has fallen from above 53 to the current 18 while the MACD is falling. Today, the movement of the pair will likely depend on US politics and the final reading of the third quarter GDP.

USD/JPY

The USD/JPY pair reached a low of 110.80 yesterday. Today, the pair moved up and reached to an intraday high of 111.45. The price is along the 14-day EMA and lower than the 28-day EMA. On a longer EMA, the pair is below the 100-day EMA on the hourly chart. Its RSI has emerged from the oversold level to the current 40 while the Parabolic SAR shows that the pair could continue moving up. If it does, it will likely test the 111.88 level, which is the 38.2% Fibonacci Retracement level.

XTI/USD

The XTI/USD pair declined slightly during the Asian session and reached a low of 46.22. On the hourly chart, the pair is below the 25-day and 50-day EMA while the RSI is between the overbought and oversold levels. The pair will likely remain along these levels as the year nears the end. However, there is also a likelihood that traders could push it up because it is oversold in the daily chart.

General Trend:

• Declines in Softbank, financials and Marine Transportation names weigh on Japanese equities
• Shanghai Property index drops over 2%
• Tencent rises over 4%, China said to have approved certain video games for sale
• Nike rises over 6% post earnings
• Oil Futures rise in Asia after declines on Thursday
• US government funding deadline of midnight on Friday in focus

Headlines/Economic Data

Australia/New Zealand

• ASX 200 opened +0.6%
• (NZ) New Zealand Dec ANZ Consumer Confidence: 121.9 v 118.6 prior

China/Hong Kong

• Shanghai Composite opened -0.4%, Hang Seng -0.4%
• (CN) Reportedly US and over a dozen allies plan to openly accuse China about its economic espionage activities - Washington Post
• (CN) China Foreign Ministry: 'Resolutely' opposes US report on cyber security; China will take necessary measures to firmly safeguard its cyber security and interests
• (CN) China said to have asked some banks to rein in FY18 profit growth – press
• (CN) China PBoC: To step up management of Bank's Required Reserves and improve oversight of Deposit base
• (CN) China Stock Exchange said to look into certain suspected improper deals - Local Press
• (CN) China said to have completed review on certain online games - Local media
• (CN) China PBoC sets yuan reference rate: 6.8825 v 6.8936 prior
• (CN) China PBoC Open Market Operation (OMO): Injects CNY50B in 7-day and 14-day reverse repos v CNY150B injected in 7 and 14-day reverse repos prior; Net: CNY50B injection v CNY150B injection prior

Japan

• Nikkei 225 opened -0.4%
• Nintendo: Exec says hardware target is not easy, can reach Switch software target (Local Press)
• (JP) JAPAN NOV NATIONAL CPI Y/Y: 0.8% V 0.8%E; CPI EX FRESH FOOD (CORE): 0.9% V 1.0%E
• (JP) Japan Vice Finance Minister for International Affairs Asakawa (top currency official): Concerning moves in FX and equity markets this week as volatility increases
• (JP) Japan, US and EU officials are considering a ministerial-level trade meeting in Jan - Japanese press
• (JP) Japan Cabinet approves general account budget spending of ~¥101.5T for FY19/20 (record amount, in line with press speculation)
• (JP) Japan End-Sept Household Assets: ¥1,859T, +2.2% y/y - BoJ Q3 Flow of Funds Report
• Nissan: Tokyo Prosecutors confirm re-arrest of Ghosn
• (JP) Japan Trade Min Seko: Declines comment on decision of prosecutors related to former Nissan Chairman Ghosn, don't know if this will develop into diplomatic issue

Korea

• Kospi opened -0.4%
• (KR) South Korea Dec First 20 Days Exports Y/Y: 1.0%; Imports Y/Y: 2.2%
• (KR) South Korea Nov PPI Y/Y: 1.6% v 2.2% prior
• (KR) South Korea Envoy Biegun: US has no intention to ease North Korea sanctions; Inter-Korea railway project to proceed as planned
• (KR) South Korea President Moon disapproval rating 46% v 44% prior; approval rating flat at 45% - Gallup Poll

Other

• (TH) Thailand Nov Customs Trade Balance: -$1.18B v +$1.0Be; Customs Exports Y/Y: -1% v +3.3%e

North America

• US equity markets ended lower: Dow -2%, S&P500 -1.6%, Nasdaq -1.6%, Russell 2000 -1.7%
• (US) US House has votes to pass stopgap bill, but opposition expected in the Senate; Senate Majority Leader McConnell (R) said Senate to take up House-passed bill on Friday
• (US) Pres Trump in tweet announces Defense Sec Mattis will be retiring at end of Feb; replacement to be named shortly
• Facebook: Said to develop 'Stablecoin' for transfers on WhatsApp (US financial press)

Europe

• (UK) Dec GfK Consumer Confidence: -14 v -14e
• (UK) Lloyds Dec Business Barometer: 17 v 24 prior
• (UK) UK Nov Car Production Y/Y: -19.6% (largest decline since Feb) - SMMT
• Danske Bank [DANSKE.DK]: Cuts FY18 net profit outlook to DKK15B (DKK16-17B prior); affirms NII
• Delivery Hero [DHER.DE]: Announces the sale of food delivery operations in Germany to Takeaway.com for €930M in cash and stock

Levels as of 01:30ET

• Nikkei 225, -1.3%, ASX 200 -0.7%, Hang Seng -0.2%; Shanghai Composite -1.3%; Kospi -0.2%
• Equity Futures: S&P500 -0.2%; Nasdaq100 -0.3%, Dax -0.6%; FTSE100 -0.3%
• EUR 1.1463-1.1441 ; JPY 111.43-111.08 ; AUD 0.7124-0.7103 ;NZD 0.6791-0.6760
• Feb Gold -0.4% at $1,263/oz; Jan Crude Oil +0.8% at $46.24/brl; Feb Copper -0.4% at $2.693/lb

Daily Pivots: (S1) 110.53; (P) 111.57; (R1) 112.33; More..

USD/JPY dropped to as low as 110.81 so far before recovery mildly. Outlooks is unchanged that price actions from 114.54 are viewed as a consolidation pattern. We'd continue to expect downside to be contained by 38.2% retracement of 104.62 to 114.54 at 110.75 to bring rebound. On the upside, break of 111.84 will turn bias back to the upside for rebound to 4 hour 55 EMA (now at 112.56). However, firm break of 110.75 will target 61.8% retracement at 108.40.

In the bigger picture, corrective fall from 118.65 (2016 high) should have completed with three waves down to 104.62. Decisive break of 114.73 resistance will likely resume whole rally from 98.97 (2016 low) to 100% projection of 98.97 to 118.65 from 104.62 at 124.30, which is reasonably close to 125.85 (2015 high). This will stay as the preferred case as long as 109.76 support holds. However, decisive break of 109.76 will dampen this bullish view and turns outlook mixed again.

While risk aversion continued in Asian session, volatility cooled mildly. Major pairs and crosses are staying in relatively tight range. Swiss Franc and Sterling are generally higher while commodity currencies are soft. But the picture for the day could easily change. For the week, dusts have little settled. Yen is trading as the strongest one on risk aversion. Euro, as second strongest, is supported by weakness in Dollar and Italy-EU budget deal. Australian Dollar is the weakest one, followed by Canadian and then New Zealand Dollar.

Technically, USD/CHF breached 0.9848 key support but quickly recovered. USD/JPY is close to 110.75 key fibonacci level. Meanwhile, EUR/JPY took out 127.61 support quite firmly yesterday. GBP/JPY also break 141.17 support. More downside is now favored in both Yen crosses.

We'll see whether further decline in EUR/JPY and GBP/JPY would drag USD/JPY down. Or, selloff in EUR/JPY and GBP/JPY with rebound in USD/JPY and USD/CHF would drag down EUR/USD and GBP/USD.

DOW at critical fibonacci level, US yield curve flattened further

Risk aversion once again spread from US to Asian session. Nikkei closed down -1.11%, or 226.39 pts to 20166.19. That's the lowest level since September 2017 and 20000 handle is now vulnerable. At the time of writing, China Shanghai SSE is down -1.11% at 2508. However, losses in Singapore Strait Times (-0.30%) and Hong Kong HSI (-0.03%) are relatively limited.

Overnight, DOW lost -1.99% or -464.06pts to 22859.60. S&P 500% dropped -1.58% and NASDAQ dropped -1.63%. DOW is now pressing key support level at 38.2% retracement of 15450.56 to 26951.81 at 22558.33. There is prospect of some recovery before yearly close. But it has to overcome near term resistance at around 23500 before declaring bottoming.

On important development to note is that acceleration in flattening of US yield curve. Overnight, 5-year yield closed up 0.026 to 2.653. 10-year yield rose 0.011 to 2.789. More importantly, 30-year yield breached 3% handle to 2.957, then closed at 3.012, down -0.003. Meanwhile, yield curve remains inverted between 2-year (2.675) and 3-year (2.652).

Japan cabinet approved record fiscal 2019 budget

Japan Prime Minister Shinzo Abe's Cabinet approved budget for fiscal 2019. The general account budget would rise for the seventh straight years, to JPY 101.5T, comparing to current fiscal year's initial estimate of JPY 97.7T.

Of the JPY 101.5T, around JPY 2T will be spent specifically to ease the impact from the planned sales tax hike in October 2019, from 8% to 10%. Measures will include shopping vouchers to help low income households.

However, stimulus measures will altogether hit JPY 6.5T, far exceeding the estimated increase in sale tax revenue. Some economists noted that Abe has now set the precedence that rise in tax would actually be delaying fiscal reform.

Nevertheless, Finance Minister Taro Aso emphasized that "we were able to manage both needs of economic revival and fiscal consolidation with this budget."

On the data front

Japan national CPI core slowed to 0.9% yoy in November, down from 1.0% yoy and missed expectation of 1.0% yoy.

Germany will release Gfk consumer confidence in European session. UK will release Q3 GDP final, current account balance and public sector net following.

Later in the day, Canada will release October GDP and retail sales. US will release Q3 GDP final, durable goods orders and PCE inflation. Some more volatility could be seen before weekly close.

USD/JPY Daily Outlook

Daily Pivots: (S1) 110.53; (P) 111.57; (R1) 112.33; More..

USD/JPY dropped to as low as 110.81 so far before recovery mildly. Outlooks is unchanged that price actions from 114.54 are viewed as a consolidation pattern. We'd continue to expect downside to be contained by 38.2% retracement of 104.62 to 114.54 at 110.75 to bring rebound. On the upside, break of 111.84 will turn bias back to the upside for rebound to 4 hour 55 EMA (now at 112.56). However, firm break of 110.75 will target 61.8% retracement at 108.40.

In the bigger picture, corrective fall from 118.65 (2016 high) should have completed with three waves down to 104.62. Decisive break of 114.73 resistance will likely resume whole rally from 98.97 (2016 low) to 100% projection of 98.97 to 118.65 from 104.62 at 124.30, which is reasonably close to 125.85 (2015 high). This will stay as the preferred case as long as 109.76 support holds. However, decisive break of 109.76 will dampen this bullish view and turns outlook mixed again.

Economic Indicators Update

Market movers today

Today, focus turns to US PCE inflation, the Fed's preferred measure on inflation. We expect core PCE inflation to stay unchanged at 1.8% y/y, close to the Fed's inflation target of 2%. However, it is still below the peak in this cycle of 2.0% y/y, reached in July. The New York Fed's John Williams is slated to appear on CNBC today at 10:00 ET.

US durable goods orders are set to attract attention, as this figure is a good indicator of US investment growth. After a steady increase throughout most of 2018, investment orders have levelled off in recent months.

In emerging markets, we are due to get Polish retail sales and unemployment rate numbers. For more on emerging markets, see Emerging Markets Briefer - Buying opportunities set to arise after Q1 19, 19 December.

In Scandinavia, it is time for Swedish retail sales and Norwegian unemployment (see overleaf).

Selected market news

Asian stocks fell and Japanese equities decreased deeper into a bear market, with regional shares on course for the worst week since October. The downward move in Asian equities followed US equity markets, which had a tough session with the S&P 500 declining 1.5%, to 2467, its lowest close since late September 2017. The so-called market fear gauge, the VIX index, rose 2.8 points to 28.38, its highest closing level since early February. The negative sentiment follows a week when the Fed appeared more hawkish than the market had hoped for, holding on to further tightening of monetary policy despite the market volatility (for more details, see FOMC Review - Fed to markets: 'Just a couple of more hikes ', 20 December).

The negative market sentiment was also prompted by renewed US-China tensions, which flared up after the US Justice Department filed charges overnight that alleged Chinese officials co-ordinated a decade-long espionage campaign to steal intellectual property and other data from dozens of companies. Treasury Secretary Steven Mnuchin said the indictments are a separate track from trade talks, which are scheduled to pick up again in January. However, China nevertheless demanded that the Justice Department withdrew the comments, highlighting the continuing tension between the world's top two economies.

Meanwhile, the lower house of Congress passed funding for Donald Trump's border wall. However, we expect the proposal to be rejected by the Senate before Friday's midnight deadline, increasing the chance of a partial federal government shutdown.

The USD/JPY breakout is either still in a wave 3 (purple) or price has completed it at the most recent low. If the wave 3 is completed, then price could be building a bullish pullback within the downtrend as a wave 4 (purple). The Fibonacci retracement levels such as the 23.6%, 38.2% and 50% are then expected to act as resistance levels.

The USD/JPY seems to have completed a wave 5 (blue) of a wave 3 (purple). The downtrend is expected to continue after price bounces at the Fibonacci levels.