• AUD/JPY spent Wednesday ranging in the mid-82.00s as focus switched to Thursday’s Aussie labour market report.
  • Higher base metal prices and resilient January Consumer Sentiment figures from Westpac helped the Aussie outperform on the session.

In the run-up to key Aussie labour market data, AUD/JPY spent Wednesday’s session ranging in the mid-82.00s, bouncing at last Friday’s 82.10 lows but then subsequently failing to sustain an attempted push above the 200-day moving average at 82.62. At current levels just under 82.50, the pair trades with modest gains of about 0.1% on the session. Strength in base metals, as well as resilient January Consumer Sentiment figures from Westpac, helped the Aussie to claim the top spot in the G10 performance table on the day.

Markets expect the Australian economy to have added slightly more than 40K jobs in December, taking the unemployment rate down to 4.5% from 4.6% and lifting the participation rate to 66.2% from 66.1%. Strong labour market figures would likely further stoke already very hawkish RBA rate expectations. On Wednesday, money market futures implied a 77% chance that the RBA lifts rates to 0.25% in May and then follow that up with a further four rate hikes before the end of the year, taking rates to 1.25%. That despite the fact that the RBA has up until now maintained there will be no rate hikes before 2023.

Analysts suspect that the final straw for the RBA that could make them capitulate to market expectations and signal 2022 rate hikes could be if next week’s Q4 Consumer Price Inflation figures surprise to the upside. If so, the central bank may opt to axe its QE programme immediately in February and signal rate hikes this year. One might expect that could send AUD/JPY back towards recent highs in the 84.00 area, but risk appetite (in global equities, anyway) remains ropey amid Fed tightening fears. The S&P 500 dropped another 1.0% on Friday and is nearly 6.0% below record highs printed at the start of the year. This makes it difficult for the risk-sensitive AUD to rally versus the safe-haven JPY. Analysts have warned that stock market sentiment may remain rocky in the run-up to next week’s Fed meeting and this may cap potential AUD/JPY gains.  

 

  • After briefly moving back above 156.00, GBP/JPY fell back to the 155.60s in recent trade, tracking equity market downside.
  • If risk appetite remains ropey ahead of next week’s Fed meeting, GBP/JPY may remain under pressure.

GBP/JPY spent most of Wednesday’s session going sideways within 155.50 to 156.20ish parameters, with the 21-day moving average and last Friday’s lows around 155.50 offering substantive support. Hotter than expected UK December consumer inflation numbers out early during European trade combined with comments from BoE Governor Andrew Bailey at the US open were unable to support the pair above 156.00. Despite the governor sounding very concerned about inflation and not saying anything that would diminish expectations for a 25bps rate hike next month, GBP/JPY has ebbed back lower to the 155.60s and is eyeing a test of session lows.

The move lower in the pair likely reflects further losses in the US equity space, with the major indices currently down between 0.1-0.5%. Investors continue to fret about the prospect of rapid monetary policy tightening from the Fed which is expected to kick off in March. Equity market downside since the start of the year (the S&P 500 is down over 4.0%) has weighed on risk-sensitive currency/JPY crosses like GBP/JPY. The pair is now flat on the year and about 1.3% below recent near-158.00 highs. Risk appetite may remain ropey ahead of next week’s anticipated to be very hawkish leaning Fed meeting.

That suggests it makes sense for GBP/JPY to remain in its recent bearish trend-channel for now, suggesting a break below the 21DMA and test of support at 155.00 this week seems likely. Risk appetite is going to need to see broader stabilisation for GBP/JPY to revert to trading as a function of central bank divergence, which would decisively favour the pair moving higher. Japan December CPI and UK December Retail Sales figures out on Friday are unlikely to have too much of an impact.

  • US equities dipped again on Wednesday, with the S&P 500 failing to reclaim 4600 and down over 4.0% in 2022.
  • The Nasdaq 100 dipped 0.2% and the Dow fell 0.3%.

US equity markets have been under modest selling pressure on Wednesday, with market commentators citing continued fears about Fed tightening and higher interest rates, but also describing the day as one of consolidation. The S&P 500 dropped about 0.1% to trade close to 4570, after hitting fresh weekly and annual lows in the 4560s, with traders eyeing a test of the 4530ish lows printed back on December 20. The index attempted but failed to recover back above 4600. On the week, the index is now down about 2.0%, taking on the year losses to about 4.3%. The sectoral performance was mixed but indicative of a defensive bias, given outperformance in the S&P 500 GICS Consumer Staples (+1.2%) and Utilities (+0.9%) sectors.

The S&P 500 GICS Financials sector was the underperformer, shedding about 1.1% as US yields pull back from recent highs (the 10-year was down about 4bps to 1.83%) and following recent downbeat earnings. In fairness, Q4 results from Morgan Stanley (+2.2%) and Bank of America (+0.8%) were better received, but not enough to turn the tide for the sector. Meanwhile, the easing in yields gave the recently battered tech sector some respite. Despite the recent upside in crude oil prices, the energy sector was broadly flat.

Looking at the other major US indices, the Dow was down just over 0.3% while the Nasdaq 100 was flat, with the latter recovering back to 15.2K after printing fresh 2022 lows under 15.15K. The indices are down just under 3.0% and nearly 7.0% respectively on the year. In a sign of further choppiness ahead, the S&P 500 CBOE volatility index or VIX hit fresh highs for the year just under 24.0, substantially up from this year’s starting levels in the 16.0s. The VIX remains well below its post-Omicron peaks near 36.0.

 

  • Silver is performing into a critical supply area on the daily chart.
  • Bulls look to 24.00 while the bears eye a correction back to test the 38.2% fibo. 

The price of silver has tracked gold higher of a sudden, yet not fully explained, at least as far as fundamentals gold rush for gold. US Treasury yields have retreated from near two-year highs on 2-year and 10-year notes.

Consequently, the greenback is pulling back which can explain some of the moves in precious metals, but the speed and distance for which gold and silver have moved are outside of the average ranges we have seen of late. Nevertheless, silver has spiked into what might be expected to be an area of supply as follows:

XAG/USD daily chart

The 24 area is where price has reacted a number of times in the past, so it would be anticipated to offer the bulls a hard time in conquering it. As it stands, the 38.2% Fibonacci retracement level aligns with the prior day’s high, so this could be a compelling level of support for the sessions ahead. 

  • Gold momentum has waned in recent trade, with the precious metal consolidating at session highs just above $1840.
  • XAU/USD burst above resistance in the low-$1830s earlier in the session amid what appeared to be a stop run.

Spot gold (XAU/USD)’s upside momentum has waned in recent trade, with prices trading in more of a subdued manner near $1842 after bursting above resistance in the low $1830s and then subsequently $1840 for the first time in over two months. The speed of spot gold’s latest advances, especially between the $1830 to $1840 area, is suggestive of a stop run. With market participants amping up hawkish Fed bets in recent weeks, a theme that has weighed heavily on certain parts of the US equity market and sent real and nominal yields surging to multi-month/year highs, many were likely betting on weaker gold prices. Many traders short gold may have had their stop loss sat somewhere in the $1830s.

It is unlikely that spot gold can resist the advances of the US dollar and US real yields forever, and expectations for a very hawkish Fed in 2022 suggest continued upside risks for both. But gold is for now garnering safe-haven demand as geopolitical tensions surrounding Ukraine amp up, market commentators said. US Secretary of State Antony Blinken warned earlier in the day that Russia could attack Ukraine at very short and there are fears this could have a highly inflationary impact on the global economy via higher energy prices. Russia is a key gas supplier to Europe and a key global exporter of crude oil. With WTI at multi-year highs in the upper $80s and further energy price gains likely, investors may be buying gold as an inflation hedge.