It seemed like two totally different worlds in trading before and after the new year. Many markets have reversed the thin year end moves on the first two trading days of 2014. Equities tumbled with the Dow closing at 16468.88 after making new record high of 16588.25. S&P 500 closed at 1831.37 after making a new high at 1849.99. German DAX also dropped sharply to close at 9435.15 after making a record high at 9620.93. The movements in bonds were relatively much mildly with 10 year yield facing much pressing from 3.0% handle and closed at 2.995%. The dollar index jumped sharply to close at 80.79 and the breach of 80.83 near term resistance carries some bullish implications.
In the currency markets, European majors were strong while yen and Aussie were weak before 2014. But then euro, Swiss franc and, to a slightly lesser extent sterling dropped sharply against dollar towards the end of the week. It should be noted that the break of 1.3625 in the EUR/USD and 0.9001 in the USD/CHF carries some bearish implications for Euro and Swiss Franc. The GBP/USD's fall was shallower as supported by weakness in the EUR/GBP, which is expected to make a new low below 0.8252 in near term.
The yen also rebound strongly after being pressured most of the time before 2014. However, the USD/JPY is staying inside a near term rising channel. Meanwhile, the EUR/JPY and GBP/JPY are both holding above important near term support level of 140.99 and 166.57 respectively. Thus, there is no strong evidence for us to turn bullish in yen yet. Commodity currencies were lifted mildly with help from selloff in European commodity crosses. However, the USD/CAD is stuck in familiar range. AUD/USD also failed to take out a near term falling channel decisively. Thus, we won't turn bullish in commodity currencies yet.
The main focus this week will be on whether the moves in the first two trading days of 2014 would gather momentum. That is, whether European majors would extend decline and yen could build sustainable rebound. Stocks will also be closely watched even though major equity indices are still strong in spite of the pull back.
As for trading strategies, based on the above analysis, selling European majors is preferable this weekend. As the USD/JPY was firm and commodity currencies are mixed, we'd prefer to sell European majors against dollar. Among the EUR, GBP and CHF, CHF is preferred based on relative strength in the EUR/CHF and weakness in the EUR/GBP. So, we'll buy the the USD/CHF with stop at 0.9, targeting 0.92 within January.
On the fundamental front, it will be a jam packed week as markets are back to business. Janet Yellen will have the Fed chairman nomination vote in Senate and that should be an easy pass. A number of central bank events would catch much attention. Fed will release the FOMC minutes which should detail the discussions regarding the tapering plan that the central bank announced back in December. It's generally believed that Fed would cut USD 10b in each meeting from the USD 85b asset purchase program. But the minutes might reveal other possible paths. Both the BoE and ECB will meet this week too.
Regarding economic data, PMIs will be a focus with UK services PMI and US ISM services featured. Euro traders will look at December CPI flash. And of course, US will release non-farm payroll report and per NFP job data. All could be market moving and would define the trend as markets could possibly be turning.
- Monday: Eurozone services PMI, Sentix investor confidence; UK services PMI; Canada IPPI and RMPI; US ISM services, factory orders
- Tuesday: Australia trade balance; Eurozone CPI flash; Canada trade balance, Ivey PMI; US trade balance
- Wednesday: German trade balance; eurozone retail sales, unemployment; US ADP employment; FOMC minutes
- Thursday: Australia retail sales; China PMI; BoE rate decision; ECB rate decision; Canada housing starts; US jobless claims
- Friday: China trade balance; Swiss unemployment, CPI; UK productions; Canada employment; US non-farm payroll