eFXplus DATA

• USD/JPY's low held the 108.97 daily kijun prop as virus risks weighed

• New virus is bigger than SARS, may take 1% off China GDP nL1N29Y0BF

• But also seen triggering aggressive China stimulus countermeasures

• Those measures and recent DM yield drops cushion the risk-off fall

• The extent of that cushion is key to the haven yen's ability to retreat

• Was talk O/N that Japan's GPIF has been buying USD/JPY this week

• 10-yr Tsy-JGB yields spreads are their lowest since 2016, last at 1.64%

• USD/JPY bulls need a close above Fibo, 21- & 30-DMAs at 109.33-36

• Bears need a close below the cloud base and 100-DMA at 108.81/75

• US Q4 GDP Thursday is the next scheduled event risk, downside miss possible

It's likely the PBOC will lower reserve requirement ratios and interest rates in their efforts to blunt the economic damage caused by the corona virus nL1N29Y0BF, increasing upward pressure on USD/CNH toward the pivotal 7.0 level nL1N29X0RI and pressure on China to support the yuan there.
If not, a breakout would be seen as an admission that devaluation is needed to cushion the blow.
Such and admission would be seen as risk-off and haven JPY on.
It would also complicate the implementation of the phase 1 U.S.-China trade deal that includes China's assurances against yuan manipulation and mandated surging purchases of U.S. goods and services.
Those huge purchases were already seen as a stretch, and would be more so if domestic demand is curtailed by the coronavirus.
Of course, a yuan fall below 7.0 to the dollar wouldn't necessarily be manipulation, rather a rational market reaction to macroeconomic forces.
At the moment, markets are trying very hard to look past the virus-related hardships ahead, instead focusing on the financial asset-inflating stimulus responses those hardships could produce nL4N29Y2P5.
This longer, more risk-on and USD/JPY bullish view is supported by the ongoing need for higher returns than BOJ and ECB negative interest rates offer for funding long-term liabilities of aging populations.

TD Research discusses its expectations for tomorrow's BoE policy decision.

"All else equal, our base case expectation for a rate cut should see sterling weaken against its main trading partners. The degree of follow-through potential will depend significantly, however, upon the messaging that surrounds their decision. Assuming a neutral risk environment on the day, the 25bps rate cut we expect should (unsurprisingly) send cable moderately lower," TD notes. 

"If our expectation for a relatively neutral Fed outcome is confirmed, cable is likely to see initial support emerge just above the 1.2950 mark. Below this, and we think the pair could slide rather quickly toward the late-December lows around 1.2900. That, we think, should provide a fairly durable floor in the absence of further bearish catalysts. For example, we think we would need to see a significant escalation of virus concerns or a clear validation that a follow-up rate cut was in the near-term pipeline for support around 1.2825 to face a meaningful challenge," TD adds.

• Citi Technicals has instigated an "opportunistic" EUR/CHF long position

• Long target is reportedly above 1.10: EUR/CHF was last above 1.10 on Dec 13

• The stop-loss on the long has reportedly been set under 1.0632 (2017 low)

• 1.0738 is EUR/CHF EBS high since it plumbed a 33-month low of 1.0666 Tuesday

• IMM specs flipped to first net CHF long since Aug 2017 in week to Jan 21

• See: nL1N29W04X. MUFG went short EUR/CHF last Friday nL1N29W0CW

Credit Suisse discusses EUR/JPY technical outlook and flags a large bear wedge pattern with a target at 117.36/08.

"EURJPY maintains its break below important support seen at the trendline from the September lows and the 200-day average, which still suggests a more concerted selloff by completing a large bear ‘wedge’ continuation pattern. Next support is seen at 119.90, below which would reinforce the ‘wedge’ pattern and suggest aggressive further weakness," CS notes. 

"Next support below here is seen at 119.37/24, the 50% retracement of the 2019/20 upmove, then the 61.8% retracement at 118.54. Below here the ‘wedge’ measured objective’ coincides with the 78.6% retracement and a corrective price low at 117.36/08, which would then expect to hold.

First resistance moves to the broken 120.71/89 zone, then 121.26, which now ideally caps to keep the risks directly lower. The next resistance above here is seen at 121.73," CS adds. 

The yen jumped earlier this week as investors sought a safe store of value, and it remains steady after pulling back nL8N29Y26Z.
USD/JPY plunged to a 108.73 EBS low on Monday on concern over the spread of the China coronavirus, but bids quickly returned and some players now suspect Japan's giant GPIF "whale" might have been involved nL1N29Y019.
USD/JPY implied volatility and JPY call risk- reversal premium are off highs, showing dealers are less wary of deeper USD/JPY drop.
The technical structure of the market also seems to be a prop.
The daily cloud, now spanning 108.81-109.13, is providing important support.
Spot broke the cloud base on Monday and Tuesday but failed to register a daily close below.
If USD/JPY manages to break and close above both the 109.33 Fibo, a 38.2% retrace of the 110.30-108.73 drop, and the 30-DMA at 109.34, that would be very bullish sign.
USD/JPY would probably take EUR/JPY with it -- the correlation between the two pairs is high.

• AUD/USD drops to 0.6752 since scaling a two-day peak of 0.6777 in Asia

• That peak was notched after slightly higher than expected Aussie CPI data

• See: nL4N29X3Y7. 0.6736 was Tuesday's 15-week low, on China virus fears

• AUD is liquid proxy for Asian risk. Virus toll crosses 130 nL4N29Y18Z

• Fed monetary policy announcement 1900GMT, IOER in focus nL2N27S13X

• RBA rate decision next week (Feb 4), unchanged cash rate verdict expected

• Overnight GBP/USD option expiry gets FOMC and key BoE MPC meeting

• Implied volatility, which determines it's premium, has gone from 9.5 to 15.0

• In break-even/premium terms - that's 51 to 81 pips for a straddle

• The amount of spot pips dealers must capture before generating any profit

• Bulk of additional premium for BoE, as FED deemed low risk in other pairs

• See nL1N29Y04TnL1N29Y058

• However, given BoE importance (market 50/50 on rate cut), price seems tame

• Existing option positioning may hinder volatility nL1N29X07G

  
  

  
  

• EUR/USD sold from the moment European traders get to their desks

• Sideways for several hours after small bounce in tailed of US session

• Asia extended that slightly to 1.1028 then mostly 1.1010-20

• Europe immediately trade down 1.1017 to 1.1005

• Support @ Nov 29 low 1.0981. Jan 29 low @ 1.0988. Expiries 1 bln 1.1000-50

• Spot value is month-end. Corporate demand may underpin USD today

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• Options expire at 10-am New York/15GMT

• EUR/USD: 1.1000 (300M), 1.1020 (235M), 1.1050 (405M), 1.1065-75 (900M)

• GBP/USD: 1.2905-15 (450M), 1.2965 (310M), 1.3000 (220M), 1.3100-20 (300M)

• AUD/USD: 0.6740 (250M), 0.6770 (230M), 0.6785-90 (400M), 0.6800 (500M),

• NZD/USD: 0.6550 (515M)

• USD/CAD: 1.3065-80 (1BLN), 1.3100 (390M), 1.3125 (1.1BLN), 1.3150 (260M)

• USD/JPY: 109.00 (611M), 109.10-20 (650M), 109.25 (465M), 110.00 (1BLN)

• AUD/JPY: 73.00 (1.3BLN). EUR/NOK: 9.9500 (721M)

• Off 0.1% in a low key session, only occasional interest in a 1.3016/28 range

• Asia cautious in the majors ahead of the Fed tonight and BoE tomorrow

• Bill planned to end automatic EU fishing rights in UK waters nL8N29Y05J

• If passed, the bill will be a major stumbling block for UK-EU trade talks

• BRC - shop prices edge higher, but still weigh on inflation nL9N28D03W

• Charts, net negative momentum studies, 5, 10 & 21 DMAs coil-conflict

• Neutral setup - 1.2953-1.3200 21 day Bolli bands define broad range

• NY 1.2976 low and 1.3058/59, 5 & 10 DMAs initial support-resistance

Barclays Research discusses its expectations for the FOMC policy meeting on Wednesday. 

"We expect the FOMC to hold rates steady at its January meeting, maintaining its message that the US economy is in a good place and that the policy rate setting is appropriate. We expect it to raise both the IOER and RRP rates by 5bp with an eye toward pushing the policy rate closer to the middle of its current 1.50-1.75% range. Markets largely anticipate these technical adjustments in light of signals from the minutes to the December FOMC meeting. We do not expect the committee to make any announcements regarding its balance sheet plans," Barclays notes. 

"However, in the press conference, we expect Chair Powell to continue to field questions about the balance sheet, with the Powell repeating the committee’s view that the recent expansion is technical in nature and not quantitative easing. In the statement, we expect few changes, with the committee continuing to describe labor markets as strong, economic activity rising at a moderate rate, and market-based measures of inflation expectations as low. With data indicating that consumer spending decelerated in Q4 2019, the statement may downgrade the assessment of the pace of household spending from “strong” to “solid," Barclays adds.

• Flat in a 0.6755/0.6773 range, with solid interest all day in Asia

• CPI just beat expectations, suggesting the RBA will remain on hold Feb 4

• Eikon RBAWATCH priced an RBA cut at around 20% pre CPI and now 12%

• RBA likely on hold leaves the virus, risk and USD in the driving seat

• Bounce in stocks has not been reflected in the AUD, downside the weak one

• Charts, momentum studies, 5, 10 & 21 DMAs track south - bearish setup

• Sustained break of yesterday's 0.6737 low would target 0.6670 2019 low

• Close above 0.6791, 61.8% of this week's fall & 5 DMA to end downside bias

• Headline CPI QQ 0.7% poll 0.6%, 1.8% YY poll 1.7%

• RBA trimmed mean 0.4% QQ poll 0.4%, 1.6% YY poll 1.5%

• Modest positive knee jerk reaction to slightly stronger data

• OIS had an RBA cut on Feb 4 at 19.67% pre CPI, now 14.75%

• Charts, momentum studies, 5, 10 & 21 DMAs track south - bearish setup

• 0.6754 November low resilient, close below to target 0.6670 2019 low

• Earlier 0.6755 low and 0.6770, 38.2% of this week's fall support-resistance

• Flat, closed down 0.2%, as EU trade talk fears & BoE uncertainty weighed

• Eikon BOEWATCH prices a BOE cut Thursday at 49.35%, from 59% Tuesday

• Even money bet suggests that GBP will be volatile around the decision

• Buyers once again emerged below the resilient psychological 1.3000 level

• Charts, net negative momentum studies, 5, 10 & 21 DMAs coil-conflict

• Neutral setup - 1.2954-1.3200 21 day Bolli bands define broad range

• NY 1.2976 low and yesterday's 1.3066 Asian high initial support-resistance

 Citi discusses its expectations for tomorrow's FOMC policy meeting and for the US Q4 GDP on Thursday. 

"For a second consecutive meeting, the FOMC is widely expected to leave the policy range unchanged though a 5bp increase in IOER is likely, but not a foregone conclusion. Fed officials are equally unlikely to push back against the slightly increased probability of a rate cut priced-into 2020.

Citi analysts also expect a taper of the USD60bn/mth in T-bill purchases to about USD20bn/mth over March-June as well as a standing repo facility rolled out later this year," Citi notes. 

"Data wise, Citi analysts forecast 2.4% US Q4 real GDP growth," Citi adds. 

• GBP/USD rises off 1-wk low 1.2976, ends NY 1.3000, Tues range 1.3066-1.2976

• Reduced global growth view, 50% chance of BoE cut Jan 30 weighs on GBP

• Sterling succumbs to global growth fears as BoE risks loom nL1N29X0M8

• Below daily cloud (1.3017) adds to bearish tone, next supt 1.2955 2020 low

• Resistance 1.3056 the 200-DMA, then Jan 24 high & daily cloud top 1.3180/90

• EUR/GBP +0.38% at 0.8469, Tues range 0.8478-37; BoE Thurs, Brexit Friday sees GBP longs lighten

• USD/CAD probes session lows by 1.3172 in NY aft; NorAm range 1.3202-1.3172

• Risk boosted as China Virus fears recede, Equities, glbl yields & oil rise

• USD/CAD fails abv 1.3200 & daily cloud top for 2nd day in row

• Sub-100-DMA 1.3178 bears eye 55-DMA 1.3153, 50% Fib of 1.327-1.2952, 1.3111

• Resistance at 1.3206 Tues high, then 1.3232 the 200-DMA & Dec 6 high 1.3270

Bank of America Global Research discusses the USD outlook around tomorrow's FOMC policy decision.

"We expect the FOMC to stay on hold at the January policy meeting, keeping the fed funds target range at 1.50-1.75%. The Fed is likely to make technical adjustments to its administered rates, increasing IOER, O/N RRP and O/N RP by 5bp...

A dovish risk for USD is if the Fed places a renewed emphasis on downside risks emanating from abroad, but this is not our expectation. Overall, we anticipate a relative non-event. Over the past year, Fed meetings have typically resolved USD-bearishly over the subsequent three days (one up / seven down). However, when controlling for USD appreciation into the event (as now), interestingly the outcome has been decidedly more neutral," BofA notes. 

"Although we think the US dollar will eventually begin to weaken this year and thus erase some of its historical overvaluation as a global economic recovery emerges, we continue to assess the balance of short-term USD risks as skewed to the upside," BofA adds. 

USD/JPY's coronavirus exacerbated 110.30-108.73 slide is being stalled by the 100-DMA at 108.73 and a pause in virus-related derisking that comes as markets momentarily look past the near-term impact of the outbreak.
Investors may be eyeing fillips from lower global rates and likely stimulus by China.
This could mean that there will be a cautious consolidation over the next week or two while the spread and impact of the virus are better modeled.
Also there is a lingering need for better returns than DM government yields offer, cushioning the risk-off flows to some extent.
Low yields and hopes for less trade war anxiety this year had, prior to the virus threat, promoted the buy-the-dips mindset in stocks and other risk assets, and selling of the haven yen.
But the coronavirus news is likely to get worse before it gets better, likely keeping the risk-taking mindset subdued near-term.
Weak internals in today's U.S. durable goods report nL1N29X0G4 are a reminder that even with the anticipated phase 1 trade deal with China, businesses remained wary of increased investment, despite tight labor.
Options and an overhang of IMM spec longs suggest the 55-DMA and tenkan at 109.15/52 will cap rebounds.
A sub-100-DMA close would put 108 in play next.