Yen Surges as Markets Tumble on Insufficiently Dovish Fed

US stocks tumbled overnight, extending recent decline, as FOMC raised interest rate and the overall announce was less dovish than expected. Risk aversion also spread to Asian session. Commodity currencies are generally pressured as a result. New Zealand Dollar additionally weighed down by poor GDP while Aussie is soft on mixed job data. While Dollar rebounded, it remains soft against European majors and Yen. Euro continues to be supported by Italy-EU budget deal. But Yen is even stronger on risk aversion.

Technically, AUD/USD is on track to retest 0.7020 low. EUR/AUD, after breaking 1.5984 support turned resistance, is also on track to retest 1.6357 high. USD/CAD is also in progress to 1.3685 fibonacci level. Yen will be a focus today as USD/JPY might finally sustain below 112.23 support with some conviction. Similarly, EUR/JPY could finally break through 127.61 support decisively. GBP/JPY might also have a tat on 141.17 support. EUR/USD, GBP/USD and USD/CHF, EUR/GBP are staying in range, awaiting breakout.

In other markets, DOW closed down -1.49% at 23323.66, S&P 500 dropped -1.54% while NASDAQ dropped -2.17%. US treasury yields tumbled sharply, especially at the long end. 10-year yield dropped -0.047 to 2.778. 30-year yield dropped -0.064 to 3.015, and it’s now risking 3% handle. More importantly, yield curve flattened further and it’s now inverted from 1-year (2.648) to 5-year (2.622).

In Asia, Nikkei is currently down -3.15%, Hong Kong HSI is down -1.51%, China Shanghai SSE is down -1.27%, Singapore Strait Times is down -0.55%. Japan 10 year JGB yield is down -0.0107 at 0.024.

Fed hikes to 2.25-2.50%, delivered dovish economic projections

Fed raised federal funds rate by 25bps to 2.25-2.50% as widely expected. The decision was made by unanimous vote. The latest economic projections were rather dovish. 2019 growth and inflation forecast was revised down. Fed also projected few rate hikes ahead. Yet, investors, possibly Trump too, are unhappy with the insufficient dovishness. The key is that Fed maintained “some further gradual increases” in federal funds rate will be consistent with sustaining the expansion and keeping inflation near target. Fed Chair Jerome Powell, while admitting that global growth is “softening”, also said “policy does not need to be accommodative” as the US economy continues to perform well.

First and most important on longer run federal funds rate, seen as Fed’s view on neutral. Median projection was revised to 2.8%, down from 3.0%. Central tendency was revised to 2.5-3.0%, somewhat down from 2.8-3.0%. Range was unchanged at 2.5-3.5%. For 2019, median was revised to 2.9%, down from 3.1%. Central tendency was revised to 2.6-3.1%, down from 2.9-3.4%. Overall, the revision argues that Fed might have one or at most two more rate hikes in 2019, rather than three as implied in September projections.

On growth, 2019 median growth projection was revised to 2.3%, down from 2.5%. 2020 median growth projection was unchanged at 2.0%. On unemployment, 2019 median unemployment rate projection was unchanged at 3.5%. 2020 median unemployment rate projection was revised to 3.6%, up from 3.5%. On core inflation. 2019 median core PCE projection was revised to 2.0%, down from 2.1%. 2020 median core PCE projection was revised to 2.0%, down from 2.1%.

Suggested readings on FOMC:

• FOMC Review – Fed Not As Dovish As Expected
• FOMC to Continue With Hikes, but Mindful of Risks
• Where The Fed May Be Wrong
• The Fed Hikes Rates, But Acknowledges Risks
• Fed Delivers Dovish Hike But Tightening Isn’t Done Yet
• Fed Raises Rates, and Expects “Some” Further Gradual Hikes Will be Required
• FOMC Review Fed To Markets: ‘Just A Couple Of More Hikes’
• Fed Recap: ‘Some’ What Dovish Hike Not Enough For Stocks

BoJ stands pat as widely expected, with 7-2 vote

BoJ left monetary policy unchanged today as widely expected. Short term policy rate is held negative at -0.1%. The central bank will continue with asset purchase at around JPY 80T a year to keep 10 year JGB yield at around 0%. The decision was again made by 7-2 vote. Y. Harada against said allowing long-term yields to move to some extent was too ambiguous. G. Kataoka continued to push for strengthen easing.

On economic outlook, BoJ said the economy is “likely to continue its moderate expansion”. Domestic demand is likely to follow an uptrend, “with a virtuous cycle from income to spending being maintained in both the corporate and household sectors”. CPI is “likely to increase gradually toward 2 percent, mainly on the back of the output gap remaining positive and medium- to long-term inflation expectations rising”.

BoJ also maintained the risks include US macroeconomic policies, protectionist moves, emerging markets, Brexit and geopolitical risks.

Australia employment grew 37k, but full time jobs dropped -6.4k

Australian employment market grew 37.0k, seasonally adjusted, in November, much better than expectation of 20.0k. However, the growth was mainly driven by part-time jobs, which rose 43.4k. Full-time employment has indeed dropped -6.4k. Unemployment rate also rose 0.1% to 5.1%, above expectation of 5.0%. Participation rate rose 0.2% to 65.7%.

New Zealand GDP grew only 0.3%, sharp contraction in construction and manufacturing

New Zealand Dollar drops sharply today after big miss in GDP data. GDP grew 0.3% qoq in Q3, sharp slow down from Q2’s 1.0% qoq and missed expectation of 0.6% qoq. Deep contraction is seen in both construction and manufacturing. Construction fell -0.8%, driven by a decrease in heavy and civil construction. Manufacturing dropped -0.8% “with 6 of 9 manufacturing industries declining.” Services growth also eased to 0.5%, slowest rate of growth in six years. Also from New Zealand, trade deficit shrank to NZD -861M in November.

Looking ahead

UK will take center stage today with retail sales and BoE rate decisions featured. BoE is widely expected to keep Bank rate unchanged at 0.75%. The asset purchase target will also be held at GBP 435B. BOE sounded hawkish in November. Yet, given the changes in economic and political developments since the November meeting, it might have to tilt its stance on the rate hike path. While the upcoming meeting is an interim one, with no release of inflation report, the members might still convene a more cautious message in its policy statement. More in BOE Probably Turns More Cautious amid Brexit Uncertainty.

Later in the day, Canada will release wholesale sales. US will release Philly Fed survey, jobless claims and leading indicators.

USD/JPY Daily Outlook

Daily Pivots: (S1) 112.16; (P) 112.41; (R1) 112.73; More..

USD/JPY drops to as low as 112.00 so far today and the break of 112.23 support indicates resumption of fall from 114.20. It’s likely now in the third leg of the corrective pattern from 114.54. Intraday bias is now on the downside for 111.37 support and below. But still, downside should be contained by 38.2% retracement of 104.62 to 114.54 at 110.75 to bring rebound. Larger rise from 104.62 is expected to resume later. On the upside, above 112.66 minor resistance will turn intraday bias neutral first.

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