US Dollar Tumbled as Haven Demand Ebbed, Asia Stocks May Climb

Asia Pacific Market Open Talking Points

• US China trade talk optimism bets send Emerging Markets, S&P 500 higher as USD declines

• Temporary pause in US government shutdown fails to further lift sentiment, JPY depreciates

• Nikkei 225 still at risk to a bearish reversal pattern. AUD/USD faces falling resistance line

See our study on the history of trade wars to learn how it might influence financial markets!

The US Dollar had one of its worst days since January 9th. This was despite a rally in local front-end government bond yields as 2019 Fed rate hike expectations improved. According to Fed funds futures, the probability of a hike in June rose from 20.4% to 24.4%. Simultaneously, global benchmark stock indexes soared as sentiment improved, sapping the appeal of haven assets.

On Wall Street, the S&P 500 rallied about 0.75% while the MSCI Emerging Markets Index climbed 1.32% as it closed at its highest since October 2018. The sentiment-linked Australian and New Zealand Dollars rose while the anti-risk Japanese Yen and Swiss Franc weakened. Most of the gains occurred during the European and early US trading session.

This suggests that market-wide optimism was not due to a temporary end in the partial US government shutdown which occurred later. The stopgap funding bill would allow the government to run until February 15th. US President Donald Trump said that if a budget for a border wall is not reached, the government would shut down. Chances of another one down the road are not necessarily completely off the table.

What seemed to be the main driver for risk appetite were perhaps hopes of a positive outcome on trade negotiations between the world‘s largest economies. China’s Vice Premier Liu He will be visiting Washington DC ahead. It should also be noted that stock markets generally rallied last week despite mixed cues from the White House. Commerce Secretary Wilbur Ross mentioned that the two nations were ‘miles and miles’ apart.

Monday‘s Asia Pacific Trading session is lacking notable economic event risk in a week filled with key statistics from the US. As such, the focus in the interim will likely remain on sentiment. It won’t be too surprising to see the Nikkei 225 aim higher. Such an outcome may further weaken JPY. The Japanese index still remains within a bearish reversal pattern that has been brewing for some time. Meanwhile AUD/USD needs to clear a critical descending resistance line.

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Asia Pacific Trading Session

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--- Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter