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Dollar strengthens as yields spike higher on BoJ speculation


Market Overview

After several weeks of very little excitement on bond markets, suddenly there has been a jump in longer dated yields. Speculation that the Bank of Japan could be ready to shift monetary policy stance has driven a reaction on the yield of 10 year Japanese Government Bonds (JGBs) and this has rippled across the markets. With inflation again coming in weaker for the BoJ overnight, the bank is set to discuss changes to its monetary policy delivery which could involve a shift in its yield curve control (YCC) to allow the 10 year yield to fluctuate above zero, in an attempt to improve banking profitability (in the face of constant flat yield curve) and stimulate lending. The 10 year JGB jumped 5 basis points yesterday and this pulled the US 10 year yield 7 basis points higher whilst also steepening the US yield curve. The 10 year Treasury has jumped to 2.95% and at a 5 week high. The longer dated yields on UK and German bonds also jumped appreciably. Currency market seem to be finding this as an opportunity to buy the dollar once more, as the Trump induced profit taking of late last week just seems to have thrown up another opportunity. With yields rising and the dollar supported again, gold has come back under renewed downside pressure, whilst equities seem to have found some support (although positive results from Google’s parent company, Alphabet have certainly helped). The flash PMIs will be keenly watched for their growth implications today and it will be interesting to see if the big miss on Japanese flash Manufacturing PMI is a harbinger of things to come, or a lone wolf. The bulls will certainly hope that it is the latter.

Bank of Japan

Wall Street held up well into the close last night as the downside pressure of the recent slip seems to be contained, for now. The S&P 500 closed +0.2% higher at 2807 with futures calling for a further +0.2% today. This has helped Asian markets find support, with the Nikkei +0.5% and European indices showing a decent rebound early today. In forex markets, the dollar strength looks to be resuming again across the majors, whilst it is interesting to see the Japanese yen again holding its ground. This move on the dollar is acting as a drag on commodities, with gold back lower again and oil also struggling for traction.

The flash PMIs dominate the economic calendar for traders today. Given that we are beginning to see some corporates warning about the negative impact on their future growth prospects it will be interesting to see how this shows up in the surveys both in Europe and the US. Eurozone flash Manufacturing PMI is at 0900BST which is expected to show a slip to 54.7 (from a downwardly revised 54.9 last month), with Eurozone flash Services PMI expected to slip back a touch to 55.0 (from a mildly upwardly revised 55.2 last month). The Eurozone flash Composite PMI is expected to be 54.8. Into the afternoon, US flash Manufacturing PMI is at 1445BST and is expected to remain at 55.4 (from the upwardly revised 55.4 last month) with US flash Services PMI expected to remain at 56.5 (as it came in last month). The US Richmond Fed Composite Index is at 1500BST and is expected to slip marginally to +18 (still very strong from a +20 last month).

 

Chart of the Day – AUD/JPY   

Aussie/Yen can often be considered to be an indicator in the forex world that reflects market risk appetite. Therefore, breaking a three week recovery uptrend may not be especially positive for risk sentiment now. The resumption of the move lower has certainly coincided with a strengthening yen and last week’s bearish engulfing candlestick signals a multi-week high within the five month trading range and leaves resistance at 83.92, whilst a move back below the mid-range pivot of 82.60 adds to the negative forces building once more within the range. Another trigger has been a break below the previous near term breakout support at 82.10 which previously held on a test during the recovery phase of earlier in July. A close below 82.10 would really suggest the market was positioning once more for a retreat back towards the range low at 80.50. Momentum indicators are certainly shaping up for the move lower, with the RSI falling back below 50 (tends to be the precursor for a move into the low 30s), the Stochastics posting a sell signal within a ranging market and the MACD lines also crossing lower again. Intraday rallies are therefore a chance to sell.

 

EUR/USD

Once more, the market has failed to back a potential decisive move and the lack of trend on EUR/USD has resulted in a continued mixed outlook. In keeping with recent weeks, yesterday’s early move higher was retraced into the close and there is little direction to speak of. The market tested the 38.2% Fibonacci retracement at $1.1735 and backed away. There is a lack of conviction once more in today’s session and the market is almost entirely bang in the middle of the almost 350 pip range between $1.1505/$1.1850. The RSI continued to calmly oscillate around 50 whilst the MACD line are hovering around neutral. Near term resistance is at $1.1790 but yesterday’s high at $1.1750 tightens that a shade. Support is with Thursday’s low at $1.1570. The hourly chart gives little more to add.

 

GBP/USD

The recovery gains from Friday’s positive candle seem to have been somewhat short-lived, as the market has already begun to drift back lower once more. The medium term technicals remain negatively configured and rallies are a chance to sell. The rebound petered out at yesterday’s high of $1.3160 which adds resistance below the pivot of $1.3200 and it still seems as though there is little appetite to back a sterling recovery against the dollar. This all points towards selling rallies in the downtrend channel for a likely retest of the market below $1.3000. The hourly chart shows a move below $1.3080 and then $1.3050 re-opens $1.3000 with the recent low at $1.2955 then in sight. It would need a decisive move above $1.3200 to really suggest that the market was building a potential recovery.

 

USD/JPY

An intraday rally from yesterday’s low at 110.75 means that the bulls have hung on to the uptrend, at least for now. The outlook is though still in the balance and today’s session could therefore be important. Another negative candle today would certainly question the support once more, with the old breakouts between 111.15/111.40 supposedly a basis of support. A close below 111.15 would question this. The momentum indicators are still feeling the effects of the recent sharp decline, but with the RSI holding up above 45 the bulls will remain confident. The hourly chart suggests that despite the intraday rally yesterday, the bulls still need to continue their move as the hourly RSI and MACD lines are still in near term corrective configuration. A break back below 110.75 would now be negative, opening 110.25 initially.

 

Gold

Rallies on gold remain a chance to sell. Technically speaking, the gold chart is also conforming to a strongly corrective configuration still. The old key support at $1236 has become resistance of overhead supply with the rally hitting the buffers at $1235 before forming yesterday’s bear candle and continued losses today. The consistently negative configuration on RSI (failing under 40 now) an MACD lines (still tracking lower) reflect a market under consistent selling pressure where any rallies are seen as another opportunity. This shapes up for a retest of last week’s low at $1211 whilst the next key reaction low at $1204.50 (July 2017 low) seems to be wide open. The hourly chart shows the prospect of a recovery from a very near term base pattern has been quickly snuffed out, with $1226/$1228 initial resistance now.

 

WTI Oil

The first day of the new contract has seen the market looking to solidify the pivot support which has built over the last three months around $67 however, with an intraday rally fading into the close, the outlook for the renewed recovery has been called into question. The resistance remains at $71.10 from Friday’s high, whilst the pivot at $69.55 is also still a factor to watch. Momentum indicators are throwing off a somewhat mixed batch of signals as the RSI and MACD lines slip around neutral whilst a recovery on the Stochastics is also questionable now. The bulls will be very keen to defend the pivot at $67 in the coming days and as the market slips a touch early today this is the focus. A closing break below $67 means a direct test of an 11 month uptrend, whilst also re-opening the key $63.60 June lows.

 

Dow Jones Industrial Average

The drift back towards the 50% Fibonacci retracement of 26,616/23,345 at 24,980 has become a key near term gauge as the impetus has slipped away from the recent mini trend higher. Recent months have been characterised by retracement moves and the risk is growing that this latest move is ready to resume a move lower again. A crossover sell signal on the Stochastics is yet to be confirmed but the could be an early indicator of a another slip back lower gathering momentum. A decisive close below 24,980 would also be something to watch out for. So far, the market has managed to resist the selling pressure with two very small bodied candles on Friday and now Monday reflecting the conflict in a consolidation. For now the market is holding up but the importance of the 50% Fib level is growing.  The hourly chart shows a top pattern would complete below 24,980 with a 230 downside target towards 24,750 whilst the next real support comes in at 24,663. Resistance is growing at 25,215 with initial resistance today at 25,124.


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At Hantec Markets Ltd we provide an execution only service. Any opinions expressed by analyst Richard Perry should not be construed as investment advice or an investment recommendation. This report does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. Forex and CFDs are leveraged products which can result in losses greater than your initial deposit. Therefore you should only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions.