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Yen Crosses Power Higher on Risk Run, Have Dollar and Pound Turned?

Yen Crosses Power Higher on Risk Run, Have Dollar and Pound Turned?

John Kicklighter, Chief Strategist

Talking Points:

  • The strong risk appetite charge that started this week continued Wednesday but momentum and breadth eased
  • Starting from a deeper discount, Yen crosses proved the most productive with strong moves from GBP/JPY to NZD/JPY to CAD/JPY
  • A strong showing in UK CPI charged the Pound higher but BoE is still ahead while the Dollar is free but lacking motivation

With EUR/USD and GBP/USD retreating holding and tentatively retreating from their respective key resistance levels, how are retail What makes for a 'great' trader? Strategy is important but there are many ways we can analyze to good trades. The most important limitations and advances are found in our own psychology. Download the DailyFX Building Confidence in Trading and Traits of Successful Traders guides to learn how to set your course from the beginning.

This week still carries the 'risk on' banner, but momentum is starting to let up. For the S&P 500 and other US equity indexes, it perhaps an afterthought that the scale of gap and follow through Tuesday was more moderate than Monday's performance. At record highs, the speculative climb is still engaged. Yet, when we look a little further afield, we can see that conviction itself is flagging - and thereby may predicate a stalled climb even for benchmarks like the S&P 500. We find this curb on motivation in uneven drive and standing of global equity indexes, emerging assets slipping, volatility measures without much premium to further deflate and other areas of the financial system that are attuned to speculation. Yet, a slack in pace doesn't necessitate a reversal. And, with that in mind, the more deeply discounted carry trade extended a more significant reach through Tuesday.

The Yen crosses in particular proved remarkable - while the atypical and oscillating Euro and Dollar standings as 'future carry currencies' was generating little traction. The USD/JPY is the most liquid of the carry pairs and it did extend its recovery from a false breakdown last week to move up to short-term, trendline resistance. More impressive still were CAD/JPY which has broken the 'neckline' of a multi-year inverse head-and-shoulders pattern and NZD/JPY which surged in its wide range reversal. Most remarkable however was the GBP/JPY which has completed a more dramatic and short-term inverse head-and-shoulders pattern. That surge was leveraged by the Pound's own rally following the surprisingly robust UK CPI figures (rising from a 2.6 to 2.9 percent annual pace).

This inflation jump raises the question of pressure on the BoE to tighten rates despite Brexit concerns, and Sterling traders are paying attention. In addition to the GBP/JPY reversal; GBP/USD has broken trendline resistance, EUR/GBP has solidified its reversal from 8-year highs, GBP/AUD has started to make progress from extended consolidation and GBP/CAD looks to be at the cusp of turning a deeply set fundamental and technical bear trend. The question is whether the Pound can continue to build on this head of steam with jobs due today and - more importantly - the BoE rate decision on Thursday? Further, fundamental observers should evaluate whether this UK price pressure reading is isolated to the UK (perhaps due to the currency's depreciation) or a signal of what lies ahead for the western world as it grapples with its collective extreme accommodation.

While the FOMC rate decision is still a week away, the August US inflation data is due today (producer price index) and tomorrow (the consumer price index). The Dollar has been driven lower and yet its fundamental value has not significantly eroded. Rather, its perceived advantage seems to have diminished. Given how much this view is weighted in speculation, it is not difficult to alter the market's assessment. While the short Dollar exposure is the third most over-done trade (according to a Bank of America survey circulated this past session), I'm not going to jump head first into a EUR/USD reversal or related Dollar view just yet. I'd rather weight for fundamental and technical confirmation to establish a foothold and am more than willing to 'pay' for the patience necessary to establish conviction. Speaking of that BoA survey, the most extreme trade in the financial markets was seen in the long Bitcoin craze. With JPMorgan's CEO jumping in on the chorus and major nations moving to regulate or ban cryptocurrencies, is there a timing element here that hasn't been available for risk trends? We discuss these developments and their trading implications in today's Trading Video.

Yen Crosses Power Higher on Risk Run, Have Dollar and Pound Turned?Yen Crosses Power Higher on Risk Run, Have Dollar and Pound Turned?Yen Crosses Power Higher on Risk Run, Have Dollar and Pound Turned?

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