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USDJPY Charges Higher Between Post-Powell Yield Rally and Nasdaq Breakdown

USDJPY Charges Higher Between Post-Powell Yield Rally and Nasdaq Breakdown

John Kicklighter, Chief Strategist

Nasdaq 100, USDJPY, Dollar, Dogecoin and NFPs Talking Points:

  • Following the Nasdaq 100’s lead Wednesday, risk trends took a universal dive through the New York session Thursday with a critical break from the S&P 500
  • Top fundamental charge was Fed Chairman Powell’s underwhelming reassurance of the ‘status quo’ which saw Yields shoot higher and ‘taper tantrum’ fears flare
  • A strong Dollar rally led to DXY and EURUSD breaks but it was the USDJPY rally that was most remarkable for me – what will NFPs do to this move?
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The Most Ominous Sign of Risk Aversion in Months

In any prevailing trend – bullish or bearish – there are small corrections. That is just the natural ebb and flow of sentiment in a large market. So, is this week’s slump in risk benchmarks a mere correction in a dominant trend or the beginning of something far more provocative? To be sure, there was a significant ‘risk off’ move that was registered through New York trade Thursday. From the S&P 500, which I consider a prominent if imperfect measure of global speculative appetite, a break of the 50-day moving average and trendline support stretching back to the March 23, 2020 post-pandemic swing low was hard to miss. Ultimately, it seems the Nasdaq 100’s ‘neckline’ break of 12,800 was a leading signal to the downswing; and the subsequent slide through the 100-day moving average should be registered in our view of next steps. I don’t consider technical moves alone the foundation for systemic trends. That said, the markets have over-indulged for an exceptionally long time and traditional fundamentals have long tracked an obvious discount to prevailing expectations. In short, this looks like a break; but a technical trigger does not ensure a trend.

Chart of Nasdaq 100 with 50 and 100-Day Mov Avg and 3-Day ROC (Daily)

Chart Created on Tradingview Platform

A trader’s willingness to take a position in the market is a function of their general risk tolerance. If you are confident that the tentative breakdown on risk assets will be short-lived, assumptions of holding to a broader range with he commensurate tight stop that would entail represents less risk taking to pursue. Alternatively, trading the break lower in US indices and other similar measures is projecting against the general course. That should therefore require far deeper conviction. Overall, it seems the capacity for a breakdown and full-scale reversal is higher than what we have seen in months. Beyond the technical breaks from US indices, there was a slide from emerging market assets, junk bonds and commodities among other measures. It can be difficult to keep tabs on the market’s broader mood, but technical cues on critical assets can be helpful for the undecided.

Chart of Risk Severity Curve

Chart Created by John Kicklighter

Risk Versus Yields

The tumble in indices and other capital gains-dependent measures seemed to reference back to the market’s fears of the past few weeks: interest rates. As yields were climbing, the fad trades of the past few months started to take a critical hit. In addition to the tumble in tech-leaning US indices, there was a quick cut down on meme stocks (most recently RKT). Imagine the heft of concern necessary to turn peoples attention away from the likes of GameStop to instead focus on something as wonky as ‘tapering’ or ‘operation twits’. For those that have been trading/investing for a while, these are terms roused in 2013 and 2015 in expectation that the massive stimulus drive would ultimately start to slow and reverse course. It seems that discussion is back in focus with search traffic for both matters hitting record highs this week.

Chart of Global Google Search for ‘Taper Tantrum’ and ‘Operation Twist’ (Weekly)

Chart Created by John Kicklighter with Data from Google Trends

Taking a closer look at the resurgence in yield discussions this past week, the US 10-year Treasury yield managed to push above 1.575 percent this past session. That is the highest we have seen this benchmark in a year and a concern for real rates of return. What’s more, the rise in foreign return erosion concerns – which many translate such a move into – is compounded by the global advance in sovereign bond yields. It is of course possible to see yields and risk assets rise in tandem – there is a consideration that higher yields is a reflection of growth – but I don’t think markets are reasonably positioned for that kind of interpretation.

Chart of US 10-Year Yield with Inverted Aggregate 10-Year Yield Gov’t Bond Yield (Daily)

Chart Created on Tradingview Platform

An Astute Dollar Benefit in Rising Yields and Risk Aversion?

What matters more to the Greenback: its relative yield advantage or its status as a safe haven. That is a constant source of speculation for the market and it remains a question today with the DXY Dollar Index breaking above its 100-day moving average and attempting to clear its previous February swing high around 91.60. I am dubious of the critical role risk aversion will play owing to the US currency’s reticence to play the flight to safety in moderate periods of concern. It often takes full tilt fear to rouse the Dollar back to life on this front and we are certainly not there yet.

Chart of DXY Dollar Index with 50 and 100-Day Moving Averages (Daily)

Chart Created on Tradingview Platform

While EURUSD broke its own critical support from the past 11 months Thursday – it s ultimately a mirror of the DXY – there wasn’t wholehearted confirmation across other Dollar-based majors. One particular exception was USDJPY which actually outpaced EURUSD for both intensity of move and technical prowess in my estimation. The pair rallied through 107 and moved on to the mid-point of the pandemic era extreme range around 108. What is remarkable here is that Yen crosses are usually correlated to risk trends which makes USDJPY’s rally even more remarkable. Is this a disconnecting pair or perhaps a reflection of how robust the Dollar’s rally truly was this past session? As always, I like to leave my judgement for whether there is follow through or not.

Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily -9% -6% -7%
Weekly 0% -11% -6%
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Chart of USDJPY with 50 and 100-Day Moving Averages (Daily)

Chart Created on Tradingview Platform

Outliers in Assets and Event Risk

While there was a general convergence in the performance of risk sensitive assets, there were a few exceptions for which we should take note. One such alternative was Dogecoin. It may seem to have been a write off session Thursday as the crypto continued to work its way deeper into a terminal triangle which will ultimately have to end in a break by virtue of running out of room. However, whether there will be follow through or not is a very different story. What was even more interesting for DOGEUSD was the announcement by Billionaire and sports team owner Mark Cuban that he intended to accept the alternative currency for purchases in his stadium. This looks like an effort to ‘pull an Elon Musk’ whereby he talked up Bitcoin when he announced it would be accepted for his company’s products. So why didn’t Dogecoin rally? I believe it is a function of the general speculative interest.

Chart of Dogecoin to US Dollar with 50 and 100-Day Average (Daily)

Chart Created on Tradingview Platform

If you are looking for something less abstract than risk trends and yield curves, there is an event risk for you to monitor. The February NFPs (nonfarm payrolls) is due for release at 13:30 GMT and the market is in somewhat of a fragile position to evaluate the data. If the data falls significantly short of the 180,000 net jobs added, the risk implications will no doubt swell. On the other hand, a jump may still be picked apart for its insinuation of something like inflation pressures. While it is more practical for a disappointment to carry a bigger impact than a ‘beat’, the markets expect to see some moderation that does unsettle activity too much.

Chart of US Nonfarm and ADP Private Payrolls (Monthly)

Chart Made by John Kicklighter with Data from the BLS

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.