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Dollar Rally Brings EURUSD to 200-Day Moving Average, Supercharges USDJPY

Dollar Rally Brings EURUSD to 200-Day Moving Average, Supercharges USDJPY

John Kicklighter, Chief Strategist

Nasdaq 100, DAX, EURUSD and USDJPY Talking Points:

  • Despite a rebound from the blue-chip Dow Jones Industrial Average, general risk trends took a hit to start this week, with the Nasdaq entering a technical correction
  • Critical for fundamental supremacy over the next 24 hours is whether the rise in yields continues to command attention or whether fresh US stimulus distracts
  • Dollar may be one of the few outlets that can benefit from risk aversion, higher yields or localized stimulus – and certainly amid all three
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Risk Aversion Starting to Set in On Top Performing Assets

The new trading week has offered up enough of a silver lining that enthusiast bulls are willing to overlook troubling signs for an overt technical slip on key benchmarks on sentiment trends. Through Monday, the Dow Jones Industrial Average managed to add to its gains this past Friday, the German DAX 30 index pushed to a record high and there is fundamental potential on the horizon. In the upcoming session, the question of a massive US fiscal stimulus infusion coming online is thawing fears over the outlook. Yet, for the time being, the balance for the markets is certainly leaning lower. Though the European session offered a level risk picture Monday, the New York session registered a rejected rally from the S&P 500 while the tech-heavy Nasdaq 100 – which has paced the already-outperforming US equity markets for years – entered a technical correction defined by a 10 percent or greater pullback from highs. The weight of full reversal is building, but we haven’t truly fallen off the cliff just yet.

Chart of QQQ Nasdaq 100 ETF with 100-Day Mov Avg and Volume (Daily)

Dollar Rally Brings EURUSD to 200-Day Moving Average, Supercharges USDJPY

Chart Created on Tradingview Platform

I am a firm believer, that ‘risk trends’ should be at the core of what we track for market health. In practical terms, that isn’t just an evaluation of a single asset or market type but rather a correlation of performance on otherwise unrelated assets that only truly converges when something as systemic as speculative appetite is in control. That said, the Nasdaq 100 has extended its retreat – particularly relative to broader or more stoic indices. In fact, the ratio of NDX to SPX has dropped with its sharpest 5-day tumble since May 2009 back to the general lowest level in nearly 9 months. Further outside the indices, there was further retreat to be registered from the EEM emerging market ETF, HYG junk bond fund and even US-based WTI crude oil.

Chart of Nasdaq-to-S&P 500 Ratio with 200-Day Moving Average and S&P 500 Overlay (Daily)

Dollar Rally Brings EURUSD to 200-Day Moving Average, Supercharges USDJPY

Chart Created on Tradingview Platform

Competing Fundamental Themes: Yields Versus Stimulus

The fast climb in US and global yields has been the dominant fundamental theme over these past few weeks, and it will be difficult to distract the markets from that theme so long as the pressure keeps building. There are different explanations associated to why the market treats this dynamic as detrimental to speculative positioning, but I believe the biggest concern is associated to the threat it poses to central banks where a moderate pace of inflation is a principal target. While I may believe that normalized monetary policy may actually be healthy in the context of economic recovery, there is enormous dependency that has been placed on the abundance of stimulus offered by the major central banks over the years. Cutting down the sizable safety net spread by these policy authorities without compensating with meaningfully higher returns means investors are saddled with recognition of enormous risks without the commensurate compensation.

Chart of US 10-Year Yield with Agg 10-Yr Yield Gov’t Bond Yield with 100-Day SMA (Daily)

Dollar Rally Brings EURUSD to 200-Day Moving Average, Supercharges USDJPY

Chart Created on Tradingview Platform

While rising yields – or the end game of central banks losing control over financial stability – is a persistent concern moving forward, there are fundamental scenarios that could foster speculative enthusiasm, even if for a brief period of respite. One such area is the anticipation of more fiscal stimulus in a transfer of capital market care provider. Tuesday, the US House of Representatives is due to vote on the Biden Administration’s proposed Covid stimulus bill which was finally passed by the Senate over the weekend. If this second house of Congress were to pass the often-touted $1.9 trillion support, it could be a substantial infusion. Of course, it is possible that the market already fully anticipates this top off and we have a ‘buy the rumor, sell the news’ situation. Alternatively, it could be exactly what wayward bulls are looking for in order to rally around. In a survey conducted by Deutsche Bank of 430 retail investors, that half of the respondents in the 25-34 category said they expect to use 50 percent of their stimulus checks on stock market investment. Given the record highs in US indices and the recent tumult in meme stocks, this doesn’t seem at all far-fetched.

Chart of Global Google Search for ‘How to Buy Stocks’ (Weekly)

Dollar Rally Brings EURUSD to 200-Day Moving Average, Supercharges USDJPY

Chart Created by John Kicklighter with Data from Google Trends

Dollar May Benefit In Multiple Scenarios

Overall, the US Dollar has not been a star performer over the past year. Aside from the surge the Greenback enjoyed during the worst of the pandemic sell off thanks to its deep liquidity, the currency has spent most of its time steering the market lower. Yet, that fortune has started to turn around in the past week in particular. That may owe in large part to the rebound in yields. While the swell may be global, the US 10-year seems to be leading the way. Furthermore, the uncertainty of what lies ahead whereby rising yields leads to risk aversion rather than growth-oriented optimism could benefit the benchmark currency in two ways. For these unique interplay, there is a particularly interesting pairing to be found in USDJPY. A building carry opportunity against a ‘risk on’ backdrop has a straightforward interpretation here. Alternatively, risk aversion with yields involved makes for a compelling picture for the bulls as well. That said, I don’t consider 110 an easy hurdle.

USD/JPY Mixed
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 0% 0% 0%
Weekly 5% -8% -2%
What does it mean for price action?
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Chart of USDJPY and Agg Yield Index with 100-Day Mov Avg and 10-Day ROC (Daily)

Dollar Rally Brings EURUSD to 200-Day Moving Average, Supercharges USDJPY

Chart Created on Tradingview Platform

Moving even higher on the liquidity scale, EURUSD taps more rudimentary fundamental matters. Having cleared the 100-day moving average and trendline support of the past 10 months this past week, we are now heading into the 200-day moving average standing around 1.1815. The three-day slump the cross has suffered is the worst since April 4th and there is another multi-angled consideration on this pair. Consider this past July when EURUSD finally cleared 1.1600 and with it a 12-year descending trendline resistance. That jumped was helped in no small part by a massive Eurozone stimulus announced at the time. Well, the long-delayed US version is expected to be on tap for this week. Will this influence cut both ways?

EUR/USD Mixed
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 0% 0% 0%
Weekly -13% 5% -2%
What does it mean for price action?
Get My Guide

Chart of EURUSD with 100 and 200-Day Moving Averages and 3-Day Rate of Change (Daily)

Dollar Rally Brings EURUSD to 200-Day Moving Average, Supercharges USDJPY

Chart Created on Tradingview Platform

One last Dollar pairing that I will point out is the one that I discussed for the weekend: USDCNH. The pairing to the offshore Renminbi is a fundamental entanglement of trade wars, competitive growth and manufactured value. I am a realist by nature, so whether this is a natural move that favors the Dollar of risk or yield purposes, it would seem fairly well founded. Alternatively, if this is an unnatural design, the break above 6.5000 was allowed to progress, so perhaps authorities will not step in. That said, it was reported this morning that some state actors have stepped in to bolstered the CSI 300 from its tumble through Monday.

Chart of USDCNH with 100-Day Moving Average (Daily)

Dollar Rally Brings EURUSD to 200-Day Moving Average, Supercharges USDJPY

Chart Created on Tradingview Platform

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