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USDJPY Threatens to Reverse Bull Trend On Risk, Inflation, Stimulus Watch

USDJPY Threatens to Reverse Bull Trend On Risk, Inflation, Stimulus Watch

John Kicklighter, Chief Strategist

Nasdaq 100, Treasury Yields, Dollar and USDJPY Talking Points:

  • The technical break to start the week for risk trends wouldn’t trigger a ready avalanche in benchmarks like the Nasdaq which bounced smartly Tuesday
  • A retreat in yields connected readily to the rebound in markets, but that theme has yet to pitch into a reversal into the opposite direction
  • Amid a rebound in GameStop and Tesla, my interests are more pointedly fixed on the Dollar and USDJPY with CPI and stimulus still on tap
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A Pause in a ‘Risk’ Breakdown or Full-Scale Recovery?

This week opened to an unmistakable recharge of the risk aversion that we’ve seen unfold in starts and fits over the past few weeks. Yet, despite a technical ‘correction’ (a 10 percent retracement from highs) from the Nasdaq 100 along with notable technical milestones; the avalanche that could have developed instead stalled in midair. With a convergence of critical updates on thematic events surrounding US stimulus and inflation which could in turn alter the backdrop for yields or general speculative appetite, that decision may find tangible fundamental connections rather than rely on the wilds of chance and headlines. As we await the event risk verdict, it is worth taking stock on where ‘risk’ stands. There was a general firming of risk measures from global equities to emerging market assets to distinct carry trade favorites. That said, closer observation showed caveats like crude oil (WTI) dropping back a second day, junk bonds losing altitude, the UK’s FTSE 100 capped by range and the already-bullish Dow stalling just shy of a record high. To me, there is little conviction in this bounce, but congestion is just as likely an outcome as a commitment to either bullish or bearish trend. I will be keeping close tabs on the Nasdaq 100 and QQQs to help draw a technical line on conviction moving forward given its technical stance. The question is: hold former support as new resistance or return to bull trend?

Chart of QQQ Nasdaq 100 ETF with 100 and 200-Day Mov Avg and Volume (Daily)

Chart Created on Tradingview Platform

Looking more closely at the health of sentiment trends, it is worth noting that there is a heavier volume associated with the selling (distribution) days of this present leg – not at all unusual historically. Perhaps more useful is the observation of possible ‘rotation’ that many have pointed out between ‘growth’ and ‘value’. For those unfamiliar with the terms, the former relates to shares/sectors more overtly connected to speculative trends while the latter connects more distinctly to robust or textbook factors of economic activity. A rudimentary means of seeing this shift in action is the ratio below between the Nasdaq 100 and S&P 500. Having broke to 9 month lows on Monday, we have seen the strongest rebound in favor of speculative favorites (tech sector) relative to the general ‘risk’ benchmark since April 4th. In less traditional outlets, you could point to the rebound in Bitcoin or GameStop which have been more recent fan favorites. While possible to see these leading measures continue to rise while the market tumbles down around them, it is highly improbable. As such, for bearish cues; I watch for any serious signals on this front first.

Chart of Nasdaq-to-S&P 500 Ratio with 200-Day Mov Avg and 1-Day ROC with SPX (Daily)

Chart Created on Tradingview Platform

Yields, Inflation and Stimulus Make for a Crowded Fundamental Day

As I find the technical picture once again on the cusp of indecision for underlying risk trends – while volatility remains exceptionally high – my attention turns to high profile fundamental catalysts that can get the broader market moving in a clear and committed direction. There are a few events on tap that I’ll be watching for distinct potential ahead, but it is important to keep track of systemic matters that don’t come with the convenience of a one-off release. Economic activity is one such theme which the OECD touched upon this past session with its interim growth forecast update. The group upgraded its global 2021 GDP forecast essentially 1 percentage point to 5.6 percent. Meanwhile, the US forecast more than doubled from the December projection to an impressive 6.5 percent tempo. That didn’t rouse the Dollar this past session, but don’t forget its impact down the line.

Chart of GDP Forecasts for Major OECD Economies in 2021 and 2022

Another important theme that is a little ‘upstream’ is the scheduled release of the February CPI (consumer price index) report due at 13:30 GMT in Wednesday’s New York session. This is the most recognizable inflation report and naturally considered a barometer for the Fed and other central banks. The problem is that the group vowed to keep policy extremely accommodative for the foreseeable future, though markets are increasingly showing skepticism over their control. If this reading indicates any serious jump, it can easily feed into broader concerns. On the flip side, the vote from the House of Representatives on the Biden Administration’s $1.9 trillion stimulus program this past session was delayed. That means Wednesday is now seen as the pivotal date. Such a massive infusion can be a source of volatility as well as competitive growth.

Chart of Global Google Search for ‘Day Trading’ and ‘Stimulus’ (Weekly)

Chart Created by John Kicklighter with Data from Google Trends

While the story of growth and inflation are critical from the macro perspective, market participants are dubious about how they should interpret the developments’ impact on the financial system. This is not a predetermined scenario analysis tree as much as the textbooks would lead you to believe. Therefore, I will be watching government bond yields from the US and the rest of the world closely through the coming session. If the breather seen this past session proves short-lived, the implications for risk aversion and Dollar support could show through immediately.

Chart of US 10-Year Yield with Agg 10-Yr Yield Gov’t Bond Yield with 50-Day SMA (Daily)

Chart Created on Tradingview Platform

Amid Various Fundamental Scenarios, USDJPY’s Appeal Stands Out

As we sort out the general status of sentiment and the scheduled event risk ahead of us, it can be difficult to plot out candidates positioned to take advantage of disparate outcomes. Consider EURUSD for example which broke meaningful support at 1.1950 and now sets that former floor as new resistance, but its charge for the Dollar doesn’t abide clearly a safe haven appetite or relative growth picture. Furthermore, the anticipation for the ECB rate decision on Thursday will complicate the intention for movement through the next 24 hours. USDJPY on the other hand is less encumbered. The carry trade picture is a strong risk trend connect while the relative perspective of US growth to the rest of the world can amplify the view for the pair. That said, the technical weight of 109 above is significant and even greater at 110.

Chart of USDJPY and Agg Yield Index with 60-Day Correlation Coefficient (Daily)

Chart Created on Tradingview Platform

On a different look at USDJPY, net retail positioning for this pair has dove sharply into bearish territory. The open interest on the short side has hit its highest level on recent accounts which has pushed the net figure to a remarkable low whereby 62 percent of retail FX traders at IG are short. Leaning against the prevailing trend to the point of attempting to pick tops or bottoms is standard fair for this investor type. Are they onto something now or is this a contrarian reading as is so often the case?

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%
What does it mean for price action?
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Chart of USDJPY Overlaid with IGCS Net Speculative Retail Positioning (Daily)

Chart Created on DailyFX

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