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Dollar Holds Technical Boundary with Dense Friday Data and Risk Trends Still Buoyant

Dollar Holds Technical Boundary with Dense Friday Data and Risk Trends Still Buoyant

John Kicklighter, Contributor
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S&P500, Dollar, Inflation, Earnings and USDJPY Talking Points

  • The S&P 500 lead a charge in ‘risk appetite’ that defied deepening convictions around monetary policy tightening from the Fed and beyond
  • Despite its uncertain positions as a deflated safe haven or rate hike benefactor, the Dollar has held the technical line and still stands ready for another bullish leg
  • While themes such as relative monetary policy remains a top potential driver through Friday, the US docket tops market moving potential between the UofM survey, retail sales and import inflation
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The Risk Rally Continues…But for How Long

Speculative appetite managed to maintain its control over the markets this past session – pushing benchmarks back to immediate resistance levels. Among the benchmarks that I track for broader sentiment, the S&P 500 stood out as its impressive 1.7 percent rally would clear the midpoint of a three month range and hone in on a 50-day moving average. We have notable ended this past session at that technical boundary which likely gives greater weight to its overall influence. I am a believer in technical analysis by recognition whereby the more market participants and capital that abide by an overt boundary, the more weight it will ultimately exert on price action. Keep that in mind as we track out the final trading day of the week – particularly given that there are few benchmarks with this same weight pushing their own respective upper boundaries. The path of least resistance from here is a correction to close out the week, but perhaps event risk will change that calculation.

Chart of SPY S&P 500 ETF with 50 Moving Average with Volume and 1-Day ROC (Daily)

Chart Created on Tradingview Platform

Taking a closer look at the uneven backdrop of risk appetite, I will note first that there was a broad bid in speculative assets. Not only did the US indices rally but we also experienced strong bullish drives from global equities, emerging market assets, high yield fixed income and carry trade. That breadth and intensity combination registers as ‘conviction’ in my book, but it doesn’t ensure follow through. Conviction requires a foundation on which market participants can anchor, and we haven’t seen a beacon arise for optimistic to follow amid monetary policy tightening, slowing growth and fear over diversification. I will note that the uncertainty was so tangible this past session that even the stocks offering up headline earnings beats were struggling for traction. Key corporations from Morgan Stanley to Taiwan Semiconductor Manufacturing would post better-than-expected numbers but their tickers would struggle. Keeping a bullish bias is one thing, but failing to gain traction when the event risk is so clearly supportive should raise red flags.

Chart of Morgan Stanley with 50-Day SMA and Volume Overlaid with S&P 500 (Monthly)

Chart Created on Tradingview Platform

Monetary Policy Remains a Driving Theme

Perhaps the most productive theme this past session was the charge in carry trade. While that classification can technically encompass quite a few pairs spanning the contrast of dovish and hawkish monetary policy backdrop, the Yen crosses certainly stand above and beyond. In a world where yield appeals and confidence in policy-lead stability remains, these currency crosses garner serious appeal. We have seen a remarkable rally from the likes of the USDJPY and other Yen crosses that harkens back to previous eras where there was a meaningful yield differential upon which the buy-and-hold could take advantage. What we are experiencing at present is more of a speculative drive rather than an actual yield play, but it is unmistakably one of the most productive drives among its ‘risk’ leaning peers. That said, the parable of the ‘nail that sticks up the furthest’ certainly applies.

Chart of Relative Central Bank Policy Standing

Chart Created by John Kicklighter

Speaking of monetary policy, inflation data out of the US continued to build on expectations. While it is given significantly-less credibility, the factory-level inflation data reinforced the consumer price data and offered little relief to price pressures that suggest the rate hikes from the Federal Reserve are overdue. It is important to recall that the Federal Reserve abides a dual mandate between full employment and moderate inflation. On the latter point, we are running way beyond the target and have done so for an extended period of time. In such a scenario, to remain passive rather than respond to exaggerated inflation risks allowing the situation grow out of control. ‘Stagflation’ is an increasingly common refrain among market participants, which speaks to the mindset of investors; and by extension, traders.

Chart of US Headline and Producer Finished Goods Year-Over-Year Inflation (Monthly)

Chart from Fed Economic Database with Data from BLS

What to Watch Through Friday’s Session

Looking ahead to the final trading day of the week, there remains a distinct contrast between Fed rate expectations and the Dollar’s overall performance. In the former’s case, we maintain a certainty in a 2022 rate hike with a modest speculation around a second increase. That said, the Greenback was still under pressure this past session. The ICE’s trade-weighted Dollar Index managed to pull out of an outright nose dive with its 20-day moving average and former range resistance (as new support) still holding guard. There is potential for a staging of a subsequent leg of a bullish run, but it is best served with a true fundamental backing. There is plenty of event risk on the US docket specifically that can stir a volatility response. Top listings on the US docket includes retail sales, the University of Michigan consumer sentiment survey and import inflation. Should it all align to a bullish or bearish view, the impact can be substantial – but that is the rare occasion.

Chart of DXY Dollar Index Overlaid with Fed Forecasts 2022 and ‘Wicks’ (Daily)

Chart Created on Tradingview Platform

Outside of the Dollar’s heavy economic docket, there are a range of markets that have a combination of technical and fundamental appeal. On the latter point, there seem to be few explicit drivers which is perhaps an explanation for the market’s inconsistent bearing for trend. Yet, among the most productive measures in the open market, the Yen crosses are the most impressive purely from a technical basis. You can tack your pick on JPY pairs to track, but I find those with the most distinct monetary policy disparity reflect the most productive foundations. While USDJPY is a pair to watch with the event risk on tap, GBPJPY is more interesting from a slow-burn perspective. Working on its 7th consecutive session rally, we are coming into the range high from May and a technical overhead that can still work against speculative intent. Meanwhile, the fundamental backdrop has seen BOE rate forecasts shift from a February lift off to a possible December launch. There is little in the way of data to alter this bearing Friday, but the active speculative backdrop can fuel the broader systemic theme.

Chart of GBPJPY with 20-Day SMA with Consecutive Candles (Daily)

Chart Created on Tradingview Platform

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