USDJPY Reversal To Balance Fed’s Persistent Rates Drive and Google-Threatened Nasdaq Plunge

Google, Nasdaq 100, Dollar and USDJPY Talking Points

• The Trade Perspective: S&P 500 Bearish Below 4,375; USDJPY Bearish Below 127
• There is serious weight around the balance of the broader financial market heading into Wednesday with a US equity selloff that has further fuel in Google earnings
• While the Dollar is likely finding a safe haven bid amid risk concerns, the Fed’s warnings that swoons won’t stop hikes lingers…and makes USDJPY even more important

A Nasty End to the Past Session and Fears for the Next

In recent market history, there have been more than a few instances where a bleak out look for the major indices and other risk-sensitive assets were on the brink of technical collapse only to find speculative appetite save the day. Heading into the new trading day, we are again on the cusp with few obvious fundamental handholds to grab onto before going over the edge. Carrying this analogy even further, it seems that the surrounding financial and economic environment is positioned to jettison us into the abyss. One of the most immediate and novel catalysts to pressure another leg lower for benchmarks like the S&P 500 was the earnings update after the NYSE close Tuesday. There were quite a few major US companies reporting their performance this past session, including Microsoft (MSFT) which beat expectations of $49.05 billion in revenue through the quarter with an actual print of $49.36 billion. As the company with the third largest market cap ($2.025 trillion), that can represent serious weight. However, Google’s own shortfall may more than offset the good will. Revenue growth slowed with $68.01 billion coming in versus the market’s estimate of $68.11 billion. An announced $75 billion share buyback may help matters, but GOOG was still down 2.6 percent later in after hours trade. If we break the head-and-shoulders pattern seen below, it could very well tip the scales.

Chart of Google with After-Hours Performance (Daily)

Chart Created on Tradingview Platform

The next move that risk assets make can redefine our course. There is prominent technical support across the wide breadth of speculative benchmarks I monitor including ‘rest of world’ indices (the VEU ETF), emerging markets (EEM ETF) and junk bonds (HYG ETF). Even the outliers like crypto (Bitcoin has slipped 39,000) and the Yen based carry trades are folding under the pressure. Yet, if I were to select a single category to monitor for its sway over trader intent, it would have to be the US indices. The Dow pulled back beneath its ‘technical correction’ mark at 33, 250, the S&P 500 closed at its session lows and within reach of the Feb 24th swing low and the Russell 2000 dropped to a new 16-month low. However, it is the Nasdaq 100 that is at the crossroads of the various speculative streams. Where tech was an undisputable leader pre and post-pandemic, it is now taking the biggest hit. The massive market cap earnings this week are key parts of the NDX. What’s more, the index is back in technical ‘bear’ territory. Heading into the next US session, we stand just above the range floor of the past 12 months range – which also happens to be the 38.2 percent Fibonacci retracement of the post pandemic low (at approximately 13,000/12,950).

Chart of QQQ Nasdaq 100 ETF with Volume and 1-Day Rate of Change (Daily)

Chart Created on Tradingview Platform

Sentiment Versus Tangible Fundamentals

If you are looking for a fundamental nudge for a breakdown or recovery, I think we will see the greatest effect if the afterhours earnings updates were to flip sentiment. Should that engine of volatility fall short, we may find the market cast adrift as there aren’t many scheduled fundamental events that can be expected to scale up to a systemic driver. On the docket, we have monetary policy fodder in Australia CPI and the ECB President’s speech – though the truly influential are Thursday morning’s Bank of Japan update; and, far more potent, the FOMC rate decision next Wednesday. Russia is another backdrop matter that could return to the forefront after reports that Gazprom was cutting off gas to Poland and Bulgaria – an economic pinch. Yet, for Russia itself, data updates on business confidence, industrial production and retail sales will offer insight into the aggressor country. If we make it all the way through the next US session without a clear course, Facebook earnings due at 20:05 GMT can stir the pot once again.

Calendar of Major Economic Events

Calendar Created by John Kicklighter

Speaking of the convergence of fundamentals and sentiment, the Dollar represents an important convergence. In traditional interpretation of the economic run, the docket was not particularly favorable. Consumer confidence eased modestly to 107.3 (from 107.6), house sales dropped -8.6 percent and overall durable goods grew a less-than-expected 0.8 percent. Nevertheless, the DXY index advanced yet again to fresh two year highs. I have seen considerable headline space connecting the drive to interest rate expectations, but the traditional measures of this course (US 2-year yields and Fed Fund futures) have actually eased back modestly. It would seem that the more conventional role to the Greenback as a safe haven has stepped in amid the broader fall in capital markets. I think a wholesale trend reversal (bearish) would be truly fed should the markets come to sincerely believe that the FOMC will hold its word not to prop up the markets (the so-called ‘central bank put’) should we enter a meaningful correction. For the US currency as a haven with an appealing carry course, that would be a serious reinforcement.

Chart of DXY Dollar Index with 10-Month SMA and 1-Month ROC (Monthly)

Chart Created on Tradingview Platform

Watch the Dollar – But Fixate On USDJPY

As we move through the middle of the week and significant risk market disruption, there will be a lot to draw from the bearing of the US currency. There has been a considerable rally from the benchmark currency over the past 11 months based in part on the swell in interest rate expectations. Now it seems the same haven appeal is comingling with those bullish intentions. As the DXY nears a break that would unseat two decades of price action, we find EURUSD pressuring its own 2020 swing lows while GBPUSD indulges its worst three-day selloff in 25 months. Yet, the pair that truly stands out to me is USDJPY. Like most other Yen crosses, rode on the rising winds of interest rate expectations that push a 12.5 percent rally in the span of just six weeks. Well, rate expectations may be sticky, but sentiment is not so impervious; and the pullback in in the S&P 500 has led to the same – at least over the past week – for most of the Yen pairs. While the potential yield forecast may not change much, the market’s appetite to chase such a low-return exposure amid tumultuous conditions where liquidity is needed made this a prone bullish view to chase. And yet, USDJPY has yet to earnestly break the bullish spell.

Chart of USDJPY with 10 and 100-Day SMAs, 10-Day Disparity Index (Daily)

Chart Created on Tradingview Platform

Technically speaking, eased back enough to push USDJPY spot back beneath its 10-day moving average. That is the first time the exchange rate slipped beneath the (until now) trailing support in 36 trading days. That matched an extraordinary run back through December 2016, but there haven’t been any other comparable moves – much less longer – on the historical data I processed. Statistically, this is an extraordinary run prone to an equivalent correction; but practically, the fundamentals matter here. In the event of further risk aversion, the Greenback may find a ‘haven of last resort’ bid under more significant flows; but the first step in sweeping risk aversion is first to unwind existing risk exposure. That would mean pulling out of USDJPY carry. This interesting fundamental mix is why this pair is so important to watch moving forward – whether you’re an FX trader or not.

Chart of USDJPY with 10-Day SMA overlaid with the Number of Consecutive Days Above/Below (Daily)

Chart Created by John Kicklighter with Data from IG