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Dollar Posts Opposing Breaks with EURUSD and USDJPY, S&P 500 Tip Toes Among Bears

Dollar Posts Opposing Breaks with EURUSD and USDJPY, S&P 500 Tip Toes Among Bears

John Kicklighter,
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S&P 500, Nasdaq 100, Dollar, EURUSD and USDJPY Talking Points

  • The Trade Perspective: S&P 500 Bearish Below 4,000; AUDJPY Bearish Below 90; EURUSD Bullish Above 1.0650
  • Sentiment is increasingly shifting from ‘ends’ to ‘means’ as the traction on risk trends shifts away from a specific fundamental motivation such as monetary policy
  • The S&P 500’s flirtation with an official ‘bear market’ carries far more potential for shifting the tone of the entire market than growth or interest rate speculation at this juncture
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The Slow Exsanguination of Sentiment and Capital Market Altitude

While I find great value in determining the most effective driver of the broader financial system – as it can aid in determining whether trends are sustainable or temporary, prone to impending event risk or not – sometimes the ends matter more than the means. While there is no serious indication of panic in the market’s slide, it seems to be increasingly guided by a bias that doesn’t require constant foothold in event risk. If we were in a spiral, there would be no mistaking the panic; but the rapid descent would also more likely find its bottom more quickly, similar to the pandemic slump. Instead, the volatile and choppy drop that we are experiencing can prove more exaggerated and perhaps more destructive to investor confidence. Friday the 13th this go around finds the S&P 500 closing on the official ‘bear market’ designation (a -20 percent correction from all time highs). If headlines project an official ‘bear’ of the most prolific in the global markets, the news – and fear – will reach much further across the financial system.

Chart of S&P 500 with 20-Day SMA and 20-Day Rate of Change (Daily)

Chart Created on Tradingview Platform

Sentiment is no just relegated to the steer provided by the US equity indices – though they are my preferred short-cut to getting a generalized bead on the market. When I am looking to get a solid assessment of market risk appetite, it is usually across a range of assets that are liquid but generally weakly related accept through risk trends. We have been tracking the drop in global indices, emerging market assets, junk bonds and even Treasuries for weeks if not months. One particularly remarkable outlier for me has been the defiant rise in FX carry trade. The same rapid escalation in interest rate forecasts that has undermined growth and troubled capital market measures has also offered an offset in the form of greater rates of return that stands out after more than a decade of low-to-no yield environment. That said, there has been a noticeable slip in carry’s upward trajectory but not an outright drop until this past session. While the hit was wide, there was perhaps no more prominent a technical representation of that than AUDJPY where the drop below 90 sheered straight through a head-and-shoulders ‘neckline’.

Chart of AUDJPY with 100-Day SMA and 1-Day Rate of Change (Daily)

Chart Created on Tradingview Platform

The Intersection of Risk Appetite, Safe Haven Monetary Policy

When it comes to a pair like AUDJPY or NZDJPY, the balance of appetite for higher yield differentials versus a fear of exposure to ‘risk’ is fairly straightforward. Yet, the calculation is materially different when you reference something like USDJPY. This pair absolutely qualifies as a high-level carry target given the Fed’s recent 50bp rate hike and the forecasts of two more 50bp hikes and then a steady series of 25bp tightening moves to close out there year. With the BOJ making clear that it will keep pumping stimulus to keep the 10-Year Japanese Government Bond yield anchored, there is no more extreme a contrast. And yet, there is still a sentiment connection here. Risk aversion pulls on the carry appetite fueling this pair but there is also the Greenback’s own role as a ‘haven of last resort’ (a more extreme harbor than the Yen). With that said, we finally say the pair drop below its 20-day moving average for the first time in 43 trading days. The leveling out of interest rate differentials likely allowed the slide in sentiment to take over. Keep an eye on this pair as it can be a good macro measure of priorities.

Chart of the (Weekly)

Chart Created by John Kicklighter

Speaking of priorities, not all evaluations can nor should be made on price action alone. In evaluating the mood of the market, I do like to consult benchmarks (like the S&P 500 or Nasdaq 100), looking into deeper dives of correlation across financial assets and evaluate actual capital flows. However, there is other analysis that can be done that is outside of the traditional technical and fundamental textbook. Worth tracking is the search habits of investors – and the world at large – for key aspects or terms that can give an insight into the predisposition of the masses. Though admittedly a little targeted in the terms used, below is the results of a search looking at common trader/investor jargon that has been used generously lately. Not only has the interest (ie fear) in ‘bear market’ hit its highest in months recently; but there very negative term soundly outstripped typically bullish battle cries like ‘buy the dip’, ‘diamond hands’ and ‘HODL’ (the crypto favorite). This by itself is not definitive in its evaluation of our market, but it adds to the stormy picture.

Google Trends Traffic for Key Trading Terms

Calendar Created by John Kicklighter

What to Watch Moving Forward

While I believe that it is a critical time to have our threat assessment radars up and on high alert, there are certainly specific matters for which we should be more mindful. As a measure and objective, the performance of the US Dollar carries a lot of weight for my outlook. While the Greenback’s slip against the Yen discussed above is a significant shift in tone from interest rate forecast to generalized sentiment, there remains a consideration over what intensity of fear we are dealing with as well as the other factors feeding into that demand. If we were consulting the DXY Dollar Index (a trade-weighted measure), it actually charged higher Thursday. A fresh 19 year high has been routine this week, but there was finally some pace added to that particular session. For EURUSD, that would translate into a break from a tight 9-day range that I did not expect. That path of least resistance would have been a range based move back above 1.0635; but the drop below 1.0500 now puts us immediately at the gate of the lowest level for the world’s most liquid cross (and perhaps ‘asset’) going back to the beginning of 2003.

Chart of EURUSD with 20 SMA, 8-Day Range and 8-Day ATR (Daily)

Chart Created on Tradingview Platform

Overall, my true fix for this current phase of the market is to evaluate the level of sentiment in the system. When fear or greed take over, the data and events that come down the line are interpreted through a preconceived view of the world. I don’t believe we are in a self-sustaining risk aversion whereby all good news is rendered moot and the need to bail is paramount. However, we seem to be witnessing a very clear skew whereby good news is discounted and the negative exacts a serious toll on key markets. Should we tip into the official S&P 500 bear market, I think it can nudge us to the very edge of full-tilt fear – or perhaps even shove us over.

Chart of Risk Trend Strength

Chart Created by John Kicklighter

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