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How a S&P 500 Breakout Would Impact USDJPY’s Two Decade High

How a S&P 500 Breakout Would Impact USDJPY’s Two Decade High

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S&P 500, EURUSD, USDJPY and AUDNZD Talking Points

  • The Trade Perspective: S&P 500 Bearish Below 4,000; EURUSD Bullish Above 1.0800; AUDNZD Bearish Below 1.1100
  • The S&P 500 is working its way to an inevitable technical break, but a breach with a fundamental backing – be it sheer sentiment or a macro spark – would be more reliable
  • GDP is a matter that will swell ahead, but top theme ahead is monetary policy between Fed speculation and RBA action
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The Market Fills Up With Fuel But Still Awaiting the Spark

Last week, we had a problem with establishing a distinct market trend due to the lack of liquidity in between the US markets closure Monday, London out Thursday and Friday, and China closed for the Duanwu Festical Friday. That is a significant gap in speculative continuity which can often stall market trends in their tracks. While there were still a few regions’ markets offline through Monday, the major financial centers were generally back to fill out market depth. That said, there was no commitment to meet anxious traders. That is perhaps not that surprising given that the past few weeks’ price action has committed to a move that conflicts with the prevailing trend with the more recent price action explicitly committing to chop. While this picture was fairly common across the spectrum, the S&P 500 presented the picture well enough in a range between 4,175 and 4,075 which has established the smallest 6-day historical range (as a percentage of spot) since mid-April, and before that back to holiday conditions. A break is highly probable but direction is not as clear and trend after the technical clearance requires some measure of conviction. Nevertheless, I believe the larger trend, liquidity and principal fundamental winds would make a bearish break a more productive outcome.

Chart of S&P 500 with 20 and 50-Day SMAs, 6-Day ATR and 6-Day Historical Range (Daily)

Chart Created on Tradingview Platform

Picking up one of the measures of ‘complacency’ that I highlighted last week, the VVIX’s ‘volatility of volatility’ measure has continued to is slide to remarkably low levels. Despite the tangible issues in persistent inflation, aggressive monetary policy practices and troubled growth forecasts; the assumptions of a sudden flare up in volatility remains exceptionally low. This index not only slipped to a new low not seen since the very beginning of 2020 (pre-pandemic), but it has dropped 8 consecutive trading days. We haven’t seen that since July 2017 – the height of what were the doldrums during an virtually unprecedented period of quiet. This is just one in a range of measures that raises concern over the market’s preparation for volatility ahead, but it doesn’t ensure activity imminently ahead.

Chart of VVIX ‘Volatility of Volatility’ Index with Consecutive Candle Count (Daily)

Chart Created on Tradingview Platform

Monetary Policy is Tuesday’s Top Macro Theme

Looking out over the entirety of this trading week, the scheduled event risk seems to most directly align to catalysts of monetary policy speculation. That said, I still consider growth forecasts as a by-product of unrelenting inflation and aggressive central bank activity the most underappreciated component to macro-pricing. The OECD’s economic forecast is a prominent beacon on my radar; but for the immediate future, rate speculation is still at the controls. The first of a run of central bank rate decisions this week is Tuesday’s Reserve Bank of Australia (RBA) rate decision. An expected 25bp increase would be a material escalation of the group’s policy and would be a necessary step to match speculation for the key rate to end up at 2.85 percent at year’s end as is priced into swaps. Pairs like AUDUSD and AUDJPY can respond to either outcome, but there are strong counterparts to factor for conviction. AUDNZD, on the other hand, curbs the influence of traditional ‘risk trends’ and can curb growth factors to a meaningful degree. It more distinctly focuses on relative rate forecasts where the RBNZ conspicuously is facing a rate forecast of 3.70 by end of year.

Chart of AUDNZD with 50-Day SMA and 5-Day / 20-Day ATR Ratio (Daily)

Chart Created on Tradingview Platform

While FOMC policy insight is not on the menu this week, it nevertheless continues to influence speculation. There were no significant indicators of substance for rate watchers to process for the US this past session, while the US trade balance and consumer credit figures ahead are far from critical measures for policy determination. Nevertheless, market appetites will keep conditions choppy. Through Monday’s close, Fed Fund futures had pushed up the probability of a fourth consecutive 50bp rate hike on September 21st to 74 percent from 36 percent a week ago. This particular meeting on the timeline is where speculation will be most responsive, but the performance of US 2-year yields and the US Dollar are also worthy of close observation for industrious traders.

Table of Probable FOMC September Rate Level According to Fed Fund Futures

Chart Created by John Kicklighter

Keeping a Line on the Majors

Speaking of the majors, the Dollar continues to carve out a frustratingly narrow range. Congestion is not itself a problem so long as it matches underlying conditions and fundamentals. For the Greenback where ‘risk appetite’, FOMC speculation for next week and relative growth conversations are principal fundamental matters; the current sense of peace is poorly established. Later this week, the combination of the ECB rate decision on Thursday and Friday’s PCE deflator from the US will be a potent combination to work on EURUSD’s range from 1.0800 to 1.065. Technically speaking, the forecast for the ECB’s benchmark rate through year’s end has firmed up to 0.68 percent while the Fed’s forecast has eased back to 2.03 percent. That closes the gap, but is it enough to override the sentiment signal and distinct US economic advantage? I’ll be watching the technical boundaries for answers.

Chart of EURUSD with 20 and 100-Day SMAs (Daily)

Chart Created on Tradingview Platform

Monetary policy plays a roll in most majors’ general positioning nowadays, but it is particularly important for the Yen crosses. Yet, it is isn’t just a play on relative yield differential forecasts; these crosses are also inextricably linked to risk trends. Most of the major JPY crosses have appreciated, but few can match the prominence of USDJPY. While not the most prolific yield differential amongst the majors, it has nevertheless extended its recent leg higher to crest levels not seen in over two decades. By traditional measures – risk appetite, yield potential, growth differentials – this pair earns its buoyancy. That said, it isn’t a constant repricing higher. The fundamentals have been seriously discounted here, and I believe a well placed flip in risk appetite could send this pair on a significant move.

Chart of USDJPY with 50-Day SMA and 6-Day Rate of Change (Daily)

Chart Created on Tradingview Platform

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