Daily Market Report

[FOREX.com]

USD/JPY: Toppy US bond yields, BOJ intervention threat mean the game has changed. May 3, 2024​

By : David Scutt, Market Analyst

• USD/JPY upside may be difficult from here
• The threat of BOJ intervention cannot be ignored
• US bond yields look at or near their peak for the current cycle
• Non-farm payrolls, ISM services PMI likely to generate wild swings in USD/JPY on Friday

The suspected intervention from the Bank of Japan (BOJ) this week has changed the game for USD/JPY, placing a rather large barrier in the way of further upside at a time when US bond yields are looking toppy. As such, the modus operandi of buying dips may need to be put on ice, replaced by a foreign concept for many traders: selling rallies.

Yield differentials still driving USD/JPY moves​

It’s no secret yield differentials play a significant role in determining the Japanese yen’s valuation, encouraging and discouraging capital flows in and out of Japan as spreads widen and contract. With the BOJ expected to increase overnight interest rates by around another 10 basis points this year, limiting movement in bond yields further out the curve, it’s meant the interest rate outlook outside of Japan continues to drive yield spreads,

The gap between US and Japanese bond yields has been no exception with the Fed’s rapid rate increases of 2022 and 2023 seeing spreads across multiple tenors blow out to multi-decade highs, helping to drive USD/JPY to levels not seen since the early 1990s.

Source: Refinitiv

USD/JPY correlation with US yields strengthening​

If the chart above wasn’t convincing enough to show how influential US bond yields have been on USD/JPY recently, the chart below will, showing that over the past quarter the rolling daily correlation between USD/JPY with US two and 10-year US bond yields has strengthened to 0.87 and 0.9 respectively. In a nutshell, where US yields move, USD/JPY typically follows.

Just as US two-year yields struggle to hold 5%​

That makes the next chart interesting with US two-year bond yields struggling to break and hold above 5%, repeating the same trend seen prior to the GFC in the mid-2000s. Unless the Federal Reserve is forced to lift the funds rate again, it suggests the main factor driving USD/JPY upside may be nearing exhaustion point.

Source: Refinitiv

If yields can’t keep pushing higher in the States, will USD/JPY? The strong positive correlation suggests it will struggle. And that’ before we consider the threat posed by intervention from the BOJ on behalf of Japan’s Ministry of Finance, adding a significant barrier to yen weakness beyond that already seen.

Selling rallies preferred as buying dips ditched​

The backdrop of toppy US yields and BOJ intervention threat has changed the game for USD/JPY. Unless you think the Federal Reserve will be forced to start hiking rates again, the case to buy dips has been greatly weakened. Given relative valuations and interest rate risks, selling rallies is now arguably a better strategy, putting the prospect of renewed downside in play.

USD/JPY squeezes becoming progressively smaller​

You can see the damage the suspected BOJ intervention episode on Monday did to former trendline supports, decimating level after level like they didn’t exist down to 153. While there have been some big bounces since, what’s noticeable is each topped out at lower levels, fitting with the sell rallies mantra.

For longer-term traders, unless we see US yields climb meaningfully above 5% again, consider selling rallies looking for a retest of former key horizontal resistance just below 152. Potential entry levels include 156 and 158, where USD/JPY squeezes topped out following Monday’s downside flush. Stops could be placed either above 158.50 or 160.25 for protection, depending on entry level.

If the trade target were to be reached, it may pay to see how the price interacts with this key level with a clean break likely to open the door to a far larger downside retracement.

Near-term trade considerations​

There are several key US data points released later Friday that could significantly influence US yields and USD/JPY.

In the April non-farm payrolls report, pay particular attention to the unemployment rate and average hourly earnings as these are the key areas Fed policymakers will be watching when it comes to the inflation outlook.

While it won’t receive the same degree of media coverage, don’t discount the importance of the ISM non-manufacturing PMI released after the payrolls report. The separate services PMI released by S&P Global last week had a meaningful impact on US rates and dollar, revealing an unexpected slowdown in activity. Should the more impactful ISM survey confirm those findings, it could lead to broad declines in US yields and greenback.

-- Written by David Scutt

Follow David on Twitter @scutty

The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex, commodity futures, or digital assets, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to FOREX.com or GAIN Capital refer to StoneX Group Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

 

[FOREX.com]

AUD/USD weekly outlook: Aussie rises for a second week, RBA on tap. May 6 , 2024​

The RBA will announce their cash rate decision on Tuesday alongside their quarterly SOMP with updated staff forecasts. And that can quickly reshape expectations for the rest of the year and move AUD/USD accordingly.

By : Matt Simpson, Market Analyst

The RBA are unlikely to change policy any time soon, however...

Regular readers should remember my stance on the RBA’s cash rate; it is unlikely to change for the remainder of the year. But that doesn’t mean things cannot change. Q1 inflation data was broadly above expectations which is the last thing the RBA (or anyone, for the matter) want so see. Especially when prices were already deemed “too high” by the RBA at prior meetings.


The basic theme for Q1 inflation was that it had slowed from Q4 on an annual basis yet was above economic forecasts, yet the q/q figures were above previous and economic forecasts. And if that trend persists, another hike cannot be ruled out.


But the RBA have warning of ‘upside risks’ for some time. And as inflation had previously cooled over multiple quarters, we must also expect some bumps in the road. Besides, consumers remain pessimistic according to Westpac which is backed up by weaker retail sales. And that suggests the cash rate of 4.35% is clearly dampening the economy to a degree. Furthermore, with the Fed closing the door on further hikes it also removes an element of pressure for the RBA to revert to the hawkish side for now (even though a hawkish bias may return in the statement). I therefore doubt a knee-jerk reaction from the RBA at Tuesday’s meeting. Even if market pricing is toying with the idea of one more hike by October.

However, what caught my eye in the AFR (Australian Financial Review) is that the RBA have hiked rates on 7 out of the 9 occasions that quarterly GDP was 1% or higher heading into a meeting. And as that box has been ticked, perhaps we should be on guard for a hike just in case.

Market pricing shows that expectations for a potential hike have risen, but only gradually.

• The 30-day RBA cash rate futures contract implied a 5% chance of a 25bp increase by May 1st
• The yield tops at 4.45% in October 2024 and falls to 4.16% by October 2025
• The OIS curve has increased to show a slight increase of perceived probability of an RBA hike.
• But alarm bells are hardly ringing, with the 1-year OIS implying sitting just 11bp above the cash rate (to suggest less than the usual 25bp hike)

Eyes on the RBA’s updated forecasts

However, the RBA will also release their quarterly SOMP (Statement on Monetary Policy) which will include updated staff forecasts. And that can quickly reshape expectations for the rest of the year. We know the RBA lack the appetite to cut rates any time soon, but given the higher levels of inflation a key thing to look out for is upward revisions to the RBA’s cash rate forecast and CPI forecasts.

To summarise the February SOMP:

• Overall demand is still greater than supply, but the economy is moving towards a better balance
• Economic growth is expected to slow here and overseas
• Labour market conditions are expected to ease further
• Inflation is expected to decline to the 2–3 per cent target range in 2025 and to reach the midpoint in 2026
• While there are encouraging signs, the economic outlook is uncertain and the Board expects it will be some time before inflation is sustainably low and stable

Click the website link below to get our exclusive Guide to AUD/USD trading in Q2 2024.

https://www.forex.com/en-us/market-outlooks-2024/q2-aud-usd-outlook/

AUD/USD futures – market positioning from the COT report:

Bears continued to cover which allowed AUD/USD to rise for a second consecutive week. A hotter CPI report for Australia, and a weaker US dollar via weaker US economic data and the Fed closing the door on further hikes sealed the deal for risk appetite.


NZD/USD and AUD/USD were the strongest majors last, Wall Street rallied on Friday which saw SPI 200 futures track higher during out-of-hours trade. And this paints a positive start for the ASX 200 this week.

• Net-short exposure for large speculators and asset managers fell for a second consecutive week
• The weekly fall in net-short exposure fell at its fastest pace since September 2022 among large specs
• Asset manages trimmed shorts and increased longs, whereas large specs trimmed longs and shorts
• AUD/USD rose for a second week and closed above 66c

AUD/USD technical analysis

I was clearly wrong-footed last week seeking another dip lower for AUD/USD, as it rallied for three consecutive days into Friday’s close, thanks to weaker US economic data and the Fed closing the door on another hike.


Bulls made good progress with a firm close above the 200-day EMA and 66c handle. But can it make such easy work of the highs around the Q3 open?


The high tail on Friday is due to the US dollar recouping some of its losses in the second half of Friday’s NY session. And that suggest a hesitancy to test the Q3 open for now. So we may be in for some choppy trade between the 200-day EMA ~0.6560 and the Q3 open at 0.6660 as markets await the outcome of the RBA meeting. Should the RBA not be as hawkish as suspected, the perhaps the rally could peter out.


But a combination of a hawkish RBA and risk-on rally for global equities could send AUD/USD towards and potentially through the 0.6700 handle. I doubt we’ll see such a move ahead of Tuesday’s RBA meeting. And if the US dollar regains its footing then the upside potential for AUD/USD is likely to be capped.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex, commodity futures, or digital assets, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to FOREX.com or GAIN Capital refer to StoneX Group Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

 

[FOREX.com]

AUD/USD rises in RBA, GBP/JPY, gold look set to bounce: Asian Open May 7, 2024​

Both gold and GBP/JPY are showing signs of stability around key support levels to suggest they could extend their bounce. But with AUD/USD rising for four days on anticipation of a hawkish RBA, whether AUD/USD can extend its rally beyond resistance is up for question.

By : Matt Simpson, Market Analyst

WTI crude oil prices were a touch higher on Tuesday as the ceasefire in Gaza remains uncertain. Oil prices fell over 7% from the Friday April 26 high to last Friday low, and are now trapped beneath the 200-day average and above the December bullish trendline.


Fed Williams said that the net interest rate move is likely to be lower. The US dollar was little changed on the day and formed a small inside day (and doji) which closed back above 105, during a quiet days trade due to the UK public holiday.


AUD/USD rose for a fourth day yet upside volatility was relatively low. There has been a growing expectation that the RBA will reintroduce a tightening bias, although the consensus remains for them to hold today. And given AUD/USD is fast approaching resistance around the 0.6550 – 0.6660 zone then I am now questioning the upside potential for AUD/USD given the selloff on the US dollar index is showing signs of stability. Should the RBA implement a hawkish bias but little else, then perhaps we’ll see another pop higher before reversing around the Q2 or 3 opens, especially if the US dollar index finds some love around 105.

Economic events (times in AEST)​

Today’s RBA meeting is clearly the big event in today’s Asian session. You can read my full view in the AUD/USD weekly outlook, but in a nutshell I suspect the RBA will hold rates and include a hawkish bias to their statement given the higher inflation print. And this is despite Monday’s reports that former governor Lowe said that he doesn’t think the fight against inflation is yet over, prompting some speculation that today’s meeting could be live.

• 09:50 – Japan foreigner stock/bond purchases
• 11:30 – Australia retail sales
• 14:30 – RBA cash rate decision
• 15:30 – RBA SOMP (statement on monetary policy) and press conference

Click the website link below to get our exclusive Guide to AUD/USD trading in Q2 2024.

https://www.forex.com/en-us/market-outlooks-2024/q2-aud-usd-outlook/

GBP/JPY technical analysis:​

The daily chart shows an established uptrend on GBP/JPY, even if late-stage parabolic rally to 200 was met with an almighty thud. Yet bearish volatility receded on Friday before Monday snapped its 3-day losing streak, which suggests a swing low may have formed on Friday. RSI (2) was also overbought on that day, the lower wick failed to close beneath the 50-day EMA and prices are back above the high-volume node from a prior consolidation area.


Bulls could seek dis down to 192 with a stop beneath Friday’s low (or the trendline for extra wriggle room) in anticipation of a retest and potential break of 194. A move towards the 2015 high may not be out of the question, although things might get shaky given the potential for further intervention.


However, there is a reasonable chance that the BOE may not be as dovish as markets hope which could further support the British pound into the weekend.

Gold technical analysis:​

Last week out I outlined a technical scenario for gold to bounce from $2300 on the assumption the weekly low had been seen. NFP figures had other plans and forced a marginal new low, but it now appears we can revisit the potential setup.


A doji formed on Friday and Monday’s bullish price action was part of a 3-bar bullish reversal (morning star). The cycle low formed around the 50% Fibonacci level and prior high-volume node to add weight to the potential swing low. From here, bulls can either enter at market or seek dips towards the $2300 handle with a stop below Friday’s low. $2350 makes a feasible near-term target, near the prior cycle highs.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge


The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex, commodity futures, or digital assets, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to FOREX.com or GAIN Capital refer to StoneX Group Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

 

[FOREX.com]

AUD/USD snaps 4-day winning streak, ASX 200 set to follow? Asian Open May 8, 2024​

By : Matt Simpson, Market Analyst

The Australian dollar handed back all of its pre-RBA gains, which was trying to notch up a fifth consecutive bullish day on anticipation of a more hawkish RBA. Yet the statement was not overly hawkish and Governor Bullock said the RBA “believe rates are at the right level to get inflation back to target”. Inflation was revised higher to show inflation falling back to target at a slower pace and the RBA remain “vigilant” to upside risks.


Ultimately, the Fed closing the door on further hikes has provide the RBA more wriggle room to see if a 4.35% cash rate can finally work its magic. There are signs of strain in the economy, but not enough to cut rates whilst there’s also no immediate threat of a hike. My view remains unchanged that a 4.35% cash rate is likely to remain in place this year.


The US dollar retraced higher for a second day although it doesn’t have the hallmarks of something that wants to return to ‘bull’ status soon, especially if the Fed continue to drop dovish cues.


Gold could appeal to bulls for a potential long setup after prices retraced lower against Monday’s bullish range expansion day. $2300 seem to be a level of importance, so ideally prices can hold above that level for a move towards the highs near $2350.

AUD/USD technical analysis:​

A bearish outside / engulfing day formed on AUD/USD to show a reluctance to retest the Q3 open, or last week’s high of 0.6650 for that matter. But does that mean it can simply roll over? That is likely down to the US dollar which notched up its second bullish day. And I suspect there is a little more upside potential for the dollar as it retraces against the ‘dovish’ Fed moves, but at the same time dollar strength could also be limited. And that suggest potential support for AUD/USD and choppy trade in the top third of its recent rally.


The 1-hour chart shows a strong bullish trend into the highs and a likely correction / sideways consolidation. RSI (2) reached oversold during US trade, and prices are holding above the weekly pivot point at 0.6575, near a high-volume node and prior consolidation area. Any dips towards the 0.6570-80 may be appealing to bulls who want to trade the range to the long side, although I’m not expecting it to simply break to new highs from here given the levels of resistance overhead.

Click the website link below to get our exclusive Guide to AUD/USD trading in Q2 2024.

https://www.forex.com/en-us/market-outlooks-2024/q2-aud-usd-outlook/

Economic events (times in AEST)​

Unless some unexpected happens, we could be in for a quiet day’s trade. US stockpiles could give a bump for crude oil prices, which are stuck between December’s bullish trendline and the 200-day average and $80 handle. We then have three Fed speakers, who if provide further dovish cues might help send the US dollar low against its 2-day mild rebound.

• 12:30 – RBA chart pack release
• 13:35 – 10-year JGB auction
• 16:00 – German industrial production
• 00:00 – US wholesale inventories
• 00:30 – US crude oil inventories
• 01:00 – Fed Governor Jefferson speaks
• 01:45 – Fed Collings speaks
• 03:30 – Fed Governor Cook speaks

ASX 200 at a glance:​

• Positive sentiment and a less-hawkish-than-expected RBA helped the ASX 200 rise for a fourth day
• The ASX 200 cash index has opened at the low of the day on each occasion and within its most bullish week of the year
• Yet price action on SPI 200 futures overnight show a market that may be losing some steam
• RSI (2) has reached overbought on the daily chart and the 1-hour RSI (2) has formed a bearish divergence with prices
• Price action is also oscillating as it grinds higher to suggest a falling wedge (bearish reversal) pattern could be forming on the 1-hour chart
• With upside potential limited, bulls may want to tighten stops or seek to fade into moves towards the 7850 handle and seek mean reversion lower.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex, commodity futures, or digital assets, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to FOREX.com or GAIN Capital refer to StoneX Group Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.