USDJPY and CADJPY Push Reversal Risk as S&P 500 Mocks Technical Levels

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S&P 500 ETF, USDJPY, CADJPY, EURJPY and EURGBP Talking Points

  • The Trade Perspective: Pairing Dow Bullish to Nasdaq 100 Bearish; CADJPY Bearish Below 95; GBPJPY Bearish Below 159; GBPCAD Bullish Above 1.6775
  • Technicals have lost significant clout in the markets recently with key breaks like the S&P 500’s 200-day SMA and 2022 mid-point failing to charge bullish or bearish momentum
  • President Biden is expected to announce fresh sanctions on Russia and central bank speak comes heavy Thursday, but March PMIs offers a third possible theme

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Sometimes Technical Analysis Takes a Back Seat

I am a firm believer that technical analysis is part of a well-rounded trading approach, but markets don’t always pay due respect to the technique. The past 48 hours is a prime example of when chart patterns and indicators may highlight key perspective while still failing to connect to traders’ true intent. By most measures, the 4,470 level on the S&P 500 (445 on the SPY ETF) carries some serious weight in textbook standards. That level represents both the 200-day moving average – one of the most recognizable chart measures even for those that shun technicals – and the midpoint of the 2022 range. And yet, when we clear the level on Tuesday, there was an utter lack of follow through. This past session, we reversed course on that failed break with a bearish clearance in the closing hours of the New York session…with the same lack of follow through. Technical cues set the stage for bigger moves, but conviction comes from something more prolific – whether that be a fundamental driver or simply an expression of market conditions. At present, there are a few themes that can take up the yoke – Ukraine-Russia; monetary policy forecasts; growth forecasts – but until one of these matters do take control, volatility will continue without a clear outlet.

Chart of SPY S&P 500 ETF with Volume and 100-Day Mov Avg (Daily)

Chart Created on Tradingview Platform

Looking across the spectrum of ‘risk assets’, the same sense of floundering was fairly universal. Emerging market assets, junk bonds and other typical measures notched the same modest slip from last week’s charge. Global indices were much in the same boat as the S&P 500, Dow and Nasdaq 100; but without the end-of-day slip given that those markets were generally offline when US investors swooned. The very notable exception to the rule remains the Yen-based carry trades. The ‘dividend stock trade’ of the FX market, there remains a firm bid under the key crosses – but how far can they run? USDJPY extended its run (following the 116.25 break of major resistance less than two weeks ago) to clear 121. This has pushed the world’s third most liquid currency cross to its best monthly performance since November 2016. Risk trends, interest rate forecast differentials and commodity prices (terms of trade) have worked in concerted to keep this drive going; but the run cannot go forever. While there are multiple cracks that can form underneath this drive, I believe basic ‘risk trends’ will likely prove the tipping point.

Chart of USDJPY with 20-Month SMA and 1-Month Rate of Change (Monthly)

Chart Created on Tradingview Platform

A Closer Look at the Yen Crosses

While USDJPY is a very representative FX pair, I don’t believe it to be the best positioned Yen cross. Overall, these crosses are far over-stretched and prone to reversal. Yet, for the market to take advantage of the situation such that it doesn’t just register a single red candle without any intent of a more significant reversal (like the S&P 500), a fundamental driver would be a meaningful engine. With USDJPY, the forecasts of a 66 percent probability of a 50bp rate hike (according to Fed Fund futures) can offset at least some of the influence from tepid risk aversion. To account for that consideration, CADJPY may represent a less driven interest rate divergence. While the BOC has moved more quickly than the Fed, the outlook for the Canadian central bank has not been on an accelerating pace as of late. Adding to that fundamental nuance, the technical picture shows CADJPY has advanced 11 consecutive trading days (there is no 12-day run in history) and 97 is the midpoint of the pair’s historical range. That does not ensure the market will stop and turn at that milestone, but it adds context.

Chart of CADJPY with 200-Day Moving Average and Consecutive Candle Count (Daily)

Chart Created on Tradingview Platform

If the stretched nature of the Yen crosses is appealing – and you are concerned about the markets struggle to gain traction on technical developments like reversals – then the fundamental backing of GBPJPY is something to consider. This pair was a ‘late bloomer’ to the rally of its peers as the commodity aspect of the Aussie, Canadian and Kiwi Dollars drew more speculative appetite. This past session, the fundamental perspective actually capped the Sterling cross. Despite the 30-year high in UK inflation, the BOE’s efforts to cool policy expectations saw the Pound slip across the board. That misstep included GBPJPY which registered the hesitation and ultimate bearish candle (with large wicks) at the midpoint of the 2015-2016 (Brexit) range. I still believe confirmation is essential in these markets, but this is much more a range candidate than a trend reversal view which goes a long way to fitting market conditions in my book.

Chart of GBPJPY with 20-Day SMA and 20-Day Disparity Index

Chart Created on Tradingview Platform

What to Watch Ahead

In general, I still believe ‘risk appetite’ is the most capable driver for the broader markets. Once moving, sentiment doesn’t necessarily require the most targeted update to sustain momentum. The most pointed potential for a risk-based move is likely through development around Russia’s invasion of Ukraine. A relief rally would be the most productive development, but with US President Joe Biden in Europe speaking to NATO, the European Council and the G7 about sanctions and alternative energy needs; the provocation will likely only draw more consternation. On the monetary policy front, a sudden reversal towards more stimulus is extremely improbable. Alternatively, there is plenty of central bank speak (specifically the Fed) to register and a number of official central bank rate decisions. In particular, the South Africa Reserve Bank and Bank of Mexico meetings are expected to end with 25 basis point hikes. We’ll see how much that does for the Dollar or USDZAR and USDMXN. Another theme should be added to the watchlist for Thursday trade: growth forecasts. The Markit March PMIs are do for the major developed economies, and the insight around inflation and Ukraine will prove critical…if not fully market moving.

Calendar of Major Economic Events

Calendar Created by John Kicklighter

As a bonus consideration of how the push and pull of market influences can create difficulties in analysis, I’ll leave us off on GBPNZD. Technically-speaking, the pair was at fairly critical support in 1.9000 following consolidation after a long-slide. This stood out as a good candidate for a bullish reversal so long as another market aspect offered the motivation. Yet, the disappointment that followed the UK inflation statistics broke that effort up before it could truly get off the ground. There is a rate forecast advantage for the RBNZ (versus the BOE) here, but I don’t think that is going to provide the foundation for a productive bear trend. This is more likely to end up a false break to the downside, but the ‘clean’ technical staging is ruined for now.

Chart of GBPNZD with 20 and 200-Day SMAs and 20-Day Disparity Index (Daily)

Chart Created on Tradingview Platform

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