Global Head of Macro Strategy
Summary: The USD extension lower on mildly weak US data was rejected, with the bigger test for the US dollar the situation for USDJPY in the wake of the Bank of Japan meeting this Friday.
What to know
The market is busy erasing the post-FOMC USD sell-off here. This could prove a key signal, as somewhat weak US data yesterday failed to keep the USD lower as EURUSD tested above 1.1800 briefly and USDJPY testing that key sub-154.50 area. Alas, US treasury yields failed to hold lower and the USD sell-off was smartly rejected by the end of the day Tuesday, with some follow-through USD strength in the Wednesday session in Asia. It’s not enough yet to prompt a more bullish outlook for the greenback – we still have the event risk of the week dead ahead: Friday’s Bank of Japan meeting. More below in the chart discussion for USDJPY.
Soft UK CPI sets up more dovish Bank of England guidance? Today (Wednesday) saw soft November CPI numbers out of the UK, with both the headline and core falling to 3.2%, the latter the most important and below expectations, nearing the lows of the post-pandemic range. This has the market anticipating more dovish guidance from the split BoE tomorrow and saw a weaker sterling today.
Chart focus: USDJPY with BoJ dead ahead
A monumental Bank of Japan meeting this Friday. Whatever the Bank of Japan delivers, if the market fails to find solace in Governor Ueda’s message the JPY is at risk of a broad extension lower still unless the backdrop changes dramatically (a new global bond rally of significant magnitude or the Fed beating the BoJ to the punch with YCC or other dramatic easing move). The Japanese government bond market is the key tell – especially the 10-year yield and whether 2.00%, the effective range high since 1999, falls. Regardless, the structural situation is the problem for the JPY: that no matter what Ueda says, the issue is the Ministry of Finance’s new larger deficits and any move by the BoJ to curtail yield pressures with YCC or other would feed straight into JPY. If the JPY finds support after all, the sub-154.50 area is the very well defined support ahead of other layers lower all the way to the structural 150.00 level, while the upside focus is 161.95 on a run higher if 157.89 falls.
Technical and other observations for key pairs.
EURUSD – the next key step for the EURUSD bulls after the break above the 1.1650-75 area was a close above 1.1800, but yesterday’s sharp rejection after US data that should have green-lighted the USD bearish case suggests that the EURUSD rally was overextended. The price action is suddenly back in the 1.1700 area. But a full rejection of the post-FOMC rally down through the 1.1650-75 area to suggest a more profound bearish reversal signal. Should that fall, we could eventually focus further down toward 1.1500 and lower.JPY pairs – USDJPY is the key, with the importance of the sub-154.50 support zone double underlined yesterday, while focus rapidly shifts to the 157.89 high if JGB’s are selling off and taking the JPY lower. The EURJPY rally also found support in Wednesday’s Asian session.
GBPUSD and EURGBP – soft CPI sets up risk of dovish BoE guidance tomorrow. EURGBP is impossibly rangebound, but the most recent development was the rejection of the attempt to move lower. A hold above 0.8800 after tomorrow’s BoE keeps focus on upside break. GBPUSD is forming an ugly bearish engulfing candlestick today – next area of note is 1.3288 and perhaps 1.3250 area.
AUDUSD and AUD pairs – Are we headed for another disappointment for AUD bullish hopefuls? The 0.6707 range high of the year from September was never meaningfully challenged, but still hope for the bulls if further consolidation doesn’t run too far below 0.6600. Elsewhere, AUDNZD lost in limbo as the RBA/RBNZ policy differential momentum has exhausted itself.
USDCAD – may be oversold as momentum has lost its edge, so consolidation risk into 1.3900 or higher if USD remains firm elsewhere.
FX Board of G10 and CNH trend evolution and strength.
Note: If unfamiliar with the FX board, please see a video tutorial for understanding and using the FX Board.
The weak are NOK (weak oil prices), JPY and the US dollar in that order, with a significant deceleration in JPY weakness as we await the key BoJ meeting on Friday. The silver trend reading of 14 is other-worldly, partly a product of the magnitude of the percentage rise in the metal (as ATR ranges balloon relative to prior years as a function of the larger price). CAD sticks out on the strong side, likely on the anticipation of flows from pension funds and possible year-end hedging.
Table: NEW FX Board Trend Scoreboard for individual pairs. No new trend changes threaten just yet in the major pairs, with USDJPY finding support, while other USD pairs are in bear trends in dollar terms, with GBPUSD and USDCHF the closest to a change of status if USD continues to firm.
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Global Head of Investment Strategy