Equities have stormed higher in this risk recovery, with the promise of ever more supportive major central banks and the hugely better than expected US jobs report to fuel the optimism. However, with so much good news now priced in, there are signs of a pause in the risk rally. Whisper it quietly, but could a pause even turn corrective. I know it sounds incredible to think it, but risk markets can go down as well as up.
There are signs of a near term retracement in bond yields and also threatening to take hold on forex markets. Although this is yet to filter into equities, with markets so overbought the risk of a correction is growing. US Treasury yields are falling back. A “bull flattener” of the yield curve (where longer dated yields fall quicker than shorter dated ones) is a retracement of last weeks “bear steepener”. It is a risk negative move.
In the past 24 hours we have seen the yen in recovery mode, whilst the US dollar is performing well too today, especially against the commodity currencies.These moves need to have the context that the are turning back from multi month highs (on AUD, NZD and EUR) versus the dollar. However, as the FOMC begins its two day meeting, the dollar sell-off has at least for now been curbed. The question is whether this stalling of risk appetite on forex markets begins to lead to profit-taking on the equities bull run.
USDJPY 4 HOUR
USDJPY plunged after reaching our TP2. Price could bounce from the lower parallel of the short term fork near 108.00. Proposed resistance is the year open and center line at 108.75-109.00. Seasonal tendencies have turned down and the rally from the May low is in 3 waves. The implication is that the rally is complete as a correction and that price is headed for a break of the May low of 105.99.
Looking ahead to Wednesday’s Fed announcements, if the Fed does not take action, the dollar will continue its run into the upper end of the trading range.
Keep an eye on the yield curve and the spread between U.S. and Japanese Bond yields. This should spur the next move in the Dollar/Yen. A shift up in U.S. yields could support a Dollar/Yen breakout possibly above 109.