Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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Gold and USDJPY reversal a green light for USD bears?
John J. Hardy
Global Head of Macro Strategy
Summary: Gold has bounced sharply after testing below key levels and the USDJPY squeeze has partially reversed. Is this enough to greenlight bearish USD trades? A reversal in the rise in US treasury yields is an additional helpful tailwind for the USD bearish case.
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Latest market moves
There isn’t much to add after yesterday’s action, although we have some intermarket developments that not only offer further support for the JPY, but also for the US dollar bearish case as gold bounced sharply after a volatile test below both 3200 area and 3165 level support yesterday as it surged 120 dollars off the lows, while the US treasury market found strong support, in part on the weak April US Retail Sales number, but perhaps as well on a delayed reaction to that FT story on US regulators considering altering large commercial bank leverage ratio adjustments and possible SLR exemptions for US treasuries. More on US treasuries below today’s chart. Still, we still have more of a picture now of broad JPY strength rather than broad USD weakness even if the greenback did roll over again overnight.
Today, it’s all about how we close the week after the intraweek pump in the US dollar that has now faded against the major currencies, but less so against the minor ones. Some levels that would encourage the notion that we have thoroughly neutralized the recent sell-off would include a EURUSD recovery and close above 1.1266 today would put in a nice “hammer” candlestick on the weekly chart. On the DXY chart, that would look like a close below the 100.27 low from Wednesday, with the 100.00 round figure the obvious psychological level in play.
Chart: EURJPY weekly Ichimoku
While we await more clarity on the USD outlook, it’s worth a look at the EURJPY weekly Ichimoku chart as it could be gearing up for something significant if the JPY is set for broader outperformance. Namely, the price action has found resistance on every attempt to rise above the cloud (the shaded area). There is no bearish confirmation yet, but we do have an interesting local bearish rejection this week if we close today near or below current levels. The theoretical confirmation of the bearish case would be the “lagging span” (a.k.a. the Chikou, the thick green line) punching below the cloud. The last time this happened was in q3 2020, when the Chikou broke above the cloud, where it has remained since. It wouldn’t take much of a sell-off to get us there (it is simply a 26-period lagged plotting of the closing price, weekly in this case), basically a close below 160.00 now and next week or two, but the break is easier after the because the bottom border of the cloud will rise.
Looking ahead: US treasury yields, not so busy week ahead.
US treasury yields remain pivotal here and the persistently high yields (until yesterdays drop) this week threatened to put a damper on the resurgent equity market had they broken significantly above 4.50%. But note that there could be other tectonic drivers afoot for the US treasury market, including foreign concerns that the US will alter the landscape on how foreign holders of US treasuries are taxed on their interest income. Michael McNair is a good follow on X on this. And it isn’t just interest income that could be in play, but also equity dividend income – see more in this post. European yields are tumbling this morning, offering a fillip to the EURJPY bears.
Interesting to note on the trade deal front that the FT this morning leads with a story discussing Japanese PM Ishiba’s reluctance to be too generous to the US side due to heavy pushback from Japan’s automakers and farmers (rural voters have more voting power than urban constituents due to Japan's voting system). Europe is likely set to make negotiations difficult as well in its bureaucratic approach to everything and its reluctance to get dragged into this new era of bilateralism. But on the military spending front that has been a key Trump concern, all signals point to increased commitments. German Chancellor Merz vowed to make the German military Europe’s most powerful yesterday and foreign minister Wadephul said they would pursue NATO secretary-general Mark Rutte’s proposal of moving to 3.5% of GDP on hard military spending and an additional 1.5% on “related spending” on infrastructure and cybersecurity.
Next week’s event risk calendar fairly quiet, with an RBA Cash Target meeting on Tuesday (25 bps cut fully priced, with July meeting guidance in play as market partially priced for a further cut). Elsewhere, we have UK CPI on Wednesday, the preliminary Eurozone PMI on Thursday and Japan’s CPI on Friday.
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 trend intensity has dropped sharply almost across the board on the recent two way action in the major currencies. Watching here whether the JPY reversal can build anything in the sessions ahead and for the USD status as its comeback attempt has not spread any wings.
Table: NEW FX Board Trend Scoreboard for individual pairs. Silver rejected the attempt at slipping into sell-off mode yesterday – but has offered nothing for trend traders for months. The JPY crosses are on my radar and USDJPY will be set to roll over into a new negative trend if it stays near or below current levels for another couple of sessions (the “score” is already negative, but the slower moving trend indicator is not triggered.)
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