FX Trading focus: Robust risk rebound, but…FOMC tomorrow. Dampest of Riksbank squibs.
So far, while valid concerns are out there in the ether, including those centered on China’s property sector, how far US politicians are willing to dance along the edge of default in the coming US debt ceiling showdown, the FOMC meeting tomorrow and longer term, fiscal cliff concerns, the sell-off in risk sentiment since last week and especially yesterday’s huge acceleration when the incredibly obvious support in the S&P 500 broke had a very technical feel to it. Regardless, we are now seeing a very strong rebound, where we identified the 4,408 level as the possible key tactical level of resistance in today’s Saxo Market Call podcast.
During the sell-off in risk sentiment yesterday, it was interesting to note that the US dollar went fairly quiet, while a tardy bid in safe haven sovereigns yesterday finally lit up the Japanese yen, where most of the action was yesterday in currencies as the yen rallied on the double whammy of risk-off and lower yields. So far so good, but one reason USD traders were and perhaps should have been a bit sidelined here, and one reason we need to remain sidelined here on market direction is that we have an important FOMC meeting up tomorrow with considerable uncertainty on what the Fed will have to say. And if what the Fed has to say in the policy statement and in the fresh projections on the economy and dot plot forecasts is more hawkish than expected, we could see a considerable jolt to US treasury yields. Those yields have been entirely quiescent for several weeks and a break in notable resistance at the long end of the curve on a more hawkish than expected Fed (or the realization that treasury issuance will have to pick up sharply in the wake of the debt ceiling resolution or both) could provide a fresh source of pressure on risk sentiment, and one that is less JPY-supportive (quite the opposite, in fact) and more USD-supportive.
GBPJPY is at a very interesting technical crossroads here, with a very nicely etched and clear, if somewhat broad head-and-shoulders formation with an odd double-neckline twist (and 200-day moving average in the mix) but clearly waiting for further fundamental catalysts here in the near term, including a key Bank of England meeting this Thursday which arrives as the market is leaning heavily on a more hawkish message (surprise side therefore being dovish), while yields after the US FOMC meeting are the most important coincident indicator for the JPY, even as the Bank of Japan meets tonight as well. The head-and-shoulders extension target is all the way down at 141.00.