FX Breakout Monitor: JPY rattles its cage
Head of FX Strategy
Summary: The post-FOMC reaction across markets has offered a rather confusing backdrop for currency trades – but today’s JPY move sends the clearest signal of the week that our focus for potential breakouts should be on JPY crosses.
A very confusing couple of sessions for currency traders as we first saw a USD sell-off and risk appetite shoulder shrug in the immediate wake of the Federal Open Market Committee decision and then saw an enormous risk-on rally yesterday, followed by today’s sudden reversal of almost equal magnitude less than an hour after the US market opened today. One suspects some of this may be linked to the quadruple witching, or expiry, of futures and options contracts. But today’s JPY signal provides suddenly clarity if we close today anywhere near the levels as of this writing and today’s FX Breakout Monitor snapshot.
A further strengthening of US Treasuries combined with any continuation in the ugly sell-off in equities could feed a powerful move – especially given widespread signs of complacency. Risk appetite weakness spreading to EM like it did today is potentially additional fuel for JPY upside. Investors and traders may find it unsettling if even this latest violent swing to a more dovish stance from the Fed can’t support the equity market.
Breakout signal tracker
We’ll add a USDJPY short position to our signal tracker as the most straightforward way to look at the potential for additional JPY strength. We place the stop above the 111.00 area.
Page 1: USDJPY smashing down through the local breakout level today and deserves additional focus next week for more downside risk. EURJPY is doing the same after today’s very weak Eurozone PMIs. Elsewhere we note the directional sympathy in EURCHF, which is nearing a major support level in 1.1200.
USDJPY tried to bounce yesterday as the JPY has a hard time appreciating when both of the important coincident indicators – bond strength and risk off – aren’t operating in the yen’s favour. USDJPY is the most straightforward way to trade the JPY and could head for 108.00 or lower here on a more significant deleveraging across markets.
EURJPY came suddenly alive on the weak flash Eurozone March PMIs today – this sudden injection of momentum could finally lead to a more notable directional move after a long period of rangebound behavior and false breaks.
REFERENCE: FX Breakout Monitor overview explanations
The following is a left-to-right, column by column explanation of the FX Breakout Monitor tables.
Trend: a measure of whether the currency pair is trending up, down or sideways based on an algorithm that looks for persistent directional price action. A currency can register a breakout before it looks like it is trending if markets are choppy.
ATR: Average True Range or the average daily trading range. Our calculation of this indicator uses a 50-day exponential moving average to smooth development. The shading indicates whether, relative to the prior 1,000 trading days, the current ATR is exceptionally high (deep orange), somewhat elevated (lighter orange), normal (no shading), quiet (light blue) or exceptionally quiet (deeper blue).
High Closes / Low Closes: These columns show the highest and lowest prior 19- and 49-day daily closing levels.
Breakouts: The right-most several columns columns indicate whether a breakout to the upside or downside has unfolded today (coloured “X”) or on any of the previous six trading days. This graphic indication offers an easy way to see whether the breakout is the first in a series or is a continuation from a prior break. For the “Today” columns for 19-day and 49-day breakouts, if there is no break, the distance from the current “Quote” to the break level is shown in ATR, and coloured yellow if getting close to registering a breakout.
NOTE: although the Today column may show a breakout in action, the daily close is the key level that is the final arbiter on whether the breakout is registered for subsequent days.
Latest Market Insights
Quarterly Outlook Q3 2022: The Runaway Train
- Central banks' attempts to kill inflation is a paradigm shift, which could end in a deep recession.
Tangible assets and profitable growth are the winnersWith US equities officially in a bear market, the big question is where and when is the bottom in the current drawdown?
Understanding the lack of investment appetite among oil majorsThe everything rally seen in recent quarters has become more uneven, as its strength is driven by commodities in short supply.
The pressure is on as the wind leaves the sailsWith cryptocurrencies in sharp decline, are we entering a crypto winter or is the bear market a healthy clean-up of the crypto space?
Why the Fed can never catch up and what turns the US dollar lower?Many other central banks are set to eventually outpace the Fed in hiking rates, taking their real interest rates to levels higher than the Fed will achieve.
Bank of Japan: Swimming against the tideThe Japanese economy has gone from the age of deflation to rapidly rising prices in no time, leaving the Bank of Japan in a pickle.
Green transformation detour and bear market hibernationWith the impending risk of global econonomic derailment, we share the five things investors need to consider in this new half year.
Crisis redux for the eurozone?Whether there's going to be a recession in Europe or not, the path towards a stable economy will be agonizing.
Technical Outlook: Gold, Oil and a remarkable multi-decade perspective on EquitiesThe Nasdaq bubble pattern, USDJPY resistance, crude oil uptrend losing steam and the technical outlook for USD.
China: the train of new development paradigm left the station two years agoChina is transiting to a new development paradigm, as they are hit by deteriorating terms of trade, a slower global economy and an uncertain future while continuing attempts to contain the pandemic.