Head of FX Strategy
Summary: The sudden JPY strength from Friday remains largely intact as we watch for whether continued weak risk sentiment will drive a sizable move in JPY crosses. Elsewhere, the weakest link among G10 currences at the moment is CAD.
For a PDF copy of this edition, click here.
The sharp JPY rally that materialised Friday remains the most notable development of the last couple of sessions, clearly driven by Friday’s large shift in sentiment and the post-Federal Open Market Committee meeting rally in US treasuries. The latter faces an interesting test in the coming days with large auctions of 2-, 5- and 7-year US treasuries. The risk-off tone is going the US dollar no favours, as NZDUSD is actually oddly trying at breakout levels today even with an ugly risk off tone in early US trading hours. This is not the FX market of years past! But the biggest loser of the moment is CAD, where its exposure to concerns about the US economy and a dovish Fed and its weak data on Friday perhaps are weighing.
Breakout signal tracker
We added a USDJPY short on Friday – hoping for the first successful USD major trending move in a long time.
Page 1: Several JPY crosses remain near the breakout levels from Friday – always tough to trade JPY upside moves due to their often spiky nature – it looks like the 110.00 area is important in USDJPY as we discuss below and the same goes for the 124.00 area (near the 49-day low) for EURJPY. Note that USDCAD remains near an upside breakout level while NZDUSD does the same as NZD and CAD head in opposite directions – note EURCAD, etc. AUDNZD is poking lower yet again today as well – but with the RBNZ up this week and with very low volatility, we’ll refrain from chasing.
The coming couple of sessions vital for USDJPY bears for a sense of whether the Friday was a one-off move or the beginning of something bigger. Note the 111.00 pivot area taken out on the way down and the Ichimoku cloud level and psychologically important 110.00 level.
The ZAR looks like an EM currency worth watching for downside risks if the current weak risk sentiment continues, having notably failed to participate recently when other EM currencies were enjoying a period of strength. A break and close clear of the cycle highs above 14.50 could set in motion a move higher to 15.00 and more.
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.