Head of FX Strategy
Summary: JPY crosses even more than USD crosses could prove quite volatile into early trading tomorrow if the FOMC meeting later today sparks dramatic swings in US bond yields and risk appetite generally. The Bank of Japan follows shortly after the FOMC as USDJPY is trading near pivotal levels.
The FX Breakout Monitor is back, and it is expanded with "autosignals" that show examples of how to trade new breakouts, defined as new 19-day high or low closes not preceded by a breakout in the same direction in the prior week. Click on the link below for a look at the full PDF of the table overview and the Recent New Breakouts tables. See further below for a couple of chart highlights related to today's monitor.
Today’s Breakout monitor
It is interesting to take a snapshot of the market here ahead of the onslaught of event risks that are the best chance in a while to break the currency market out of its recent torpor. Besides tonight’s FOMC meeting and the Bank of Japan meeting up overnight, we have important US data up Friday and early next week that could further spark a reassessment of risk appetite and/or the Fed policy trajectory from here. A few USD pairs have approached major support levels for the USD this week and even beyond in the case of some EM’s, but within the G10, USDCAD and AUDUSD are the closes to major breakout pivots (though USDCA less so today after the BoC).
Meanwhile, as we discussed extensively in today’s FX Update, while USDJPY has done the opposite, driven by rising bond yields. USDJPY already nominally broke to new highs for the cycle – but the key event triggers in coming days, not just the FOMC and BoJ later today and overnight, but also the US data – to which USDJPY is traditionally one of the most reactive USD crosses – all offer tests for whether the upside break unfolds in earnest or is stuffed back into the range – other major JPY crosses are also likely to show correlation and possibly higher betas to the moves in USDJPY. The EURCHF move toward and above breakout levels will also likely correlate with the direction of long bond yields and JPY crosses in the coming days.
Today’s Breakout Highlight: USDCAD
At the vanguard within the G10 of the softer US dollar recently is USDCAD and AUDUSD, with USDCAD having just completed a successful downside breakout (new 19-day low close on Oct 11 near 1.3200, with profit taking nine trading days (a few sessions ago) near 1.3070, so around 2.5 ATR, depending on entry levels. Now, breakout traders should be zooming out to the bigger picture, where the 2019 low daily close (1.3028) is in play if the Bank of Canada and FOMC combination today support the sell-off further – the Bank of Canada statement released just prior to the chart snapshot not CAD supportive as the BoC sounded a note of caution, but let’s see where the dust settles post-FOMC and post-US data on Friday.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
