Weekly Review and Outlook
Dollar Broadly Lower after Central Bank Parade
Equities were given another boost by the more dovish than expected FOMC announcement last week while dollar tumbled broadly. DJIA closed the week up 389 pts, or 2.3% at 17602.30. S&P 500 also gained 27.4 pts or 1.4% to close at 2049.58. WTI crude oil extended recent rebound and breached 40 handle to as high as 41.20 before paring some gains to close at 39.35, still up for the week. Gold failed to extend recent rise and pull back into familiar range around 1250. Dollar index took out recent support of 95.23 and resumed the whole fall from December's high of 100.51. In the currency markets, the greenback was overwhelmingly the weakest major currency. That was followed by Aussie and then Sterling. Yen was indeed the strongest major currency as BoJ stood pat, shrugged off risk market rallies. Trading activities could start to decrease as markets enter into holiday weeks ahead of first quarter end. Nonetheless, the technical outlook in some instruments suggest that the risk rally could be due for a pull back. And, there is sign of pickup in strength in Yen.
Before looking into some technical details, let's recap central bank activities last week. The FOMC meeting turned out to be more dovish than expected. While acknowledging that the economic activity has been expanding at a 'moderate' pace, policymakers were concerned about recent easing measures adopted by some central banks, including ECB, BOJ and PBOC. The latest dot plot points to only two rate hikes, down from four, this year. As such the long term interest rate forecast is revised -25 bps lower to 3.25%. The staff economic projections have also been revised lower. More in Dovish Fed Signals Only Two Rate Hikes This Year, Down From Four.
BoJ left monetary policies unchanged as widely expected. Interest rate was held at -0.1% and the target of monetary base expansion was kept at JPY 80T per annum. The central bank noted in the statement that economy "continues to recover moderately as a trend" but warned that pick-up in exports paused on slowing global growth. Meanwhile, inflation expectations has been "weakening recently". There are talks that the downgrade of economic assessment was an act to pave the way for further easing in the second quarter. BoJ governor Haruhiko Kuroda also noted in that press conference that time is needed to gauge the impact of the negative rate policy. But he pledged that he won't wait too long to take additional actions if needed.
SNB stood on the sideline in March despite ECB's aggressive stimulus measures. The central bank kept the sight deposit rate at record low of -0.75% and the 3-Month LIBOR target range unchanged at -1.25% to -0.25%. Policymakers kept the powder probably as ECB's announcement last week did not trigger significant euro depreciation. Meanwhile, SNB acknowledged that negative interest rates have made Swiss franc less attractive but continued to war over the 'significantly overvalued' Swiss franc. The staff also revised lower the GDP growth and inflation forecasts. More in SNB Kept Powder Dry, Trimmed Growth And Inflation Forecasts.
BOE again voted unanimously to leave to Bank rate unchanged at 0.5% and the asset purchase program at 375B pound. While acknowledging 'solid' domestic demand growth, policymakers were concerned about the uncertainty brought forward by Brexit referendum in June. Members remained diverged regarding the 'balance of risks to inflation relative to the central projection presented in the February Inflation Report'. As such, it is concluded that 'the MPC's best collective judgment is that it is more likely than not that Bank Rate will need to increase over the forecast period to ensure inflation returns to the target in a sustainable fashion'. More in BOE Voted Unanimously To Keep Rates Unchanged, Concerned Over Brexit Referendum.
On the technical side, DJIA's rise from 15450.56 extended as expected. But now it's in proximity to medium term trend line resistance at around 17700. Overbought condition is also seen in daily RSI. As noted before, price actions from 18351.60 could be finished with three waves down at 15450.56. Or it could develop into a triangle pattern with one more falling leg. Hence there is chance of reversal after hitting the trend line resistance. And, break of 17120.15 will turn focus back to lower side of range of 15450.45/17977.84.
Crude oil's rebound from 26.05 extended to as high as 41.20 last week but is struggling to gain further on overbought condition. WTI is also close to 61.8% retracement of 50.92 to 26.05 at 41.42, which lies between key resistance zone of 40 psychological level and 42.03 (Mar 2015 low). We might start to see WTI losing momentum further this week with a test on 35.96 support. And break there should at least bring near term pull back through 55 days EMA (now at 34.94).
Dollar index's break of 95.23 support confirms resumption of whole fall from 100.51. Deeper decline is expected in near term to lower channel line (now at around 94). At this point, we'd expect the greenback to lose momentum after hitting the channel line. Overall, fall from 100.51 is part of the consolidation pattern from 100.39. Thus, strong support is expected above 38.2% retracement of 78.90 to 100.39 at 92.18 to contain downside and bring rebound. Larger up trend is expected to resume later in the year.
AUD/JPY's rebound started to lose momentum after hitting 86.40 and struggled to sustain above 86.35 resistance. While further rise cannot be ruled out for the moment, we'd expect strong resistance around medium term falling channel (now at 87.43) to bring reversal. And, break of 83.34 would indeed indicate that rebound from 77.58 is already completed and will turn outlook bearish for a test on 77.58 low.
Regarding trading strategy, we're viewing the possible reversal in risk markets as an opportunity. Firstly, as dollar index suggests that it will possibly stay pressured in near term. Secondly, USD/JPY's breach of 110.98 also indicates resumption of larger fall from 123.74. Thirdly, in spite of rally in stocks, yen ended up as the strongest major currency last week, which is a sign of underlying strength. Fourthly, Aussie also failed to gain except versus dollar in spite of stock rally. Hence, to conclude, we will first sell USD/JPY at market this week, with stop at 112.30 and put medium term fibonacci level of 106.63 as a target. Also, we will sell AUD/JPY on break of 83.34 support with 77.58 low as initial target.
USD/JPY Weekly Outlook
USD/JPY's break of 110.98 support suggests that larger decline from 125.85 is resuming. Initial bias remains on the downside this week for long term fibonacci level at 106.63. On the upside, break of 113.81 resistance is needed to indicate near term reversal. Otherwise, outlook will stay bearish in case of recovery.
In the bigger picture, price actions from 125.85 medium term top is developing into a deeper correction. Further fall would be seen to 38.2% retracement of 75.56 (2011 low) to 125.85 at 106.63 and possibly below. Break of 113.81 resistance is needed to be the first sign of completion of the correction. Otherwise, risk will stay on the downside in case of rebound.
In the long term picture, the strong impulsive look of the rally from 75.56 suggests that USD/JPY is now in a long term up trend. Nonetheless, break of the long term trend line argues that it's now in a corrective phase. Sustained break of 115.96 should bring deep medium term correction before resuming the up trend.
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