Weekly Review and Outlook
Dollar Soared Broadly as Funds Flowed Back to Major Stock Markets
The developments in financial markets last week were rather significant. On the one hand, US equities continued the run for new records with DOW broke through 15000 level to close at 15118.5. S&P 500 also moved away from 1600 to close at another record at 1633.7. It should be noted that German DAX also closed at record high at 8278.6 while FTSE 100 extended the run to new five year high to close at 6625 which is not far from historical high of 6950. US bonds tumbled sharply towards the end of the week with 10 year yield closed at 1.900%, comparing to May's low of 1.614%. 30 year yield jumped to close at 3.104% comparing to May's low at 2.810%. The strong rally in treasury yields helped dollar staged broad based rally with dollar index breaching April's high of 83.49 before closing at 83.14.
The jump in US treasury yields were in tandem with broad based selloff in the Japanese yen. USD/JPY finally took out 100 psychological level, so did CAD/JPY. EUR/JPY also broke through 131.12 resistance to resume the larger up trend. Aussie and Kiwi were overwhelmed by the strength in dollar, US equities, and treasury yield and had weakened sharply, and broadly. Aussie was pressured by the unexpected RBA rate cut while Kiwi tumbled on RBNZ intervention comments. Both currencies were indeed worse than the Japanese yen. Canadian dollar also reversed against dollar even though it was firm against European majors. In addition to the broad based weakness in JPY, AUD, and NZD, Swiss franc also dropped sharply against Euro and Sterling. Meanwhile, Euro and Sterling displayed some weakness against the greenback.
The overall movements argued that funds were flowing back to major stock markets for higher returns. The funds were from bonds (as seen in rally in yields), yen, and even the so called higher yield Aussie and Kiwi. Gold suffered steep selloff but rebounded strongly on Friday and we'd see whether more fund will flow out of gold in the next two weeks to affirm this view. US, UK and EU all benefited from the current move with US and dollar having an upper hand.
The strategies mentioned last week, long GBP/JPY and CAD/JPY but short EUR/GBP didn't yield any result. The near term trends are quite clear that weakness in Aussie, Kiwi and Yen should extend. Comparing the three, we maintain our bearish view in AUD/NZD and neutral to bullish view in AUD/JPY. Thus, shorting yen is still preferred even though AUD and NZD were the worse performer last week. Swiss Franc is avoided as fund from swiss should also follow and move out. The question is whether to long USD, EUR, GBP, or CAD against JPY. It should be noted that EUR/USD, GBP/USD and USD/CAD displayed sign of near term reversal last week. Dollar index breached 83.49 was viewed as up trend resumption. We're prefer dollar over others. And in particular, an important motivation on long dollar is the possibility of a steep selloff in gold.
Hence to conclude, we'd prefer to switch GBP/JPY and CAD/JPY long to USD/JPY long this week. Meanwhile, we'd close the EUR/GBP short because while deeper fall could finally come, downside potential is relatively limited. And, we'd better focus on what's happening now.
We'd now comment on the charts of some of the above mentioned key developments here.
S&P 500 jumped to close at new record high of 1633.7 last week. Upside momentum was strong with daily MACD breaking through a near term falling trend line. Also, the index is staying healthily above the rising 55 days EMA, as well as the channel from 1343.35. There is no sign of topping and the current rally should extend to 161.8% projection of 1266.74 to 1474.51 from 1343.35 at 1679.52 next.
The sharp rise in 10 year yield last week, with TNX back above 55 days EMA indicates that pull back fro 2.086 is already over at 1.614. And, the momentum suggests that stronger rally would be seen through 2.000 level. It's a bit early to talk about long term trend reversal in yields as the rebound from 1.394 to 2.086 looked corrective. But in any case, we'd anticipate a break of 2.086, possibly within Q2. And, that should favor dollar, in particular USD/JPY.
Dollar index's breach of 83.49 last week should confirmed resumption of whole rise from 78.92. Near term outlook is turned bullish again for 84.10 key resistance. Current momentum argues that 84.10 would be taken out and in that case, whole long term rally from 2011 low of 72.69 should have resumed for a key trend line resistance at around 85.6 level. It's critical for the index to build up momentum in the next two weeks to solidify this case.
USD/JPY Weekly Outlook
USD/JPY finally broke 100 psychological level last week and reached as high as 101.97. Medium term up trend has resumed and initial bias remains on the upside for 161.8% projection of 77.13 to 96.70 from 92.56 at 104.65 next. On the downside, below 100.54 minor support will turn bias neutral and bring consolidation first before staging another rally.
In the bigger picture, rise from medium term up trend from 75.56 is still in progress and there is no sign of topping yet. Nonetheless, note that USD/JPY is now in an important long term resistance zone of 101.65 and 38.2% retracement of 147.68 to 75.56 at 103.10. We'd be cautious on topping at the current level. But break of 97.00 support is needed to be the first sign of topping and otherwise, outlook stays bullish. Sustained trading above 103.10 will have long term bullish implications.
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. Key focus will be on current 100/103.10 resistance zone. Sustained trading above there would open up the case for further extension through 124.13 resistance in the long term. We'd judge the outlook again should USD/JPY pull back from current level.
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