It’s a week of drama. In the UK, Liz Truss became the shortest-serving Prime Minister as political chaos continued, and the race for the next PM started immediately. In the US, stocks surged on Friday on talks that Fed could start slowing its rate hikes in December. Meanwhile, in Japan, the government waited patiently until a golden opportunity came to all-in intervene.
The net results are, Dollar ended as the worst performer, but Yen was somewhat a close second. The fact that Swiss Franc was the third weakest indicates clearly an improvement in sentiment. New Zealand Dollar was the strongest one, followed by Aussie and Loonie. Meanwhile, Euro and Sterling were just mixed, with Euro a touch better.
Markets speculating that Fed might slow tightening from December
US stocks staged a strong rally on Friday as sentiment was boosted by prospect of Fed slowing its tightening cycle. The move was triggered by a WSJ report, which said that while a 75bps hike was expected at the November meeting, policy makes might debate whether to signal openness to a smaller hike in December.
As of now, fed fund futures are pricing in 95% chance of a 75bps hike to 3.75-4.00% on November 2, pretty much a done deal.
But chance of another 75bps to 4.50-4.75% dropped notably to 45.6%, down from 75% on Thursday, and nearly 70% a week ago.
DOW broke near term resistance, not yet for S&P 500
DOW closed up 748.97 pts, or 2.47% on Friday, and scored the best week since June. The break of 30454.46 resistance confirmed short term bottoming at 28600.94. The close above 55 day EMA was also a positive sign. Yet, it’s still too soon to declare the the down trend from 36965.83 has completed.
Next focus will be 61.8% retracement of 34281.36 to 28600.94 at 32145.61. Rejection by this level or below will maintain medium term bearishness for another fall through 28600.94 at a later stage.
Also, it should be noted that DOW’s turn was not accompanied by corresponding development in S&P 500. That is, SPX is still hold below 3806.91 resistance and 55 day EMA. Rejection by this resistance zone will drag SPX through 3491.58 rather quickly, to resume the decline from 4818.62. If happens, that would also argue that DOW’s rebound was just an overshoot.
10-year yield on track to 4.474 as up trend continues
10-year yield extended recent rally and reaccelerated to as high as 4.333. But it then retreated notably on Friday, on the above mentioned news, to close at 4.213. Nevertheless, there is no change in the overall outlook. Further rise is expected to 61.8% projection of 2.525 to 3.992 from 3.568 at 4.474 next. This will remain the favored case as long as 3.992 resistance turned support holds.
Dollar index extended consolidation staying in up trend
Dollar index extended the sideway consolidation pattern from 114.77, mainly because Dollar had been going nowhere except versus Yen. The impact from rising yields and stocks were counting each other.
Still, outlook will stay bullish as long as 55 day EMA (now at 110.38) holds. Break of 114.77 will resume the up trend towards 100% projection of 94.62 to 109.29 from 104.63 at 119.30, which is close to 120 handle.
Japan played their intervention poker beautifully
Talking about Yen, Japan played their intervention cards rather beautifully last week. There were signs of probing on both sides on 150. But buyers, or “speculators” as seen by Finance Minister Shunichi Suzuki were unmoved. Japan then kept the cards to the chest and waited patiently, while letting USD/JPY rose.
Then came the WSJ news as stocks and Dollar were starting to reverse. Japan then went all-in with intervention. This time, the so-called “speculators” turned their side and jumped in helping Japan shoot down USD/JPY.
For now, USD/JPY should have turned into a consolidation phase until further development. Deeper decline and break of 145.89 resistance turned support cannot be ruled out. But the pull back shouldn’t go as far to 140.33 support. Another rebound is possible but buying would now turn very cautious above 150. As range trading continues, one might considering buying below 145 and taking profit at 150, or just ignore the pair.
Prospect of more near term rebound in Aussie
There is prospect of further rebound in commodity currencies if sentiment does continue to improve for the near term. Australian Dollar might start to reverse some of its fortune, after being an under-performer for most of the month.
It should be noted that Aussie’s weakness, comparing to Kiwi and Loonie, came after RBA slowed down its rate hike. Yet, Deputy Governor Michele Bullock reminded people that RBA meets more frequently than others (11 times a year). And, the “policy rate trajectory has been as steep, or steeper, than other central banks”.
Technically, AUD/CAD stabilized after meeting target of 61.8% projection of 0.9514 to 0.8733 from 0.9104 at 0.8621. Break of 0.8733 support turned resistance should confirm short term bottoming at 0.8596, and bring stronger rebound to 55 day EMA (now at 0.8830) and above.
AUD/NZD extended the decline from 1.1489, as a correction to whole up trend from 1.0278. It’s now inside keys support zone of 1.0987/1.1168, close to 38.2% retracement of 1.0278 to 1.1489 at 1.1026 on oversold condition. There is prospect of a near term rebound from current level. Break of 1.1138 minor resistance will likely lift the cross to 55 day EMA (now at 1.1197) and above, as the second leg of the corrective pattern from 1.1489.
EUR/JPY Weekly Outlook
EUR/JPY’s up trend resumed last week and hit as high as 148.38. But subsequent retreats indicates that it’s turned into another consolidation phase. Initial bias is turned neutral this week first. Downside should be contained by 140.88/144.06 support zone to bring another rally. Break of 148.38 will resume larger up trend to 100% projection of 133.38 to 145.62 from 137.32 at 149.56, which is close to 149.76 long term resistance.
In the bigger picture, the up trend from 114.42 (2020 low) is still in progress for 149.76 (2014 high). Decisive break there will pave the way to 161.8% projection of 114.42 to 134.11 from 124.37 at 156.22. This will now remain the favored case as long as 137.32 support holds.
In the long term picture, there is sign of upside acceleration with strong break of long term channel resistance. Outlook will stay bullish as long as 134.11 resistance turned support holds. Sustained break of 149.76 (2014 high) will open up further rally, as resumption of the rise from 94.11 (2012 low), towards 169.96 (2008 high).
