Yen Extended Down Trend on Rise in Yields and Rebound in Stocks

Yen’s down trend continued last week and even accelerated against commodity currencies. Persistent rally in benchmark yields, rebound in stocks, and diverging central bank expectations are expected to weigh on Yen further. Meanwhile, expected rate hike by Fed and BoE didn’t provide much support to Dollar and Sterling, as both closed among the weakest.

On the other hand Aussie and Kiwi ended as the best performer. Euro followed as third, but there was also sign of turning around towards the end of the week. The development in the coming days might decide whether Euro’s rebound has completed and selloff is returning.

Fed started tightening, S&P 500 completed correction

Fed finally started the tightening cycle by delivering a 25bps rate hike to 0.25-0.50% last week. It also indicated that quantitative tightening will start “at a coming meeting”. Fed Governor Christopher Waller later said that he actually preferred 50bps, but voted for 25bps hike only because of geopolitical events. That’s probably the view of the majority in the FOMC. But then, by not “front-loading” the hikes now, Fed might risk being forced to doing it more aggressive later. The dot plot currently suggests a peak of 2.80% in federal funds rate next week, but that is clearly subject to revision based on upcoming developments.

Anyway, stocks responded well last week. S&P 500’s rebounded strongly last week and broke 4416.78 near term resistance. Corresponding levels in DOW (34179.07) and NASDAQ (13837.58) were also taken out. The development suggests that SPX’s correction correction from 4818.62 has completed with three waves down to 4114.65 already. Further rise should seen to 4595.31 resistance next. Firm break there will pave the way to retest 4818.62 high.

It’s too early to say that long term up trend in SPX is ready to resume. The index could still extend the corrective pattern from 4818.62 with another falling leg towards 38.2% retracement of 2191.86 to 4818.62 at 3815.20. However, NASDAQ has already did that by testing corresponding level of 38.2% retracement of 6631.42 to 16212.22 at 12552.35 already. Hence, SPX’s correcting could turn out to be shorter and shallower than envisaged.

10-year yield hit 2.246, pressing key resistance zone

10-year yield surged through 2.065 high to resume the long term up trend last week, hitting as high as 2.246. It’s still unsure if TNX would eventually be rejected by key cluster resistance level at 2.159/2.187 (61.8% retracement of 3.248 to 0.398 at 2.159, 61.8% projection of 0.398 to 1.765 to 1.343 at 2.187).

But in any case, break of prior week’s high at 2.021 is needed to be the first sign of short term topping. Otherwise, further rally is still in favor. Sustained trading above 2.159.87 will pave the way to 100% projection at 2.710, which would be a rather significant development.

AUD/JPY and CHF/JPY resumed long term up trend

Yen ended as the worst performer on a combined factor of central bank divergence, rising global benchmark yields, and return of risk appetite. AUD/JPY was the top mover last week, gaining 3.12%. The strong break of 86.24 high confirms long term up trend resumption. Outlook will stay bullish as long as 85.87 resistance turned support holds. Next near term target is 161.8% projection of 78.77 to 84.27 from 80.34 at 89.23, which is close to 90.29 long term resistance.

It should also be noted that the whole down trend from 105.42 (2013 high) has completed with three waves down to 59.85. The support from 55 week EMA was a medium term bullish sign, and argues that AUD/JPY is reversing the whole down trend from 105.42. Sustained break of 90.29 would confirm this case and target 105.42 again.

CHF/JPY also broke through 127.05 resistance last week to resume long term up trend from 106.71. The multiple support from 55 day EMA is a medium term bullish sign. Outlook will now stay bullish as long as 126.44 minor support holds. Current rally should now target 61.8% projection of 117.51 to 127.05 from 124.23 at 130.12 next.

More importantly, the next rise could come with a break of long term channel resistance, which signals upside acceleration. Further break of 130.12 would solidify this acceleration. CHF/JPY could then target cluster projection level of 100% projection of 117.51 to 127.05 from 124.23 at 133.77, and 161.8% projection of 101.66 to 118.59 from 106.71 at 134.10.

EUR/AUD finished rebound, EUR/CHF to follow lower?

Euro spent most of the week attempting to extend the near term rebound. But its effort has somewhat faltered towards the end, except versus Yen. EUR/AUD’s break of 1.4920 support on Friday argues that the rebound from 1.4561 has completed at 1.5327 already. The rejection by 1.5453 support turned resistance keeps near term outlook bearish. Retest of 1.4561 low should be seen next. Break there will resume long term down trend from 1.9799.

At same time, attention will be paid to development in EUR/CHF to confirm if selloff is back on Euro. The cross faced initial rejection by 38.2% retracement of 1.1149 to 0.9970 at 1.0420 and dropped notably to close the week. At this point, further rally could still be seen as long as 1.0184 support holds.

However, deeper decline this week, followed by break of 1.0184 support, should confirm that rebound from 0.9970 has finished. If happens, the development will keep medium term outlook bearish in EUR/CHF and bring retest of 0.9970 low first, even though there might still be another rebound before down trend finally resumes. Anyway, break of 1.0184 in EUR/CHF would be a sign of return to weakness in Euro in general.

USD/JPY Weekly Outlook

USD/JPY’s up trend accelerated further to as high as 119.39 last week. Initial bias remains on the upside this week. Next target is 100% projection of 109.11 to 116.34 from 114.40 at 121.63 next. On the downside, below 118.35 will turn intraday bias neutral again and bring retreat. But downside should be contained above 116.34 resistance turned support to bring another rally.

In the bigger picture, the break of 118.65 resistance (2016 high) suggest that up trend from 98.97 (2016 low) is resuming, with rise from 101.18 (2020 low) as the third leg. Medium term outlook will remain bullish as long as 113.46 low. Sustained trading above 118.65 will pave the way to 125.85 (2015 high).

In the long term picture, the rise from 75.56 (2011 low) long term bottom to 125.85 (2015 high) is viewed as an impulsive move, no change in this view. Price actions from 125.85 are seen as a corrective pattern which could still extend. However, firm break of 128.85 will resume the up trend form 75.56 towards 135.20 long term resistance next.