Yen Dropped Broadly as Treasury Yields Jumped on Hawkish Fed
Yen’s fortune reversed last week as US treasury yields accelerate up after hawkish FOMC meeting and projections. US stocks also display strong resilience and closed generally higher, reversing prior losses. Sterling, on the other hand, shrugged off hawkish BoE voting and ended as second weakest. Aussie and Kiwi were not too far away with concerns over China’s Evergrande in Asian markets.
On the other hand, Canadian Dollar ended as the best performer, with help from extended rebound in oil price. Swiss Franc and Dollar followed as next strongest. However, it’s noted that Dollar’s upside momentum hasn’t been too convincing. It’s a big question on whether the greenback could ride on hawkish Fed to pick up more buying.
Market pricing in 75% chance of Fed hike by 2022 end
FOMC announce last week somehow met expectations of a hawkish twist. The statement clearly indicated that “a moderation in the pace of asset purchases may soon be warranted”, if the “progress continues broadly as expected”. That set up expectation that an announcement at the November meeting.
Additionally, Members have also pushed forward the timing of the first rate hike. The median dot plots showed that 9 out of 18 members projected it to happen in 2022. Indeed, the staff projection also showed that the policy rate would increase to 0.3% next year.
Latest fed funds futures are now pricing in only 25.43% chance of federal funds rate staying at 0-0.25% in December 2022. . That’s a huge decline from 44.87% just a week ago. In other words, markets are now pricing in nearly 75% chance of at least one rate hike by the end of 2022.
5-year yield ready for upside breakout, 10-year yield broke 1.4 handle
US treasury yield jumped notably last week and accelerated higher after FOMC. Closing at 0.957, 5-year yield is now in proximity to 0.988 high. Consolidation from there should have completed at 0.606 already and the up trend from 0.192 should be ready to resume. Based on current upside momentum, break of 0.988 would happen soon and FVX would target 61.8% projection of 0.192 to 0.988 from 0.606 at 1.098 next.
The benchmark 10-year yield also made substantial progress by breaking through 1.420 near term resistance. Overall, the development affirms that case that correction from 1.765 has completed at 1.128, after hitting 50% retracement of 0.504 to 1.765 at 1.134. Further rise is now in favor to retest 1.765 high next. The question is more on the strength of the momentum of the next rally.
S&P 500 displayed strong resilience, could have completed brief pull back
Stocks were surprisingly resilient last week, even in response to the hawkish FOMC announcement. S&P500’s pull back looks completed at 4305.91 and near term bullishness was revived by a strong close above 55 day EMA. Consolidation from 4545.85 could turn out to be a relatively brief and shallow one. Even in case of another falling leg, downside would likely be contained by 23.6% retracement of 3233.94 to 4545.85 at 4235.23.
Dollar range bound despite hawkish Fed, more upside still in favor
Dollar’s reaction to Fed was pretty muted while Dollar index was bounded in tight range last week. Major reaction was actually found in Yen’s selloff. Anyways, with 9.178 support intact, DXY’s rise from 89.53 is in favor to continue through 93.72. That would also resume the whole pattern from 89.20. 38.2% retracement of 102.99 to 89.20 at 94.46 remains the major hurdle for DXY to overcome, if it’s turning medium term outlook bullish.
CHF/JPY drew support from important zone and rebounded
Talking about Yen’s selloff, it’s particular apparent in CHF/JPY which staged a sharp reversal and ended the week as the biggest mover. CHF/JPY has indeed drew strong support from key zone of between 38.2% retracement of 106.71 to 122.74 at 116.61 and 55 week EMA (now at 118.05). Near term focus is now back on 120.57 resistance. Firm break there should full retain medium term bullishness, and could send the cross through 122.74 high to resume larger long term up trend. In such case, Yen’s selloff could accelerate further elsewhere.
USD/JPY surged sharply higher to 110.78 last week. The break of 110.44 resistance suggests that consolidation pattern from 111.65 has completed already. Initial bias is now on the upside this week. Firm break of 110.79 resistance will target a test on 111.65 high. On the downside, below 110.30 minor support will mix up the near term outlook and turn bias neutral again.
In the bigger picture, medium term outlook is staying neutral with 111.71 resistance intact. The pattern from 101.18 could still extend with another falling leg. Sustained trading below 55 day EMA will bring deeper fall to 107.47 support and below. Nevertheless, strong break of 111.71 resistance will confirm completion of the corrective decline from 118.65 (2016 high). Further rise should then be seen to 114.54 and then 118.65 resistance.
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. In case of deeper fall, downside should be contained by 61.8% retracement of 75.56 to 125.85 at 94.77. Up trend from 75.56 is expected to resume at a later stage for above 135.20/147.68 resistance zone.
