What are the chances of intervention?


Talking points on the dollar, the yield curve, the S&P 500 and crude oil

  • The business perspective: USDJPY bearish below 121; AUDUSD bullish above 0.7450; GBPCAD Bullish above 1.6500
  • The S&P 500 managed to hold the line at the midpoint of its 2022 range, but the move hardly reflected broader risk appetite.
  • As the dollar extends its rally for a sixth straight session, questions arise over how far the Fed forecast can go and speculation over USDJPY intervention

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Consistency of S&P 500 volatility against the dollar

Between the main fundamental themes of Russian sanctions, monetary policy speculation and growth concerns; there is a tumultuous whirlwind of speculation. A characteristic of these circumstances is the frequency of short-term reversals and the elusive formation of reliable trends. We would see such a situation in the last session with the benchmark S&P 500 rising 0.4% after a fairly volatile trading day. With the Fed’s hawkish comment the previous day and the US Senate’s vote on escalating sanctions against Russia, the session open threatened a break below the support formed by the midpoint of its 2022 range and its 20 day simple moving average at around 4,465. most representative American prone to reversals amid volatility and fleeting attachment to important fundamental themes.

Chart of the S&P 500 with 20 and 200 day SMA, speculative net positioning on futures contracts (Daily)

Chart created on Tradingview platform

Overall, the major US indices have an abundance of volatility, but they are very “poor” in the area of ​​consistency. The dollar seems to have the exact opposite problem. The DXY Dollar Index rallied for a sixth consecutive session through Thursday’s close – which is the longest since July 1st. This ascent pushed the benchmark currency to a nearly two-year high as it breached March resistance at 99.40, but the pace leaves much to be desired. That previously mentioned lead (which was 7 days) was seriously pointless with a series of sessions of little progress being made. Naturally, when the ride ended, there wasn’t much pressure for a hard pullback. What we are seeing now is more productive, but it has similar characteristics. Basically, what’s the boost for the greenback to not only stay buoyant, but ready for the next major step higher? As a safe haven and growth leader, there are few fees to be found. Rate expectations are a key factor, but we already anticipate a remarkably hawkish trajectory for the Fed. How far can we push this line?

DXY Dollar Index Chart with 100 Day SMA and Number of Consecutive Candles (Daily)

USDJPY forecast: What are the chances of intervention?

Chart created on Tradingview platform

Monetary policy remains my targeted priority theme

When it comes to prospecting for serious volatility or momentum, it pays to assess the deepest fundamental wells to see where the potential lies, waiting for a spark. The US 2-10 Yield Curve has corrected in very questionable circumstances, but we can see that “recession” fears have eased noticeably just in the simplistic change in the indicator. As for Russia’s invasion of Ukraine, the global economic toll has risen in the last session as the US Senate voted to both strip the aggressor country of its normal trade status (resulting in higher tariffs ) and to ban imports of energy products from the country. The biggest impact on the country’s foreign income would be if Europe cuts its purchases of Russian energy, but that call appears to have been pushed back to August. Meanwhile, monetary policy continues to put pressure on the markets. The 10-year U.S. Treasury yield continued its advance to three-year highs above 2.6% this past session following verbal (dovish) support from Vice Chairman Lael Brainard for a “ aggressive “quantitative tightening” and FOMC minutes suggesting cuts will start at $95 billion per month. How widespread is this policy of letting the long end of the curve rise? This is just as much a relative value outlook as with pairs like EURUSD as it is a collective driver for risky assets (where there remains a significant premium around years of central bank support).

Chart of Central Bank monetary policy stance with rate forecasts

USDJPY forecast: What are the chances of intervention?

Graphic created by John Kicklighter

Speaking of relative monetary policy, it is worth pointing out that the contrast between hawks and doves is increasingly extreme. At the lower end of the spectrum, we have the Bank of Japan and the Swiss National Bank who bemoaned their currencies and refused to deviate from their exceptionally dovish policy paths. At the other end of this spectrum, there is an identical tightening of 216 basis points for the Federal Reserve, the Reserve Bank of New Zealand and the Bank of Canada. It’s exceptionally aggressive, but which currency will find traction against its hawkish peers? I think the unwinding of the stimulus that raises the long end of the yield curve will respond more to short-term speculative shifts. In the meantime, keep an eye on the moves of these major players over the past week and month. The Bank of England’s forecast has eased significantly recently while the ECB’s maximum forecast of around 40 basis points of hikes by the end of the year jumped to 62 basis points. There is considerable potential for market displacement in these transitions.

Table of major macroeconomic events

USDJPY forecast: What are the chances of intervention?

Calendar created by John Kicklighter

Pairs to watch: USDJPY and GBPCAD

As we head into the end of the trading week, I will be keeping a close eye on yen crosses. Recently, a former finance minister in Japan said he thought the authorities were worried about the local currency and that they might step in to support the JPY if the USDJPY hits 130. I think they wouldn’t wait probably not that long – and that they may have acted in March to prevent the benchmark pair from rising above 125. BOJ Governor Kuroda expressed concern about the unusually steep depreciation of the yen lately, but he would hedge by suggesting that a weaker local currency could still be beneficial to the economy overall. I doubt that position holds, as the cheaper exports are more than offset by the significantly higher costs of imported raw materials where the country needs to supply its manufacturing. Keep an eye out for this pair.

USDJPY chart with 100-month moving average and 1-month ROC (monthly)

USDJPY forecast: What are the chances of intervention?

Chart created on Tradingview platform

Looking ahead to the last trading day of the week, there is no detailed list of high-level events. One of the most interesting lists on my radar is the Canadian jobs report for March. Historically, this data series has generated significant volatility; and given the aggressive rate forecast for the BOC, it can absolutely tap into a deeper market artery. Overall, I think the biggest upside is a disappointment given the yield premium already factored into the loonie. This does not mean, however, that the data will be disappointing. Looking through the CAD crossovers, one pair I’m particularly interested in is GBPCAD. The BOE and the BOC forecast similar tightening trajectories through the end of the year; and yet, the cross has fallen over 1,000 pips in just over a month. There is a one-sided market here that could trigger a deeper correction.

GBPCAD with 20 day moving average (daily)

USDJPY forecast: What are the chances of intervention?

Chart created on Tradingview platform

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