- It is a two-sided coin when it comes to EM-FX derisking.
- The dollar broke a key technical level at 94.80 which now acts as a resistance.
- The DXY is climbing and has scored back into the 94.60’s, off the day’s lows down at 94.43.
- Technically, Valeria Bednarik, chief analyst at FXStreet explained that the risk is skewed to the downside.
USD/JPY is on the march and headed for a test through the 111.20’s. The pair has been as low as 110.95 and currently trades at 111.16. It is down from the 111.35 European highs. US equities are solid, albeit of fresh record highs scored earlier in the day. The DXY is climbing and has scored back into the 94.60’s, off the day’s lows down at 94.43.
It is a quieter day in markets today. However, USD/JPY has not exactly been very exciting, stuck between in a going nowhere range of between the 111.90’s/50 sideways channel since Friday’s dollar weakness on Powell’s arguable dovish speech which capped this month’s recovery USD/JPY highs in a rally that started back on the 20th from down in the 109.90’s – The continuation, of which, was partly on the back of the FOMC minutes where the market still expects a September rate hike. The correction has also been due to EM derisking flows that weighed on the yen.
Subsequently, the dollar broke a key technical level at 94.80 which now acts as a resistance. (Fundamentally, the market’s dovish interpretation of Powell’s Jackson Hole speech has added fuel to the downside after Trump’s dissatisfaction with the Fed’s current policy, and 2019 hikes are now questionable).
A crowded bull dollar trade, but de-risking anchors the yen
So, it is a two-sided coin when it comes to EM-FX derisking that weighs on the yen while the downside in the greenback probably has more to go given how much it has depended on the spread widening on Fed expectations. While markets expect a rate hike at September’s meeting, it will be the dot plot that will garner more interest. In Powell’s view, “there doesn’t seem to be an elevated risk of overheating,” so we may see that projection in the median Fed Funds rate at year-end 2020 projected to 3.375% lowered and a less aggressive tightening program marked out along the dots with the current neutral rate of between 2.5 and 3 per cent maintained. Therefore, anything that has been priced into the dollar beyond may well see a speculative bull stampede for the exits and that could cap the five-month rally here for the foreseeable future – (But add derisking to the fray, that could be the bulls savour).
USD/JPY levels
Technically, Valeria Bednarik, chief analyst at FXStreet explained that the risk is skewed to the downside:
“The pair remains unable to surpass the 111.40/50 region, while, in the 4 hours chart, selling interest keeps limiting the upside around the 200 SMA, currently flat at around 111.30. In the same chart, technical indicators have lost directional strength, the Momentum below the 100 level and the RSI currently at 53 with a modest downward slope, while the 100 SMA is also horizontal at around 110.85. A softer tone in equities and yields could be the catalyst for a bearish breakout, with a slide below the 110.80/90 region exposing the 110.00 figure.”
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