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US Greenback Outlook:
- The US Greenback (by way of the DXY Index) has been flagging in October, surviving an important take a look at this week by discovering assist at its day by day 21-EMA.
- Eurodollar spreads and the US Treasury yield curve proceed to recommend a extra hawkish Fed is coming, holding intact the bullish basic argument.
- The IG Shopper Sentiment Index means that USD/JPY has a bullish bias within the near-term.
US Greenback Rebounds, Bull Flag Holds
The US Greenback (by way of the DXY Index) touched a recent yearly excessive earlier this week, however a spherical of revenue taking quickly emerged, serving to the DXY Index proceed to carve out a transparent bull flag via October up to now. However the basic narrative has not modified: inflation persisting at larger ranges longer than anticipated by the Federal Reserve has elevated the probability that tapering will quickly start, leaving the dollar with a extra favorable central financial institution backdrop than both of its main counterparts, the Euro or the Japanese Yen.
Hawkish Fed Nonetheless Anticipated After US CPI, FOMC Minutes
We will measure whether or not a Fed charge hike is being priced-in utilizing Eurodollar contracts by analyzing the distinction in borrowing prices for business banks over a selected time horizon sooner or later. Chart 1 under showcases the distinction in borrowing prices – the unfold – for the October 2021 and December 2023 contracts, with the intention to gauge the place rates of interest are headed by December 2023.
Eurodollar Futures Contract Unfold (October 2021-DECEMBER 2023) [BLUE], US 2s5s10s Butterfly [ORANGE], DXY Index [RED]: 4-hour Chart (April 2021 to October 2021) (Chart1)
By evaluating Fed charge hike odds with the US Treasury 2s5s10s butterfly, we are able to gauge whether or not or not the bond market is performing in a fashion in keeping with what occurred in 2013/2014 when the Fed signaled its intention to taper its QE program. The 2s5s10s butterfly measures non-parallel shifts within the US yield curve, and if historical past is correct, because of this intermediate charges ought to rise sooner than short-end or long-end charges.
As has been the case for a number of weeks now, regularly elevated Eurodollar spreads alongside motion within the US yield are in keeping with the 2013/2014 interval that means a extra hawkish Fed is quickly to reach; which was additionally in keeping with a stronger US Greenback.
There are 117-bps of charge hikes discounted via the top of 2023 whereas the 2s5s10s butterfly just lately reached its widest unfold because the Fed taper discuss started in June (and its widest unfold of all of 2021). Furthermore, in keeping with current chatter from FOMC officers, the primary charge hike appears more and more prone to arrive in late-2022.
DXY PRICE INDEX TECHNICAL ANALYSIS: DAILY CHART (August 2020 to October 2021) (CHART 2)
Regardless of pulling again via the center of the week, the DXY Index has proved its mettle by discovering assist at its day by day 21-EMA – and within the course of, setting a ‘higher low’ above its August excessive at 93.73. This episode of former resistance proving as assist following a bullish breakout means that momentum stays firmly to the upside.
Even with the pullback, the DXY Index’s day by day 5-, 8-, 13-, and 21-EMA envelope stays in bullish sequential order. Day by day MACD is beginning to recede, however stays well-above its sign line. In the meantime, day by day Sluggish Stochastics are straddling overbought territory, additional confirming momentum’s bullish inclinations.
Whereas it might be too quickly to recommend that the following leg larger is starting, it could be equally silly to declare the current rally extinct.
USD/JPY RATE TECHNICAL ANALYSIS: WEEKLY CHART (July 2011 to October 2021) (CHART 3)
Even because the DXY Index’s rally has paused, USD/JPY charges have continued to surge larger. USD/JPY from the weekly timeframe, there’s a affordable foundation to imagine that we’re nonetheless within the early innings of a longer-term bullish breakout. USD/JPY charges are above their weekly 4-, 8-, and 13-EMA envelope, which is in bullish sequential order. Weekly MACD has simply issued a bullish crossover whereas above its sign line, and weekly Sluggish Stochastics have began to return to overbought territory.
Close to-term resistance could quickly be approaching within the type of the 23.6% Fibonacci retracement of the 2011 low/2015 excessive vary at 113.99, however any pullback from this degree henceforth would essentially be seen as a ‘buy the dip’ alternative – particularly as US fairness markets have began to breakout larger.
IG Shopper Sentiment Index: USD/JPY RATE Forecast (October 14, 2021) (Chart 4)
USD/JPY: Retail dealer knowledge exhibits 26.08% of merchants are net-long with the ratio of merchants quick to lengthy at 2.83 to 1. The variety of merchants net-long is 1.43% larger than yesterday and 19.25% decrease from final week, whereas the variety of merchants net-short is 2.78% larger than yesterday and 27.31% larger from final week.
We sometimes take a contrarian view to crowd sentiment, and the very fact merchants are net-short suggests USD/JPY costs could proceed to rise.
Merchants are additional net-short than yesterday and final week, and the mixture of present sentiment and up to date adjustments provides us a stronger USD/JPY-bullish contrarian buying and selling bias.
— Written by Christopher Vecchio, CFA, Senior Strategist
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