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Yen bull run dragging the dollar higher but can it last?

Written Richard Perry | 2018-01-10 04:20:26 GMT

The bull run on the yen continues to strengthen and this is helping the dollar to also continue its own recovery, but can it last? The news that the Bank of Japan had lowered its asset purchases last month has given a jolt to the bond markets. Primarily it has driven a sharp upside move on longer dated Japanese Government Bond yields and subsequently a yen rally as investors have moved to speculate on whether this is a “stealth” form of tightening monetary policy. However, the move has also driven Treasury yields sharply higher, with the 10 year yield spiking to 2.56%, a nine month high. Furthermore, the dollar is also following the yen in outperforming the forex major currencies. The question is whether this will last. The 10 year JGB yield is around 0.085% with 0.10% being a key range barrier that the BoJ seems to have as a line in the sand. Also, the US 10 year yield comes up against a considerable technical barrier around 2.64%, whilst the US Dollar Index is into a band of resistance 92.50/92.75. The dollar is mixed against forex majors today but the yen remains strong, once more storming higher. In equities the free run higher on Wall Street could begin to come against more consideration with Q4 earnings just around the corner giving traders something to ponder. Right now it is difficult to see anything derailing this rally, but that is cause for concern in itself.

Markets

Wall Street again closed at all-time highs with the S&P 500 at +0.1% at 2751, however Asian markets have been more cautious with the Nikkei -0.3% and European markets are also looking ponderous in early moves. In forex, the dollar is performing well against major currencies, although the yen remains the standout performer, gaining strongly across the board. The strengthening dollar and rising Treasury yields are hampering gold still as it consolidates a touch today around the support band $1300/$1310. Oil continues to push into new multi-year highs as the market consolidates yesterday’s upside break.

China inflation was mixed today with CPI showing a slight miss of expectations at +1.8% (+1.9% exp, +1.7% last) whilst PPI was mildly higher than expectations at +4.9% (+4.8% exp, +5.8% last).

Aside from the China inflation numbers released overnight there is little of major significance on the economic calendar. The UK Industrial Production at 0930GMT which is expected to improve by +0.3% on the month and show +1.8% growth for the year. The UK Trade Balance is also at 0930GMT and is expected to marginally improve to -£10.70bn (from -£10.78bn last month). The EIA oil inventories are at 1530GMT and are expected to show another drawdown for crude stocks of -3.5m barrels (-7.5m barrels last week), with distillates showing a build of +1.0m barrels (+8.9m barrels last week) and gasoline stocks up by +2.6m barrels (+4.8m barrels last week).

Chart of the Day – Silver 

After almost four weeks of trending higher, it seems as though the bulls have lost control of the run higher and the potential for a correction is now elevated. The rally again seemed to fail around $17.30 which was a basis of old resistance on several occasions with the highs of October and November failing to make a decisive break. Silver seems to be unable to breakout of this long term sideways range as the classic overbought/oversold signals continue to play out. The market has again rolled over with the RSI turning lower from 70. The question now is whether this is a consolidation or the beginning of a correction. If the MACD lines turn to cross lower and the Stochastics also confirm a bear cross lower then the chances of a corrective move increase further. A second strong bear candle has now broken the four week uptrend and this now opens the support of an old pivot at $16.80 which will be the key gauge. A breach of $16.58 support this would open continued retracement to $16.30. The hourly chart shows initial resistance now at $16.95/$17.15 and if this is where another lower high forms the selling pressure could grow.

Silver

EUR/USD

The dollar continues to make headway against the euro as the pair has completed a third consecutive negative candle and confirmed the break of a three week uptrend. Momentum indicators have turned near term corrective with the Stochastics confirming a crossover sell signal and the MACD lines also crossing lower. This remains a near term correction within a larger nine week uptrend and looks likely to provide the bulls with another opportunity to buy at some stage. Although the initial breakout support band $1.1940/$1.1960 has been broken there is further support between $1.1860/$1.1900, whilst the nine week uptrend comes in at $1.1845 today. The hourly chart shows that intraday rallies are still being sold into, with $1.1950/$1.1970 a basis of initial resistance now.

EURUSD

GBP/USD

The Cable bulls may have just lost their edge for the time being, however sterling continues to hold up above the initial support at $1.3500. This comes despite another test of the support yesterday. However the momentum has rolled over and the market looks set to add further pressure today. The momentum indicators are reflecting the loss of impetus for the bulls but equally are also not suggesting imminent downside. The hourly chart points to a slight negative bias forming on momentum but again there is no major selling pressure yet. This would change on a breach of $1.3500 (completing a small top and implying a further 110 pips of downside) with the support of an eight week uptrend around $1.3450 today. As with the euro though, any correction would still have the air of a near term correction within the medium term bullish outlook. Resistance is at $1.3585 and then more considerable at $1.3612.

GBPUSD

USD/JPY

With the strengthening of the yen seen early this week, the question is whether some serious move will be seen against a dollar that is also gaining ground. Yesterday’s negative candle changed the near term outlook and followed by further downside today the stronger yen is ready to put pressure on a key near term support on Dollar/Yen. Throughout December the support at 112.00 had held firm, however the market seems to be in the process of forming lower highs in recent weeks (latest at 113.40) and the pressure on the key support is really strengthening now with momentum indicators having a negative near term bias (primarily on the RSI and Stochastics). This is reflected on the hourly chart with the run of lower highs, the latest being the overnight rebound to 112.75. Selling into strength for the test of 112.00 is playing out well currently but it will be how the dollar bulls defend 112.00 which will be key for the near term outlook. A closing breach would open 111.40 initially and then the key November low at 110.85. A sustained move above 113.00 would improve the outlook once more.

USDJPY

Gold

Having held up well in recent sessions, gold has just started to struggle in the early stages of this week. Is the market topping out again? The slide and negative candle formation yesterday has continued in the Asian session today to breach the support of a four week uptrend. The momentum indicators have also lost impetus with the RSI pulling decisively now below 70 being the main concern. The Stochastics are also drifting lower. However the key gauge will be the reaction to the long term pivot band $1300/$1310 which is now supportive for gold. A closing breach of $1300 would be a significant disappointment now for the bulls, having worked so hard for a breakout. The hourly chart does have the look of a market that has lost its way and is unwinding in a drifting manner. Will this turn to be a more precipitous correction? The $1300 support will be key. Initial resistance around $1315.

Gold

WTI Oil

The May 2015 high at $62.60 has been a key barrier that the market will have been watching. However this was blown out of the water yesterday as the market continued to push strongly higher, aided by the significant drawdown in the API inventories. The market is now at three year highs. Intraday declines are simply being seen as a chance to buy. Momentum indicators remain bullishly configured with the RSI, MACD and Stochastics all extremely strong. The support of a four week uptrend comes in at $61.10 today which coincides with the late support left from last week at $61.10. On the hourly chart the 89 hour moving average (currently around $62.00) has been a strong basis of support since 19th December for any intraday weakness. Closing above $62.60 continues the recovery to levels not seen since December 2014 and the precipitous decline of late 2014, with subsequent resistance at $63.75 and then c. $69.50.

Wti

Dow Jones Industrial Average

Correction? What correction? Monday’s slightly corrective looking candle appears to be a distant memory as the market again pushes out to further all-time highs and remains strong. Momentum is again back in strong configuration with the MACD and Stochastics lines rising and the RSI around 80. The rally is seemingly incessant at the moment as even the most minor of intraday declines are being bought into. The support of a six week uptrend comes in above 25,000 now at 25,017 whilst the latest breakout is supportive back at 24,876. The market is looking a touch stretched again on the momentum and Bollinger Bands but essentially the bull control is so great that this barely matters. Monday’s low at 25,235 is initial supportive.

Dow

Author

Richard Perry
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