New month, new quarter…new market trends?

This week began with a violent reversal of the countertrend in the major themes of the past month, quarter and year to date. Major global indexes are up 5-7% from weekend lows, the US dollar is down nearly 500 points from last week’s peak against most of its major rivals, and even gold is up more than 100 points.

Following smaller-than-expected interest rate hikes by the RBA and the Bank of Poland, as well as UN requests for central banks to slow rate hikes, The fundamental narrative is that we may be on the verge of a potential Fed “reversal” toward slower rate hikes.

There’s just one problem with this narrative: traders aren’t buying it (at least not yet)! Looking at CME’s FedWatch tool, Fed futures traders still peg the likelihood of another 75bps interest rate hike in early November from about 2 to 3, and a nearly 70% chance of another rate hike at 125 b/s until the end of the year. Instead, the recent price action looks more like a temporary counter-trend move from last week’s extreme levels.

Ironically, softening financial conditions and September market changes, This week’s rally in the stock market and the pullback of the dollar is doing it MORE most likely, the Fed continues on the path of suppressing inflation at all costs. We also saw US economic data from Core PCE Consumer Confidence to Initial Jobless Claims to this morning’s ISM Services PMI came in better than expected, suggesting that the US economy is holding up relatively well so far.

Technical view: USD/JPY

Looking at the daily chart of USD/JPY, the currency pair most responsive to monetary policy, rates are currently consolidating near their 32-year highs in the mid-146.00s. Currently, traders are still wary of pushing the pair higher given the risk of BOJ intervention in the near term, but the longer-term trend is still clearly up, so it may only be a matter of time before we see USD/JPY at its highest level since 1990.

Astute traders will also note that the consolidation over the past month has softened the overbought condition in the pair’s RSI indicator, allowing the unit to correct through time rather than price, potentially setting the stage for another rally in the coming weeks. A sustained break above 146.50 could clear the way for a continuation to 150.00 as BoJ tapers, while only a break below previous resistance turned support at 136.50 would challenge the long-term bullish trend.

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