What stock markets could be saying and why it matters for Forex
Since Brexit something interesting and unexpected has happened. US shares have hit all-time highs, and stock markets around the world have also rallied. The reasons behind this move could turn out to be very significant for forex markets.
Either equity markets are poised for an improving global economy or a step up in central bank intervention and fiscal stimuluses. If there is any truth in either of those scenarios, and both have some plausibility, then the environment could be turning supportive for some emerging market and risk currencies and negative for JPY and CHF. The latter two currencies, traditional safe havens, have lost ground against the USD and could see further falls – if – equity markets are correct.
So far US quarterly earnings on aggregate have exceeded expectations suggesting that large swathes of the US economy are performing well. In the meantime, US GDP growth remains steady and the jobs market is robust, which could see rising earnings. Friday (July 29) sees the release of the quarterly US GDP estimate.
China's economy, meanwhile, appears to be holding up as it transitions towards one driven by consumption. That bit at least has been growing fast for some time, which is promising.
Even the traditional sick man of the global economy, the Eurozone, grew at 1.7% in Q1 and this week there should be some clues as to how it performed in Q2 via a flash estimate to be released on Friday.
If markets are turning towards a risk-on mode, then it could present a window of opportunity for the US Federal Reserve to raise interest rates by 25 basis points, which it’s wanted to do for a long-time.
Meanwhile, Japan is looking at a big state spending boost, which might take pressure off the Bank of Japan to increase its huge monetary stimulus efforts. On Friday, the BoJ will hold a much anticipated press conference.
However, this rosy scenario comes with many caveats. For a start, the Eurozone is plagued with political and financial strains, which are getting worse. European bank stress test results, which also come out on Friday will be heavily scrutinised particularly for the Italian banks and could be a EUR negative.
China’s economy remains too wedded to infrastructure spending and its banks have many, unrecognised bad debts. The UK, which is struggling to get to grips with Brexit will very likely see the Bank of England intervening to support the economy and possibly the government as well.
However, even if the dynamics are shifting towards supporting risk currencies, the caveats mentioned above will still come to the fore from time to time sending traders rushing towards safe havens such as JPY and CHF and shaking them out of emerging market and risk currencies.
TECHNICAL ANALYSIS: USD/JPY – Technicals still suggest JPY strength
From a technical perspective, USD/JPY still very much looks as if it is in a downtrend, despite the possible shift towards risk-on sentiment in global markets as shown by the rally in equity markets.
Since early June, USD/JPY has been in retreat with the rally which occurred since July 11 looking like a short-term counter-trend, which may have petted out late last week. After all, the Bank of Japan is under considerable international political pressure not to take measures to weaken JPY.
On Friday, markets should know whether the BoJ has been heading those concerns at its press conference. It’s increasingly expected to do little, which could give JPY a further boost at the expense of USD.
Also, the recent up move looks very consistent with previous short-term counter-rallies, which have been occurring since at least November 2015. Another factor is that the slow stochs have given a strong sell signal.
Any sign that the recent rally in USD/JPY has legs will need to see it clear away nearby resistance at 106.82 and 107.50 before it can mount an attack on more important levels at 108.21 and 111.04. If it can eventually take out the latter number, then this could signal a fundamental reversal in the USD/JPY trend – a sign that bullish sentiment is starting to prevail in global markets and that a US interest rate rise is once again back on the cards.
But if the charts suggest that the recent up-move is little more than a counter-trend rally then support at 105.35 is likely to be tested quite soon, setting up a basis to challenge more important support levels at 102.78, 100.55 and eventually even very psychologically important levels of 99.98 and 98.78.
By Justin Pugsley, Markets Analyst, MahiFX