Intraday Market Thoughts Archives

A typical and major error of pure fundamental or technical analysis is the 100% use of one of form of analysis with complete disregard of the other. Attempting to draw conclusions and forecast on USDJPY by comparing current price and technical patterns to previous decades risks ignoring some vast policy differences. The chart below shows each time USDJPY broke below its 200-DMA, it went on to fall by an average additional decline of 5%. The 2 exceptions were: 2013/4 when yen weakness and QE formed the basis of 3 Arrows Policy; and July 2023 when US-JPN monetary policy paths continued to diverge. The stand-out fundamental factor is the Three Arrows Policy pursued in 2013 by the late PM Shinzo Abe and powerful former BoJ chief Haruhiko Kuroda. You can do a simple Google search about the details and FX implications of 3 Arrows. So what will it be this time?

Does the latest re-break below the 200-DMA pave the way for further downside in USDJPY ? Regardless of whether the BoJ normalises (or hints at) normalizing yield curve control at next week's policy meeting, the decision to terminate it in 2024 is inevitable. 2023 will see USDJPY complete its 3rd consecutive year of being the weakest performing G10 currency. Imagine that…3 straight years of being the worst currency.  Taking another close look at the above chart, will tell you something about 5% extension below the 200-DMA. This explains our recent use of "smaller+further" trading strategy for such set-ups for the WhatsApp Broadcast Group.

I usually tell people what and how we did with the WGP after major events. On Wednesday, the second I saw the Fed Dot Plot called 4.6% FF for 2024 (3 three rate cuts) I jumped on USDJPY short. No, i did not focus on Long AUDUSD or Long EURUSD..it was all Short USDJPY and Long XAUUSD. Result: Not only "Short USDJPY" was the best combo trade of Wednesday, but of the entire week (USD weakest and JPY strongest). 

 

 

 

 

At today's FOMC decision, Fed chair Powell's primary intention and challenge is to sound positively hawkish; meaning to maintain the soft landing narrative, while pushing back against market (fed funds futures) pricing of 4-5 rate cuts in 2024. Powell's ability to convince markets will primarily depend on the interplay between the DotPlot (Fed members' forecasts for FedFunds rate) and the Summary of Economic Projections (SEPs)-- the average forecasts for growth, inflation and unemployment. 

New vs September DotPlot for 2024 

The current median of Fed members' FedFunds expectations issued in September stands at 5.1%, meaning policymakers were pricing about one rate cut for 2024. Today's meeting is expected by economists and strategists not the “market” to see the median dot plot dropping to 4.9%, meaning two rate cuts of 25-bps by end of 2024.  Again, the market (fed funds futures) are currently pricing between four and five rate cuts by end of 2024. 

What to Watch

The initial market reaction at 2:00 pm Eastern (7pm GMT, 11 pm Dubai) will largely depend on the outcome of the median dot plot.

Anything between 4.8% and 5.0% (two rate cuts) is expected by the consensus of strategists and economists and may trigger a short-lived selloff in indices, metals and lift up the US dollar.

Anything between 4.6% and 4.7% (three to four rate cuts) would be deemed dovish, particularly dovish and markets-friendly if closer to 4.6%. 

Subsequent market reaction will shift to SEPs on growth and inflation, with each number raising questions and drawing speculation, until Powell appears on the podium. Once again, Powell's challenge will be to push back against aggressive easing expectations on the basis of inflationary risks instead of recession or hard landing. 

About the Above Chart

The chart above shows the non-surprising relationship between the probability of a 25-bp FedFunds rate change at the March 2024 meeting. The current -0.45% -- indicating a 45% chance of a 25-bp cut-- is much less than the 75% probability of a similar rate cut seen last week, when gold and EURUSD were both higher. Watching the real-time development of this probability pricing will be crucial in gauging the evolving market reaction, and that's exactly what I'll be updating our WhatsAapp Bdcst Group members before and after the decision. 

Another thing (not on the chart) is that Bitcoin also peaked at the bottom of these FedFunds expectations for March 2024, whereas SPX and Nasdaq100 tend to show more resilience. 

Good luck to eveyone, and dont forget Thursday's BoE decision, especially after today's dismal GDP and industrial production figures. Once that's done, we move to the unimportant ECB decision before next week's crucial BoJ policy decision.

 

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