intermediate support

Deflationary spiral risk has negated confidence in China equities. US dollar has continued to hold steady against the yuan despite a broad-based sell-off against other major currencies ex-post US non-farm payrolls. The key intermediate support to watch on the USD/CNH will be at 7.2160. Weak China inflation data offset positive China Big Tech news flow The dreaded fear of a deflationary spiral in China has reached “code red” where the latest consumer inflation rate for June has flattened to 0% year-on-year from a gain of 0.2% year-on-year in May and came in below expectations of an increase of 0.2%. This latest reading in CPI is the weakest rate since February 2021. In addition, producers’ prices (factory gate prices) continued to deteriorate further into contraction mode; it dropped -5.4% year-on-year, faster than a 4.6% fall in May, and worse than expectations of a -5.0% decline. Overall, it has marked the ninth consecutive month of producer deflation and its steepest fall since December 2015. Time is running out for Chinese policymakers to negate the steepening rout in the internal demand environment that can potentially lead to further loss in consumer and business confidence if the deflationary spiral starts to be persistent. It may lead to a liquidity trap scenario in China where monetary policy tools will be less effective to stimulate real economic growth. The forward pricing mechanisms of the stock market seem to have started to take into account some aspects of the negative feedback loop triggered by the liquidity trap scenario, earlier intraday gains of between 1% to 3.2% seen in today’s Asian session on the Hang Seng indices as well as China’s benchmark CSI 300 driven by China Big Tech equities as Chinese regulators have signalled on last Friday after the close of the Asian session to end a two-year plus of crackdown on the technology sector have been reduced by slightly more than half, CSI 300 (0.5%), Hang Seng Index (0.8%), Hang Seng TECH Index (1.25%), and Hang Seng China Enterprises Index (0.7%) at this time of the writing.     China’s yuan remained soft despite the broader USD sell-off       Fig 1:  US dollar rolling 1-month performance as  of 10 Jul 2023 (Source: TradingView, click to enlarge chart) The US dollar sold off last Friday, 7 July reinforced by technical factors after the US Dollar Index cracked below its 50-day moving average that had been acting as a prior minor support since 28 June 2023, also ex-post US non-farm payrolls for June that came in below expectations (209K added vs. 225K consensus). Based on the rolling one-month performances as of today, the USD is weakest against the EUR (-1.89%), GBP (1.81%), and CHF (-1.35%) while holding steady against the offshore yuan, CNH (+1.44%). In addition, the US Treasury 2-year yield premium over an average of key developed nations’ 2-year sovereign yields (Germany, UK, Japan, Canada, Switzerland, Australia, China) has narrowed as well.     USD/CNH short and medium-term uptrend phases remain intact     Fig 2:  USD/CNH short & medium-term trends as of 10 Jul 2023 (Source: TradingView, click to enlarge chart) Since the start of its upside acceleration on 4 May 2023, the USD/CNH has managed to evolve above its 20-day moving average and today’s price action has managed to stage a rebound after a retest on it. If the 20-day moving average now acting as a key intermediate support at 7.2160 is not broken down, the USD/CNH is likely to remain in its short-term bullish trend trajectory which in turn may see further potential weakness in the CSI 300 and Hang Seng indices. The only catalyst for a potential revival of bullish animal spirits in China equities is a clear signal from China’s State Council on the implementation of new fiscal stimulus measures in terms of scope and timing.  

Medium-term uptrend of USD/JPY in place since 16 January 2023 at risk of breakdown. Steep decline from last Thursday, 6 July 2023 has reached oversold condition. Minor bounce cannot be ruled out at this juncture above 140.60 support. Watch the 142.50/142.80 intermediate resistance zone. This is a follow-up on our prior analysis “USD/JPY surged to a 7-month high, but fundamentals diverge” published on 23 June 2023. We have highlighted the risks of the overextended rally exhibited in the USD/JPY seen in the past six weeks as it approached a key resistance zone of 145.50/146.10 (click here for a recap). The price actions of the USD/JPY have indeed staged a retreat right below 145.50 (the lower limit of the key resistance zone) as it printed an intraday high of 145.07 on 30 June 2023 and dropped by 379 pips to hit a low of 141.28 in yesterday, 10 July US session.   Medium-term uptrend from 16 January 2023 is at risk of breakdown   Fig 1:  US/JPY medium-term trend as of 11 Jul 2023 (Source: TradingView, click to enlarge chart) Two key observations have emerged that indicated that the ongoing medium-term uptrend phase of the USD/JPY in place since the 16 January 2023 low of 127.22 may have reached its terminal point on 30 June 2023 which in turn may see the start of a multi-week corrective down move. Firstly, price actions have reintegrated below 142.50 (the pull-back support of the upper boundary of the medium-term ascending channel where price actions pierced above it on 22 June 2023) which suggests that the prior bullish breakout is likely a failure. Secondly, the daily RSI has broken below a key parallel ascending trendline support at the 48 level, indicating that medium-term upside momentum has waned.     A minor bounce cannot be ruled out as the decline reached short-term oversold condition   Fig 2:  US/JPY minor short-term trend as of 11 Jul 2023 (Source: TradingView, click to enlarge chart) In the realm of technical analysis, price actions of tradable financial instruments do not evolve in a vertical fashion but oscillate within a trend. As seen on the 1-hour chart of the USD/JPY, the steep decline since last Thursday, 6 July 2023 minor high of 144.65 has led the hourly RSI to reach an oversold condition (below the 30 level) and flashed out a bullish divergence observation (higher low in RSI but lower low in parallel price actions). These current observations have emerged as the decline in price actions is coming close to 140.60 key intermediate support (see daily chart). Hence if the 140.60 intermediate support manages to hold, a minor bounce may unfold with intermediate resistances coming in at 142.50 and 142.80 (20-day moving average). The key short-term pivotal resistance will be at 143.70 to maintain the ongoing short-term downtrend phase in place since the 30 June 2023 high of 145.07. On the other hand, a break below 140.60 exposes the next supports at 139.95 and 138.70.

AUD underperformed among the major currencies against the USD from 27 to 28 July 2023 ex-post FOMC, ECB, and BoJ. Split view among economists and interest rates traders on RBA monetary policy decision today. Short-term bearish downside momentum at this juncture as the AUD/USD failed to trade above the 200-day moving average. Key short-term resistance on AUD/USD is at 0.6740. This is a follow-up analysis of our prior report, “AUD/USD Technical: Rebounded right at 200-day moving average” published on 25 July 2023. Click here for a recap. The AUD/USD staged a rebound thereafter and reached an intraday high of 0.6821 on 27 July, just shy of the 0.6835 intermediate before it staged a bearish reversal and shed -198 pips ex-post FOMC, ECB, and BoJ to print an intraday low of 0.6623 on last Friday, 28 July. The Aussie has underperformed among the major currencies against the US dollar in the last two trading days of last week where the AUD/USD recorded an accumulated loss of -1.68% from 27 July to 28 July versus EUR/USD (-0.63%), GBP/USD (-0.71%), and JPY/USD (-0.65%) over the same period. The weak performance of the AUD/USD is likely to be attributed to the wishy-washy monetary policy guidance of the Australian central bank, RBA that led to a split forecast among economists and traders for today’s RBA monetary policy decision. Split view among economists and traders on RBA decision According to polls, the consensus among economists is calling for a hike of 25 basis points hike to bring the policy cash rate to 4.35% after a pause in the previous meeting in July. In contrast, data from the ASX 30-day interbank cash rate futures as of 31 July 2023 has indicated a patty pricing of only a 14% chance of a 25-bps hike, down significantly from a 41% chance priced a week ago.     Fig 1: AUD/USD medium-term trend as of 1 Aug 2023 (Source: TradingView, click to enlarge chart) From a technical analysis standpoint, the price actions of the AUD/USD are still trapped within a major sideway range configuration with its range resistance and support at 0.6930 and 0.6580 respectively.       Fig 2: AUD/USD minor short-term trend as of 1 Aug 2023 (Source: TradingView, click to enlarge chart) The AUD/USD has managed to stage a minor rebound of 117 pips from its last Friday, 28 July intraday low of 0.6622 in conjunction with an oversold reading seen in the hourly RSI oscillator on the same day. Interestingly, the minor rebound has challenged and retreated at the key 200-day moving average yesterday, 31 July during the US session (printed an intraday high of 0.6739). Right now, the hourly RSI oscillator has broken below its ascending support after it hit an overbought condition yesterday which indicates that short-term momentum has turned bearish. Watch the 0.6740 key short-term pivotal resistance to maintain the bearish tone, and a break below 0.6625 intermediate support exposes the major range support of 0.6600/6580. However, a clearance above 0.6740 negates the bearish tone to see the next resistance at 0.6835 in the first step.  

AUD underperformed among the major currencies against the USD from 27 to 28 July 2023 ex-post FOMC, ECB, and BoJ. Split view among economists and interest rates traders on RBA monetary policy decision today. Short-term bearish downside momentum at this juncture as the AUD/USD failed to trade above the 200-day moving average. Key short-term resistance on AUD/USD is at 0.6740. This is a follow-up analysis of our prior report, “AUD/USD Technical: Rebounded right at 200-day moving average” published on 25 July 2023. Click here for a recap. The AUD/USD staged a rebound thereafter and reached an intraday high of 0.6821 on 27 July, just shy of the 0.6835 intermediate before it staged a bearish reversal and shed -198 pips ex-post FOMC, ECB, and BoJ to print an intraday low of 0.6623 on last Friday, 28 July. The Aussie has underperformed among the major currencies against the US dollar in the last two trading days of last week where the AUD/USD recorded an accumulated loss of -1.68% from 27 July to 28 July versus EUR/USD (-0.63%), GBP/USD (-0.71%), and JPY/USD (-0.65%) over the same period. The weak performance of the AUD/USD is likely to be attributed to the wishy-washy monetary policy guidance of the Australian central bank, RBA that led to a split forecast among economists and traders for today’s RBA monetary policy decision.   Split view among economists and traders on RBA decision According to polls, the consensus among economists is calling for a hike of 25 basis points hike to bring the policy cash rate to 4.35% after a pause in the previous meeting in July. In contrast, data from the ASX 30-day interbank cash rate futures as of 31 July 2023 has indicated a patty pricing of only a 14% chance of a 25-bps hike, down significantly from a 41% chance priced a week ago.     Fig 1: AUD/USD medium-term trend as of 1 Aug 2023 (Source: TradingView, click to enlarge chart) From a technical analysis standpoint, the price actions of the AUD/USD are still trapped within a major sideway range configuration with its range resistance and support at 0.6930 and 0.6580 respectively.   Short-term momentum has turned bearish   Fig 2: AUD/USD minor short-term trend as of 1 Aug 2023 (Source: TradingView, click to enlarge chart) The AUD/USD has managed to stage a minor rebound of 117 pips from its last Friday, 28 July intraday low of 0.6622 in conjunction with an oversold reading seen in the hourly RSI oscillator on the same day. Interestingly, the minor rebound has challenged and retreated at the key 200-day moving average yesterday, 31 July during the US session (printed an intraday high of 0.6739). Right now, the hourly RSI oscillator has broken below its ascending support after it hit an overbought condition yesterday which indicates that short-term momentum has turned bearish. Watch the 0.6740 key short-term pivotal resistance to maintain the bearish tone, and a break below 0.6625 intermediate support exposes the major range support of 0.6600/6580. However, a clearance above 0.6740 negates the bearish tone to see the next resistance at 0.6835 in the first step.

The 2-day rebound seen in USD/JPY has reached 146.20/70 minor resistance zone. The movement of USD/JPY in the past month has a significant direct correlation with the US 10-year Treasury/10-year JGB yield spread. The short-term to medium-term trends of the US 10-year Treasury/10-year JGB yield spread remain bearish. Watch the 146.70 key short-term resistance on USD/JPY. This is a follow-up analysis of our prior report, “USD/JPY Technical: Potential counter-trend rebound within medium-term downtrend” published on 8 December 2023. Click here for a recap. USD/JPY has rebounded and hit the short-term resistance zones of 144.80/145.30 and 146.20/70 as highlighted in our previous analysis reinforced by the better-than-expected US non-farm payrolls data for November and a media report released yesterday, 11 December that stated the Bank of Japan (BoJ) officials were in no rush to scrap short-term negative interest in the upcoming 18 to 19 December monetary policy meeting according to sources. This latest set of “BoJ’s monetary policy thought process” reported by the media contrasted with the hawkish remarks made by BoJ Governor Ueda and Deputy Governor Himino last week that increased market speculations that the decade-plus of short-term negative interest rate policy in Japan may be scrapped sooner than expected. The USD/JPY extended its gains from last Friday and rallied by +0.86% to print an intraday high of 146.59 as seen in yesterday’s 11 December US session on the backdrop of the media report. It’s all about the yield spread between the US 10-year Treasury & 10-year JGB Fig 1: Movement of USD/JPY and US 10-year Treasury/10-year JGB yield spread as of 12 Dec 2023 (Source: TradingView, click to enlarge chart) Interestingly, the movement of the USD/JPY in the past month has moved in sync with the yield spread of the US 10-year Treasury/10-year Japanese government bonds (JGB) which can be considered as an indirect summation net effect of monetary policy guidance from the Fed and BoJ. Their current 20-day rolling correlation coefficient is at 0.90 which suggests that the movement of the US 10-year Treasury/10-year JGB yield spread has a significant direct influence on the movement of the USD/JPY. If the US 10-year Treasury/10-year JGB yield spread compressed (inched downwards), the movement of the USD/JPY reflected a similar directional move on the downside and vice versus if the yield spread expanded to the upside. Overall, the short to medium-term trend phases of the US 10-year Treasury/10-year JGB yield spread is still bearish as it continues to trend below its downward sloping 13-day moving average. Hence, it may put further downside pressure on the USD/JPY. USD/JPY’s recent minor rally may have exhausted Fig 2: USD/JPY short-term minor trend as of 12 Dec 2023 (Source: TradingView, click to enlarge chart) The price actions of the USD/JPY have staged a bearish reaction after 2-day of counter-trend rebound at the 146.70 short-term pivotal resistance (former minor swing lows area of 4/5 December 2023 & 50% Fibonacci retracement of the prior minor downtrend phase from 13 November 2023 high to 7 December 2023 low). In addition, the hourly RSI momentum indicator has flashed out a bearish divergence condition at its overbought condition during yesterday’s US session which suggests that the bullish momentum of the 2-day rally is likely to be exhausted. Near-term support will be at 144.20 and a break below it exposes the next intermediate support zone of 142.20/141.60 (coincides with the 200-day moving average). On the flip side, a clearance above 146.70 sees a potential extension of the counter-trend rebound towards the medium-term resistance zone of 147.40/148.60 (coincides with the downward sloping 20 and 50-day moving averages).  

An increase in dovish expectations on a rapid pace of Fed funds rate cuts projected for 2024 indicates a potential impending recession. An uptick in recession risk may see a further deterioration in the US 10-year Treasury real yield which reduces the opportunity costs for holding Spot Gold (XAU/USD). Spot Gold (XAU/USD) has managed to trade back above its 20-day moving average. This is a follow-up analysis of our prior report, “Gold Technical: Extension of corrective decline ahead of FOMC” published on 11 December 2023. Click here for a recap. The price actions of Spot Gold (XAU/USD) have shaped the extended corrective decline to print an intraday low of US$1,973 on 13 December during the European session ahead of the FOMC meeting announcement on the same day which was just a whisker away from the US$1,955 support highlighted in our previous analysis. All in all, it has shed -8.2% from its current all-time high of US$2,149 printed on 4 December 2023 which represents a retracement of close to 50% of its ongoing medium-term uptrend phase in place since the 6 October 2023 low of US$1,810. The US Federal Reserve unleashed its dovish pivot last Wednesday, 13 December where its latest “dot plot” projection for the trajectory of the Fed funds rate has indicated a total of three rate cuts (75 basis points) pencilled in for 2024, upped from two projected rate cuts in the prior September’s dot plot which in turn led to an increased in dovish expectations of market participants to price in six rate cuts, a total of 150 bps in 2024 via the 30-day Fed funds rate futures calculated by the CME FedWatch tool. This kind of dovish expectation that has skewed towards a rapid pace of the Fed funds rate cuts projection in the upcoming monetary easing cycle seems to indicate an impending recessionary scenario in 2024 that may put further downside pressure on the US 10-year Treasury real yield. US 10-year Treasury real yield broke below the 200-day moving average   Fig 1: US 10-year Treasury real yield medium-term trend as of 18 Dec 2023 (Source: TradingView, click to enlarge chart) The price movement of the US 10-year Treasury real yield has broken down below a major support zone of 1.82%/1.73% (also the 200-day moving average) which room for further downside potential with the next intermediate support coming in at 1.38%. Based on intermarket analysis, a further deterioration in the US 10-year Treasury real yield may support another round of potential impulsive upmove sequence in gold prices due to lower opportunity costs as gold does not produce “fixed coupons income streams” like bonds.  

Consensus is expecting no change to BoJ’s monetary policy, but its policy statement and Governor Ueda’s press conference may signal an imminent shift away from short-term negative interest rates. Mounting pressures from public and private sectors with Economy Minister Shindo attending today’s monetary policy decision meeting as a representative from the Cabinet Office. Technical analysis suggests further potential weakness in the USD/JPY. This is a follow-up analysis of our prior report, “USD/JPY Technical: Potential JPY bullish pressure reasserts” published on 12 December 2023. Click here for a recap. In December, the JPY was the best performer among the major currencies against the US dollar where it soared by +4.85% as of 19 December at this time of the writing. The recent JPY strength has been attributed to two factors; the US Federal Reserve’s dovish pivot where it guided market participants by projecting three cuts on the Fed funds rate in 2024. In contrast, hawkish guidance from top BoJ officials made two weeks ago where Governor Ueda and Deputy Governor Himino’s remarks have dialled up speculations that the current short-term negative interest rate policy in Japan in place since 2016 is likely to be scrapped sooner than expected and may come as early on the 23 January 2024 monetary policy meeting where BoJ releases its latest economic outlook report on the same day. Today, the Bank of Japan (BoJ) will conclude its last two-day monetary policy meeting for 2023 while the consensus expectations are expecting no change to the current monetary policy setting, BoJ can still potentially lay the groundwork for its upcoming shift away from short-term negative interest rates via its policy statement and BoJ Governor Ueda’s press conference at 3.30 pm after the close of the Japan’s stock market. BoJ faced mounting pressures from the public and private sectors Interestingly, ahead of today’s monetary policy decision outcome, it seems that mounting pressure from the public and private sectors has arisen, prominent Jaan business lobby Keidanren head Tokura said yesterday that BoJ must normalize monetary policy as early as possible. Also, today’s meeting outcome will be attended by Economy Minister Shindo as a representative from the Cabinet Office who cannot vote on monetary policy decisions. It is rare for a cabinet minister to attend BoJ monetary policy meetings as such “attendee roles” are usually assigned to deputy ministers. In the past meetings that cabinet ministers attended had resulted in major monetary policy changes such as the launch of the mega quantitative asset-buying programme in April 2013. USD/JPY is hovering around the 200-day moving average Fig 1: USD/JPY medium-term trend as of 19 Dec 2023 (Source: TradingView, click to enlarge chart   The medium and short-term downtrend phases of the USD/JPY in place since a test on its 151.95 major resistance on 13 November 2023 remain intact as price actions remain below its downward sloping 20 and 50-day moving averages without a bullish divergence condition seen on its daily RSI momentum indicator at its oversold region. Short-term momentum has turned bearish Fig 2: USD/JPY short-term minor trend as of 19 Dec 2023 (Source: TradingView, click to enlarge chart In the shorter term as depicted on the hourly chart, the RSI momentum indicator has staged a bearish breakdown below its parallel ascending support after it hit overbought status yesterday, 18 December. Watch the 143.30 short-term pivotal resistance and a break below the recent 140.95 low printed last Thursday, 14 December may expose the next intermediate support at 139.20 in the first step (also the close to the 50% Fibonacci retracement of the prior medium-term uptrend phase from 16 January 2023 low to 13 November 2023 high). On the other hand, a clearance above 143.30 negates the bearish tone for a potential minor countertrend rebound to see the next intermediate resistances coming in at 144.80 and 146.70 if 144.80 is taken out.