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XTB TRADEBEAT

Yen gains as yields increase, equities remain high

Summary:

  • Yen dominates in G10 again, USDJPY to test support at 112
  • Wall Street saw another intraday highs, Gundlach sees declines
  • Stocks down in Japan and Australia, gains seen in China

A session in Asia resulted in moderate moves on the FX with the Japanese yen on the front line again as JGB yields increased. Equities were mixed following another record setting session on Wall Street where a pace of increases decelerates and there are voices that correction could be under way. 

Yen wins in G10, BoJ in trouble?

The Fed policy could be the biggest trouble for the Bank of Japan. As the Fed is on track to increase rates 3 times this year again and to trim its balance sheet on top of it, we see bond yields rising, to 2.57% today. That helps US dollar in general but in case of 
Japan it complicates the task for the central bank that wanted to stick with a 0% yield for a 10-year paper. This is increasingly difficult as global bond yields increase and today the Japanese yield is 0.065%. 

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USDJPY is close to a short term support zone at 112. Source: xStation5 

What does that mean for the USDJPY? In theory the spread keeps widening and that should be supportive. However, investors may try and trade against the BoJ selling bonds and buying yen in an attempt to force it to change its policy targets. That’s why we see a second day of declines on USDJPY amid overall fairly strong dollar and buoyant sentiment. The pair’s been locked in a long term consolidation and from that perspective there would be plenty of downside. The nearest support is 112, a fairly important zone that - if broken - could lead to a significant declines. 

Gundlach sees S&P500 down this year. 

After an explosive start on Wall Street this year many investors became even more optimistic but that was not the case with Jeffrey Gundlach who says that the S&P500 (US500 on xStation platform) will bring a negative return in 2018. The billionaire bond investor argues that all the good stories have been priced in and as such there’s room just for a disappointment. 

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XTB’s tactical indicator for the S&P500 is close to extreme overbought. Source: XTB Research 

He could have a point here. Our tactical indicator for the index shows overbought levels, not yet the extreme zone but it’s fairly close. That means that optimism dominates in a decisive way and in extreme cases it could be a contrarian indicator. 

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A full expansion of a channel could be a resistance for US500. Source: xStation5 

Looking at the chart, we had another intraday all-time high yesterday although the bulls were unable to sustain all these gains. Do notice that the index was able to nearly travel throughout the full expansion of the previous upwards channel and this higher line might be the ultimate resistance. Coming back to Asia, we had really a mixed bag as Nikkei (JAP225 on xStation platform) declined 0.25% and Australian ASX (AUS200) slid by 0.65% but the Chinese Hang Seng (CHNComp) posted a solid gain of 0.6% after inflation truned out to be lower than expected. 

 

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