JPY strength

The central dynamic in Asia today has been JPY strength, notably against the USD.

Source: Bloomberg

USD/JPY has been affected by the barrage of rhetoric from various Fed members over the weekend, with the pair gapping lower. The 38.2% retracement of the 8 August to 1 October rally (¥101.50 to ¥110.09) at ¥106.81 has come into play.

The JPY strength has had an impact on the likes of EUR/JPY which is testing what looks like a psychological floor in the market on the daily chart. NZD/JPY has made a lower low, while AUD/JPY has broken the uptrend drawn from the 2012 low and is actually just a pure proxy on S&P 500 futures. The correlations are amazing – clearly the algorithms have been set to follow tick-for-tick.

Japan has been hit hard on the JPY strength, with the Nikkei futures (Singapore exchange) down 2.6% (the cash market is closed). It took 112 trading days for the Nikkei to rally 17.9% but, as the old saying goes, ‘up the stairs, down the elevator’, and the index has dropped 6.5% in the last eleven sessions. I feel it wise to see if USD/JPY tests ¥106.81, and ultimately discover how the pair behaves before jumping into Nikkei longs.

Some buying of resource stocks in Australia

The ASX 200 hit a low of 5122, just ten points shy of printing a technical ‘correction’. However, buyers have come into the market, although pricing issues at the Sydney Futures Exchange (SFE) didn’t help matters in afternoon trade. The buying centred on the resource space, with strong gains in some beaten up names like BHP, RIO and FMG – but clarity on earnings is still limited and thus this would be trading capital. Iron ore futures increasing by their daily limit helped, with talk today that a number of mines had not reopened after the Golden Week holiday.

Another interesting space is the beaten-up energy sector. 25% of the ASX 200 is trading over two standard deviations from its 20-day moving average, but if I search for additional stocks whose 14-day RSI is under 25 and stochastics are at extreme lows, I get two in the ASX – WPL and STO. The combination of these could suggest mean reversion, and I look for a short-term bounce to potentially arise from grossly oversold conditions.

China’s trade data showed a narrowing of the surplus, although this was no bad thing as imports rose a healthy 7% (the market was expecting -2%), while exports pushed up 15.3%. This is exactly what the bulls needed, given the plethora of negative news over the last two weeks that had many questioning the global growth story.

AUD/USD rallied nicely into the release, but caught an extra bid after the data – naturally we will be interested to see how London deals with these figures. It’s a very hard stretch, but a close above Friday’s high of $0.8785 would be extremely bullish and signal a potential bullish reversal. Nevertheless, I would be looking to fade any move this week closer to $0.8934, although again this is optimistic. Copper hasn’t really moved, but that could easily change.

There hasn’t really been too much of a bounce in S&P futures. That will change depending on how Europe trades, but the open is at least looking like a lonely and dark place for the bulls. Still, I wouldn’t be surprised if we saw some sort of bounce materialise as a number of the braver traders come back in amid oversold conditions.

Bearish technicals on the DAX, CAC and FTSE

From a purely technical standpoint, my preference is to now be short the DAX, CAC and FTSE. The IBEX is still holding its longer-term trend and I’m therefore slightly more positive. The German DAX, specifically, looks awful on the weekly chart and, having closed below the neckline of the head and shoulders pattern and longer-term uptrend, could see another 5% - 10% loss in the medium term. It’s interesting that the market internals highlight the broad-based weakness, with 90% of companies trading under the 50-day moving average. This is also thematic in Australia (also 90%), while 94% of UK-listed firms are under the medium-term average by 10% or more.

Data is fairly limited in the upcoming session. However, the central bank narrative continues, with Peter Praet (a member of the Executive Board of the ECB) and Fed member Charles Evans due to speak. Mr Evans will discuss the economic outlook – recall he has been as dovish as anyone.

It has to be said that, given the barrage of comments of late, it’s hard to believe we will hear anything new. With fairly limited data, that won’t really alter the macro picture. US earnings should be a better guide, so it gives traders and investors a better chance to mark-to-market earnings outlooks to the current economic climate. Watch the 200-day moving average on the S&P 500, as the index has held this average for a record 470 trading sessions.

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