Weak NFP Expected; USD/JPY Triangle Takes Shape

Must read

Crude Oil Heavy As Global Demand Worries Win Out Over Geopolitics

Crude Oil Analysis and ChartsCrude Oil Prices are sliding as soon as once more.Traders stay frightened about demand if inflation proves resilient and rates...

ZAR Gains Continue as ANC NEC Announcement Keeps Markets Optimistic

USD/ZAR Key Points: Recommended by Zain...

Polkadot Challenges One-Month Low as Selling Mounts

DOT/USD has taken one other damaging flip in early buying and selling this morning, producing a robust spike decrease because it now has a...

US Dollar Price Action Setups: AUD/USD, USD/JPY, EUR/USD, GBP/USD

US Dollar, Australian Dollar, Japanese Yen, Euro, British Pound – Price Action Setups: Recommended by ...

US Dollar Outlook:

  • The US Dollar (by way of the DXY Index) has plunged forward of the January US NFP report, wiping out the entire good points across the January Fed assembly.
  • With Fed hike odds staying elevated, USD/JPY charges have been surprisingly resilient within the face of broader US Dollar weak point and a drop in US fairness markets.
  • The IG Client Sentiment Index means that USD/JPY has a blended bias within the near-term.

Last Week’s Gains Gone, and Then Some

It’s been a completely brutal week for the US Dollar. The DXY Index has erased the entire good points final week collected across the January Fed assembly, primarily for 2 causes. First, expectations for the US jobs report have deteriorated quickly following the January US ADP report. Second, the European Central Bank’s shock shift in the direction of opening the door for price hikes this 12 months has offered a major raise to the Euro, which is the most important part of the DXY Index (57.6% weighting).

Thus in lies the quandary for the US Dollar: a weak US NFP report has been largely priced in, however with US inflation charges nonetheless at 40-year highs, the percentages that the Fed backs off its aggressive hawkish path appear unlikely. It would be the case that the US NFP report tomorrow provokes an exhaustion sell-off, whereby the US Dollar stabilizes quickly thereafter. In explicit, if the US Dollar is ready to achieve floor, USD/JPY charges are simply in the perfect place among the many main USD-pairs.

Hawkish Fed Still within the Picture

We can measure whether or not a Fed price hike is being priced-in utilizing Eurodollar contracts by analyzing the distinction in borrowing prices for business banks over a selected time horizon sooner or later. Chart 1 beneath showcases the distinction in borrowing prices – the unfold – for the February 2022 and December 2023 contracts, to be able to gauge the place rates of interest are headed by December 2023.

Eurodollar Futures Contract Spread (FEBRUARY 2022-DECEMBER 2023) [BLUE], US 2s5s10s Butterfly [ORANGE], DXY Index [RED]: Daily Timeframe (August 2021 to February 2022) (Chart1)

By evaluating Fed price hike odds with the US Treasury 2s5s10s butterfly, we will gauge whether or not or not the bond market is performing in a way per what occurred in 2013/2014 when the Fed signaled its intention to taper its QE program. The 2s5s10s butterfly measures non-parallel shifts within the US yield curve, and if historical past is correct, which means that intermediate charges ought to rise sooner than short-end or long-end charges.

There are 162-bps of price hikes discounted by way of the top of 2023 (six-plus 25-bps price hikes), simply off a cycle excessive, whereas the 2s5s10s butterfly unfold is holding close to its ranges from late-December and late-January. The disconnect seen in latest days could also be a operate of markets pricing in a weak January US nonfarm payrolls report, which has seen expectations slashed after the January US ADP employment change report earlier this week confirmed a lack of -301K jobs. The odds have elevated that the January US NFP determine could present a contraction; nevertheless, the Bloomberg News consensus forecast remains to be for +150K.

DXY PRICE INDEX TECHNICAL ANALYSIS: DAILY Timeframe (January 2021 to February 2022) (CHART 2)

US Dollar Forecast: Weak NFP Expected; USD/JPY Triangle Takes Shape

All of the DXY Index’ good points from final week have been erased, and the dollar gauge is now poised to safe two consecutive closes beneath its every day 21-EMA (the one-month transferring common) for the primary time since late-December. Loss this week have seen the DXY Index drop by way of a confluence of Fibonacci ranges: the 50% retracement of the 2017 excessive/2018 low vary at 96.04; and the 23.6% retracement of the 2011 low/2017 excessive vary at 96.48.

A deeper setback could happen earlier than the lows are discovered. Rising trendline assist from the May 2021 and January 2022 swing lows is available in nearer to 95.15 by the top of the week, whereas the 2022 lows are down close to 94.63 – proper close to the place the March 2020 low, September 2020 excessive, and September to early-November 2021 highs had been carved out. With Fed price hike odds intact, it could be the case that the world round 94.63 represents the opportune threat/reward degree by which to hunt lengthy alternatives once more.

USD/JPY RATE TECHNICAL ANALYSIS: DAILY TIMEFRAME (January 2020 to February 2022) (CHART 3)

US Dollar Forecast: Weak NFP Expected; USD/JPY Triangle Takes Shape

While the DXY Index has struggled, USD/JPY charges have proved extremely resilient. The sideways motion that originated in October has continued. It stays the case that “the give-and-take between US Treasury yields and US equity markets is mainly responsible for this churn, a dance that is unlikely to end any time soon. As such, a rally back above 116.00 may be seen as an opportunity to sell into range/channel resistance, while dips below 113.50 may be viewed as an opportunity to buy near range/channel support.” Ultimately, a symmetrical triangle could also be forming since late-November, which in context of the previous transfer, would search for decision increased.

IG Client Sentiment Index: USD/JPY RATE Forecast (February 3, 2022) (Chart 4)

US Dollar Forecast: Weak NFP Expected; USD/JPY Triangle Takes Shape

USD/JPY: Retail dealer knowledge reveals 38.62% of merchants are net-long with the ratio of merchants brief to lengthy at 1.59 to 1. The variety of merchants net-long is 7.90% decrease than yesterday and 0.55% increased from final week, whereas the variety of merchants net-short is 2.57% decrease than yesterday and 10.02% decrease from final week.

We usually take a contrarian view to crowd sentiment, and the actual fact merchants are net-short suggests USD/JPY costs could proceed to rise.

Positioning is extra net-short than yesterday however much less net-short from final week. The mixture of present sentiment and up to date modifications provides us an additional blended USD/JPY buying and selling bias.

— Written by Christopher Vecchio, CFA, Senior Strategist

factor contained in the factor. This might be not what you meant to do!
Load your utility’s JavaScript bundle contained in the factor as a substitute.

More articles

LEAVE A REPLY

Please enter your comment!
Please enter your name here

Latest article

Canadian Bitcoin ETFs Face Outflows as Investors Pivot to US Funds

nvestors are shifting from Canadian Bitcoin ETFs to US-based counterparts, with the Purpose Bitcoin ETF witnessing a big discount in holdings. Recent information counsel...

Japanese Inflation in Focus as USD/JPY Tests Tokyo’s Resolve

(AI Video Summary)Nvidia and US shares have been the star performers final week, sending the S&P 500 to a recent all-time excessive and lifting...