On rising oil prices, USDJPY will beak a bull flag more than on rising DXY
The forex market is becoming more interesting as economic data is influencing the currency moves. It is good to see macroeconomics guiding the technical analysis and for new trends to possibly be initiated on breakouts. Trading is easier when the moves are directional compared to the chop-fest we have been in.
Forex Analysis - USDJPY
Today is Veterans Day in the USA, so I am not expecting very high volumes in the markets, though they remain open. It is a bank holiday so we should be aware that things may be slow as there is little economic data coming out in the US session.
Yesterday CPI data readings for October came in higher for the sixth consecutive annualized reading and will not go unnoticed by Washington's lawmakers. Part of Joe Biden's Build Back Better plan is reliant on Congress passing the $1.7 trillion stimulus package. One problem that may stand in President Biden's way is in the form of Democratic Senator Joe Manchin, who could pull his support for the package into next year, due to concerns over this rising inflation. He is concerned that recent stimulus packages have contributed to rising inflation, so adding more would exacerbate the problems.
Yesterday pushed the US dollar index through the last edge of the Ichimoku cloud and this could be the signal of a greater rise in the bullish trend for the greenback. The rising dollar may come to President Biden's rescue as whenever the dollar reaches new heights, monetary conditions tighten. Benchmark yields have already risen from 1.45% to nearly 1.6% as markets price in a rate hike sooner rather than later.
The biggest result of the dollar move will be when commodity prices also fall. This can't come soon enough for the Democrats who will be looking to the mid-term elections next year and keeping their constituents happy.
President Biden is under considerable pressure to release strategic oil reserves to relieve the energy burden faced by the voters. Analysis has shown that releasing some SPR reserves won't necessarily have much of an effect, especially long term, as there is fundamentally a supply deficit going into 2022 which could be filled by OPEC+ if they choose to. A release of the SPR would be politically motivated rather than very useful.
The US dollar index (DXY) looks like it is heading to the 96.00/96.10 area which had been a significant trading level in 2019 and 2020.
When the price had reached the highs above 114.50, USDJPY had gotten significantly overbought as seen in the daily RSI indicator. I'm still looking for a breakout of the bull flag pattern to work out and when it does, ideally the daily RSI will still be under the key 70 level on the RSI. The recovery from the test of 113 in the last few days supports a buy on dips approach but with so much uncertainty around the US treasuries and the Fed rate hikes, I couldn’t buy the dip this time, as we could have been going lower to 111.50 under different circumstances.
In October, nonfarm payrolls showed a decent rebound in employment, although they remain 4.2 million below pre-pandemic levels. The 10 million JOLTS vacancies need to come down as the Fed is looking for participation to rise. Assuming the labor shortage due to rising COVID variants is behind us and people need to find work now that the enhanced benefits are ending, NFP should return to the 550k-600k range Fed Chair Powell talked of. If the labor markets show movement towards the maximum employment needed for rate hikes to commence, the US 10-year yields, etc. will be leading higher and that has been good for the USDJPY.
Higher energy prices have been viewed as bad for Japanese household finances and also for Japanese manufacturing and exports. This has been weighing on the yen and prop up the USDJPY. It will be interesting to monitor whether the tight supply and possibly increasing demand for oil is able to remain supported in a rising US dollar environment too and whether the USDJPY is pushed by US yields or energy markets more. The above chart shows a higher correlation between recent moves in the USDJPY (black) and Brent (Orange) prices. The DXY and US 10-year yields are currently tracking the USJPY but tend to deviate away from the currency pair.