USDJPY resisted by multi month downward trendline

USDJPY is currently trading at a multi-month downward trendline, seeing resistance at 91.80. This can be considered good resistance as the trendline actually goes back a long way..

Please see the weekly chart below to have a graphical feel:



As to where the USDJPY might fall, if it does really fall, the next likely support is at 90.50 - the 23.6% level between the '09 high and low (on the weekly chart).

This level provides good support because it kept the USDJPY afloat during Oct and when broken through on the downside eventually, it provided good resistance in Dec when the USDJPY surged (after NFP). Areas where support turned into resistance are often significant because orders tend to congest around there.

Please see chart below.

US STOCKS TOPPING OUT

US stocks seem to be topping out based on a couple of technical indicators.
Please see chart below.



There is currently this phenomena of a divergence between the S&P500 price and both the Rate of Change (ROC) and MACD indicators. As the S&P500 heads higher, the ROC and MACD indicators are making lower highs. I drew lines joining the tops of these indicators and found there is some consistency in both indicators signalling that momentum (hence strength) of the advance is weakening. More likely than not, the bears would take over the market soon.

Also, the tapering off of volume (chart below) points to a growing disinterest in the market.



On the other hand, because of near term volatility and the fact that volume is tapering off, it might actually be easier for the market to make another push higher before turning back down - for this, I'd use the blue lines drawn above the ROC and MACD indicators to gauge when the S&P500 will meet resistance.

New Immediate Resistance Level - 1,121 (50% Retracement of '08 high - '09 low)

The 50% retracement (1,121 on the S&P500) could provide strong resistance to this whole rally as in past recessions, the 50% halfway mark between the pre crisis high and crisis low usually sees some stalling of stock indices, followed by months of gradual down moves.

In fact, this level is just 2.6% higher from where we are now, so how the next few days will pan out will be interesting.

The alternate scenario may happen going into the Christmas season is that a Santa Claus rally causing a break above 1,121 will open the way to immediate targets 1140 and 1185, another 4.3% or 8.4% upside respectively though this is the more unlikely scenario for now.

NFP - 6 Nov 09

The mother of all economic data, the non farm payrolls figures showed that the US lost 190k jobs, slightly above the 175k expected. However, the real wet blanker to risk sentiment is that the official unemployment rate surged to 10.2% from 9.7%, a shocking deterioration of the labor market. Estimates are for a decline to 9.9%.

What do I see for the next few weeks for the markets?

- The USD will remain on the defensive as expectations are growing that the Fed will push back hiking rates.

- US stocks to pull in more of a correction as high unemployment will hurt consumer spending and investors' sentiments, but rangey trade overall expected . Only outperforming economic data can move stocks another leg higher. I think the S&P500 might hit a peak of 1,225 (and I mean the peak) as highlighted in a previous post 'How high can stocks go?'; before we see a 15-20% correction like in previous recessionary recoveries

- The fact that stocks remained bouyant inspite of the NFP outcome goes to show that the level of liquidity in the financial system is enough to float anything you throw into it at the moment. It takes tightening expectations for this liquidity to be drawn out, which might take place during Q1 '10

- Gold and AUD to maintain attractiveness, with the latter expecting to enjoy further rate hikes going forward (as indicated by the RBA in its minutes today). This too, to take place as long as the fed doesn't give a stronger hint to raising rates/ or when the US unemployment rate improves

Post FOMC

The Federal Reserve's rate decisions and statements are very important for the markets and cannot be underestimated. Their actions determine to a good extent the amount of liquidity that remains in the system and this will affect risk assets i.e. stocks.

The fed funds rate decision or statements about impending changes affect yields on US treasuries, which ultimately influences the decisions of central banks around the world because US treasuries are the mainstay of global central banks' reserves.

As expected, the FOMC kept its key rate at 0 - 0.25% for an 'extended period' in order to nurture the still fragile economy, citing that credit to households is still tight and that labor markets isn't yet in recovery. This 'extended period' phrase is key to the outlook of any rate hike - and it seems the FOMC has pointed out that it will look to inflation and the unemployment rate to improve before changing the phrase.

A change in the phrase to perhaps 'considerable period' (ala Greenspan some years ago) will have the most impact on USDJPY as the USD and JPY have the closest (and lowest) yields. It will surge on a fed funds rate hike.

Japan's inflation (or deflation) report out this week indicated that the government expects deflation until 2011, meaning the BoJ will likely not raise interest rates until then, so the yen will be the last in the developed world to enjoy a rate hike, putting the currency firmly as the ultimate funding (carry trade) currency for the foreseeable future.

Going back to the fed, even when they are focusing on both the inflation and unemployment rate for monetary guidance, I feel the bottleneck for a rate hike will be unemployment. Because it is hard to determine the peak and the fed historically wait a while longer after the peak before indicating a willingness to raise rates, there is likely to be a good time of waiting - which, to pro dollar investors, is really an 'extended period'. In another words, this fed looks to me to be a pretty dovish one for now, disregarding the change of incoming hawkish voting member(s) next year.

Friday's expected NFP figure is 175k job losses and a rise to 9.9% in the official unemployment figure. The government said unemployment rate is expected to peak above 10%.

Hence, for now, as long as stimulus is in place and extended by governments supporting risk sentiment, I feel the dollar will remain on the defensive and perhaps decline further against its major counterparts going into 2010.

My EURUSD forecast for week ending 8 Nov

The most significant econ data of the week is the US Q3 advance GDP which at +3.5% beat estimates of +3.2%. This is largely a positive for risk sentiment as it marks the bottom of the economy and within the reading’s components; indications were of broad based recovery.

Looking into the details, household spending actually rose 3.4% even as household income fell 3.4%. It seems that instead of de-leveraging, families are returning to spending quite quickly (namely durable goods) and that suggests that this increase in spending might not be sustainable. That number can be largely attributed to cash for clunkers (new cars purchases with a government grant) which just expired.

Meanwhile, residential investment increased for the 1st time in 3.5 years as prices stabilized with help of 1st time home buyers tax credit (again, more government grants) helping real residential investment to rise an astonishing 23.4% after a drop of a similar magnitude in the 2nd quarter. Hence, Q3 will mark the turnaround in the housing market after the subprime crisis. Its sustainability is also questioned but to a lesser extent as the federal govt is likely to continue with the tax credit program until late 2010.

Prior to the release of the GDP data, we saw some risk aversion in the market during which Goldman Sachs downgraded GDP to +2.7%. EURUSD broke below 1.50 firmly and USDJPY came close to breaking the 90 support level as investors pared carry trade.

An observation is that the yen is coming back as the main funding currency now instead of the dollar as short term yields on the dollar at close to 1% is proving very attractive vis a vis yen assets, giving USDJPY support this week (which kept above 90 for the most part). But I the feel the main pair to watch for dollar direction is the EURUSD, the fact that it is now trading below 1.50 for 4 running days goes to show that mkt has been pricing an eventual recovery in the US economy which was confirmed by the GDP release and by extension, the unemployment rate.

Recently there has also been market talk in the WSJ and FT about the fed preparing to change its ‘extended period’ language and the suspicious may think this was induced by some in the fed to prepare the market for an eventual change in language.

In the FOMC meeting next week however, I think the fed will still keep its ‘extended period language’ because recovery is in its early stages and to do otherwise would be disruptive. But they will put more weight and words describing the recovery of the economy and maybe suggest more winding down of securities purchases in light of better corporate funding and financial conditions. QE has ended and would be a thing of the past. All these are dollar supportive as these have to take place before removal of the ‘extended period’ phrase. So even if PMI data and earnings in the earlier part of the week are good, any dollar sell off would be contained. Rangey trading is expected.

My expected range for EURUSD next week (ending 8 Nov): 1.4650 (50 day moving average) - 1.50 (I doubt the market is willing to take on risks before the outcomes of the FOMC on Wed and NFP on Friday.

How high can US stocks go?

I just took a look at the S&P500 weekly chart to see the next target point(s) should the bullish run continues.

It seems that the next important target is 1120 (red line), which has proven also to be a good resistance/support level for the broad equity index dating all the way back to 1998.

1120 happens to also be the 50% retracement level between last year's high and this year's trough, hence highlighting the significance of this level. Its like ISM's 50 expansionary/recessionary cutoff.

If the upward trend continues, the market should have less gyrations between 1080 (red line) to 1120 as this space in between looks quite clear historically. I've gotten the level 1080 from the confusing 'rays' - which I highlighted as brown lines. These are gann lines and show the natural support/resistance levels like Fib lines do.

In terms of momentum, it seems things are going well for the current trend. Volume continues to be higher than usual (vs pre- 3Q '08) and this means good interest in the equity market on the way up. Rate of Change (seen by the ROC section at the bottom) have ascending lows so this spells good momentum.

Beyond 1120, the next objective is 1220, which historically has been a good resistance/support levels for years dating past.

In terms of support, the first line of defence has always been the 12 wk mva (red mva) - a representation of the quaterly average of prices (some funds do window dressing every quarter btw). That currently stands at 1024, where the mkt bounced up from last week. The next level of support will be on the gann line, but because we are pretty far away from that now, let's leave this story to another day if the bear does comes to eat up the bull.

My GBPUSD forecast

For the Gbp especially, it is hard to see much further upside from where we are at now (GBPUSD spot 1.5887) when policy makers appear to lean towards a weaker sterling. (King saying that a weak Gbp is beneficial - Thur 24 Sep 09)

To be sure, the UK economy is running huge public debts - to the tune of a level which rating agencies like Moody's usually flashes red lights for a possible downgrade.

But at the moment, the UK will keep their AAA status.

Right now though, PM Brown has said he will not unwind quickly the levels of debts until he sees the recovery becoming firmer and more sustainable.

My thinking is.. with the poor fiscal outlook and debt levels as the UK's, it will probably take some years to deleverage and finally achieve a more prudent balance sheet.

Even if the economy does pick up, the currency is likely to underperform the Eur and the dollar. For the latter, the reason being the US is expected to push itself out of recession faster than the UK. For the former, well, at least no central banker wants to talk down the currency in such a direct way.

The pound used to be one of the highest yielding currencies in the developed world and has been a big favourite for the carry trade.

But we might be seeing a permanent change occuring right now. The Gbp may not return to as strong as it was before, given it needs time to sort out its public debt and groom other parts of the economy to replace the sputtering financial industry and contribute to taxes.

So I'm out on a limb here, saying that in the medium term, we might see parity in the EURGBP (spot now is 0.9216).

My forecast for GBPUSD anyway, is 1.5600 (Dec '08 congestion high) to 1.6230 ( near neckline of double top reversal).