Fundamentals:
Interest rates stopped rising mid-January after investors priced in four FRB rate hikes within 2022, but risk assets
were sold and stock markets saw some adjustment as some observers predicted the FRB would tighten further by
shrinking its balance sheet, for example. In his speech after the FOMC meeting, though, FRB chair Jerome Powell
struck a hawkish tone when he hinted at a 50bps rate hike in March, with the markets still reeling from this news.
However, it seems stock markets are starting to regain composure after several straight days of wild trading and it
appears a recession will be avoided for the time being. FRB officials have yet to tone down their hawkish comments,
so it seems US interest rates will continue trending higher for a while. A topside target could be the 116 dollar/yen mark
recorded at the start of January, but with investors moving faster than expected to price in rate hikes, it would not
be surprising if the pair tops this level.
However, investors should also be wary of downside risk. There are two major potential risks.
Firstly, stocks could come under some adjustment. The reaction to FRB tightening has already been mentioned
above, but the situation in Ukraine will also require monitoring. The US government is set to speak to Congress
ahead of formulating a bill that would prepare the ground for sanctions if news emerged of a Russian invasion, so
there are concerns about worsening US/Russia relations, even if this does not lead to a military skirmish. Russia is
one of the world’s largest producers of oil and natural gas, so commodity prices could surge higher if supplies are
shut off, with stagflation potentially ensuing. If investors focus on these concerns, stock markets could start sliding
again.
The second risk involves a potential adjustment to the trend of dollar buying as a result of monetary tightening
by other major central banks. The FOMC will not be meeting in February, but observers will be focusing on the
meetings of the RBA, ECB, BOW and RBNZ. All these central banks have been shifting from easing toward an
exit since late 2021. They look set to continue tightening in the FRB’s footsteps, so the Dollar Index might fall if
the greenback is sold against other currencies. Though there are no reasons to buy the yen, the dollar/yen pair’s
topside will probably be held down as the dollar is sold internationally.
Based on the above, it seems the pair’s topside will be tested towards 116 yen if stock markets continue to rally.
However, if the situation changes on the aforementioned risk factors, there could be some sharp position unwinding,
with the pair subsequently crashing, so caution will be needed.
Technicals:
The reaction of DXY to US Jan CPI was rather muted as US OIS rates may have risen by some 50bp since Dec but so have other OIS rates by a similar amount - from a rates differential point of view little seems to be changing. Citi expects a 50bp Fed hike in March. Such a hawkish outcome however is not shared for other central banks. This puts USD as the currency to buy on dips though more selectively rather than broad based (against JPY, CHF). A close below 95.45, if seen, may potentially see DXY testing next support at 94.63 (Jan 14th low) followed by 93.44 and the 200d MA at 93.10.
SL 1910
Tp 1710
Interest rates stopped rising mid-January after investors priced in four FRB rate hikes within 2022, but risk assets
were sold and stock markets saw some adjustment as some observers predicted the FRB would tighten further by
shrinking its balance sheet, for example. In his speech after the FOMC meeting, though, FRB chair Jerome Powell
struck a hawkish tone when he hinted at a 50bps rate hike in March, with the markets still reeling from this news.
However, it seems stock markets are starting to regain composure after several straight days of wild trading and it
appears a recession will be avoided for the time being. FRB officials have yet to tone down their hawkish comments,
so it seems US interest rates will continue trending higher for a while. A topside target could be the 116 dollar/yen mark
recorded at the start of January, but with investors moving faster than expected to price in rate hikes, it would not
be surprising if the pair tops this level.
However, investors should also be wary of downside risk. There are two major potential risks.
Firstly, stocks could come under some adjustment. The reaction to FRB tightening has already been mentioned
above, but the situation in Ukraine will also require monitoring. The US government is set to speak to Congress
ahead of formulating a bill that would prepare the ground for sanctions if news emerged of a Russian invasion, so
there are concerns about worsening US/Russia relations, even if this does not lead to a military skirmish. Russia is
one of the world’s largest producers of oil and natural gas, so commodity prices could surge higher if supplies are
shut off, with stagflation potentially ensuing. If investors focus on these concerns, stock markets could start sliding
again.
The second risk involves a potential adjustment to the trend of dollar buying as a result of monetary tightening
by other major central banks. The FOMC will not be meeting in February, but observers will be focusing on the
meetings of the RBA, ECB, BOW and RBNZ. All these central banks have been shifting from easing toward an
exit since late 2021. They look set to continue tightening in the FRB’s footsteps, so the Dollar Index might fall if
the greenback is sold against other currencies. Though there are no reasons to buy the yen, the dollar/yen pair’s
topside will probably be held down as the dollar is sold internationally.
Based on the above, it seems the pair’s topside will be tested towards 116 yen if stock markets continue to rally.
However, if the situation changes on the aforementioned risk factors, there could be some sharp position unwinding,
with the pair subsequently crashing, so caution will be needed.
Technicals:
The reaction of DXY to US Jan CPI was rather muted as US OIS rates may have risen by some 50bp since Dec but so have other OIS rates by a similar amount - from a rates differential point of view little seems to be changing. Citi expects a 50bp Fed hike in March. Such a hawkish outcome however is not shared for other central banks. This puts USD as the currency to buy on dips though more selectively rather than broad based (against JPY, CHF). A close below 95.45, if seen, may potentially see DXY testing next support at 94.63 (Jan 14th low) followed by 93.44 and the 200d MA at 93.10.
SL 1910
Tp 1710
Comment:
change stop loss to 1928
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