Weaker Numbers from the US
Over the past few weeks we have seen increasingly weaker numbers out of the USA, with average hourly earnings, consumer confidence and yesterday’s dismal existing home sales all focusing the market’s attention on tonight’s testimony. The importance of the word ‘patience ‘has never played such an important role as in the upcoming direction of the dollar.
Whilst US equities closed at record highs last week, there are many signs that the investment community are starting to view these markets in a precarious position, with tepid growth forecasts, diminished earnings, near record low rates of return and the impact of the strong dollar on earnings.
Patience for Meeting in March
Last week saw several Fed members (Fisher, Plosser and Bullard) state that the removal of the phrase ‘patience’ was necessary at the next meeting in March, with a possible rate hike as early as June. Since we have to wait until March 18 before we hear definitively from the FOMC meeting, Yellen’s comments later today will be closely watched for clues regarding international developments, a strong USD, jobs data and cooling inflation.
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We are waiting for Yellen to state that the Fed remains data-dependent and she may hint at whether rates increase as soon as the June FOMC, which will no doubt see the dollar find a bid tone. But what will happen to the USD if she emphasizes ‘patience’ while assessing other developments? We could expect the dollar to suffer initially but this could be bullish for US stocks. However, with QE in Europe about to start we believe it will trigger more QE in Japan and any dip in USD/JPY should be viewed as a buy opportunity, our technical analysis of the currency pair supporting this view as we will now highlight.
Sell off down to the 116-117 Support Area
The USD/JPY has been trading sideways for the last 2 and half months within a contracting triangle but has not yet finished its complex wave 4 triangle. We can see from the daily chart that wave E is now in progress and expect to see a little more weakness which would tie in nicely with a Yellen comment reiterating that the fed is now awaiting other developments, considering the bad data we are consistently getting from the US. We would look for a sell off down to the 116-117 support area before looking at the price action and the very short-term momentums to show a bottom.
The last up move in 3 waves from the 16th of January lows at 115.86 failed just shy of the December 23rd highs, completing what we believe on a pure price action alone basis, the wave D of wave 4. We have since sold off to test the 61.8 per cent retracement at 118.12, and although we could call this the bottom of the wave E, we would prefer to see it trade a little lower.
Wave 5 Is under Way
The longer term trend and structure remain firmly positive and any bullish dollar move in the coming days above the 120.50-85 level will confirm that the next leg higher in a wave 5 is under way. We would then expect the multiyear December high at 121.85 to break on its way to our long-term target and previous top of a major wave IV to best meet at 124.14. A move above this will target the highs in October and November 2002 around the 125.60-80 level.
So, if you believe as we do that markets have already priced past data and expectations into whatever Janet says tonight, we will see a higher USD/JPY. It’s just a matter of time !!