Falling Yields After CPI Stimulates Major Technical Reversals in DXY and USD/JPY Rates

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US Dollar Outlook:

  • The post-CPI collapse of the US dollar is one for the pounds: the worst daily performance of 2022; and USD/JPY rates are bracing for their worst weekly loss since the start of the pandemic.
  • US Treasury yields, US real yields and the odds of a Fed rate hike have plummeted dramatically.
  • The IG Customer Opinion Index suggests that USD/JPY rates have a short-term bearish bias.

Recommended by Christopher Vecchio, CFA

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The US dollar is sinking

October’s surprising US inflation report, well below consensus forecasts, gave risk assets a break. Rates markets have significantly revised expectations for the Federal Reserve’s rate hike path, with the Fed’s main rate expected to reach 4.875% by May 2023, down from its post-Cutting high of 5.135%. November meeting of the Fed. Yields on US Treasuries are down across the curve, with belly portions of around -20 to -30 basis points. US real yields are also collapsing.

While these were positive developments for gold prices and US equities, the latter posting its best performance since April 2020, the net result was a US dollar (via the DXY Index) which been completely destroyed, in pace with its worst daily performance of 2022.

DXY PRICE INDEX TECHNICAL ANALYSIS: Daily Time Frame (November 2021 – November 2022) (CHART 1)

The DXY index loses support from the bull flag and in turn loses the uptrend from lows in February, August and early November. This may indicate a short-term top. The momentum quickly deteriorated, with the greenback’s gauge below its daily envelope of 5, 8, 13 and 21-EMA, which is now in a bearish sequence. The daily MACD continued its descent below its signal line, and the daily Slow Stochastics are back in oversold territory. Further losses in the area between the 38.2% Fibonacci retracement of the February 2022 low/September 2022 high at 107.29 and the September low at 107.68 may occur before technical support short term is not achieved.

Recommended by Christopher Vecchio, CFA

How to trade USD/JPY

USD/JPY RATE TECHNICAL ANALYSIS: DAILY TIMETABLE (November 2021 to November 2022) (CHART 2)

USD/JPY rates took a beating as US Treasury yields tumbled, leading to one of its worst losses in a decade and the worst weekly performance since the start of the pandemic in 2020. before the intervention was fixed on September 22 at 145.90. is no longer partisan, having been eliminated with relative ease. The area around 140.35/141.10 is now in focus: 22nd September low; the 76.4% Fibonacci retracement of the 1990 high/2011 low range; and the rising trend line from the February and August 2022 lows.

IG Customer Confidence Index: USD/JPY rate forecast (November 10, 2022) (Chart 3)

USD/JPY: Retail trader data shows 44.46% of traders are net long with a ratio of short to long traders of 1.25 to 1. The number of traders net long is 13.09% higher than yesterday’s and 15.13% higher than last week, while the number of net-short traders is 21.29% lower than yesterday and 27.44% lower than last week.

We generally take a contrarian view of crowd sentiment, and the fact that traders are net short suggests that USD/JPY prices may continue to rise.

Still, traders are less net-short than yesterday and compared to last week. Recent sentiment shifts warn that the current USD/JPY price trend may soon reverse lower despite traders remaining net short.

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— Written by Christopher Vecchio, CFA, Senior Strategist

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