USDJPY traders play the range, the S&P 500 fails to charge the breakdown


S&P 500, USDJPY, Evergrande and Dollar Discussion points

  • The S&P 500’s fall below 4,450 – a long-standing channel support – on Tuesday failed to generate follow-up in the last session
  • While technical developments and seasonal assumptions offer sparks, it looks like a definitive fundamental fire is needed would be the FOMC next week.
  • Difficulty forging clean breakouts and excess event risk can amplify conditions for more active ranges that we see on a range of assets like USDJPY

Don’t let us fall into technical temptation

I asked a question yesterday: Was the S&P 500 technical bearish breakout the tipping point for a full outage on an incredible 18 month load? My appetite for more active markets would have liked to see the markets turn around, not for the bearish outlook, but rather this is where momentum is most likely to gain ground. However, we knew it would be a high threshold to encourage such resilient (resilient?) Markets without something more tangible to guide fears. And there doesn’t appear to be a scheduled event with a global scale on the bridge until we come to next Wednesday’s FOMC rate decision. That said, it’s important to stay on top of the headlines if an unexpected debt ceiling issue or financial fallout from a source like China’s Evergrande catches that dry tinder. In the meantime, if we fail to break well-established technical boundaries and the intention of big changes is anchored in more future events, that seems to be the basis of the course conditions.

S&P 500 chart with 50 day SMA and 1 day rate of change (daily)

Graphic created on TradingView platform

When escapes fail, beaches can proliferate

While some may see big reversals around every corner, it seems many in the market are more than comfortable making a range call when big levels appear. Presumably there is an active effort to lean against the big breakout by market resolution alone, but it is also possible to see positioning in action in some places. Below is the retail positioning in S&P 500 CFDs at IG. There was a sharp reversal in positioning from 75% of those who had net short positions two weeks ago around record highs to a mostly neutral division as we hit the 50-day moving average. Total shorts are still remarkably heavy, suggesting an undercurrent of expectations; but so far there is also the highest number of long positions for at least a year.

S&P 500 chart overlaid with IG client CFD positioning (daily)

USDJPY traders play the range, the S&P 500 fails to charge the breakdown

Graphic created on DailyFX.com

While there is a lot of fanfare in the larger market around the S&P 500, the drama associated with its particular channel test doesn’t look much different than what we find in a more persistent, horizontal range of the USDJPY. In retail FX trading (again at IG) we can see the active results of range trading both in net positioning and changes in long and short legs. In the last session, the USDJPY managed to break through the 109.50 mark and thereby widen the most restrictive 20-day trading range on record. However, erasing an intense range would only lead the market to stall at wider support and the confluence of the levels at 109.00. While all of the yen crosses have a “risky” tendency for them, the additional consideration of the dollar here will intensify the focus on the Fed’s conical speculation.

USDJPY chart overlaid with IG client CFD positioning (daily)

USDJPY traders play the range, the S&P 500 fails to charge the breakdown

Graphic created on DailyFX.com

The unexpected and the seasonal

As I keep my focus and anticipation trained on the Fed’s rate decision next week (with updated forecast due to the event), I keep open the possibility that this sentiment could engage in a real charge without the prompting of a scheduled event. From a seasonal standpoint, the surge in liquidity expected after Labor Day appears to be taking place. However, the averages for September and the individual weeks of the year (currently the 37e) have not yet convinced market players to dissociate themselves from historical trends. Yet if something peripheral were to get the ball rolling, those same assumptions can cause many drop buyers and HODLers to withdraw their reluctance.

Graph of the performance of the S&P 500 by calendar week to 1900

USDJPY traders play the range, the S&P 500 fails to charge the breakdown

Chart created by John Kicklighter with data from Bloomberg

Speaking of unforeseen and unpredictable risks, there are a number of issues that the market is intentionally or ignorantly downplaying. The increase in Covid cases in many economic centers around the world is not translating into total risk aversion, as the case of blockages in response has been drastically reduced. Nonetheless, this is a trend that should be watched. Meanwhile, the risk of a US debt ceiling seems to have plunged politicians and investors into a crisis of amnesia, with the severity of the downgrade of the US sovereign rate by Standard & Poor’s not so distant (2011). When it comes to gray swans, however, warnings about Evergrande in China are growing sharper. One of China’s largest real estate developers, the company has struggled to cope with large bad debts; and now it is reported that Chinese banks have been warned that Evergrande will likely miss an interest payment on a loan on Monday. Without substantial intervention from regulators that could signal a material default – a rare event in China where bad debt is a substantial problem. Is this a global financial threat? He has a significant capacity to reach this scale, but it should not be assumed.

Graph Evergrande with 50-day moving average and volume (Daily)

USDJPY traders play the range, the S&P 500 fails to charge the breakdown

Graphic created on TradingView platform

Top event risk for Thursday and the dollar

Although the markets appeared to have been relieved of concerns about important fundamental developments during the last session, there were a few significant updates to go through. On the back of the US CPI, which failed to generate a decisive response from the US dollar, there have been similarly snubbed inflation updates from the UK and Canada. In both cases, price pressures increased further to reach a record 3.2% and an overall pace of 4.1% respectively. Neither the pound nor the Canadian dollar would register a serious bullish commitment despite the slow lean hawkish developed by the Bank of England and the Bank of Canada in recent times. Given this reluctance to budge in the face of meaningful data, I am cautious about what can be achieved in releasing the expected data today. New Zealand’s record GDP offered the Kiwi a slight uptick and a significant job shortage for Australia did not hit the Aussie hard. The first list on my agenda for Thursday is the US retail sales report due at 12:30 GMT. This is not an event that goes beyond our main concerns, but rather could generate an impact on the market by altering speculation around the Fed’s reduction intentions. That said, I still don’t think the DXY will make any imminent offers to break 93 or 92.

Dollar DXY Index Chart with 100 Day SMA, 7 Day Range (Daily)

USDJPY traders play the range, the S&P 500 fails to charge the breakdown

Graphic created on TradingView platform

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