#WaveAnalysis
#USDJPY broke support level 130.75
• Likely to fall support level 126.50
USDJPY under the bearish pressure after the earlier breakout of the support level 130.75 (which has been steadily reversing the pair from last May).
The breakout of the support level 130.75 coincided with the 50% Fibonacci correction of the previous downward impulse from December.
Given the continuation of yen gains, USDJPY can be expected to fall further toward the next support level 126.50 (previous monthly low from May).
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#USDJPY broke support level 130.75
• Likely to fall support level 126.50
USDJPY under the bearish pressure after the earlier breakout of the support level 130.75 (which has been steadily reversing the pair from last May).
The breakout of the support level 130.75 coincided with the 50% Fibonacci correction of the previous downward impulse from December.
Given the continuation of yen gains, USDJPY can be expected to fall further toward the next support level 126.50 (previous monthly low from May).
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Japan’s inflation acceleration sets up a hawkish BoJ stance
Japan's Domestic Corporate Goods Price Index rose 0.5% m/m and 10.2% y/y in December after 0.8% m/m and 9.7% y/y. This is near the peak of 10.3% set in September. Despite lower commodity prices, prices are stubbornly reluctant to fall in Japan. And this is discouraging as more than one generation of economists has seen Japan as a prime example of deflation, citing demographics. We may continue to see a secondary effect of the yen weakening.
The Bank of Japan has halted the yen's weakening spiral by reversing about half of the losses since the start of 2021. Nevertheless, increased exchange rate volatility pushes sellers to impose higher margins on prices, which prolongs inflationary pressures and risks triggering the price-wage spiral that every central bank in the world fears.
Japan's Domestic Corporate Goods Price Index rose 0.5% m/m and 10.2% y/y in December after 0.8% m/m and 9.7% y/y. This is near the peak of 10.3% set in September. Despite lower commodity prices, prices are stubbornly reluctant to fall in Japan. And this is discouraging as more than one generation of economists has seen Japan as a prime example of deflation, citing demographics. We may continue to see a secondary effect of the yen weakening.
The Bank of Japan has halted the yen's weakening spiral by reversing about half of the losses since the start of 2021. Nevertheless, increased exchange rate volatility pushes sellers to impose higher margins on prices, which prolongs inflationary pressures and risks triggering the price-wage spiral that every central bank in the world fears.
With this kind of resilience in inflation, investors expect to see a tougher central bank stance. From that point of view, it is logical that the Bank of Japan has had to go out with record purchases of Japanese government bonds in recent days to keep their yields from rising.
However, rising government bond yields are increasing pressure on the budget. There are doubts about the sustainability of the Japanese finance ministry, given the country's massive national debt, chronic budget deficit and sluggish economic growth.
The BoJ remains the only central bank to maintain negative interest rates, probably out of fear of triggering unnecessary pressure on the economy. It is, therefore, with double interest that we should watch for the decisions and comments of the BoJ on Wednesday morning, where no options can be ruled out.
However, rising government bond yields are increasing pressure on the budget. There are doubts about the sustainability of the Japanese finance ministry, given the country's massive national debt, chronic budget deficit and sluggish economic growth.
The BoJ remains the only central bank to maintain negative interest rates, probably out of fear of triggering unnecessary pressure on the economy. It is, therefore, with double interest that we should watch for the decisions and comments of the BoJ on Wednesday morning, where no options can be ruled out.
We could see a decisive turnaround from the policy targeting government bond yields and even a key rate hike. If that is the case, the yen could continue to strengthen towards 120 before the end of the first quarter.
The opposite surprise cannot be ruled out when the central bank strengthens its negative rate policy and puts the yen back on a sustained downward path. This turnaround could be particularly dramatic for the currency as market prospects are now skewed towards an expectation of tighter policy, albeit less dramatically than we see in the USA or the Eurozone. In that case, the USDJPY might hit 133 very quickly and then aim for 140 before the end of March.
A dull scenario is also possible if the BoJ balances out its signals and does not cause market turbulence as it did at its last meeting in December. The inflation picture is pointing towards a policy-tightening option despite the risks of losses for the economy.
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The opposite surprise cannot be ruled out when the central bank strengthens its negative rate policy and puts the yen back on a sustained downward path. This turnaround could be particularly dramatic for the currency as market prospects are now skewed towards an expectation of tighter policy, albeit less dramatically than we see in the USA or the Eurozone. In that case, the USDJPY might hit 133 very quickly and then aim for 140 before the end of March.
A dull scenario is also possible if the BoJ balances out its signals and does not cause market turbulence as it did at its last meeting in December. The inflation picture is pointing towards a policy-tightening option despite the risks of losses for the economy.
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#WaveAnalysis
#Nikkei225 reversed from key support level 25695.00
• Likely to rise to resistance level 26500.00
Nikkei 225 index recently reversed up from the key support level 25695.00 (which has been repeatedly reversing this index from last May).
The upward reversal from the support level 25695.00 continues the active long-term upward impulse wave ③, which also previously started from the same support level.
Nikkei 225 index can be expected to rise further toward the next resistance level 26500.00 (which has been reversing the index from the end of December).
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#Nikkei225 reversed from key support level 25695.00
• Likely to rise to resistance level 26500.00
Nikkei 225 index recently reversed up from the key support level 25695.00 (which has been repeatedly reversing this index from last May).
The upward reversal from the support level 25695.00 continues the active long-term upward impulse wave ③, which also previously started from the same support level.
Nikkei 225 index can be expected to rise further toward the next resistance level 26500.00 (which has been reversing the index from the end of December).
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#WaveAnalysis
#NZDJPY reversed from key support level 81.35
• Likely to rise to resistance level 82.60
NZDJPY currency pair recently reversed up from the key support level 81.35 (which is the lower border of the wide sideways price range inside which the pair has been moving from September).
The support level 81.35 was further strengthened by the lower daily Bollinger Band.
Given the strength of the support level 81.35, NZDJPY can be expected to rise further toward the next resistance level 82.60 (former support level which stopped wave A at the end of last month).
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#NZDJPY reversed from key support level 81.35
• Likely to rise to resistance level 82.60
NZDJPY currency pair recently reversed up from the key support level 81.35 (which is the lower border of the wide sideways price range inside which the pair has been moving from September).
The support level 81.35 was further strengthened by the lower daily Bollinger Band.
Given the strength of the support level 81.35, NZDJPY can be expected to rise further toward the next resistance level 82.60 (former support level which stopped wave A at the end of last month).
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Bitcoin has slowed but is still looking higher
Bitcoin hit a high above $21.4K on Monday but pulled back to $21.0K – the area of the high since November – the rate is frozen, waiting for new signals.
It was apparent yesterday that the market needs a technical correction, or at least a consolidation around one level before it can continue rising after a 30% rally since the beginning of the year.
A technical correction might send the price to $20.2K or, more likely, $19.6K. The 200-day moving average and 61.8% Fibonacci level from the last rally pass near the latter level. A pullback to this area would be a typical correction. The emergence of new buyers will signal the end of the bearish trend in crypto. In the event of a more profound plunge, there is a high risk of a new disappointment of early buyers and an imminent return to a down-trend followed by lower lows.
According to CoinShares, investments in crypto funds rose by $9M last week, with small inflows following three weeks of withdrawals.
Bitcoin hit a high above $21.4K on Monday but pulled back to $21.0K – the area of the high since November – the rate is frozen, waiting for new signals.
It was apparent yesterday that the market needs a technical correction, or at least a consolidation around one level before it can continue rising after a 30% rally since the beginning of the year.
A technical correction might send the price to $20.2K or, more likely, $19.6K. The 200-day moving average and 61.8% Fibonacci level from the last rally pass near the latter level. A pullback to this area would be a typical correction. The emergence of new buyers will signal the end of the bearish trend in crypto. In the event of a more profound plunge, there is a high risk of a new disappointment of early buyers and an imminent return to a down-trend followed by lower lows.
According to CoinShares, investments in crypto funds rose by $9M last week, with small inflows following three weeks of withdrawals.
China smashed expectations for the economy, but that hasn't stopped the yuan's correction
An extensive package of statistics from China showed a much better economy than the average analysts had expected. But this set of economic surprises failed to affect the renminbi, which is falling for a second day, having lost 1.4% in the meantime.
China's economy grew by 3% last year (2.7% was expected). GDP was virtually unchanged for the fourth quarter, although a decline of 0.8% was expected, which is a considerable difference between expectation and fact.
The high-frequency data for retail trade and industrial production also exceeded expectations. The industrial production index in December was 1.3% higher than a year earlier. Since the start of the year, production has risen by 3.6%. Retail sales last month were 1.8% lower than a year earlier but were expected to fall by 9.5% y/y.
The unemployment rate fell from 5.7% to 5.5%, rejecting analysts' forecasts that it would remain unchanged.
An extensive package of statistics from China showed a much better economy than the average analysts had expected. But this set of economic surprises failed to affect the renminbi, which is falling for a second day, having lost 1.4% in the meantime.
China's economy grew by 3% last year (2.7% was expected). GDP was virtually unchanged for the fourth quarter, although a decline of 0.8% was expected, which is a considerable difference between expectation and fact.
The high-frequency data for retail trade and industrial production also exceeded expectations. The industrial production index in December was 1.3% higher than a year earlier. Since the start of the year, production has risen by 3.6%. Retail sales last month were 1.8% lower than a year earlier but were expected to fall by 9.5% y/y.
The unemployment rate fell from 5.7% to 5.5%, rejecting analysts' forecasts that it would remain unchanged.
Often such a divergence triggers an impulse to buy currencies on the back of capital inflows into domestic assets. But this time, the markets have quietly digested the difference, developing a second day of a technical rebound in the renminbi after the 9% rally from the beginning of November to the peak at the end of last week.
So far, the movement of the last two days has resembled a "buy the rumour, sell the news" style technical bounce, as investors ramped up their investments in the yuan late last year, betting on a turnaround to greater openness.
And this bet is working on several fronts across a broad spectrum of activity, from abandoning the 0-covid policy to easing for the technology sector. On top of that, we are seeing a softening of rhetoric from trade representatives and a pumping of liquidity into the financial system. Simply put, China has comprehensively taken up economic growth stimulus to regain some of the appeal for investors that it has been losing in several waves since 2018.
So far, the movement of the last two days has resembled a "buy the rumour, sell the news" style technical bounce, as investors ramped up their investments in the yuan late last year, betting on a turnaround to greater openness.
And this bet is working on several fronts across a broad spectrum of activity, from abandoning the 0-covid policy to easing for the technology sector. On top of that, we are seeing a softening of rhetoric from trade representatives and a pumping of liquidity into the financial system. Simply put, China has comprehensively taken up economic growth stimulus to regain some of the appeal for investors that it has been losing in several waves since 2018.
The USDCNH exchange rate is consolidating near the 50- and 200-week averages after collapsing from 7.35 to 6.71 in just over two months. The exchange rate reduced near these same levels from May to August 2022 and found support in early 2019. Therefore, another potentially prolonged stop here is a probable scenario.
A market shakeout could lift USDCNH to 6.86-6.90 before we see a new reversal to the downside. At the same time, this would remove the short-term overbought yuan on FX and provide some impetus to the economy through exports.
If China supports the economy and opens up to investors in the coming weeks, capital inflows into the renminbi could continue. In that case, the USDCNH could return to 6.25-6.35, where multi-year lows and the 161.8% Fibonacci level from the last rally of the Chinese currency are concentrated.
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A market shakeout could lift USDCNH to 6.86-6.90 before we see a new reversal to the downside. At the same time, this would remove the short-term overbought yuan on FX and provide some impetus to the economy through exports.
If China supports the economy and opens up to investors in the coming weeks, capital inflows into the renminbi could continue. In that case, the USDCNH could return to 6.25-6.35, where multi-year lows and the 161.8% Fibonacci level from the last rally of the Chinese currency are concentrated.
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UK Earnings rise alongside employment drop
The UK market is showing further signs of a reversal in the labour market towards a fall in employment, but the increased pace of wage growth is keeping a close eye on the Bank of England's actions and comments.
Jobless claims rose by 19.7k in December after climbing by 16.1k a month earlier, a logical development after a smooth stop to the decline earlier last year.
The unemployment rate remained at 3.7%. Here there is a 0.2 percentage point increase from the August lows, but these levels remain very low by historical standards. Unfortunately for policymakers, the low unemployment rate reflects a shrinking active workforce, which has forced the government to launch a programme of tax incentives for those back to work in the ages over 50.
The UK market is showing further signs of a reversal in the labour market towards a fall in employment, but the increased pace of wage growth is keeping a close eye on the Bank of England's actions and comments.
Jobless claims rose by 19.7k in December after climbing by 16.1k a month earlier, a logical development after a smooth stop to the decline earlier last year.
The unemployment rate remained at 3.7%. Here there is a 0.2 percentage point increase from the August lows, but these levels remain very low by historical standards. Unfortunately for policymakers, the low unemployment rate reflects a shrinking active workforce, which has forced the government to launch a programme of tax incentives for those back to work in the ages over 50.
In theory, this should increase supply and curb wage growth, which now looks like the most dangerous part of the inflationary spiral. Wages in the last three months to November were 6.4% higher than in the same period a year earlier. This is below current inflation. However, this high rate of wage growth risks is the most significant factor in anchoring inflation expectations and overall inflationary pressure.
A fresh set of inflation data is published tomorrow morning, where a sharp fall in prices is not forecast on average. The combination of high consumer inflation and rising wages could force the Bank of England to push the economy harder into recession to suppress consumption and bring price growth under control, which would be positive for the pound.
A fresh set of inflation data is published tomorrow morning, where a sharp fall in prices is not forecast on average. The combination of high consumer inflation and rising wages could force the Bank of England to push the economy harder into recession to suppress consumption and bring price growth under control, which would be positive for the pound.
#WaveAnalysis
#EURCAD reversed from key resistance level 1.4585
• Likely to fall to support level 1.4400
EURCAD recently reversed down from the key resistance level 1.4585 (which has been repeatedly reversing the pair from the end of 2021 as can be seen below).
The downward reversal from the resistance level 1.4585 continues the active weekly downtrend from the start of 2020.
Given the overbought reading on both the daily and the weekly Stochastic indicators, EURCAD can be expected to fall further toward the next support level 1.4400.
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#EURCAD reversed from key resistance level 1.4585
• Likely to fall to support level 1.4400
EURCAD recently reversed down from the key resistance level 1.4585 (which has been repeatedly reversing the pair from the end of 2021 as can be seen below).
The downward reversal from the resistance level 1.4585 continues the active weekly downtrend from the start of 2020.
Given the overbought reading on both the daily and the weekly Stochastic indicators, EURCAD can be expected to fall further toward the next support level 1.4400.
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#WaveAnalysis
#Silver reversed from resistance level 24.15
• Likely to fall to support level 23.00
Silver recently reversed down from the key resistance level 24.15 (which has been reversing the pair from the start of December), intersecting with the upper daily Bollinger Band.
The downward reversal from the resistance level 24.15 stopped the previous intermediate ABC correction (2) from the start of January.
Silver can be expected to fall further toward the next support level 23.00 (low of the previous impulse wave (1)).
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#Silver reversed from resistance level 24.15
• Likely to fall to support level 23.00
Silver recently reversed down from the key resistance level 24.15 (which has been reversing the pair from the start of December), intersecting with the upper daily Bollinger Band.
The downward reversal from the resistance level 24.15 stopped the previous intermediate ABC correction (2) from the start of January.
Silver can be expected to fall further toward the next support level 23.00 (low of the previous impulse wave (1)).
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#Bitcoin continues its streak of small wins, recording its 13th consecutive day of gains on Tuesday, adding for 15 days over 16 sessions this year. The exchange rate rewrote a two-month high at $21.55K. Local overbought conditions continue to build, with help from the stock indices, where the Nasdaq100 managed to close Tuesday's trading higher.
We continue to point out that in this stage, growth is vulnerable to sharp declines. From a long-term investor perspective, we pointed out already in November that the crypto market has passed its low point.
However, the best time for speculative buying is yet to come, when there will be a FOMO stage, like we last saw from December 2020 to April 2021 and from April to December 2017. In both cases, an acceleration and near-ubiquitous rise after surpassing previous historical highs.
We continue to point out that in this stage, growth is vulnerable to sharp declines. From a long-term investor perspective, we pointed out already in November that the crypto market has passed its low point.
However, the best time for speculative buying is yet to come, when there will be a FOMO stage, like we last saw from December 2020 to April 2021 and from April to December 2017. In both cases, an acceleration and near-ubiquitous rise after surpassing previous historical highs.
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#WaveAnalysis
#GBPAUD reversed from support level 1.7525
• Likely to rise to resistance level 1.7800
GBPAUD recently reversed up from the pivotal support level 1.7525 (which stopped the previous waves A, (B) and (1)).
The upward reversal from the support level 1.7525 stopped the previous intermediate impulse wave (3) from the start of January.
Given the strongly bullish sterling sentiment and the oversold daily Stochastic, GBPAUD can be expected to rise further toward the next resistance level 1.7800.
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#GBPAUD reversed from support level 1.7525
• Likely to rise to resistance level 1.7800
GBPAUD recently reversed up from the pivotal support level 1.7525 (which stopped the previous waves A, (B) and (1)).
The upward reversal from the support level 1.7525 stopped the previous intermediate impulse wave (3) from the start of January.
Given the strongly bullish sterling sentiment and the oversold daily Stochastic, GBPAUD can be expected to rise further toward the next resistance level 1.7800.
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The Bank of Japan, which has not changed interest rates for the past six years and remains fully committed to QE, sparked a strong market reaction by leaving policy unchanged today. The Bank of Japan surprised markets at its last meeting by announcing that it would now target a range rather than a specific level. This was seen by many, including us, as a first step in the gradual abandonment of the quantitative easing and negative rate policies that the BoJ has been pursuing alone amongst large peers.
The outgoing central bank governor, Kuroda, was hesitant to change course at the end of his term, which expires in April.
This adherence to the previous course came as a surprise to the foreign exchange market. Within two hours of the announcement, the USDJPY jumped 2.5% to levels near 131.60. Despite the impressive move, it only managed to bring the exchange rate back to the levels at the end of last week. And then, we saw a sustained pair reversal towards the downside.
The outgoing central bank governor, Kuroda, was hesitant to change course at the end of his term, which expires in April.
This adherence to the previous course came as a surprise to the foreign exchange market. Within two hours of the announcement, the USDJPY jumped 2.5% to levels near 131.60. Despite the impressive move, it only managed to bring the exchange rate back to the levels at the end of last week. And then, we saw a sustained pair reversal towards the downside.
The yen market dynamics on Wednesday suggest that investors and traders remain confident that the Bank of Japan will still turn towards a tighter monetary policy.
By now, the yen has recovered about half of its losses incurred on the divergence of Fed and BoJ policy since the start of 2021. The market has gone too far in believing that Japan can make a reversal as dramatic as that of the USA or even the Eurozone.
Moreover, the bears in the USDJPY need a reset for a new downward move. From a fundamental analysis point of view, it is also more likely that the yen will return to a declining trend but not develop a rising trend.
This is doubly so when we have the reassurance of the BoJ maintaining its ultra-soft policy contrasting with Bullard's comments from the Fed that it is necessary to bring the rate above 5.0% as soon as possible (+50 points to the current level) and then watch the information coming in.
By now, the yen has recovered about half of its losses incurred on the divergence of Fed and BoJ policy since the start of 2021. The market has gone too far in believing that Japan can make a reversal as dramatic as that of the USA or even the Eurozone.
Moreover, the bears in the USDJPY need a reset for a new downward move. From a fundamental analysis point of view, it is also more likely that the yen will return to a declining trend but not develop a rising trend.
This is doubly so when we have the reassurance of the BoJ maintaining its ultra-soft policy contrasting with Bullard's comments from the Fed that it is necessary to bring the rate above 5.0% as soon as possible (+50 points to the current level) and then watch the information coming in.
Bitcoin retreats for reset
Bitcoin has lost 2% over the past 24 hours, pulling back to $20.77K, almost $1K below Wednesday's peak. The first cryptocurrency followed stock indices, which turned sharply lower on Fed officials' hawkish rhetoric simultaneously with growing signals of weakness in consumer demand and business activity.
Technical analysis suggests that the latest pullback is a legitimate correction to the accumulated short-term overbought conditions after the rally since the beginning of the year.
The correction can only be reclassified as a new downturn only after the BTCUSD consolidates below $19.5K, as the 200-day moving average and the 61.8% Fibonacci retracement level from the rally since the beginning of the year pass just above that level.
Bitcoin has lost 2% over the past 24 hours, pulling back to $20.77K, almost $1K below Wednesday's peak. The first cryptocurrency followed stock indices, which turned sharply lower on Fed officials' hawkish rhetoric simultaneously with growing signals of weakness in consumer demand and business activity.
Technical analysis suggests that the latest pullback is a legitimate correction to the accumulated short-term overbought conditions after the rally since the beginning of the year.
The correction can only be reclassified as a new downturn only after the BTCUSD consolidates below $19.5K, as the 200-day moving average and the 61.8% Fibonacci retracement level from the rally since the beginning of the year pass just above that level.
Fed is in no hurry to soften its position despite contracting activity
U.S. statistics released on Wednesday signalled a decline in economic activity towards the end of the year, but the Fed maintained its hawkish rhetoric. Such a toxic mix turned markets lower towards the end of the day, causing the Dow Jones to fall 1.8% and the Nasdaq100 to drop 1.2%. The VIX fear index returned to above 20, a sign of a wave of selloffs in the equity market more than once during the previous year.
For December, retail sales fell by 1.1%, following a 1.0% decline a month earlier. Excluding cars, the drop was also 1.1%, more than double the 0.5% decline expected after a 0.6% decline in November. US retail sales at face value were released, adding 6.7% y/y, just 0.2 percentage points above the latest inflation figure. This is sharply below the 10-year average through February 2020, when lockdowns triggered sales turbulence, making such a comparison unrepresentative.
U.S. statistics released on Wednesday signalled a decline in economic activity towards the end of the year, but the Fed maintained its hawkish rhetoric. Such a toxic mix turned markets lower towards the end of the day, causing the Dow Jones to fall 1.8% and the Nasdaq100 to drop 1.2%. The VIX fear index returned to above 20, a sign of a wave of selloffs in the equity market more than once during the previous year.
For December, retail sales fell by 1.1%, following a 1.0% decline a month earlier. Excluding cars, the drop was also 1.1%, more than double the 0.5% decline expected after a 0.6% decline in November. US retail sales at face value were released, adding 6.7% y/y, just 0.2 percentage points above the latest inflation figure. This is sharply below the 10-year average through February 2020, when lockdowns triggered sales turbulence, making such a comparison unrepresentative.
Producers’ inflation was also weaker than forecast. For December, the overall index lost 0.5% (the most substantial decline since April 2020), and the annual rate fell to 6.2%. The core index, which excludes food and energy, slowed to 5.5%. The yearly comparison of producer prices has already hit a high base: In November 2021, prices started to rise sharply, and now we see a natural deceleration of the annual rate, although monthly declines are rare.
All the economic indicators listed indicate sharper-than-expected cooling of the economy. But at the same time, Fed spokespersons continued to assure that they would not cut rates before the end of the year as the markets expected. The divergence of opinion amongst the governing council is just what the next move will be. At least two now support an increase of another 50-points hike at the start of February, but markets see just a 5% chance of this move. The reassessment of these expectations could be a new driver for the market.
All the economic indicators listed indicate sharper-than-expected cooling of the economy. But at the same time, Fed spokespersons continued to assure that they would not cut rates before the end of the year as the markets expected. The divergence of opinion amongst the governing council is just what the next move will be. At least two now support an increase of another 50-points hike at the start of February, but markets see just a 5% chance of this move. The reassessment of these expectations could be a new driver for the market.