USD/JPY bull flag could temp bulls, ASX traders eye Wall Street stability

Monday’s broad risk-off rout was beginning to look like nothing more than a bad dream early on Tuesday, with Wall Street indices recouping most of Monday’s losses early in yesterday’s session. Reassuring comments from the Fed that the job market slowdown does not signal a recession at least helped sooth fears of emergency Fed rate cuts and a hard landing. As did the better-than-expected ISM services report, and Atlanta Fed’s GDPnow estimating Q3 GDP at 2.9%, above the 2.9% expected. Yet Fed fund futures are still pricing in three 25bp cuts over the next three meetings with a 74% probability.

While the S&P 500, Nasdaq and Dow Jones closed the day between 0.7% to 1% higher, much of their earlier gains were handed back by the close. And this serves as a reminder that we may not be out of the woods, as strong rebounds can and do occur in even the grizzliest of bear markets. If that was a turnaround Tuesday, it was a lame one indeed. Still, stability is the first step towards recovery.

AUD/USD and NZD/USD were the strongest FX majors, supported by improved sentiment and the RBA’s hawkish hold. The cash rate remained at 4.35% for a sixth consecutive meeting, and I see little reason for this to change in either direction at all this year. While governor Bullock confirmed they had discussed raising the cash rate at this meeting, it seems to be more of a formality than a threat. Cuts have been firmly ruled out, and although headline CPI is expected to dip within the RBA’s 1-3% target early next year, underlying inflation is expected to slow more gradually than expected.

GBP/USD was the weakest FX major as traders price in 100bp of potential Fed cuts versus 50bp from the BOE. Sterling closed below 1.27 for the first time in nearly 5 weeks and is on track for a fourth consecutive week lower. Consequently, GBP/AUD has fallen to an 11-day low after falling over 600 pips from Monday’s high, where it briefly traded above 2.0.

Events in focus (AEDT):

• 08:45 – NZ employment
• 13:00 – CN trade balance
• 16:00 – DE industrial production
• 00:00 – CA Ivey PMI

USD/JPY technical analysis:

The -12.5% fall since the July high on USD/JPY is not quite as impressive is the Nikkei’s -12.5% plunge on Monday, but it is impressive none the less. But with its daily RSI (14) dropping to its most oversold level since 1996, something had to give. And that saw USD/JPY form a bullish inside day on Tuesday. A small victory perhaps, but it still breaks up bearish momentum.

The 1-hour chart shows a potential bull flag which is also being confirmed by its RSI. A 100% projection level of the flag lands around the weekly pivot point and a high-volume node (HVN), which makes the 149 area a potential upside target for bears. Assuming risk is allowed to recover. While traders should be on guard for spikes lower around the Tokyo open, dips look tempting after such a selloff and the stock-market rout has paused for breath.

ASX 200 futures (SPI 200) technical analysis:

A bullish hammer formed on the ASX futures chart on Tuesday after it recovered from a false break of its April low. The magnitude of the 8% decline from the record high remains the dominant feature of the daily chart, but it could still make room for a bit more of a corrective bounce – even if its eventual destiny is lower from here. Also note the very negative delta volume that accompanied Monday’s bearish candle, which suggests bears waded in with force and that many may have already closed out following the reversal back above the April low.

The 1-hour chart shows classic corrective price behaviour. But that does not rule out further gains, even if only minor.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge