USD/JPY, Nikkei could have some more mean reversion up their sleeves

Friday’s nonfarm payrolls data seemed to throw a spanner into the works of those assuring that the Fed will deliver a single 50bp cut amid 100bp of cuts this year. Unemployment was lower, hourly earnings were higher although jobs added missed the mark. It doesn’t kill the 50bp hypothesis, but it certainly doesn’t make it a slam dunk.

US data overnight was not exactly recessionary either, with GDPnow, wholesale trade and consumer credit beating expectations.

And with shorting the US dollar arguably and overcooked trade, it has allowed the dollar to flourish as pre-emptive bears reconsider their bets. The US dollar index rose for a second day on Monday and is not just a day or two away from the 102 handle. This allows for some further upside potential for the dollar over the near term before US CPI data on Wednesday.

Wall Street indices snapped a 4-day losing streak on Monday, helping Nasdaq 100 futures partly recover from its worst week since January 2022 and the S&P 500 futures’ worst week since September 2022. Dow Jones futures recouped all of Friday’s losses.

China’s producer prices completely missed the mark in August, contracting -1.8% y/y (-1.5% expected, -0.8% prior) or 0.4% m/m (0.7% expected, 0.5% prior). The China A50 fell to its lowest level since February and the Hang Seng reached a 3-week low. The weak data also provides little reason to be overly bullish on crude oil prices, although when you consider it has already fallen -13.5% over the prior 20 days then it may be a market to fade rallies, instead of seeking to enter the bear move late.

AUD/USD and NZD/USD were lower for a second day, although volatility was much tamer to what was seen on Friday. EUR/USD continued lower from Friday’s bearish hammer which failed at the December high, with a break of last week’s low and move to 1.10 potentially on the cards.

Events in focus (AEDT):

• 10:30 – AU consumer sentiment (Westpac)
• 11:30 – AU business confidence, conditions (NAB), building approvals (ABS)
• 13:00 – CN trade balance
• 16:00 – UK earnings, job claims, unemployment
• 16:00 – DE CPI
• 19:00 – EU economic forecasts
• 20:00 – US small business optimism (NFIB)
• 21:00 – OPEC monthly report
• 22:25 – BoC Macklem speaks

USD/JPY technical analysis:

I suspect the path of least resistance for USD/JPY is an eventual break beneath 142. But with the US dollar flexing its muscle elsewhere, USD/JPY might have a little more mean reversion up its sleeve before bears get their way.

A bullish inside day formed on Monday to snap a 4-day losing streak, and Friday’s low remain untested. A bullish divergence has also formed on the daily RSI (2) and (14). Price action is on the choppy side on the 1-hour chart, although bulls seem to be slowly turning the ship around.

Bulls could seek dips for near-term swings on the 1-hour chart. Alternatively, bears could bide their time to seek shorts around resistance levels such as the 144.23 high or 20-day EMA (145.53) with a 140 downside target in mind.

Nikkei 225 technical analysis:

If USD/JPY can extend its bounce today, so could the Nikkei 225. The 10% decline from the September high stalled at a high-volume node (HVN) and ended with a bullish pinbar. A false break of the 38.2% Fibonacci ratio closed firmly above it and prices hovered in the top quartile of that day’s range on Monday.

The 1-hour chart shows a strong rally from the 35k area and prices are now consolidating. Bulls could either seek dips towards 35,800 or enter within the consolidation, in anticipation of its next leg higher.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge