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Technical analysis: taking a positive stance with risk on a roll

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Chris Weston, Head of Research for Pepperstone offers his weekly analysis of what’s brewing in the markets.

We roll into the new trading week with risk and sentiment on the front foot. A broadly weaker USD, a slight dip in US real rates and a 5% rise WoW in reserve liabilities (on the Fed’s balance sheet) all working concurrently as a tailwind. Certainly, the correlation with reserves seems key and where reserves go, risky assets head in obedience. Liquidity is always king.

There is a clear focus on US CPI – that is the marquee event risk this week, and while the momentum favours long equity, short USD for a tactical short-term trade, a hot CPI number will hurt. This is a dark, sinister market and if you don’t have an open mind and are prepared to react to sentiment that can and will change on a dime, then you’ll feel it if you are using leverage, Utilise leverage in accordance with market volatility and accompany it with the appropriate position sizing, relative to the size of your account.

Central bank speeches are in focus too. The Fed are in a black-out period ahead of the 21 Sept FOMC meeting, where I am sure many in the market will welcome a lack of inputs from the various Fed members. The ECB will, however, be active, with 9 separate speeches that could impact EU assets. The market is already leaning towards another 75bp hike in October (currently there’s a 64% chance of a 75bp hike). The increasing focus though is on clarity on ECB Quantitative Tightening (QT), a factor that may not come this week, but will almost certainly be the core focus in the 27 October ECB meeting. With that in mind, the EUR should become sensitive to Italian Government Securities (BTP). German bund yield spreads are currently sitting at 232bp. If this spread pushes closer to 300bp (or 3%) then the EUR may attract sellers.

Keep an eye on any further jawboning from the BoJ/MoF, who have done a good job of causing JPY shorts to part cover. I still don’t buy intervention at this stage and feel USDJPY needs to be closer to ¥147.00 to really be in play. We’d need a huge beat to US CPI for USDJPY to march towards that zone and we know any moves into ¥145 will get officials out on the wires, causing some anxiety from funds to hold JPY shorts.

Hear from Chris Weston on the latest Pepperstone podcast

This article is brought to you in association with Pepperstone. All opinions expressed in this article are from the author and do not necessarily represent the opinions of The Armchair Trader.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

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