Volatility ahead with intervention USDJPY, US GDP for S&P 500, ECB rate decision EURUSD

S&P 500, Event Risk, USDJPY, Housing and GBPUSD Talking Points:

• Market perspective: USDJPY Bears below 146; EURUSD Bulls above 1.0000; gold Bears below 1,680
• Japanese policymakers intervened in the USDJPY late last week in an attempt to use the tight liquidity for a major market move
• Event risks will increase significantly next week from sentiment surveys to US and German GDP to FAANG earnings to the ECB and Bank of Japan exchange rate decisions

Risk trends are expected to increase significantly depending on seasonal and systemic events

We have come to the end of a period that was expected to combat the speculative drive. Although there were several highlights on the economic list and a number of unresolved background themes, there was limited expectation of a rapid development (or “revival”) of systemic trends. This is especially true given the scale of expectations for the coming week. When it comes to the baseline of speculative appetite, then S&P 500 ended the week up 2.4 percent, which would still ultimately settle into the week’s range. Still, that was a 4.7 percent charge cap for the week, which falls short of the benchmark’s average performance in the U.S. through the 42nd week of the year. Historical averages are historically meaningful, but they do a poor job of accounting for the environment from year to year. For the US indices, what I look for to signal a true recovery is an overall improvement in fundamentals or an increase in speculative exposure (for which I keep a close eye on the 50 mark for the VIX). We saw neither.

S&P 500 Chart with Volume, 20-Day SMA, 1-Day ROC and VIX Inverse Overlay (Daily)

The chart is created on Tradingview platform

Fundamentals and technicals are important to me in my market price evaluation analysis, but “conditions” are my first concern when evaluating markets. Participation, exposure to volatility and a general bias towards risk-on trends among speculative rankers can dramatically change the way markets move. There are some interesting benchmarks ahead to look at from a benchmark perspective: We’re wrapping up October, which typically sees both volatility and volume in the S&P 500 peak; The 43rd week of the year average retreated from the historical average peak, and the list is laid out with a high risk of events. However, a more innocuous development for those seeking to control only developed markets is the return of market depth in China. The country’s National People’s Congress is drawing to a close, and the curb on markets during the political gathering should not be surprising. It remains unclear when Chinese authorities will release their Q3 GDP reports and September economic data, which have been delayed since last week, but the attention they will attract is certain. Meanwhile, USDCNH still hovering near 14-year highs, while China ( FXI ETF ) to US (Dow Index) experienced a sharp divergence. I’ll be watching this week to see if these delayed fundamental beacons are scheduled for release anytime soon.

USDCNH chart with 20-day SMA overlaid on Shanghai-Dow (daily)

The chart is created on Tradingview platform

Japanese intervention, timed to take advantage of market inertia

In the rest of the quiet end of last week, it is worth mentioning the volatility Japanese yen. By Thursday’s close, the USDJPY had risen for 12 consecutive trading sessions, the longest stretch since 1973. If all it took was a one-session correction to turn the tide, volatility was seemingly disarmed last Friday. The world’s second most liquid exchange rate unexpectedly fell -1.7 percent by Friday, marking a sharp reversal from 152. The move was said to appear to coincide with the view that Japan’s Finance Ministry is once again working to rein in rampant depreciation (some would say “devaluation”). Although politics had a bigger impact last session, it’s worth noting that the central bank suffered a heavy lift. In addition, officials have yet to convince the G7 to help with exchange rate volatility, and Japan has refused to take practical steps to close the policy gap with its biggest peers. I will be watching next week’s opening closely to see if some of the recent technical breakouts turn into a trend or if the fundamental focus shifts.

USDJPY chart with 20-day SMA, 1-day SMA and consecutive candles (daily)

The chart is created on Tradingview platform

Intervention is an outlier and, ultimately, a dubious impact at best. To truly turn a value like USDJPY from its inexorable climb to multi-decade highs, it may take something more rudimentary to support the shift. Closing the gap in monetary policy between the Fed and the Bank of Japan could well be the most effective means of targeting the exchange rate; however, the Federal Reserve entered a media blackout period (two Saturdays before FOMC meeting) with enough rhetoric to support a 75 bps hike at the Nov. 2 meeting, though the debate over easing rates after that is intensifying according to Fed statements and futures. Unless the Bank of Japan surprises the world with an announcement this week that it is abandoning its (very dovish) yield curve control policy, potential USDJPY deflation will have to rely on a pullback in either risk trends or the dollar itself.

The risk of a critical macro event in the global economic calendar for the next week

Calendar created by John Kicklighter

Among the main themes: monetary policy for me at the top of growth and profit

I usually have to go through shallow lists of the most important risk events a week ahead to chart a trajectory for the markets as a whole. This time, the list is full of event risks that could revive the markets. Leaving aside unplanned influences such as the next BOJ intervention, I will be watching some systemically important growth and earnings updates for their ability to change deeper fears. Growth is a particularly well-represented theme ahead between US and German Q3 GDP readings due later in the week, as well as timely October PMIs for the world’s major advanced economies on Monday. Filling out the “middle” of the week, we have FAANG earnings from Tuesday to Thursday (after-hours), as well as sentiment surveys from a number of major economies. It is unlikely that all this coincides with the same “bullish” or “bearish” view of the future course; but if it does, the potential for momentum could prove profound.

Diagram of the relative positioning of the monetary policy of the main central banks

Chart created by John Kicklighter

Between the risk of an economic event, systemic issues arising through market conditions, and a particularly attractive own technical picture; Next week, I’ll be focusing on another major currency: the EURUSD. While it doesn’t face the same unpredictable – and therefore extreme – volatility potential as the USDJPY, it carries a convergence of influences that could make a significant move. A wedge has formed in this pair over the past three weeks, but the overwhelming bearish trend to 2022 is the dominant feature of the terrain. Volatility is too high for the tight trading range we’ve seen over the past few weeks. Between PMIs, Q3 GDP figures, sentiment surveys, ECB rate decision and overall risk mismatch; this is a loaded pair that should be on any FX watcher’s radar.

EURUSD chart with 50-day and 100-day SMA, 10-day ATR and historical range (daily)

The chart is created on Tradingview platform