While US indices, Nikkei futures, the USD/JPY, and commodity dollars – some of the assets that have come under intense pressure – all bounced off their lows on Monday, we didn’t see much follow-through. This suggests that we are not out of the woods yet, but things could calm down as we head deeper into the week, notes Fawad Razaqzada, technical analyst at Trading Candles.
A quieter US economic calendar means there won’t be many fresh recession signals to unnerve traders, while soothing comments from Federal Reserve officials could also help alleviate the pressure on markets.
The DXY was testing potential resistance around 103.20 at the time of writing, while a more significant resistance is seen in the range between 103.65 to 104.00. Following the recent bearish price action, be on the lookout for a fresh drop in the DXY around these levels.
Source: TradingView.com
Overall, it has been a rough ride for global risk assets lately, and the turbulence shows little sign of easing. Investors have been gripped by fears that the Fed has waited too long to pivot on its policy, especially in light of Friday’s disappointing US jobs data and a slew of other weak economic indicators pointing toward a looming recession. Monday’s stronger ISM services reading helped to modestly ease concerns somewhat, causing yields to bounce back.
I would be very surprised if the Fed refuses to offer some soothing words in light of the big moves we have seen. There are not many Fed speakers on tap this week, but Chicago Fed President Austan Goolsbee said earlier that if the economy were to deteriorate, the Fed will “fix it.” Fed officials will have to choose their words carefully, as more evidence of an economic slowdown could emerge in the coming weeks.
As for all the yen carry trade talk, a carry trade is a strategy where traders borrow money at low-interest rates and invest it in higher-yielding assets. It’s a popular tactic in forex trading, where investors take advantage of low interest rates and weaker currencies in one country to reinvest in another country with higher returns.
Japan has been a favourite for carry trade, thanks to the Bank of Japan’s ultra-loose policy that’s been in place for many years, coupled with a weak yen. This has made the yen an attractive option for global investors looking to maximize their returns through carry trades.
