Play of the Day Recaps: March 12 – 13, 2024

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Our strategists were only able to get out two discussions this week, this time focusing on U.K. jobs data, the developments around a potential hike from the Bank of Japan, and U.S. inflation updates.

One turned out to rough, while the other played out almost perfectly. Check out our reviews to see what happened and how we did!

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On Tuesday, after seeing net weaker than expected U.K. economic data – rising unemployment and slowing wage growth – we thought that the market may increase odds of the Bank of England potentially being more inclined to cut interest rates, which could draw in net sellers into Sterling in the short-term.

We paired this development with the Japanese yen, which has been seeing net bullish momentum, on the idea that the Bank of Japan may end their negative interest rate regime in March or April.

We also noted that U.S. data may be an influence on the broad market, most notably the U.S. CPI read, and how it may influence broad risk sentiment in the short-term.  Risk sentiment usually is one of the bigger short-term drivers of currency behavior, especially the Japanese yen, so it was worth noting.

So we leaned bearish on GBP/JPY, and after a clear rejection of the 189.00 resistance level, we thought that additional bearish candlestick patterns may begin to draw in more net selling. The initial target might be the 188.00 support level, with the possibility of the downtrend extending further if the US CPI release doesn’t dramatically alter sentiment.

After our discussion, the sentiment in the Japanese yen began to turn strongly net bearish and was arguably the main driver for GBP/JPY. Earlier net weak Japanese economic updates plus comments from BOJ Governor Ueda highlighting some economic weaknesses within the recovery may have draw traders away from the recent rate hike optimism.

It can also be argued that March rate hike speculation was losing steam, possibly on the idea the Bank of Japan may wait until April to hike to see if small and medium sized business may follow the big companies with large wage hikes.

This did bring GBP/JPY up to the weekly pivot point, which did draw in net sellers on Wednesday and Thursday, but buyer were ready and waiting at the 100 SMA as well to keep the pair choppy. On Friday, we saw an upside break of the pivot point area, correlating with the confirmation of large company wage hikes in Japan, as expected.

Overall, we think this strategy discussion was not supportive of a positive outcome. We think our fundamental analysis was on point, but those comments from BOJ Ueda was unexpected and really shifted yen sentiment.  Also, our technical analysis trigger also meant likely entering around the 188.50 area, which was the lows for the week post discussion.

It would have been possible to achieve positive outcomes with our bearish fundamental lean, but only for traders who played the pivot area as a their entry strategy (or scaled up entries to that area) and actively managed short-term profit taking. Outside of those ideas it would have been a rough one.

10-yr U.S. Treasury Yield (US10Y): Wednesday – Mar. 13, 2023

U.S. 10-yr Treasury Yield (US10Y) Chart by TradingView

U.S. 10-yr Treasury Yield (US10Y) Chart by TradingView

On Wednesday,  we saw that the U.S. CPI release and the bullish reaction in bond yields suggested that traders may be reassessing expectations about the pace of potential Fed interest rate cuts. And with the upcoming US Producer Price Index and Retail Sales data, we thought that if those updates supported that broad interest rate reassessment, bond yields had a chance of moving higher this week.

With that scenario in mind, we discussed potential scenarios/areas to draw in buyers, (e.g., upside break of R1 Pivot resistance or retest of R2 Pivot support area), and an upside potential resistance area that could turn to net selling.

We thought that best practice was to wait for the data to release and see the market’s reaction, to reduce the directional uncertainty as the market would likely still have plenty of points to catch, as seen with the recent CPI release.

Well, this strategy basically played out as expected, almost to a T. U.S. PPI data came out hotter than expected, weekly initial jobless claims was better than expected, but retail sales data was relatively inline with expectations (arguably weaker on net).

The reaction in bond yields was instantly bullish, but after the initial spike higher, US10Y fell back, almost to pre-event levels just above 4.20%. That’s where buyers had another opportunity to step in at a great price as yields rallied through the rest of the session up to the targeted resistance area before stabilizing.

Given that our fundamental triggers played out and the yield moved favorably to technical targets, it’s highly likely this strategy discussion was supportive of a positive outcome, with little need for complex risk management execution or adjustments. 

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