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USD, JPY, Indices- Deep Dive Market Analysis

6/21/2021

Fundamentals

The US dollar and the Japanese yen is probably one the most interesting pairs in forex due to their traits and behaviors and how they fall into their roles. For example, both currencies are considered safe havens to most investors, but at the same time, they a very fundamentally different. The yen's negative interest rates and deflationary monetary model make the yen looks attractive to lots of investors in times of economic fear. The US dollar's positive and soon-to-be rising interest rates meant to cap 'high' inflation (above 5%) acts as another safe haven investment for most people. But, the fact that the two most opposite extremes seem to be the safest place to put your money is very interesting.

COT Report:

COT data shows a small decrease in the change of long positions on the USD and a considerable decrease in the number of short positions on the yen. There was also an decrease in short and long positions in the SPX500 and US30 in the past week which means little change as of last Tuesday, but the recent sell off in stocks probably will show up on this week's COT as an increase in shorts unless stocks fire past all time highs before this Tuesday.

GDP, Interest Rate, and Inflation Rate:

What we're seeing now is a rise in demand for the USD and a rise in stocks simultaneously, so to help explain this, we can look toward economic numbers. But the Fed promised two rate hikes by 2023... that's not much of a big deal anymore. The US's GDP has seen a drastic increase in the past year- let alone the past few quarters- that we are looking at a rebounding economy which is good for stocks and the USD. Additionally, higher inflation is actually better for the stock market than the value of the dollar, because there's more money in the market due to the Fed's trillions of dollar economic stimulus plan. The overall point I'm trying to make is that sentiment for both stocks and the dollar are bullish for the time being in this transitionary period from low to higher interest rates.

Going Forward:

I have shifted my sentiment on the USD that we will see further demand and upside on the dollar, as well as continued buying in the stock market (at least for the next week) although these reasons are more long term factors. My argument stems from the meteoric rise in GDP, currently low interest rates, the promise of higher rates in the future, and the promise of inflation curbing. So, it looks like the steps taken by the US are more impactful than the yen's current state as the Japanese economy remains mostly stagnant at a negative interest rate, inflation rate and GDP. Obviously, we will have to see what's in store for this week and beyond, but that is my reasoning behind what I think.

Technicals

SPX500:

SPX500 1D chart (top), correlation coefficient to JXY (bottom)

The stock market reacts to this sentiment as well. The chart above is of the SPX500 and its correlation to the Japanese yen index which is the red colored chart below the candlestick chart. There is usually a mixed correlation between US equities and the yen. When the yen rises, it's a coin toss on where equities will end up. Currently, we are at a negative correlation between the yen and the SPX500 which is probably due to the reasons stated in the fundamental analysis previously in the article.

SPX500 4H chart

The SPX500 bottomed out at $4140 for support and is now back up to resistance at a falling trend line better seen on the 4H timeframe. That level is also paired with resistance at $4208, but a close above this level could be a good sign for the stock bulls.

DXY:

DXY 4H chart

Here is the dollar index on the 4H chart. After a tremendous rise in price, the dollar has pulled back a little bit to support. What we are seeing on this chart and all USD pairs, is a retracement. So, people might start thinking that the shift back to dollar bearishness is here, but I think otherwise. This pullback from recent highs and lows (depending on what USD pair you're looking at) just look like a short breather before continued upside. This level of support DXY is on right now is very mild and should not usually be a key level of support, but due to the recent news and hard uptrend in price, candles don't need too much incentive on the technical side to keep pushing up.

USDCAD:

USDCAD 4H chart

USDCAD on the 4H chart is doing the same thing as DXY where price pulls back to support. 1.23660 is around where our support zone lies so maintaining and bouncing off this level is a bullish sign for the pair.

USDJPY:

USDJPY 4H

USDJPY is already moving to the upside on the 4H chart after interest rate news. Demand for the USD might push this pair up above resistance near the rising trend line as price could test all time highs once again. If not, the pair has support at 109.763 and its 200 SMA on this timeframe.

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