Yen Gains Traction Following Dovish Fed; MACD Generates Sell Signal

Following last week’s surprisingly dovish Fed statement, the dollar is correcting after overshooting the markets perception that the Fed would begin to tighten interest rates as early as June 2015. Thus the Fed remains in accommodative mode, and in line with other key central banks which are actively pursuing simulative policies.

Last week the markets were extremely volatile as a result of this change, with yields posting their largest declines in years, and in some cases hitting fresh record lows, while global equities had their best week in almost two years. While the markets will continue to benefit from central bank accommodation, the bullish impetus may lose traction, especially with prices near record highs, and as growth worries resurfacing.

The FOMC’s statement, followed by Yellen’s press conference which included the downgrade of economic and Fed funds forecasts had a powerful effect on US interest rates. The rate-sensitive 2-year yield fell 10 basis points to 0.55% after the Fed announcement on Wednesday, its largest decline since 2009. The 10-year yield plunged 13 basis points to 1.92% as the Fed seemed less confident about its inflation outlook.

The decline in US yields took its tole on the greenback, eroding the value of the dollar and allowing the Euro, pound and yen to gain traction. The upward trend in the dollar will likely continue, but data will supply the direction. Look for some consolidation this week heading into quarter-end. Central bank stimulus will continue to support, but near-record price highs may leave investors on the sidelines for now. This week’s data will be closely scrutinized too with global calendars including PMIs, inflation, sentiment/confidence, housing and employment numbers, all of which are key for central bankers.

The USD/JPY is trading near support levels, created by an upward sloping trend line near 119.90. A close below this level could lead to a quick test of support near 118. Momentum on the currency pair has turned negative as the MACD (moving average convergence divergence) index generated a sell signal. This occurs as the spread (the 12-day moving average minus the 26-day moving average) crosses below the 9-day moving average of the spread.

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