Posted on: 22 Nov, 2018
JPY crosses look expensive based on both order flow & structure of the risk-weighted index. It looks like an attractive proposition to engage in sell-side action all else equal.
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Authored by Ivan Delgado, Head of Market Research at Global Prime. The purpose of these institutional-level chart studies is to provide an assessment of the market conditions for the next 24h of trading in order to assist one’s decisions on a regular basis.
Risk model: Unsupported by order flow/structures
By analyzing the risk-weighted index, we can clearly see that there is something off, a misalignment of sorts which presents an opportunity to re-engage in a buy-side campaign on risk-off assets the likes of the US Dollar or the Japanese Yen. Either that orthere is an awful lot of catch-up to do by equity and bond traders. And when it comes to dissecting and judge the risk conditions, I will be taking my clues off equity and bond traders all day long.
The anomaly that I mention between where the risk stands and the valuation of JPY crosses can be measured by the decoupling of the correlation between the index and AUD/JPY to nearly 0, as exhibited by a red area in the 2nd window of the chart above. What’s interesting is that this rare occurrence happens to take place at a time when the depreciation of the RWI in the last 24h came as a function of lower yields, lower equities, and a lower USD. When that’s the case, it presents a genuine opportunity to look for sell-side business in the instruments that look set to be expensive, in this case, the Japanese Yen crosses are hands down the best play.
Let’s recap: We have a clearly bullish DXY, which essentially minimized the chances of seeing a long-lasting recovery in risk based on the premise that the index is now favored by a newly bullish structure as depicted by the black lines above. For argument’s sake, let’s scratch the DXY, therefore, as a market unlikely to alleviate the downward pressure in risk assets. It gets worse when we add the renewed allure to bid up US bonds (lower yields). As the US 30-year bond yield reflects, we’ve now transitioned into a fresh cycle-low, with the order flow also in alignment with sellers for now.
What about the equity market? And to be more concrete, let’s look a the S&P 500 as the bellwether indicator for the appeal towards equities. This is where a glimmer of hope still resides given the up-cycle structure on the hourly, which won’t be compromised until we see a break and acceptance sub 2,700.00, in which case, I am expecting risk conditions to really take a hit. But here is the kicker. The signs we are getting off equities are far from promising, as the last leg up fell short of its minimum magnitude extension, then we broke the ascending trendline on a pick-up of order flow (more impulsive), and for two consecutive days, the market is finding equilibrium (value) just ahead of the 2,700.00 area. Not good.
EUR/JPY: Looks expensive b/ on the risk-weighted index
Today, there is a compelling case to be made whereby if one compares the value of the risk-weighted index and JPY crosses (exc USD), it looks expensive based on both order flow & structure of the risk-weighted index. It looks like an attractive proposition to engage in sell-side action all else being equal.If we look at the EUR/JPY, the pair has rebounded quite vigorously, but long and behold, the risk-weighted index still trades at the lows of the cycle as noted above. It’s important to note that the rebound happens to just test the 50% fib retracement of its recent down-move and is also in line with the down-cycle in play, which adds to the bearish case. A similar opportunity exists if we were to analyze the AUD, NZD, CAD, GBP, CHF against the JPY, subject to any individual headline that may alter the ebbs and flows towards a particular currency.
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