JPY gains in the FX market

Maybe the characteristic move in the FX market yesterday was the strengthening of the JPY. Expectations for a hawkish BoJ in combination with a flight to safety by market participants tended to provide support for the Japanese currency.

MORNING OVERVIEW

US tech shares tumbled yesterday as worries associated with the costs related to AI development emerged once again. On the other hand oil prices edged higher as worries for the supply side of the international oil market and the tensions in the Gulf region intensified. Gold’s price continued to present bearish tendencies  yesterday, with worries for inflation in the US economy and a possible tightening of the Fed’s monetary policy weighing on a fundamental level. In the FX market, JPY took the market’s by  surprise yesterday as it gained across the board, with analysts citing a flight to safety by investors, given the AI jitters.

MARKET SNAPSHOT

KEY MARKET THEMES

01 — US tech equities  on the retreat

US equity markets suffered a significant decline yesterday, driven largely by concerns about the sustainability of AI investment and its impact on the technology sector. Meta Platforms dropped approximately 7%, while Advanced Micro Devices fell by over 8%. Micron Technology and Nvidia also declined by 6% and 4%, respectively. Persistently high interest rates are likely to pressure highly leveraged sectors, while investors increasingly question the substantial capital expenditure required for AI development. If inflationary pressures remain elevated and doubts about the viability of AI-related investments intensify, US equities could face further declines amid weakening investor confidence and heightened market uncertainty.

Market implication (Nasdaq): Bearish

02 — Bullish tendencies for Oil prices  correct lower

Oil prices have continued to climb as fears of supply disruptions in the global oil market grow. Houthi attacks on Saudi Arabia have raised concerns about the Kingdom’s capacity to ensure consistent and reliable oil supplies. Moreover, the inability of Saudi Arabia and the United States to control the Houthi rebels has undermined confidence in Saudi Arabia as a reliable oil producer and appealing investment destination. If regional instability continues and attacks on vital oil infrastructure persist, global oil prices are likely to rise further in the coming months.

Market implication (WTI): Bullish

03 — JPY’s safe haven status provides support

One of the key developments in yesterday’s foreign exchange market was the Japanese yen’s appreciation against the US dollar, British pound, and euro, reflecting its broader strength. This movement may be driven by a flight to safety as investors reconsider the sustainability of AI-related investments, although carry-trade activity remains ongoing. Furthermore, Japan’s September inflation accelerated, exceeding the Bank of Japan’s 2% annual target and potentially strengthening expectations of tighter monetary policy. With the BoJ’s interest rate decision scheduled for next Friday, any further increase in hawkish market expectations could provide additional support for the yen, potentially extending its recent gains against major currencies.

Market implication (USD/JPY) : Bearish

WHAT MATTERS TODAY

US Preliminary PMI figures for October

(Composite PMI)

Time GMT+2): 16.45

Expected: –

Previous: 58.4

Potential market reaction:
A substantial drop below 58.4 could weaken USD

WHAT MATTERS ON MONDAY

Germany’s Ifo indicators for October

(Business climate)

Time (GMT+2): 11:00

Expected: –
Previous: 89.9

Potential market reaction:
A substantial drop below 89.9 could weaken EUR

ASSET FOCUS

[Nasdaq/ US indexes]

Nasdaq tumbled yesterday and during today’s Asian session, broke the 29065 (R1) support line, now turned to resistance. It all lines up for a bearish outlook for the index, as the downward motion was intense and the RSI indicator has reached as low as 30, flirting with oversold conditions that could cause a correction higher. Despite a stabilisation of the index in today’s Asian session, we tend to maintain a bearish outlook for the index. Should the bears remain in charge, we may see Nasdaq breaching the 28860 (S1) support line and aim for the 28532 (S2) support level. For a bullish outlook to emerge, we would require Nasdaq to reverse yesterday’s losses and break clearly the 29262 (R2) resistance line aiming for the 29568 (R3) resistance line.

KEY LEVELS

• Resistance (R1): 29065
• Resistance (R2): 29262
• Support (S1): 28860
• Support (S2): 28532

Technical View: Bearish

CROSS-ASSET VIEW

TRADING SPHERE VIEW

Bearish for the US Tech sector

Our base case:
Continued expectations for the Fed to tighten its monetary policy by raising its interest rate could enhance market worries for the debt laden US tech sector, as increased debt servicing costs could negatively affect their performance, especially the AI sector and its high CapEx. 

What would change our view:
A possible easing of the market’s expectations for the Fed to tighten its monetary policy in the near term, or an easing of the market’s worries for high inflationary pressures in the US economy.

RISKS TO THE VIEW

High oil prices

High or potentially even higher oil prices could enhance market’s worries turning the market sentiment more cautious weighing on US stock markets and gold’s price.

TODAY’S WATCHLIST

01 US Preliminary PMI figures for October

02 Germany’s Ifo indicators (Monday’s European session)

AVISO LEGAL: Esta información no se considera un asesoramiento de inversión ni una recomendación de inversión, sino que es una comunicación de marketing.