GBP/JPY May Fall as the Fed Feeds Yen Real Yield Advantage

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GThe Japanese Yen rose in the wake of June’s momentous FOMC meeting, where policymakers said that price growth had surpassed their expectations and shifted up the timeline for on-coming interest rate hikes. Having previously seen rates flat through 2023, the central bank has now pencilled in two hikes that year.

The priced-in market view implied in Fed Funds futures following the announcement is more aggressive still, envisioning one hike in 2022 and two more in the following year. That probably echoes subsequently hawkish comments from officials including the presidents of the St Louis, Boston and Dallas Fed branches.

Japanese yields rose in tandem with those in the US in response, reflecting the ubiquity of the US Dollar as the go-to medium of exchange global trade. Close to 80% of global monetary transactions are settled in USD. So, a rise in the cost of borrowing the Greenback typically translates into higher credit costs globally.

As it happens, the process that the Fed is slowly initiating finds most global policy rates having converged on Japan – that is, toward zero and sometimes beyond it, into negative territory – amid the onset of the Covid-19 pandemic. Recovering from these depths in most places is expected to come alongside reflation.

Japan is a familiar exception. Here, structural forces holding down prices for the better part of 30 years and inspiring an epic (and mostly fruitless) BOJ counteroffensive remain in play. What this means is that real interest rates – that is, nominal yields

discounted by the expected rate of inflation – are higher in Japan than most of the G10

GBP/JPY TECHNICAL ANALYSIS

Crude Oil Prices Hit $75

Crude oil prices are hovering near two-and-half year highs during Monday’s APAC mid-day session, as OPEC+ failed to reach an output agreement at Friday’s meeting. The discussion will continue today with a focus on disputes between Saudi Arabia and the United Arab Emirates (UAE). The closure of US markets on Monday suggests that trading volume might be thin due to fewer market participants.

Members of the oil cartel except the UAE agreed in principle to ease production cuts by 400k bpd from August to December 2021, while extending output curbs into next year. The UAE is seeking to change the baseline for calculating its quota in order to boost its own production.

The planned OPEC+ output hike is lower than a Bloomberg forecast of 550k bpd and marks a small fraction of an estimated global supply shortfall of 3 million bpd by the end of this year. Therefore, tight market conditions may warrant a slow and gradual output increase and pave the way for prices to challenge higher levels in the weeks to come.

Technically, WTI breached above a key chart resistance of 74.00 and opened the door for further upside potential. The next resistance can be found at around $78.5 – the 61.8 Fibonacci extension. The overall trend remains bullish-biased as suggested by the upward sloped SMA lines. The Relative Strength Index (RSI) pierced above the 70 mark, suggesting that prices may be temporarily overbought and vulnerable to a technical pullback.

WTI Crude Oil Price – Daily Chart

Australian Dollar Q3 Top Trading Opportunities.

AUD/USD trades to a fresh 2021 low (0.7477) in June as Federal Reserve officials project two rate hikes for 2023, and the exchange rate may continue to give back the V-shape recovery from 2020 as the Reserve Bank of Australia (RBA) appears to be on track to retain the current course for monetary policy.

Keep in mind, AUD/USD negated the threat for a head-and-shoulders formation amid the string of failed attempts to close below the neckline around 0.7560 (50% expansion) to 0.7570 (78.6% retracement), but the break of the April low (0.7532) as pushed the exchange rate up against the 50-Week SMA (0.7485) for the first time since June 2020. The Relative Strength Index (RSI) highlights a similar dynamic as the indicator establishes a downward trend and sits at its lowest reading in over a year, and it remains to be seen if the decline from February high (0.8007) will turn out to be a correction in the broader trend or a key reversal in market behaviour amid the diverging paths between the Fed and RBA.

With that said, failure to hold above the 50-Week SMA (0.7485) may push AUD/USD towards the former resistance zone around0.7370 (38.2% expansion) to 0.7390 (38.2% expansion), with the next area of interest coming in around 0.7090 (78.6% retracement) to 0.7180 (61.8% retracement).

AUD/USD WEEKLY CHART

AUD/JPY WEEKLY CHART

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