USD/JPY hints at another false break, AUD/USD looks set to bounce

The US dollar index formed a small bearish inside day after once again failing to hold onto gains above 105.20 for the second day in a row. This could allow for some mean reversion for some of its FX peers, and for today we have a potential AUD/USD long and USD/JPY short in focus.

Wall Street once again reached record highs, and US treasuries were lower following a batch of high-grade bond sales on Monday, led by Home Depot. The S&P 500 notched its 30th record high of the year, and the Nasdaq reached a record high for its sixth day in a row. Even the Dow Jones managed to close higher, forming a three-day bullish reversal pattern called a morning star formation. This could bode well for the ASX 200 today, with the SPI 200 snapping a two-day losing streak overnight and holding above 7680.

Higher demand forecasts from OPEC, EIA, and IEA helped crude oil bulls spring back to life after a very modest retracement last week. WTI crude rose over 2% on Monday after rallying from its 200-day average and now looks set to break above $80.

Economic events (times in AEST)

We have a fair amount of data over the next 24 hours, although most of it falls under the 'second-tier' category. We're not expecting anything profound from the RBA, who are likely to hold rates at 4.35% and maintain their obligatory hawkish bias – which few believe will be acted upon. We also have US retail sales and production figures, which could prompt some movement for the US dollar and yields if they come in hot or cold enough. Also, take note of the plethora of Fed speakers, although I'd be surprised if they collectively veer too far from the script fresh on the heels of last week's FOMC meeting. And for now, that script seems to be dangling a potential December cut, but not more.

• 09:55 – South Korean exports
• 10:10 – RBA assistant governor Ellis speaks
• 10:30 – Singapore non-oil exports
• 11:00 – Fed governor Cook speaks
• 11:30 – SG trade balance
• 14:30 – RBA cash rate meeting
• 15:30 – RBA press conference
• 19:00 – German ZEW
• 19:00 – Eurozone CPI
• 22:30 – US retail sales
• 23:15 – US industrial production, manufacturing production, capacity utilisation
• 00:00 – FOMC Barkin speaks
• 01:40 – Fed Collins speaks
• 03:00 – Fed Logan, Kugler speaks, US 20-year bond auction, Atlanta Fed GDPnow
• 04:00 – Fed Goolsbee speaks

USD/JPY technical analysis:

On Friday, I warned about false breaks above 158 for USD/JPY, and so far that was the right call. A shooting star candle formed after a false break of 158, and the market has since drifted back up towards the level for another attempt. I remain unconvinced that the market is ready for a strong move higher, so once again I am on guard for false breaks. This leaves two clear levels in mind to look for such reversals: 158 and 158.26 (Friday's high).

The one-hour chart shows a clear game of two halves. A strong rally up to 158.26 was met with high volumes, yet an equally sharp reversal with high volumes sent prices lower over the next few hours. Price action on Monday allowed prices to drift higher, yet volumes are relatively low, which is suggestive of a false move.

Prices are hugging the May high and show the potential for a brief swing or two higher, which brings the 'MOF intervention' level ~158 and Friday's high into focus as potential false breaks and countertrend move triggers.

AUD/USD technical analysis:

Last week I was looking for prices to hold above the ‘US CPI’ low. Clearly, it didn’t hold. But prices are holding above the 100 and 200-day EMA and swing low ~0.6580. And with a bullish pinbar forming on Monday, I suspect a cheeky bounce might finally be due.

The 1-hour chart shows volume increased at the cycle low, and a bullish divergence on RSI (14) ahead of the bounce back above the US CPI low. From here, I prefer dips towards 0.6600 and for a potential move towards 0.6640, or 0.6660 at a push. A weak set of US economic data is likely required for the latter.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

How to trade with City Index

You can trade with City Index by following these four easy steps:

1. Open an account, or log in if you’re already a customer 
   
   • Open an account in the UK
   • Open an account in Australia
   • Open an account in Singapore
   
   
2. Search for the market you want to trade in our award-winning platform 
3. Choose your position and size, and your stop and limit levels 
4. Place the trade