Corrections are terribly tricky – Impossible to judge between a true breakout and a false one

Outlook: US economic data remains feisty but existing home sales today look gimmer. The Bloomberg forecast is a drop of 4.1% after a bigger drop in Feb, a whopping 7%. Trading Economics forecasts 5.9%. The commentary points out a handful of exceptional data points: “Existing-home sales in the US sank 7.% mom to a seasonally adjusted annualized rate of 6.02 million in February of 2022, below market forecasts of 6.1 million. It is the lowest reading in six months. The inventory of unsold existing homes slightly increased to 870,000, equivalent to 1.7 months of supply at the current monthly sales pace. The median sales price rose to $357,300, up 15% YoY. This marks 120 consecutive months of year-over-year price increases, the longest-running streak on record.”

Housing is not usually a mover in the FX market but can contribute to the reversal of fortunes in the dollar today. As journalists like to say, not having a clue, “it fell because of” or “it fell despite of” Factor X.

The downward correction in the too-strong, overbought dollar is appearing in every major currency and some not so major. The dollar/yen broke its nearly two-week trendlet and is down about 100 points from the high yesterday at 129.405. The inexperienced are sure to say it was the approach to the round number 130 that did the trick, but that’s not, in all likelihood, the case. A Fed study years ago did show that round numbers in FX get hit more than chance would allow, but this time it was a universal correction and little to do directly with the yen.

In fact, the BoJ repeated support for curve control today and offered to buy an unlimited amount of 10-year bonds at 0.25%–and will keep the offer open for the next four days. This is affirmation of the policy that is sending the yen lower, not a pushback against it, despite the widening trade deficit. And it’s not intervention, even of the jaw-boning variety, which so far is pretty tame. We expect more fiery rhetoric before the BoJ would actually act.

That doesn’t mean the dollar/yen can’t keep falling, depending on whether a bandwagon gets rolling and traders pile on. After all, a 50-year record is notjhing to sneeze at. The B band bottom on the 480-minute chart lies at 124.52. Fibonacci retracement levels are ridiculous but so many traders observe them that we have to accept their view, and there the 50% retracement is 122.08. Or consider the top of the ichimoku cloud at 127.42 on May 2. Bottom line, there is a wide range of possible retracements and any of them might get hit–or none of them, if the yield-divergence crowd prevails and we return to test the 130 level.

We get the Beige Book later today, although it’s not likely to deliver any more information about the Fed’s mindset, which is being amply transmitted by individual speakers (and we get three today).

Yesterday we had Chicago Fed Evans expecting Fed funds at 2.25-2.50% by year0end. Atlanta Fed Bostic wants expediency and sees the neutral rate at 2-2.5% and sees 1.75% by year-end.

Never mind–neither of these two is a voter this time. The market is not giving much attention, either, and delivered a historic moment–Investors in 10-year Treasuries can expect to earn real returns on their money for the first time in more than two years. The yield on 10-year inflation-protected Treasuries rose as high as three basis points in Asia trading Wednesday, with the turnaround driven by the Federal Reserve’s hawkish stance.”

Corrections as we are seeing now are terribly tricky. It’s all but impossible to judge between a true breakout and a false one. Technical analysts debate endlessly whether you use different techniques to determine a trend resumption over what you use to determine a new trend. We say they are different–a move contrary to an existing, established trend needs to be seen in perspective of that existing trend.

Technical analysis God Perry Kaufman says no, a trend is a trend if the same criteria are used to identify and we are not mathematically capable of differentiating between them. We see the problem is commentators making up stories to justify a reversal and then all too many traders buying into it, delivering that wicked thing, momentum. When a trend resumes later, as it will this time on the yield divergence, we forget all those justifications for the trend to have stopped and reversed. In other words, it’s the human tendency to love and believe stories at fault. But hanging on to basic principles and debunking stories can lose you your shirt. Retreat is the brave stance.

Tidbit: The IMF’s WEO economic forecast say, according to Reuters, global growth will fade to 3.6% in 2022, down from 4.4% projected last time in January. “The IMF has estimated that Ukraine's GDP will collapse by 35% this year, while Russia's output will shrink by 8.5% in 2022, while emerging and developing Europe, including both countries, will contract by 2.9%.”

Inflation will be higher for longer. For 2022, it forecast inflation of 5.7% in advanced economies (a gain of 1.8% since Jan) and 8.7% in emerging markets, a gain of 2.8%.

Tidbit 2: The next round of the French election will be held on Sunday. Current chief Macron is ahead in the polls. The US press hardly ever pays attention to European politics but France is different this time because the contender is Marine LePen, coming from a stance from her dad of anti-Semitism, holocaust denial, anti-immigration, anti-EU, anti-Nato and pro-Puti, anti-sanctions and pro-invasion. It’s hard to imagine a pro-Putin candidate winning under current circumstances, but hey, nobody thought Trump would be elected, either. It’s a serious matter because if France were to pull out of the EU and Nato, as LePen wants, Ukraine’s goose is cooked.

This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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