Hollow NFPs Leaves US Dollar, S&P 500 Vulnerable to Sellers

Talking Points:

- US yields continue to plunge at the long-end of the yield curve.

- Previous instances of US yield curve bull flattening have hurt the US Dollar, US stocks.

- USDJPY could be next domino to fall.

Recall the article last week in which we discussed the implications of US yields falling further (see here). Our prognosis was that if the 10-year US Treasury Note yield dropped below 2.58%, the US Dollar could see a more difficult period ahead; the bull scenario would only kick in should the 10YY exceed 2.82%. With the 10YY yield dropping as low as 2.568% today, US Dollar bulls should be cautioned going forward.

The decline in US yields, and therefore, the US Dollar’s appeal over the last two days is directly related to disappointing US Nonfarm Payrolls report on Friday. Although the headline at +288K was the best such rate of jobs growth in two years, the rest of the report rang hollow as the decline in the unemployment rate can be full explained by the drop in the participation rate; overall, over -800K people left the labor force.

The type of action seen in the US yield curve the past several weeks, and accentuated the past two days, is what’s known as a ‘bull flattener’: when long-term interest rates fall faster than short-term interest rates. The 30-year Bond yield has been in freefall in Q2, having declined by just under 24-bps the past four weeks. Even secondary tier US economic data has proven helpless in boosting the buck.

While ‘bear steepening’ (when long-term interest rates rise faster than short-term interest rates) has previously proven positive for the US Dollar (see: May to August 2013), it’s commonly believed that the decline in long-term interest rates signals weaker inflation pressures, perhaps a commentary on the state of the US economy. If this is the case, then it is unlikely that USDJPY or the S&P 500 stays elevated for long.

Forex Technical Analysis: USDJPY Chart (D1)

- USDJPY has disconnected from US yields, insofar as the drop in yields would suggest that the USDJPY should be trading lower, near ¥100.75.

- In the short-term, ¥102.75 and ¥102.95 have proved to be resistance over the past five trading days, although a more serious test will come at former swing high near ¥103.40..

- Former support near ¥101.95 is currently being tested, which if broken would allow for a move towards ¥101.30 and the yearly low, ¥100.75.

- The Slow Stochastic oscillator has flipped bearish as of May 1.

- The 10-day average trading range (ATR) for USDJPY is only 49.7-pips.

Forex Technical Analysis: USDOLLAR Chart (D1)

- USDOLLAR (equal-weighted USD long versus AUD, EUR, GBP, JPY short) posted a significant inverted hammer on Friday, typically signaling a bearish reversal in price.

- The bearish hammer occurred at a former level of support near 10495, where price had bottomed out during late-March and early-April before spilling over.

- The downtrend from the January and March highs remains, with the most recent rejection coming on Friday.

- A test of 10400 (yearly low) could be in order; below there the 2013 low set in October would be eyed near 10354.

- Only a weekly close through 10495 will warrant a reconsideration for a bullish bias.

Read more: Euro Waits for ECB Balancing Act as Data Bump Limits Policy Response

--- Written by Christopher Vecchio, Currency Analyst

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