Nikkei 225 longs favoured into BOJ and Fed rate decisions, Nvidia GPU conference

• Recent price action in Nikkei 225 futures points to upside risks this week
• USD/JPY has broken back above its 50-day moving average, key development that may embolden bulls

Recent price action in Nikkei 225 futures points to upside risks this week, indicating confidence among traders that even with major events such as rate decisions from the Bank of Japan and Federal Reserve, along with Nvidia’s GPU Technology Conference, the bull market is anything but finished. With USD/JPY also pushing higher, with the yen weakening not only against the US dollar but also other G10 FX names, it’s not a stretch to suggest the Nikkei may revisit its record highs this week.

Nikkei bulls have the upper hand near-term

Looking at Nikkei 225 futures traded in Singapore, having tried or threatened to break support at 38250 on multiple occasions last week, the bullish engulfing candle on Friday signals buyers may be starting to get the upper hand, coming on the back of a bullish hammer a session earlier. Granted, the candles on a weekly timeframe lend themselves to a bearish evening star pattern, but the nearer term price action, coupled with the USD/JPY rebound, outweighs on this occasion.  

For those considering longs, the first level to watch is 38855 where the price ran into sellers early last week. Beyond, 396620 and record high around 40570 are both trade targets. A stop below 38060 – last week’s low – would provide protection against the trade going against you.

USD/JPY reclaims key 50DMA

While the relationship hasn’t been as strong over the past month, a resurgent USD/JPY is another near-term tailwind for the Nikkei as markets pare dovish Federal Reserve rate cut bets in the wake of several hot inflation readings released in the US last week.

You can see USD/JPY traders balked at the chance run through the 200-day moving average earlier this month, bouncing off horizontal support at 146.50 on two consecutive sessions before ripping higher, taking out the 50-day moving average in the process.

It’s the latter that should help embolden bulls given how the price has interacted with this level in the past – once it goes through it tends to stay there for a period, rarely momentarily.

The path of least resistance appears higher near-term, especially if the Fed gives a nod to the resilient US economy and persistent strength in inflationary pressures when it meets on Wednesday. Having broken horizontal resistance at 148.80 on Friday, those contemplating longs could place a stop below that level for protection. Initial upside targets include 149.70 and 150.90.

BOJ, Fed, Nvidia key events ahead

As for the risk events to consider when evaluating these trades, Nividia’s GPU Technology Conference on Monday is the first you'll need to navigate. While Nvidia has been on an epic winning streak, you only need to look at how it has performed after major events recently to see it’s regularly exceeded lofty expectations. Past performance is not indicative of future results, but that’s the trend right now. If Nvidia delivers a similar outcome on this occasion, it should lend to Nikkei strength, especially in tech-related names.

As for the Bank of Japan and Fed rate decisions, the lack of market reaction to the strong Rengo preliminary 5.28% wage increase for FY24 announced on Friday suggests markets have already priced in the bank abolishing negative interest rates, be it later this week or in April. That suggests if it does hike 10 basis points, it may cause little reaction on Japanese markets. And if it doesn’t move, the implications would be deemed as dovish, adding to upside risks for USD/JPY and Nikkei 225.

For mine, it’s the Fed decision that’s the most important for broader markets, especially with traders scaling back dovish bets on how many rate cuts it will deliver this year. Fed funds futures and OIS markets now have less than three hikes priced, fewer than the three the Fed signalled in December.

Should the latest dot plot show only two cuts as the median forecast, it lends itself to higher US bond yields and stronger USD/JPY. Conversely, should it continue to show three cuts, it will likely see US stock indices rally, creating upside risks for the Nikkei even with the prospect of a slightly lower USD/JPY.

-- Written by David Scutt

Follow David on Twitter @scutty

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