the big picture 6 charts you need to see before feds interest rate decision 1324052015

Thursday, 17 September 2015 will be a crucial day for the financial markets as the whole world will be watching whether the U.S. central bank, the Fed will start to hike the benchmark overnight Fed Funds interest rate for the first time since December 2008 where the Fed slashed its policy rate to 0.25% to combat the economic malaise caused by the Great Financial Crisis.

Since the 4^th quarter of 2014, U.S. has started to see signs of economic improvement from consumer confidence, retail spending and employment. Also, the Fed Funds futures market has indicated a probability of more than 50% of a rate hike for the September 2015  meeting until things started to change after the “risk-on” environment seen on 24^th August 2015 (“Black Monday”),partly triggered by the sudden Chinese Yuan (CNY) currency devaluation.

Right now, the Fed Funds futures market is only showing  a 23% probability for a 0.25% hike (link) in the September 2015 meeting and there is a lot of debate in the market place on whether the Fed should hold or start its path of interest rate normalisation.  Let us take a look at things from a technical analysis perspective to decipher this “confusion period”.

U.S. Treasury Yields (2 & 10 Year)

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Since 3^rd quarter of 2012, the U.S. Treasury yields have been on a path of upward trajectory. The 10-year yield remains bullish above the lower limit (support) of an ascending channel at 1.84.  In addition, its weekly (long-term) RSI oscillator is above the 50% neutrality level and still has room for further upside before reaching its extreme overbought level. These observations suggest that upside momentum has continued to build up for the 10-year yield and it can see a potential push up to at least 2.97 in the near term.

The upward trajectory in the shorter-term 2-year yield is much more pronounced and “steep” as it continues to evolve above its 50-week Moving Average since 2012 in a series of “higher highs” and “higher lows”.

Therefore, both the charts of the 2 and 10-year U.S. treasury yields are showing further upside potential which implies that U.S. interest rate is likely to creep higher. In light of this finding, the U.S. dollar will be a beneficiary due to the interest rate differential model.

 USD/JPY

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The recent rout seen last month in global equities has triggered a “risk-off” scenario where funding currencies (due to their lower yields) such as the JPY and EUR have strengthened against the U.S. dollar.

These funding currencies are typically used to fund short-term “risky investment activities” and any bout of heightened sell-off in equites will lead to an unwinding of such funding positions (for example, buying back JPY & EUR).  The events that lead to the fateful “Black Monday”, 24 August 2015 has seen the USDJPY tumbled by 7% from its June 2015 high of 125.85.

Interestingly, this horrendous decline of the USD/JPY has managed to hold above the lower boundary (support) of its long-term ascending channel at 115.60 in place since September 2012.  This observation suggests that the long-term uptrend remains intact of the USD/JPY (see weekly chart).

Recent price action has started to show signs of stabilization as it evolves into a series of “higher lows” above the 119.20 trendline support (see daily chart). Right now, a break above the 121.75 intermediate resistance is likely to trigger a potential upside movement to retest the June/August 2015 range top at 125.30/125.50.

Volatility Index (VIX)

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The VIX, a popular measure of the implied volatility of the benchmark S&P 500 index options often referred as the “fear index” represents the market participants’ expectation of stock market volatility over the next 30 days period (forward looking).

Contrary opinion (a form of technical analysis that measures changes in sentiment) suggests that the VIX has an inverse relationship with the S&P 5000. For example, when there is a spike up in the VIX towards an “extreme level”, the S&P 500 will tend to recover from its recent steep downside movement as negative momentum abates.

Taking a look at the first chart which overlays the S&P 500 with the VIX futures, the spike up in the VIX futures from its “complacency zone” of 12.80/10.10 in mid-August 2015 (low implied volatility which suggests market participants are “greedy” and ignoring any risk of a sell-off in the U.S. stock market) to a high of 30.83 printed on 01 September 2015.

This recent push up seen in the VIX futures is the most “dramatic” since October 2011 where the first Greece sovereign debt crisis imploded. The recent spike up in the VIX futures represents a lot of “fear” in the marketplace. Interestingly, the VIX futures has stalled at the 28.25 resistance and the S&P 500’s steep decline of 12% from its all-time high of 2134 has found support at the lower boundary of a long-term ascending channel in place since 26 September 2011.

Thus from a contrary opinion perspective, the S&P 500 has started to see signs of stabilization after the recent horrendous decline.

As illustrated in the second chart, negative technical elements have surfaced for the VIX short-term future ETF (exchange traded fund) (VIXY) (reacted off the trendline resistance in place since February 2014 at 20.43, exhaustion gap seen in the recent sharp rally & the bearish divergence  sighted in the RSI oscillator). As long as the 16.96 resistance is not surpassed, the VIXY may see a continuation of the decline towards 13.73 before 11.83.

Charts are from eSignal & StockCharts.com  

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