Bullish engulfing yields amp Yen crosses

The better than expected 175,000 net creation in February US jobs, the 25,000 in net positive revisions from December and January and 0.4% rise in average hourly earnings m/m (highest in 8 months) have been instrumental in accelerating this week’s existing rebound in bond yields, putting the positive correlation between yields and stock back in order.  The unemployment rate rose to 6.7% fro, 6.6%, posting the first increase in 14 months, as a negligible amount of workers returned to the labour force.  The labour force participation rate remained unchanged at 63%.

Back to pre-polar vortex

Considering the surprising jobs creation in February overcame severe weather conditions, and with as many as 601,000 employees reportedly still out of work due to bad weather, then the anticipated snapback in employment will cement the case for persistent tapering of asset purchases into the end of Q2, until the all-important June FOMC meeting releases Fed forecasts and sets the stage for expectations into the rest of the year.

A most likely scenario is for the normalisation in labour markets to emerge in  tandem with improved weather conditions, lifting yields back towards the 2.90-2.95% territory and making 1,960 and 17,200 objectives in the S&P500 and DJIA both realistic by mid-April—just before the April FOMC announcement.

Can’t ignore those bullish engulfing bars

Bullish-engulfing candles or price bars occur when the open, close, high and low in a candle enevelops exceeds or engulfs the preceding period’s open, close, high and low. The examples in the charts below are of weekly price charts, with each candle telling the story of a 5-day week. The implication of these rare price formations is for continued increase, especially if the preceding candle is dark i.e. where the closing price of the week is below that of the open—which is the case in all three charts below.

US 10 year Yields

US 10-year yields are currently trading near 2.80% and will likely close near this level, which would easily exceed the highs of the preceding week near 2.73%. Aside from the fact that this week’s white candle (closing price is likely to remains above the open), the rise follows two negative weeks, as identified by the two preceding dark candles.  The fundamental case for further gains towards 2.95% may be laid out by improved data/weather, broader certainty of tapering into end of summer; brighter prospects from the Eurozone.

USDJPY

USDJPY finds no choice but to join the rest of rallying yen crosses as the Japanese currency succumbs to recovering risk appetite, following the Ukraine-related sell-off on Monday. Fresh gains in Eurozone PMIs, a 26K decline in US jobless claims and today’s US-driven data suprise broadens the rally in yen crosses to USDJPY. This week’s news from Japan’s Health Department on investments reiterating that that the Japanese Government Pension Investment Fund (GPIF) ought to shift focus onto equities and refrain from investing in Japanese government bonds, also helped the Nikkei at the expense of the yen. 104.80 may be expected by mid Q2.

AUDCAD

AUDCAD hit 10-month highs after an avalanche of upside data surprises from Australia eroded the credibility of the RBA governor’s repeptive attempts to talk down the currency. Jan building approvals jumped 6.8% vs exp 0.5%; Q4 GDP rose 0.8% q/q vs exp 0.7% (from prev 0.6%) and +2.8% y/y vs exp +2.5% (from prev 2.4%); and Jan retail sales rose 1.3% vs exp 0.4% (from prev 0.7%). Meanwhile, today’s release of net 7,000 decline in Canada February employment—the 4th monthly decline over the past 12 months — boost our stance of renewed selling in CAD, and bolsters our anticipation of 1.0400.