Yellen autopilot boosts shares yields amp yen crosses

Fed Chair Janet Yellen’s testimony may be seen differently by doves and hawks alike as it balances the Fed’s view that unemployment has yet to decline to satisfactory level with the recognition of continued positive traction in the overall economy.

More importantly, the testimony confirms the main message of the FOMC that the path of least resistance remains that of continued tapering in the months to come, as the normalisation of asset purchases remains consistent with the steady improvement in business and consumer data.

Yellen succeeds in signalling the message that further tapering remains part and parcel of policy normalisation, but will not emerge at the risk of jeopardising a gradual but fragile US recovery at a time when China, the world’s 2nd largest economy is revealing continued signs of weakness in manufacturing and services.

Markets are taking the speech in stride, as signalled by rising equities, higher bond yields and a stronger US dollar. The increasingly positive correlation between equities, yields and yen crosses (falling yen) is manifested on the upside amid receding fears in emerging markets.

Bond yields are up 5 basis points on the day. A rise of 6 basis points would be the highest single day increase of the year. Yields would have to break above the 100-day moving average of 2.74%, which coincides with the trendline from last year’s high.

Yellen rises with yields and yen crosses

As we indicated on Friday, the price formations shown in the weekly USDJPY and 10-year yield were that of hammer candles suggesting a bottoming and subsequent recovery. The S&P500 stabilised between the 100 and 200 DMAs, while the Dow Jones Industrials Index bottomed right above its 55-WMA of 15,260. Meanwhile, USDJPY bottomed around its 100-DMA, turning its focus towards the 103.40 ceiling.

The challenge emerges in mid Spring (late April), when asset purchases would have been halved from the original $85 billion- a potential risk in the event that China fails to maintain air in its end of the global growth valve.