After hitting above 103.50 last week, price collapsed spectacularly as fears of Abenomics’s effectiveness rose suddenly. Japanese stocks started collapsing first, pulling Yen lower with it, which in turned pull stocks lower even further, resulting in a continuous vicious cycle which resulted in a more than 250 pips fall from peak to trough on 23rd May. Price has since recovered, but 102.5 remain a strong ceiling, and the latest attempt to break it yesterday resulted in a fall of more than 150 pips back below 101.0.
The actual support for USD/JPY is actually closer to 109.8 than 101.0, but certainly the entire band between 109.8 – 101.2 can be considered as a support band in the short-term. Stochastic readings suggest that price is on its way to move towards 102.5 once more, with readings pointing higher sharply after the latest attempt to break the support zone just an hour ago. However, looking at the distance between current Stoch readings from the Overbought levels, it seems plausible that price may face resistance closer to 102.0 when Overbought is signaled, rather than 102.5 .
The 102.0 level can be seen as the more significant level via the Daily chart as compared to 102.5. Nonetheless, price continue to look bullish as long as price remain above 100.0. Even a break of 100.0 may only serve to indicate the bullish momentum has stalled, but does nothing to suggest that a full reversal has taken place unless the next level of support around 97.0 (the floor of the April consolidation) is broken.
Stochastic indicator currently is bullish, with stoch readings looking likely to push higher from here after a Stoch/Signal cross. However, the possibility for a move back towards 100.0 can not be ignored as readings could be forming an interim trough since levels have not yet entered into the Oversold region.
Fundamentally, it is clear that BOJ is getting concerned. Not with USD/JPY though, but rather Stock prices and the rising JGB yield. Kuroda and various big wigs have since came out to say that the decline in stock is no a fundamental issue, but rather due to profit taking and a temporarily correction. With regards to yields, these big wigs mentioned that that it is normal for yields to rise as market risk free rate has increased due to the improved global economy. Nonetheless, Kuroda affirms Japanese that BOJ will reduce yield volatility and that it will certainly stabilize. When asked about the effectiveness of Abenomics, all of them gave a resounding “Yes”, saying that the economy is definitely improving.
From a neutral perspective, it is highly debatable whether Japanese’s economy is indeed getting better. Yesterday’s Retail Trade data continue to show decline, with the Y/Y figure coming in at -0.1% vs previous month’s -0.3%. Large Retailers’ Sales numbers has dropped significantly, coming in at -2.3% vs previous month’s 2.5% positive. Perhaps the effectiveness of Abenomics have not work through every single facet of the market, but to say that the economy is definitely improving is really a stretch when industrial productions and exports do not show significant increases.
What does it mean for USD/JPY moving forward? It is more clear cut for Japanese stocks, as a failure in Abenomics would simply mean lower stock prices. However, for USD/JPY, price may dip lower should traders/speculators believe that they have overestimated BOJ’s ability to weaken Yen. However, the general rule of thumb where weak economic = weaker currency may be true as well, and though this characteristic of currencies has not been associated with Yen for decades, the fact that yields are increasing may push this standard relationship between Yen and Japanese Economy back into play after a long absence. As such, traders would do well to establish what is the fundamental relationship that is at play first before jumping in head long and assume that past correlations that have worked well previously are still good.