Japanese Economy Minister Amari conceded today that he doesn’t know when the USD/JPY correction will stop. Without knowing his thoughts, we can only speculate whether that is a tacit admission that he is worried about the non-stop weakening Yen, or perhaps using this as a throwaway line to bait speculators that current Yen trend can go further. Listening to what he said yesterday with regards to Government stepping in to negate negative effect of a weakening Yen, it seems more plausible that Amari is genuinely worried about the runaway Yen train. But what does this mean for USD/JPY moving forward?
Fundamentally, such a declaration by Amari would mean that USD/JPY will have little headroom to grow, if BOJ and the Government has their way that is. USD/JPY trade lower yesterday, pushing back towards 102.0 after the early morning rebound from the aforementioned level. Currently, price has recovered once more ahead of 102.0, but 102.5 – 102.6 continue to act as respectable ceiling with the upward trendline continue to exert pressure downwards.
Price on the daily chart is also facing resistance of its own. If the rebound from Channel Top is confirmed, a move towards 100.0 and Channel Bottom opens up. However, even should price move back towards 100.0, the overall outlook for USD/JPY from a technical basis is still bullish, as it would merely constitute a sideways consolidation pattern similar to what we have seen back in April and also Jan 2013. Stochastic agrees with a move back lower with readings hinting to come down after staying extremely overbought for the past 2 weeks.
Ultimately, it is important to note that BOJ/Japanese Government may have little say on where Yen may be headed. They have unleashed a monster they cannot control, with speculators front running BOJ’s actions way before Kuroda announced its stimulus package. This put Yen at the mercy of speculators, and BOJ may find it hard to wrestle back control and strengthen Yen should market wish to see a weaker yen going into 2013 end. History puts BOJ in a bad light, with the central bank failing to influence the market on a mid-long term basis which was what led to USD/JPY hitting below 80 in recent years to begin with. Hence one would be really optimistic to believe that BOJ will have a large say to strengthen Yen back even if they want it.
Where does that leave us? It seems that Technicals is still pointing to a strong uptrend (despite short-term pullbacks possible) in line with fundamentals. Should USD/JPY reach a point of no return where weakness of Yen is going to impact Japan negatively, fundamentals of weak Japanese economy may result in even weaker Yen, pushing USD/JPY even higher. We may be very near to the point of no return already, with JGB yields jumping higher despite BOJ purchases, and that is a worrying sign that Japan has to resolve pretty soon to prevent a total capitulation of its financial soundness. The only hope USD/JPY bears have right now is a return of fear similar to what we’ve seen back in 2008. Should that happen, USD strength will evaporate and traders will flock back into Yen on safety concerns, alleviating current weakness. However given current stock prices, it is hard to imagine a spectacular sell-off in stock right now, which put bears in a very uncomfortable spot now.
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