Yen strengthened significantly yesterday during European hours when risk aversion gripped the market, sending USD/JPY touching below 100.0 before early US session helped to prop prices higher. However, that was not enough to keep prices afloat, with prices breaking below 100.0 once more when FOMC minutes were released. The sell-off of USD/JPY wasn’t smooth, with price initially rallying higher on the dovish FOMC minutes – which indicated that many members would like to see continued easing. The number of voting members who want to taper QE by the end of this year isn’t really an overwhelming majority, which lowers the likelihood of any tapering action actually materialize. Hence it is not surprising to see USD/JPY moving higher together with US stocks due to slight USD strengthening due to the positive correlation with US stocks and also positive risk flow which weakens Yen.
However the gains did not last long, as USD started to weaken significantly when market start to price in a continued easing scenario. The pace of USD weakening increased further when Bernanke started to reiterate that he believe easing is here to stay for the “foreseeable future”. Furthermore, Bernanke commented that current unemployment rate may be “overstating” the strength of economy. All these suggest that Bernanke himself is not pushing for the case for QE tapering, and hint that his QE timeline suggestion back in June could simply be making a concession for the rest of the FOMC who wants to see the end of QE in 2014. This would mean that Bernanke will prefer to continue easing if he could help it, which is a long-term USD weakening factor. The statements by Bernanke broke the camel’s back, sending price quickly below the 99.5 support and hitting as low as 98.25.
Price managed to pull back during early Asian hours but that is mostly attributable to a technical rebound from 98.50. 99.50 continue to remain firm, placing price on a strong bearish pressure. BOJ rate decision and the subsequent press statement did very little to advance Yen weakness as there was no plans for more stimulus, with the Central Bank meeting statement merely restating that BOJ’s own version of QE is going to continue until CPI target is reached. However, there were some cause for concern, with BOJ cutting GDP growth forecast – 2013 GDP growth is now expected to be 2.8% versus previous 2.9% estimate, while 2014 now stands at 1.3% vs a previous 1.6%. 2015 numbers have also been slashed, with BOJ believing that the Y/Y growth from 2014 would be 1.5% vs previously stated 1.6%. This suggest that Japanese economy may not be performing as well as what BOJ has hoped, and further imply that the impact of Abenomics may be overstated, resulting in market quickly sending USD/JPY lower.
From a technical perspective, the holding of 99.5 puts bears firmly in charge, and opens up the next consolidation zone from 97.0 – 98.5. Stochastic readings are currently pointing lower, suggesting that we are in a minor bearish cycle. However if we were to take into consideration that stoch readings never really entered the Oversold region recently, current minor bearish cycle could be interpreted as the extension of the larger bearish cycle since 6th of July. With that in mind, the rebound from 98.5 is also not a full bullish cycle, but merely a corrective rally – suggesting current price may be able to break 98.5 for a bearish extension.
Weekly Chart also favor bears, with the decline this week being interpreted as a bearish rejection from the Rising Channel. Should price break 98.5, 94.0 will reemerge as a plausible bearish target, and threaten to undo the entire bullish rally since 2012 Nov should 94.0 gets broken. Stochastic readings is still marginally pointing higher, but it is possible that readings may turn around soon as stoch curve has flattened rather significantly this week. However, before we get over confident of the prospect of bearish reversal, it is important to note that the past 3 weeks’ candle forms a nice 3 White Soldier bullish candlestick pattern. Price should ideally trade below the body of the 2nd “soldier” and show signs of bearish extension on the short-term chart before we can confidently invalidate the overall strong bullish pressure above 94.0 and start preparing for a full bearish reversal ahead.