USD/JPY is enjoying a good day with price breaking into the Overhead Kumo during early Asian trade. The rally faltered during midday Asian hours with price unable to break the 99.80 resistance which happens to be the confluence with Kijuu Sen (red line). However, the allure of the flat Senkou Span B proved to be too strong, with price eventually tagging it, forming a forward Kumo bullish twist. It is interesting to note that USD/JPY rallied when Nikkei 225 actually clocked in a red day. This divergence is interesting considering that Japanese stocks tend to rally on weaker Yen, mainly due to export gains from a weaker exchange rate. Hence, this slowly resulted in the opposite relationship, where Yen tended to strengthened when Nikkei 225 collapse. Part of the reason for this relationship is due to safe haven flows, which accounts for a huge portion of the correlation. But we cannot ignore the speculative aspect, where traders basically trade the correlation even though it may not make perfect sense fundamentally.
Hence, a break down of correlation between Nikkei 225 and USD/JPY suggest that neither risk trends nor speculation is affecting USD/JPY. This would naturally leave us with the conclusion that the rally seen today is due to USD strengthening alone. However, that being said, there isn’t strong reasons for USD to suddenly strengthen out of nowhere, especially during Asian hours. This lead us back to the drawing board in terms of determining whether current rally can last the mile, based on an evaluation of whether the bullish driver still have legs to run or not.
From a technical perspective, the combination of the Kumo Breakout and Kumo Twist puts price in a good position to break 100.0. However, Stochastic beg to differ, with readings already hitting Overbought and threatening to head lower for a bearish cycle signal. Even if price break 100.0, it is possible that additional resistance can be found around 100.20 in the form of yesterday’s swing high and structural support of 19th July. Hence true bullishness and confirmation of the Kumo Breakout/Kumo Twist can only be formed should 100.20 is firmly broken, which will open up 100.8 as immediate short-term bullish target.
Long term chart does not give us clear direction of where price is heading. On one hand, price is on the back of a strong bullish rally which started all the way back in late 2012, forward Kumo is also bullish, with current price levels the result of a rebound off the flat Senkou Span B underneath. On the other, price is forming lower highs since May, and stochastic readings suggest that we are currently in a bearish cycle. In theory, we could possibly see price move back towards Senkou Span B without invalidating the long-term uptrend and the bullish Ichimoku signals. Furthermore, Stoch readings are likely to hit Oversold when price hit the sub 99.0 level, with further support to be found around 98.6. Which may allow bulls to relax and hence allowing for a move torwards there knowing that the overall bullish set up will remain standing.
In terms of policy guidance which will affect Yen the most, we have mixed signals coming out from policy makers. Shinzo Abe’s advisor Hamada has been flip floppy with regards to the hike in sales tax, saying that the sales tax should happen during last week’s press conference, but switching camp this week after LDP’s coalition election win. Finance Minister Aso and Economic Minster Amari are also disagreeing with each other on whether the sales tax should happen soon. This is the first major disagreement from Japanese leaders, and should lines be drawn, it is possible that future policies making/decision will be muddled, and the communication to markets will certainly be impaired. As such, we could see further directionless price action moving forward for USD/JPY especially if USD does not move.