JPY has gained more than 250 pips against the Greenback since 25th July, falling from 100.5 to sub 98 per Dollar during today’s early Asian session. Looking across other major currencies, it is clear that USD has weaken significantly during the same period. However, do not be misled and think that the slide in USD/JPY is due to USD alone. In fact, JPY has been the biggest winner W/W, gaining 1.37% against a common weighted basket of G7 currencies. This suggest that main driver for USD/JPY decline lies solely on Yen itself, while USD weakness a collateral damage from USD/JPY sell-off spilling over to all other major pairs.
A large reason for USD/JPY’s sell-off can be attributed to Shinzo Abe’s LDP Election win. Market was afraid that Abe will no longer stick firm to his economic reforms due to such emphatic political advantage. There is very little incentive for Abe to fulfill his promises other than being “The One” that saved Japan’s perennial deflation problem. Nonetheless, market started to calm themselves once more when Abe’s Advisor Hamada said that a sales tax hike right now is not a good idea, despite just saying last week that sales tax is needed to keep the fiscal soundness of current Government. Hamada’s flip floppy behavior aside, market liked what they hear, pushing USD/JPY back up above 100.0 once more. The feel good factor did not last long however, when 2 prominent speakers – Finance Minister Aso and Economy Minister Amari both went on air on the same day, with opposing views on whether a hike in sales tax is warranted. This is the first open discord seen since Shinzo Abe took over the Prime Minister office, and represent the first crack that the unified Abenomics grand plan has. Market is reasonably spooked, which brings us to where we are currently. Early this week saw reports suggesting that Abe will be more likely to hold and postpone the rate hike. These reports did nothing to soothe the market, with USD/JPY continuing trading lower until BOJ Kuroda’s speech was released.
With regards to what Kuroda speech, nothing new has been revealed. We have the mandatory G20 pandering, in which Kuroda assured the rest of the world that BOJ easing isn’t targeting the exchange rate, but rather a side effect. Then we have the usual bullish talk that says that recovery in Japan is on track, with inflation growing. This is followed by regular pleading, trying to say that “yeah it’s hard work trying to turn the economy around; that time is definitely needed to hit the 2% landmark. Beyond the usual dross, we do not really have any new nuggets of gold. Hence it is not surprising that market did not regain back any confidence, with Nikkei 225 continue to trade lower. USD/JPY did trade slightly higher, but it does not feel as though we are in a fresh bull trend, but rather just a lethargic technical rebound arising from a continued bearish move that spanned more than 48 hours.
Speaking of technicals, we have now successfully broken below the incumbent Kumo, with price forming a 3 black crow bearish pattern at the same time. Currently, the rebound is pushing against the Senkou Span A, while Stochastic readings are within the oversold region. Should price break back into the Kumo with a Stoch bullish signal, we could see a retest of the descending trendline. But even so, it is unlikely that 100.0 will be tested once again with the broad bearishness that has started since May. Should Senkou Span A reject the rally, we could see further acceleration towards the downside with 97.0 expected to provide some support given the overbought nature of current price.
Ultimately, considering that a large part of USD/JPY gains has been built on confidence of Abenomics/BOJ stimulus, the cracks seen and flip floppiness of key Japanese leaders do not bode well for long-term gains in this currency pair. Shinzo Abe will really need to clear the air and straighten up his inner cabinet (maybe asking them to speak less is a good start) before we see market confidence growing once more.
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