USD/JPY hit above 100.0 for the first time since 26th July after BOJ Governor Kuroda’s press conference following the BOJ rate monetary policy announcement. In the latest round of policy making, BOJ choose to retain current pace of monetary easing of between 60 to 70 Trillion Yen per year. This was mostly within expectation, and hence USD/JPY was stable during the period. Prices only started moving during the press conference, in which Kuroda assuring listeners that the expected sales rate hike will not derail current trajectory to hit the 2% inflation target. Perhaps Kuroda thought that market may not be convinced, and hence preemptively mentioned later that even in the event that recovery will be impacted, BOJ stand ready to inject further stimulus to make sure that the 2% target will not be affected. Furthermore, Kuroda mentioned that the 2% target is merely a mid-term target, suggesting to the market that more can and should be expected for the Japanese economy. Market reciprocated Kuroda’s assuring words by sending USD/JPY to a high of 100.12.
However, those who expected a bullish breakout above 100.0 will be extremely disappointed to see that price did not manage to soar up higher, but instead trade back below 100.0 again. The reason for the decline appears to be simple technicals. Prices have been trading within a mild ascending channel, and the rally ran into the brick wall which is the Channel Top. By failing to break Channel Top, Channel Bottom becomes the obvious bearish target, but that does not invalidate current uptrend, and it is possible that we could perhaps even retest 100.0 once again by bouncing off soft support of 99.75 – 99.80 instead of seeking Channel Bottom. Stochastic readings agree with such an outlook with readings currently forming a trough. This trough does not originate from Oversold region, but is around the levels where peaks have been seen earlier this week.
Weekly Chart show prices breaking the Pennant this week, which is a trend continuation pattern. Currently it is still too early to tell whether current breakout is legit, as the week has not ended. Furthermore, price action since May has been producing lower highs, and current breakout is nowhere near to break the sequence. Furthermore, current Stochastic trough did not emerge from an Oversold region, and hence is difficult to ascertain whether this is indeed a proper bullish move or perhaps just volatility at play. A better indication of a pennant break would be price trading above the swing high of July, which would most likely coincide with Stoch readings pushing above 65, the previous peak. Even in the event that price stalls at 104.0, which may be possible considering that Stoch readings would be close if not within the Overbought region by then, bulls would have been at least 200 pips in the money, which makes a decent Risk/Reward ratio.
Fundamentally, there isn’t much to be said. As long as BOJ is in control and the market continue to trust in it, it is unlikely that we will see a capitulation of USD/JPY towards 0.94. Kuroda is enjoying market’s trust right now, and he is not about to let this hard earned reputation go away. Perhaps Reserve Bank of India’s new Governor can learn from what Kuroda said – Not much fiscal or monetary authorities can do once market loses trust in Japanese finances – with regards to the importance of a sales tax hike in order to increase Government revenue. Wise words indeed. Perhaps market’s trust in BOJ to steer Japanese economy out of troubled waters may not be so irrational after all.
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