Yen strengthened today following the release of stronger than expected inflation data. National Consumer Price Index (ex fresh food) in August grew by 0.8% Y/Y, higher than previous month’s 0.7% which is similar to analysts consensus estimate. Headline Consumer Price Index is also better than expected, coming in at 0.9% which is 10 basis points higher than the 0.8% expectation and 20 basis points higher than July’s number. Traditionally, a higher inflation is bullish for the currency (e.g. stronger Yen) as higher inflation rates generally means that the Central Bank will need to be hawkish and raise interest rates to prevent inflation from getting out of control. In this regard, it make sense that Yen strength grew today.
However, this is Yen we are talking about, where conventions doesn’t hold at all. In fact, recent higher than expected inflation numbers have been interpreted as a sign that Abenomics is working, resulting in USD/JPY trading higher instead. Hence it is interesting to see USD/JPY reacting bearishly this time round. But that is not the only thing that is perturbing – Finance Minister Aso has also implied today that a lowering of Corporate Taxes should be considered, which should have been a boon for Japanese stocks and by extension (or correlation) USD/JPY as well. But instead of pushing higher, both Nikkei 225 and USD/JPY actually traded lower further, compounding the mystery today.
Perhaps we may be barking up the wrong tree, and that the main driver of today’s decline is entirely technical based. There is some potential truth to this assertion as prices have been kept below the 99.15 ceiling since 24th September. Hence it is not surprising to see prices pushing lower. The fact that the decline found some support around the 98.7 Kumo lends credence to the assertion, and the subsequent break of the aforementioned Kumo opens up a potential move towards 98.3 previous swing low levels which is also close to the descending trendline levels.
Stochastic readings disagree though, and suggest that we could yet see a retest of the overhead Kumo as Stoch readings are currently Oversold and pointing higher. Furthermore, as we are lacking a bearish forward Kumo, it may be too early to assume that price will be able to trade lower from here immediately. Hence, the most bearish scenario would actually have prices pushing up higher now but continue to stay below Senkou Span A (Kumo topside), allowing Stochastic readings to push higher before a next wave of bearish momentum bring us below 98.30. It is also likely that a forward bearish Kumo twist will be formed then as well, giving us further bearish strength.
If short-term price action behaved exactly as described above, it is we may be able to break the Kumo which is thinning. It is also likely that the rising trendline would be broken, but prices may still yet find support from the descending trendline. Stochastic readings does not favor a descending trendline break as readings are currently close to the Oversold region, hence the likelihood of a rebound/sideways movement after the descending trendline is tagged becomes higher. If prices fail to break Kumo/Rising trendline, the case for a rebound higher increases, which will open up a move towards 100.50. Stochastic actually agrees with such a scenario as previous troughs and peaks have been formed around the same stoch levels. Given the varied possibilities coupled with unclear fundamental drivers, USD/JPY traders should wait for confirmation of either direction before committing heavily. A good way to gauge (if possible) would be to wait for Monday’s reaction if a rebound/breakout has occurred and see if the market direction continue in favor of today’s close.
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