USD/JPY: Yen Bears Winning Battle But Losing War

USD/JPY rallied today despite strong bearish sentiment in Asia markets today. A huge part of this rally can be attributed to the weaker than expected Trade Balance which was released earlier. August Trade Balance (BOP basis) came in at -¥885.9B. Balance of Payment Current Account has also fallen 63.7% on a Y/Y basis, versus an expected 18.1% gain. Economics 101 will tell you that a trade deficit means that your country is actually having a net outflow of funds, hence it is no surprise that JPY weakened in light of this, as a higher than expected outflow of funds hurts the currency (see Rupee and Rupiah).

Hourly Chart
USD/JPY Hourly" title="USD/JPY Hourly" src="https://d1-invdn-com.akamaized.net/content/picca06a914dfe6acb0e01c9af6a436136a.PNG" height="322.63448275862" width="undefined">
From a technical perspective, prices is hitting 97.0 support turned resistance. Stochastic readings suggest that current prices may still push up higher beyond 97.0. This is especially true if price retest the intersection between 97.0 and the descending trendline in a few hours time. Should the confluence be broken, we could see acceleration towards 97.4 – 97.5 which happens to be the closing levels of Friday. Should the aforementioned level gets broken, immediate bearish pressure will be alleviated and initiative will be given to bulls. However, it is likely that Stoch readings will be Overbought when 97.4 is reached (if we even accomplish that to begin with), and hence the likelihood of a strong bullish reversal is unlikely.

Daily Chart
USD/JPY Daily" title="USD/JPY Daily" src="https://d1-invdn-com.akamaized.net/content/picd5d4860ca049a82ecabb7b73d766b1da.PNG" height="324.19310344828" width="undefined">
Daily Chart shows similar setup as Short-term chart – 97.0 is equally if not more important as a resistance, while there is a descending trendline just above the key 97.0 level (in this case in the form of descending Channel Top). However unlike Short-term Chart, Stochasitc readings have yet to provide a bullish signal, and will only appear after 97.0 and the descending Channel Top is broken. Should that happen, a push above 98.0 resistance may be possible given that we still have a full bullish cycle ahead of us. Should Stoch readings break 50.0 in conjunction with price clearing 98.0, we could even see acceleration towards triple digits.

Fundamentally, we need to realize that having a continued trade deficit is not good for the economy. In theory, a worse off economy tend to mean weaker currency – Yen in this case, but it should be noted that if this situation continues, Shinzo Abe may need to rethink his Abenomics strategy. As it is right now, Abenomics is resulting in a bad kind of inflation, one that is driven by more expensive imports due to weaker Yen, and not one that is pushed by increase in consumption levels. According to newspaper Sankei’s latest poll, Abe’s support rates have fallen by 6.6% to 58.6%, with most Japanese highly unhappy with the sales tax hike which will bring their cost of living even higher. There is a high likelihood that Japanese may simply end up consuming less due to all the increases in prices, forcing Abe to change his policies.

As Abenomics is the only thing that is keeping JPY weak to begin with, a shift in policy would actually result in ultimate strengthening of JPY, and a lower USD/JPY outlook. So one could say that currently USD/JPY bears are winning the battle but this may end up being a Pyrrhic victory with long term Yen weakness in doubt.

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