USD took yet another beating yesterday, sending USD/JPY below a sequence of significant trendline en route to the Mar swing high of 96.8, which price is in the midst of breaking. This decline in USD was observed together with the moderate rally in US Stocks, with S&P500 gaining 0.85% while DJI up by 0.53%. With US NFP Job numbers coming in less than 12 hours time, we could see the final nail needed to seal the inverse relationship that has been in play since last Friday.
What does it mean for USD/JPY though?
US stocks have been appearing softer recently due to rumors of tapering of QE3 increasing. Yields have actually risen, supporting the rumor theory which means that current bearish pullback may be able to see longer-term correction in June. If the USD inverse relationship holds, then USD/JPY may have some hope of a short-term rebound for the rest of June. From a technical perspective, it is not hard to fathom such a rebound as Stochastic readings are showing price to be highly extended on the downside. In terms of price action, despite breaking 96.8,the full consolidation range back in April was slightly below 96.0, which current sell-off failed to test before pulling back up, which suggest that bulls around the area can be rather formidable.
That doesn’t mean price cannot break down lower though, as there are good fundamental reasons to do so. The primary reason why USD/JPY is tanking right now can be attributed to the fact that BOJ and the Japanese Ministers including Abe himself have been less than convincing in their communication to the public. Without any planned actions coming up for the rest of 2013, there will be zero reason for speculators/traders to prop USD/JPY up especially in light of recent USD weakness. Traders who have been holding on to their longs since 80+ regions will be highly tempted to close out their positions if they haven’t already done so, while speculators will be out seeking blood if price breach below 96.0 convincingly, potentially pushing price down to sub 94.0 levels (which happens to be the rally post Kuroda’s 1st monetary policy announcement). If 94.0 is breached, there may be yet another wave of bearish momentum to bring price back towards 90.0 and potentially lower.
It is also interesting to note that Nikkei 225 futures continue to collapse yesterday during US trading session, when US stocks were rallying, which underlined the “vote of confidence” market has cast for “Abenomics”. With this in mind, the long-term outlook for USD/JPY will certainly be bleak especially since the rally thus far has been riding mostly on confidence in Abe and BOJ. Short-term rebound can still be expected as mentioned above, but USD/JPY will have dark days ahead if Kuroda don’t come out with any new policies soon.