USD/JPY Bulls Start Week Well With 102 Tagged

The USD/JPY pair continued its upward trajectory above 100.0 after G7 Finance Ministers and Central Bankers gave tacit approvals to the BOJ’s yen weakening efforts. The group reaffirmed their collective commitment to avoid currency rate competition in the London meeting, but did not single the yen out nor accuse Japan of breaking the agreement made during the last G20 meeting.

Instead, non-Japanese leaders said that they were ‘reassured’ by Japan that Abenomics is not aimed specifically at the yen, but rather deflation. Tell that to the Koreans though, whose exporters have been complaining about the fall in yen affecting its own exports, as Korean industry products are very similar to that of Japan – for every Sony (SNE) there is a Samsung (SSNLF), for Toyota (TM) think Hyundai (HYMLF).

Furthermore, it seems that Japanese fundamentals aren’t really improving beyond the benefits of a weakened yen. Industrial production remains negative Y/Y, consumer confidence and spending remain low while prices have increased slightly, certainly not with the same magnitude as the USD/JPY rally. The Nikkei is now approaching the 15,000 mark – a post financial crisis high, but the rally in stocks seems due more to yen weakening rather than a fundamental improvement in the economy. If Abenomics is working, it is due to the weakening yen, so it is strange to consider that a lower yen is ‘collateral damage’ when it is in fact the smoking gun.

Whatever our feelings towards the G7′s mute response to Japan may be, the fact is that they are not sanctioning the BOJ or Japan. With that in mind, it is understandable that the current rally above 100.0 will be allowed to continue and perhaps run even further given such bullish optimism right now.

Daily Chart
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From a technical perspective, the rally following the break of 100.0 last Friday does have some resistance to toy with. First, we have the rising trendline that was acting as the signal for a double top formation back in late April. The trendline may still be able to provide some slight resistance against the current rally.

However, there is still every likelihood of price straddling the trendline to trade higher, rather than rebounding lower from it. Given current bullish optimism, it would be risky to bet on a rebound just based on this line alone. Stochastic readings are currently within the Overbought region, but readings are still pointing higher with the highest peaks still a fair distance away.

This suggest that price may still head higher before pulling back, in line with the scenario where price may test the rising trendline before coming down again. Also, looking at recent price action, the April – early May consolidation region seems similar to the one back in February, where price did manage to break out towards 96.8 – 280 pips from the 94.0 ceiling before climbing back down. If we were to use that as a reference, price may be finding resistance between 104 – 106 (if the difference in consolidation range is taken into consideration), which again is in line with a rebound from the rising trendline.

Hourly Chart
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From the short-term chart, price is kept mostly within the newly formed rising channel above 100.50. If the channel is reliable, we should be able to see price bouncing off current channel bottom towards the channel top. However, should temporary weakness in the USD be found, price could still move back towards 101.5, which is in-line with what Stochastic readings are suggesting right now.

Nonetheless, as long as 101.5 holds, a move towards 104-106 still remains plausible, corroborating what the Daily Chart is hinting to us. Sentiment may change drastically below 101.5 though, as short-term weakness may creep in. This may only prove to be just a dent on the longer-term chart, but may open up 100.5 and perhaps even 99.0 as downside targets.

Fundamentally, USD/JPY has largely been moved by USD strength in recent days. And the USD has largely moved in tandem with the S&P 500 and Dow Jones Industrials. With last Friday not a strong day for the US stock market, we could potentially see a pullback in USD strength this week especially given that US futures are retreating in early Monday trade.

Nonetheless, we’ve also discussed previously that USD/JPY technicals appear to have outlived the influence of USD strength, which would also mean that the retreat in US stocks may do little to harm USD/JPY’s current rally. There may be some truth in this hypothesis, as the Nikkei 225 is rallying strongly, gaining 1.55% while US stock futures are trading lower. Certainly, speculators/traders of USD/JPY and Nikkei 225 are highly bullish now, which can only mean higher highs for both assets. At least for now.