USD/JPY: 99.0 Breaking, 98.5 Under Threat

USD/JPY certainly has seen better days. Price has fallen close to 450 pips from May peak to recent trough, breaching the previous April consolidation zone between 94.0 – 100.0 which was forged after Kuroda announced the latest 2013 stimulus package. However, before we start to bemoan about how USD/JPY is on its way to a full bearish reversal, it is worth noting that this is not the 1st time price has suffered such a setback in this era of “Abenomics”. We only need to look back in Mar 2013 to find a similar sell-off which push price down from 97.0 – to slightly under 93.0. The characteristics are fairly similar to current situation – Price pushed back to the center of the previous consolidation between 92-94, and subsequently bounce back up strongly just when Stochastic readings hit Oversold.

The fundamental situation was also fairly similar – speculators were starting to lose faith in “Abenomics”, while US equities were looking weak. However, there is a considerable difference between then and now. Kuroda’s first BOJ announcement in April managed to allay fears temporarily and allowed both Japanese Stocks and USD/JPY to rise significantly, but right now the economic docket remains empty and it is unlikely Kuroda et al will be able to pull a rabbit out of the proverbial hat and surprise all of us, especially since that he has said before that BOJ is basically done for 2013. The best he and other Japanese Ministers (including “demon slayer” Abe) could muster as a response for current decline can be basically summed up as bullish rhetoric and blatant denials that the market has shift. Besides the usual “this is just a short-term correction”, “volatility is too be expected” etc, there were no introduction of new measures, or attempts to placate the market that they are on top of it. This certainly doesn’t bode well for traders, who punished Abe with Nikkei trading below 13,000 after his speech which was meant to be uplifting.

Daily Chart

What does this mean for USD/JPY? This may mean that though USD/JPY is poised for a technical rebound based on Stochastic and the support lines, we could be facing a strong unabated shift in investor sentiment that may drive USD/JPY sharply lower. The USD inverse correlation with US stocks that was originally in play at the start of the month appears to be shaky already, with no clear indication of where the Greenback may be heading as USD gets pulled in all directions by different majors (see AUD/USD, EUR/USD and GBP/USD). This leaves the erosion of confidence in “Abenomics” the only distinct directional driver left. Price could still find support around 98.5, and possibly 97.0 as we head down, but current sell-off will be hard to reverse if BOJ don’t do anything soon.

Hourly Chart

Short-term chart shows how one of those above mentioned support could still work. 99.0 currently is providing some short-term support, but the rebound from it is clear that bullish impetus was not found from the support. Price failed to test above 99.40 interim support/resistance and that will continue to weigh USD/JPY down for an eventual break of 99.0. Stochastic readings agree with this outlook with an interim peak forming, suggesting a next shorter wave of bear cycle may occur to send price towards 98.5.

With NFP coming tomorrow, perhaps talk of USD lacking direction may be premature. This may be the last hope for USD/JPY to pullback higher if USD strength increase from then on in light of BOJ’s non-action. If NFP weakens USD further, or help to establish the relationship that USD/US Stocks are moving in tandem, the continued weakening of US equities will bode further bad news for USD/JPY to potentially accelerate even faster lower in the rest of June.