USD/JPY: Bull Trend Remains Intact

Some people think that USD/JPY has seen better days compared to where we are now. That is technically true – as USD/JPY has lost a fair amount of the previous bullish impetus, and may be pulling back further after failing to over take 104.0. However that statement almost sounds farcical when we consider that USD/JPY has rallied significantly since 2012, cleared the 100.0 big figure and is still higher than the entirety of January – April 2013. When you put it this way, it is hard to accept that USD/JPY is currently in the midst of a bearish reversal – extraordinary claims require extraordinary evidence. And based on what is available right now, to say that USD/JPY is now pulling back is definitely premature to say the least.

Daily Chart
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From a technical basis, last week’s sell off – though impressive – failed to allow bears to establish themselves for further losses. The pullback failed to test 100.0, and also failed to keep price below the rising trendline that has been in play since the rally in April (Kuroda 1st announcement). This suggest that the uptrend is still in play, and the pullback is merely corrective and not a true sign of reversal. Stochastic readings also suggest that the worse of the pullbacks may be over soon, with the stoch line flattening just around the same levels of the previous trough.

Hourly Chart
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Hourly Chart is less bullish though, with Stoch readings heavily within the overbought region. However readings are still firmly pointing higher, which is encouraging for bulls as it suggests a possibility of price trading above 102.0 as we approach this significant resistance. The ability to break 102.5 remains in doubt though, despite the fact that trading above 102 opens up 103.5 as a reasonable topside target.

Fundamentals from Japan remains confusing, and it seems that politicians and central bankers are equally perplex. Following the 3 day slide in Nikkei 225, various members have came out to lend support to “Abenomics”, saying that it is working. The latest one is Hamada, close advisor to Shinzo Abe, who said that the recent stock market drop was a “natural correction”, and should not invoke fear. Funny that Economic Minister Amari said the same thing last Thursday after the strong slide, but the market continues to trade lower instead of stabilizing.

Nonetheless, there are good reasons for further ascension of USD/JPY. If Abenomics is continuing to work, USD/JPY can be expected to move higher on weakened Yen. If Abenomics failed, the increasing yields in JGBs and the current account deficit may actually result in Yen getting weaker due to loss of faith in Japan’s economic control. Hence either way, the case for higher USD/JPY remains. However, the aforementioned theory hinges on the assumptions that market is rational right now. USD/JPY have been given an advance weakening way back in Sep- November when no fundamental changes were made, and BOJ Kuroda himself acknowledged that USD/JPY’s weakness back then were running basically on speculative actions. If the speculative direction reverses, it is highly likely that USD/JPY will be able to trade lower no matter what the fundamental says.