USD/JPY: Seeking 100 Once again

USD/JPY has been in full retreat every since the failure to break 103.5 convincingly. Price moved back to the 101.0 and stayed around the level on 25th May, with one last hurrah on 28th May which sent prices above the rising trendline once more but ultimately failed to establish a return of the bullish impetus. Bears quickly took over, breaking the 101.0 level on 30th May, with 31st May showing a Doji candlestick which acted as a point of inflexion for a potential bearish extension in June.

Daily Chart
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However, despite the strong setup which bears dutifully obliged, there is no evidence that current bearish momentum can break 100.0. Stochastic readings show that pace of bearish momentum has slowed down considerably, with Stoch line flattening and closing into the Signal line just as price hover above the 100.0 level. Furthermore, current readings levels is one of the lowest in recent years, even lower than the Stoch troughs back in Sep 2012, when the incredible rally began. Hence it will not be surprising if we see bearish momentum petering out around 100.0 to have bulls taken over once again, similar to what we’ve seen back in early May, and early April.

Hourly Chart
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Short-term hourly chart shows price action being kept within a descending channel with price in good position to test the 100.0 support and confluence with Channel Bottom in the next few hours, should price maintain current bearish momentum. Stochastic suggests that such scenario is potential possible with readings still maintaining some slight distance from the Signal line, and current levels still a hair away from 30th May’s Stoch trough. This suggest the price may still have some more room to run lower based on current bearish momentum, but certainly breaking 100.0 is another issue altogether.

From a fundamental analysis standpoint, Japan’s economy is not head and shoulders better than before. In fact, recent data suggest that the impact of Abenomics have been overstated. With the recent decline in Japanese stocks, various Ministers and BOJ members were forced to come out and lend vocal support to Abenomics, and calm the markets. Chief Cabinet Secretary Suga is the latest in line, saying that the decline in stocks is “natural” after a 60% rally in 5 months. This is following yet another day of heavy losses for the Nikkei 225 index, coming in at -3.72% today. It is interesting to see that Yen is strengthening while stocks are retreating, suggesting that market is starting to lose confidence in Abenomics and the ability of BOJ to weaken Yen and revitalize Japan’s economy.

JGB yields is a very good sign of that – 10yr Benchmark Yields is higher by 27 bps M/M and 2 bps Y/Y, which is startling if we consider that BOJ has been increasing the purchases of JGBs significantly. Kuroda and his BOJ members have been saying that it is expected that yields should increase slightly due to higher stock returns, but a simpler explanation is that market is starting to lose faith, especially since we know that the benchmark yields did drop below 0.50% back in April, when BOJ first announced the newly minted policy.

If the above assertion is true, we could see USD/JPY coming down heavily especially if 100.0 is broken. However, if Japanese economy is broken beyond repair, there lies an extreme scenario where JPY will continue to weaken in tandem with the collapsing economy. This may explain a little the reason why USD/JPY failed to fall in the same magnitude as Nikkei 225, and is something worth remembering even as the reputation of Abenomics continue to deteriorate.