Talking Points:
- USD/JPY Technical Strategy: Wobbles Upon Tagging 50% Retracement of 2015/16 Decline
- Macro Forces Favor Further JPY Depreciation
- Trade-Surplus Comes From Large Drop In Imports Driven By Energy’s Fall
The JPY weakness could continue to decline based on the divergence of monetary policy and the potential policies of President-Elect Trump that have had U.S. Treasury yields pushing ever-higher. In September, the Bank of Japan converted their monetary policy (one of three arrows of Abenomics) to focus on Yield Curve Control, which was focused on keeping the JGB 10-yr Yield at ~0%.
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In addition to relative inflation expectations and therefore, monetary policy divergence, a wider spread in government debt is a key contributor to strong moves in the FX markets. This could play nicely into the hands of the Bank of Japan who recently saw a second monthly trade surplus in October as a further sell-off in U.S. Treasuries in fear of coming inflation while the BoJ buys JGB’s to suppress the yield keep the spread of US/JP 10-year yields diverging further.
We’ve noted earlier that on a relative scale the JPY continues to be the most aggressively sold currency in G10 post-election and the Yield Curve Control alongside inflation implications of U.S. Fiscal Policy in a super-majority Congress could keep the JPY weak for some time.
D1 USD/JPY Chart: USD/JPY Has Broken Months’ Worth of Resistance in the Last Week
Chart Created by Tyler Yell, CMT, Courtesy of TradingView
Price Action in USD/JPY has seen the price to move to the 50% retracement in near-magnetic fashion after clearing the previously mentioned chart-hurdle at the 200-DMA as well as the post-Brexit high of 107.49. Given the sharp rise in U.S. yields and the US/JP sovereign spread widening that we mentioned above, we encouraged traders to be on the watch for USD/JPY rush in or fear of missing out a trade that could keep USD/JPY bid.
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The sharp moves from early November are being treated as part a bottoming process. The Bullish view that I’m holding has been validated. This view will remain if the price holds on a closing basis above the 200-DMA at 106.40. If the price breaks above the 50% retracement of the 2015-2016 down (111.24), we’ll then shift focus to the 61.8% retracement of the same zone at 114.20.
Should the fundamental trends continue that we’ve seen and discussed above, we’ll continue to anticipate a further price advance. Only a break below the 21-DMA (currently at 106.12) would shift our bias from Bullish to Neutral.
Shorter-Term USD/JPY Technical Levels: November 21, 2016
For those interested in shorter-term levels of focus than the ones above, these levels signal important potential pivot levels over the next 48-hours.
