Any further gains for JPY could be rocky
Not surprisingly JPY’s surge since late last year has caught the eye of Japan’s authorities who are sounding increasingly stringent about halting its rally. They may not be able to stop it, but they can certainly insure that its upward progress is strewn with pitfalls of volatility for the bulls.
JPY’s move comes despite the Bank of Japan’s aggressive quantitative and qualitative easing programme, now complemented by negative interest rates – both of which should be very bearish for the currency.
Yet USD/JPY has fallen around 11% this year. This partly reflects the US Federal Reserve’s dovish stance on interest rates, but also the steady migration of funds towards JPY seeking a safe haven from worries about the Eurozone, China and even the possibility of the UK exiting the EU.
For now, Japan’s authorities are relying on verbal intervention – but if the rally continues intentions will have to be backed up by something more substantial otherwise markets will simply ignore the rhetoric.
The hesitation over doing something more substantial seems to stem from not wanting to upset Japan’s trading partners, particularly since it was only last month that the country’s government agreed with others not to engage in currency manipulation. At the same time some of the US presidential candidates have labelled Japan as a currency manipulator.
However, central banks dislike substantial fast moves in the currencies they manage, it therefore shouldn’t be too long before Japan does start intervening. A good excuse would be a pickup in deflation, falling corporate profits or sagging economic growth – that would give the BoJ an excuse to do more QQE and maybe even deepen its negative interest rate policy. There seems to be no limit as to what the BoJ is prepared to do to achieve its aims.
The fig leaf of boosting the economy would be an easier sell than doing outright intervention in the currency markets to push down JPY, which would so obviously be seen as currency manipulation. Nonetheless, even that can’t be entirely ruled out, especially if USD/JPY plummets to 100 and below. Japan’s authorities may also want to wait for the next G20 meeting in late May to be out of the way before taking action.
In the medium- to long-term, Japan’s authorities might be rescued by possible improvements in the US and Chinese economies. Recent data from both countries suggests areas such as manufacturing could be starting to stir after inventory run-downs, besides cheaper commodity prices should give some support to consumers. This may bring back sustained rallies in risk assets, which should see JPY weaken as safe havens won’t be in such high demand.
But in the meantime, rest assured that Japan’s authorities will do their best to make sure JPY isn’t a one way bet for the bulls.
TECHNICAL ANALYSIS: USD/JPY – How low can it go?
The pace of decline of USD/JPY since December has been nothing if not impressive down around 11.4% in just four months – a big move for a currency major. The question is can the trend continue at such a pace?
Answering that question depends on whether the pair can clear the recent low of 107.66 and then take out 106.75. If so, it could be a fairly quick ride down to 105, particularly if Japan’s authorities feel constrained for political reasons over intervening in the markets to stem JPY’s bull run.
But for this week, the rally certainly appears to have legs – the pair have broken down from a consolidation pattern, which lasted from February until the beginning of April. Also, the MACD is maintaining a sell signal.
USD/JPY, could, however, be close to forming a short-term consolidation pattern, before resuming their downward trend. On Friday the daily RSI indicator went deeper into oversold territory at 24 and the last three times that occurred in the last eight months resulted in a bounce for USD/JPY. Also the move has greatly stretched the lower Bollinger band, which often results in a snap-back.
Any upward move is likely to encounter resistance at around 108.39, 110.24 and 111.03
By Justin Pugsley, Markets Analyst, MahiFX