Continued lax BoJ policy undermines case for JPY
Last week was truly one for the central banks, the US Federal Reserve raised rates, the Bank of England indicated that it had been close to doing so and the Bank of Japan stood pat sending JPY on a lower trajectory.
Of the three central banks the BoJ’s stance may have the most impact on its currency. The central bank is unlikely to retreat from its aggressive monetary policy until Q1 2018 at the earliest as it worries that deflationary forces are still a threat, wants JPY to be competitive for exports and to continue boosting the domestic economy.
Despite a very uncertain world, the Eurozone looks a lot more stable with a raft of national elections having gone well for the block, investors seem to be growing used to maverick US President Donald Trump and the global economy is improving. In other words, there’s less call for safe havens like JPY – even gold has pulled back recently.
With US Fed still looking to raise interest rates and providing economic and market conditions remain benign, JPY could begin to move lower reflecting the growing interest rate divergence between the US and Japan. It was above USD/JPY 110.00 on Friday, compared with over 118.00 back in mid-December 2016. It could now work its way to USD/JPY 114.00-115.00.
However, whether these benign conditions persist for the rest of the year remains to be seen.
Credit and asset bubbles are building up in the US around real estate and auto-loans with the possibility of a recession in 2018 or 2019, which would quickly spread to the rest of the world. And for all its confidence at the moment, the Eurozone retains a flawed economic model with deep economic divergences, a lack of financial, fiscal and regulatory integration and with some members suffering significant competitive issues and unsustainable debts. There’s also a suspicion that countries such as Italy may have become over-dependent on European Central Bank stimulus and real problems could flare up if this is withdrawn.
These are the type of issues that will come bubbling to the surface at some point, which will see JPY back in strong demand pushing below USD/JPY 110.00.
TECHNICAL ANALYSIS: USD/JPY looks set for gains
Friday saw USD/JPY make some gains, and the recent pattern of market bottoms has been for higher ones, which is bullish for USD versus JPY. What’s lacking is a series of important higher highs.
For a start, the pair recently moved above the 200-day moving average (turquoise line), which is bullish, and the last time they did that, USD/JPY rallied from around 110.00 to 114.00 from mid-April to early May.
In the meantime, the daily RSI is in neutral territory and the pair are within the two outer Bollinger bands – suggesting USD/JPY could be in for a period of bullishness. Whether that rally has any legs or not will depend on it clearing 114.00-115.00, which are likely to be particularly tough resistance levels.
Resistance can be seen at 111.35-42, 111.84-6, 113.26 and 114.37 with support at 110.46, 109.56, 109.39 and 108.42.
By Justin Pugsley, Markets Analyst, MahiFX