North Korea & French elections should keep JPY in demand
Following some domestic set-backs, US President Donald Trump has turned his attention to foreign affairs with a gusto helping ratchet up already considerable geopolitical tensions, which could keep the JPY rally alive for a while longer.
At the end of December, USD/JPY reached over 118.00 on hopes that Trump would spur a big US economic boom. However, those expectations have steadily faded as Trump has had trouble getting legislation passed in congress, such as the repeal of Obamacare. He may now be turning his attention to foreign affairs to divert attention from domestic set-backs – even though this was supposed to be an area of low priority. He also has a very low approval ratings among US voters and might be pinning hopes on foreign successes boosting his popularity at home.
His recent foreign policy actions include a missile strike on Syria, which has alienated Russia, a massive bomb in Afghanistan, escalating the war on terror, and now sabre rattling over North Korea’s nuclear programme. This has seen USD/JPY work its way to just above 108.00
As if that weren’t enough, France holds elections on Sunday and the world will be watching to see how anti-EU candidate Marine Le Pen will perform. She has been losing some ground in the polls recently, but should she make a strong showing on the day USD/JPY could ratchet down further ahead of the likely second round on May 7, which she is not expected to win.
A strong showing by Le Pen’s Front National at the first round of the elections and escalating tensions over North Korea, where ‘everything is on the table’ in terms of US policy options, could see USD/JPY fall to 104.00 and even down to 100.00, if the US conducts a military strike against Pyongyang’s nuclear facilities.
And given Trump’s hostile attitude towards other countries manipulating their currencies, there’s not a great deal the Bank of Japan can do about JPY’s appreciation, especially with Japan now on a currency manipulator watch list.
However, traders should be wary that JPY’s rally could quickly splutter if: A/ Le Pen doesn’t do particularly well in the French elections and B/ The rhetoric over North Korea is dialled down, maybe with China’s help, and tensions dissipate.
At which point USD, AUD and NZD could all stage strong relief rallies.
TECHNICAL ANALYSIS: Oversold USD/JPY looks set for short-term snap-back
Two important events occurred on USD/JPY – one, which is potentially long-term bearish and the other short-term bullish. Also, neither has occurred for a considerable amount of time. The first is that USD/JPY has pierced the 200-day moving average on the downside (turquoise line) and the other is that the daily RSI has gone into over-sold territory. On the last three occasions that happened – July 2016 – the pair staged a short recovery rally and on the third occasion quite a sharp one.
Also, the pair are digging hard into the lower Bollinger band. The implication is that USD/JPY are due a snap back or at least a period of consolidation likely this week. Also, the 200-day moving average could become a key battleground for the bulls and the bears. Though much will depend on news events. Support can be seen at 106.87 and 105.66 and 105.29 with resistance: 109.03, 110.66 and 117.17.
Longer-term there is potential for the pair to work their way down to 104.00, an area where there should be strong support.
By Justin Pugsley, Markets Analyst, MahiFX