USD/JPY due a breather as BoJ meets for last time in 2016
The Bank of Japan (BoJ) holds its final meeting of the year on Tuesday and with market trends finally moving in the direction it wants not much is expected in the way of big announcements, which may help USD/JPY stabilise temporarily.
The one bullish factor for JPY that could emerge from that meeting are hints that the BoJ might be considering tapering its massive qualitative quantitative easing programme sometime next year. That would be supportive for JPY, at least in the short-term.
After all Japanese business confidence is up, the economy is actually growing (1.3% in Q3 and preliminary estimates for Q4 are 2.2%), JPY has fallen dramatically against USD since the US elections in early November and deflationary pressures are easing as inflation expectations among companies are for it to rise.
In the meantime, the US Federal Reserve has revised up the number of times it expects to raise interest rates next year from twice to three times – this should keep the wind in the sales of USD/JPY for a bit longer.
Indeed, sometime in Q1, 2017, USD/JPY could even challenge resistance at 121.69, a high seen in late January 2016, and net short positions against JPY are at their highest in a year.
Therefore, if USD/JPY does stabilise or even reverse a bit in the closing weeks of the year with data calendars looking relatively light as well, it could establish ideal set up points for more short-selling positions, especially as some of the USD selling on Friday seems more related to profit-taking rather than any fundamental reassessment of market trends or economic conditions that have formed since the election victory of Donald Trump in the US.
TECHNICAL ANALYSIS: USD/JPY – due a pause before resuming rally
The USD/JPY rally, judging by the technicals at least, looks very over-bought and looks ripe for a pause, if not an outright pull-back.
Not only is the daily RSI overbought at 80, and has been since around mid-November (it’s very unusual to be overbought for such a long period of time and that last occurred briefly in mid-November 2015), it is also pushing outside the upper Bollinger band and that in itself usually signals that a period of consolidation is due very soon – probably this week.
The sharpness and velocity of the move on USD/JPY is testament to the sea change in market sentiment since the election victory of Donald Trump on Nov 8, 2016. Though USD/JPY remains bullish, the pair are unlikely to keep rallying this hard for such a long period of time without major news catalysts.
The pair could consolidate or pull back, maybe as far as 115.00, given the sharpness of the up move and with the possibility of further profit taking before year-end. Support is placed around 117.01, 115.86, 115.37 and 114.87 with resistance is seen at 118.18-20, 118.66, 119.96, 120.04 and 121.69.
By Justin Pugsley, Markets Analyst, MahiFX