Key Level Break in USDJPY
The break of the 107.29 level in USDJPY is a significant technical development which leaves the USDJPY poised for further losses over coming months. USDJPY had been trading a broad 107s to 114s range over the last year, with several tests either side of the range. This break however, marks the first set of consecutive closes beyond the range border. With the range having broken, traders are now keen to see how the BOJ responds to this latest bout of Yen appreciation.
PM Abe’s submission for BOJ chief Kuroda to be reinstated looks likely to succeed and the continuation of existing BOJ policies should be a positive for USDJPY. However, while these current policies have failed to provide any great JPY sell off over the last year it isn’t clear that Kuroda’s reappointment alone will be enough to push USDJPY back up above the 107 level watermark.
Fed Tighetning Cycle Not Supporting USDJPY
The other issue affecting USDJPY is the story surrounding the Fed tightening cycle. The Fed’s recent rate hikes have done little to ignite any rally in USDJPY and what should be of concern to bulls is the breakdown in correlation between USDJPY and US rates which previously had been linked strongly and saw speculative buyers buying USDJPY on rise in US rates.
The nature of the USDJPY market is important and the break below 107 could make it complicated for Japanese exporters who had hedged their 110 purchases with sell orders at this level. If exporters revise their USDJPY assumptions lower for fiscal year18/19 lower, this could prompt further USDJPY selling.
USDJPY Market Dynamics
Institutions have noted that Japanese lifers were buying dips between 100 to 107 and pension funds are likely to continue buying dips cautiously as the market moves below this range. The difference here is that the move below 107 means these funds will need to be careful about in boosting their riskier investments ahead of the fiscal year end.
Since the failure of USDJPY to reach 115 at the end of last year the pair has been hit heavily early on by the significant fall in bonds and equities. The bigger red flag for USDJPY going forward if that positioning in JPY remains at elevated short levels. If these short JPY positions start to be dismantled, the pace could gather quickly and USDJPY would be vulnerable to a sharp shunt lower.
BOJ in Focus
The market has recently become particularly sensitive to BOJ commentary and meetings after a period of inactivity. Following BOJ chief Kuroda’s comments about a “reversal rate” (a level at which low interest rates stop stimulating the economy and have a negative effect) a couple of month’s ago. Investors are now alert to the prospect of a potential shift in BOJ policy despite assurances at recent BOJ meetings that the bank is not weighing up a change in policy. Last months the BOJ unexpectedly announced a tapering of their QQE purchases which has further fuelled speculation that the bank is debating a shift in course. Expect this issue to take on further significance as we progress through the year.
Not only has USDJPY broken down through the low of the 114 – 107 range, price has now also broken down through the rising long trend line running from the 2012 lows. While there is a band of support in the 105 – 104 level the key focus now will be on major structural support at the 98 – 100 level. Unless price makes it back above the 107 level, focus will be on further downside towards the hot zone at 100 which is a major psychological level.