What’s Happening?

The Yen has collapsed in recent weeks as capital fled defensive havens and moved back into risk markets following the US election. Technical signs have appeared suggesting that the recent selloff may be nearing its limits and a reversal possible. This week’s Bank of Japan decision and statement could provide a catalyst for a change in sentiment and a possible trading correction.  

 

Technicals:

Over the summer USDJPY completed a triple bottom near 100.00. A base had been forming between there and 105.00 before the election but following the election the rally has been truly explosive with USD soaring and JPY crashing. A head fake dip down to 101.00 shook out the last of the weak hands and since then the advance has been relentless with rising RSI and a Golden Cross of the 50 and 200-day averages confirming a new uptrend.

RSI has been overbought for a month showing that RSI can stay overbought which is why RSI rolling back under 70 is the key signal to watch. What is different currently is that a new high for the pair has not been confirmed by the RSI, a negative divergence that suggests upward momentum has peaked and is starting to slow.

The pair recently ran into resistance and has started to backslide toward 117.60. Next potential tests in a correction could appear near 117.00 then 115.35 and the 115.00 round number. Should the uptrend resume and the pair manage to break out, next resistance may appear near 120.00.

 

Fundamentals

JPY has been crushed so badly in recent weeks for two main reasons:

First, capital has been leaving defensive havens in general, gold and bonds have also taken big hits.  

Second, traders have speculated 2017 could see the Bank of Japan and the Federal Reserve Board go in opposite directions on monetary policy with the Bank of Japan going pedal to the metal on stimulus and the FOMC raising interest rates to normalize policy.

This week’s Bank of Japan meeting may indicate whether this expected divergence is likely to be the case or now. While the Fed has taken a hawkish turn, the pressure on the Bank of Japan to go all in for stimulus may be easing.

The big drop in the Yen has done some of Governor Kuroda’s work for him. A number of Japanese economic reports have come in better than expected lately and are showing signs of improvement including retail sales and housing starts, although other measures like GDP and PMI remain soft. If the outlook for the economy improves the Bank of Japan could adopt a neutral stance which could shore up support for the depressed Yen. Signs that the central bank may need to add to stimulus, however, could depress the currency even further.  

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