Japanese Yen Poised to Gain Further For Three Key Reasons
David Rodriguez, Senior Strategist and Michael Boutros, Technical Strategist for DailyFX.com
The Japanese Yen heads into 2017 descending quick conflicting a US Dollar, and elemental developments advise a JPY competence continue a decrease contra a resurgent Greenback. Yet it was usually dual months ago a USD/JPY sell rate languished nearby multi-year lows and a conflicting was true. A startle outcome in a US Presidential choosing set off a thespian convene in tellurian bond yields and equities—sparking a largest five-week USD/JPY convene (Japanese Yen decline) in complicated history.
The considerable turnaround in marketplace view acts as transparent sign that elemental currents can change in an instant. We conduct into a New Year with a transparent JPY-bearish trade opinion for dual pivotal reasons. Yet it will be vicious to watch these same factors given that marketplace view can and have altered utterly dramatically.
Reason 1 to Sell Yen: Bank of Japan Guarantees it will Remain Low-Yielder
An assertive pledge from a Bank of Japan guarantees that Japanese Government Bond (JGB) yields will sojourn low as BoJ Governor Kuroda threatened total purchases of JGB’s to keep a 10-year produce nearby 0 percent. By comparison a US 10-year Treasury Note produce strike as high as 2.62 percent a month following a US Presidential election. Selling a JPY-denominated bond during 0.0 percent could theoretically offer 2.6+ commission points of guaranteed produce around a USD-denominated counterpart, and a fast-growing produce differential helps explain because a USD/JPY changed dramatically aloft into a year-end.
Yet no trade or process is though risk: a USD/JPY seductiveness rate differential stays appealing usually if yields sojourn fast and sell rate sensitivity is low. The BoJ’s hazard of total shopping is positively credible—it could hypothetically imitation vast JPY in sequence to account a purchases. Of march such a process could utterly fast have a destabilizing outcome as a swell in a income supply could send domestic acceleration neatly aloft and serve force debasement in a Yen. If a Bank of Japan subsequently breaks a pledge on yields we would roughly positively see conspicuous sensitivity in both JGB markets and a JPY. Traders should keep these risks in mind before chasing a USD/JPY aloft on yields alone.
If we assume a Bank of Japan keeps a promise, a JPY-short trade stays appealing in a fast marketplace environment. Which brings us to a successive pivotal theme—buoyant tellurian markets inspire risk-taking and could fuel serve Yen weakness.
Reason 2 to Sell Yen: Global Equity Markets Trade nearby Records, Rewards Outweigh Risks
The late-year swell in tellurian equity markets has speedy risk-seeking behavior, and a Japanese Yen stays expected to decrease serve as speculators follow aloft earnings in other vital tellurian currencies. The call of mercantile confidence surrounding a US economy following a Presidential Elections serve suggests markets will sojourn expansive by a foreseeable future. What could change?
Put simply: marketplace view can change in an instant, and there are foreseeable and unforeseeable risks to a remarkable resurgence in tellurian financial marketplace risk-taking. Chief among them is maybe a remarkable swell in tellurian populism and trade protectionism that threatens to cut into tellurian trade. In this courtesy Japan itself is quite during risk—it perennially runs a vast Current Account over-abundance and a economy depends on tellurian consumers to expostulate growth.
If tellurian populism sparks a trade war, Japan’s economy could take a vast strike and financial marketplace sensitivity would be all though guaranteed. One competence disagree that a pointy dump in trade would harm a Japanese Yen and in spin send a USD/JPY higher—benefiting those who have speculated on serve JPY weakness. Yet prior episodes of Japanese financial marketplace instability have in fact constructed a conflicting outcome as domestic investors spin risk-averse and fast repatriate supports into JPY. This outcome stays a transparent risk for those who find to sell a Yen contra a US Dollar and other vital counterparts.
We will keep a tighten eye on tellurian financial marketplace risk appetite—particularly as pivotal mercantile risks dawn large. Absent a element change in marketplace sentiment, however, a Japanese Yen stays expected to trade reduce into a New Year. – DR
Technical Analysis: Rally Targeting Structural Resistance- Pullbacks to Be Viewed as Opportunity
USDJPY responded to a vicious support connection in a second half of a year around a 101-handle (100.71-101.26) – this segment is tangible by a 50% retracement of a 2011 rally, a 1999/2000 lows, former trendline insurgency fluctuating off a 1998 2007 highs and a median-line fluctuating off a 2009 lows. The sell rate could not register a weekly tighten next this symbol and as of 12/20 a successive convene has noted a largest quarterly allege given Q3 1995 and a largest quarterly operation (ATR) given Q4 of 2008. If this was only a wizz retest of a 2014 breakout, a broader opinion would sojourn constructive while above this pivotal threshold streamer into 2017. Note that a together fluctuating off a 2013 highs converges on a Jun high and highlights probable near-term support during 111.45.
The concentration streamer into Q1 is on a pivotal insurgency connection during 120.18-121.12 where a 2016 open converges on a yearly high-week close, a 78.6% retracement of a 2015 decline, a top median-line together of a embedded descending structure and simple trendline insurgency off a 2015 high. The stream convene is during risk streamer into this segment and we’ll be looking for a pullback to offer auspicious long-entries while above connection support during 111.45.
Divergence in near-term cost movement serve highlights a risk for a pullback streamer into this pivotal constructional insurgency separator (doesn’t meant we can’t continue to convene for a few some-more weeks). Interim support rests during 115.52-116.08 corroborated by 113.80 111.45– areas of seductiveness for probable depletion / long-entries. A crack above connection insurgency targets successive topside objectives during 121.69, 122.77 a 2015 high during 125.85. Bottom line: while a evident concentration is higher, a long-bias is exposed streamer into a start of a year / pivotal insurgency and we’ll be looking to blur debility while within this structure off a yearly lows. A dermatitis of this arrangement would expected to see accelerated gains for a span towards prior yearly highs and a broader median-line arrangement fluctuating off a 1995 lows (~127-128).
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