A breakout in the Yen?

Alex Kazmarck of Trade Leader SpotEuro presents analysis of the JPY.

Fundamental:

Bank of Japan announced last week that it will continue to keep its benchmark interest rate steady at 0.10% and made no change to its monthly purchases of nearly 6 trillion yen. The USD/JPY weakened on the news as the BOJ continued to reiterate that it will continue to expand its monetary base until its inflation target of 2% is reached and stabilizes. Expectations that Japan will have a difficult time reaching its goal as early as 2015 is leading many to think that the yearly amount of 70 trillion yen will most likely be increased in 2014, especially if inflationary data continues to underperform. This week’s CPI and other key data from Japan will be very important in order for the yen to keep its downward momentum. Of course, expectations that the FOMC will begin tapering the QE policy are also aiding the dollar. Some anticipate the first announcement to come as early as December, but most anticipate a January meeting to lead to the first cut so that more economic data could be evaluated, especially on the employment front. These are key factors that will be moving this currency pair in the coming months.

I think it will be much more important to monitor the fundamentals than technicals as there remain risks in both Japan, US, and EU markets and any major disruption could cause the yen to act as a safe haven and lead to a reversal in favor of the yen.

Technical:

On November 8th, the USD/JPY saw a breakout of the wedge pattern that has been consolidating during the summer months. The combination of this technical breakout along with the aforementioned key fundamental factors has led to the perfect storm in JPY weakness. The key levels to watch if the pair continues to increase are the highs set over the past 7 months, with the 103.70 the key level before we can confirm the trend. Some other key levels to be aware of are 105.50, which is the 61.8% fib level from the 124 highs in 2007 to the lows of 75 in 2011. During that time, the yen strengthened due to the unwinding of the carry trade as global economies weakened and yield was more difficult to find given the risk involved. Above 105.50, traders should look to the 110 level before further consolidation occurs.

To the downside, which we only anticipate if equity markets begin to breakdown, a break below the supporting wedge trend line could lead to mid-80s in the cross.

Outlook:

While the current strength of the USD/JPY cannot be ignored, I’ll be looking for this week’s Japanese economic data to confirm the bullish potential. A break above 103.70 and 105.50 will act as key technical resistance levels and if this trend continues, a target of 110 could be insight during the first half of 2014.

As mentioned earlier, there remain risks that must be monitored. These risks are hidden in the low bond yields that are manipulated by central banks in order to push investments into riskier assets. While this could continue indefinitely, these types of actions have the potential to form bubbles. Market participants are aware that if the QE policies were not present, yields for risk free assets such as government bonds would be much higher, a key measure of market risk.  I think it’s prudent to put the latest breakout out of the wedge into context and be aware of these risks as volatility could increase very quickly and price action could return to what we saw in 2008.

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