Will USD/JPY Break 100?

Will USD/JPY Break 100?

Will USD/JPY Break 100?

Fundamentally, we are long term dollar bulls but in the near term, there’s more downside than upside risk for USD/JPY. Stocks are trading heavy and the U.S. Presidential Debate could cause further weakness in U.S. equities. According to studies dating back to 1980, U.S. stocks trade lower the week after a debate 80% of the time with an average 1.5% loss for the S&P 500. And we know that if stocks fall, USD/JPY generally drops as well. Traditionally stocks rise when the current party wins and in this case, there’s so much uncertainty surrounding a Trump victory that if Clinton is crushed in the debate, the sell-off in stocks could be more severe than usual. Foreign investors in particular are extremely nervous about a Trump win and market participants have already sold dollars in fear of this possibility. Unfortunately the market hasn’t sufficiently priced in the possibility of Trump rising out of tonight’s debate victorious and for this reason, the larger reaction in currencies will be to a Clinton defeat. Also, it is estimated that Japanese life insurance companies and other similar institutions have only hedged 60% of their yen risk. If USD/JPY drops below its August low of 99.50, we could see that ratio rise to 80%, which would involve buying more yen.

Technically, the daily charts show USD/JPY rolling over with 100 likely to be tested. If 100 breaks it could be a quick drop to the August low of 99.54 and if that cracks as well, the pair will target the June low of 99.03. On the upside, a stronger recovery isn’t possible until we see a close above 101.25.

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