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USD/JPY Bulls Get the Green Light from the Fed
Today’s FOMC announcement breathed new life into the dollar and there is typically another 0.75%-1.5% continuation after major revelations in monetary policy. One of the best currencies to sell versus the dollar is the Japanese Yen. Hopefully tomorrow’s Q3 GDP report will lead to a correction in USD/JPY that could trigger our entry. Investors bought dollars aggressively after learning that the central bank is still actively thinking about raising interest rates in December. This specific December guidance sends a strong signal to the market that the Fed is looking past the recent slowdown to the prospect of stronger growth and higher inflation expectations. The next big focus for the market will be Friday’s Bank of Japan monetary policy announcement. According to recent surveys 40% of investors expect the BoJ to ease, which is consistent with economist expectations. Of the 37 economists surveyed by Bloomberg, 14 expect the central bank to increase the size of its asset purchase program and their expectations range from a 5 trillion to 20 trillion increases. Since the last monetary policy meeting on October 6, we learned that machine orders, industrial production, consumer confidence and retail sales plunged. Although oil prices jumped today, inflation remains low, indicating that it will be a long time before their 2% inflation target is reached. The risk of a contraction in Q3 GDP screams of the need for more easing but Japanese officials have been dismissing the need, signaling that they are in no rush to act. The Bank of Japan rate decision will be a tough call and the risk is to the upside for USD/JPY because we do not expect a big reaction to steady policy. Easing on the other hand would be very positive for USD/JPY. We can’t help but remember that a year ago, the BoJ sent USD/JPY soaring 500 pips in 3 days after they shocked the market with more QE.
Technically even though today’s USD/JPY rally has been strong, there’s still quite a bit of resistance for the currency pair above current levels. First USD/JPY needs to break above the August high of 121.75. Then it needs to clear the 100-day SMA at 121.90. Only after a move above 122 can we see the potential for a move to 125. Further gains are likely after today’s FOMC statement but its important to be aware of these levels. As for support, 120 is very significant not only because it’s a psychologically meaningful level but also because its where the 50-day SMA and the apex of the previous triangle converge.
Will the Fed Help or Hurt USD/JPY?
There has been no shortage of volatility in USD/JPY pre FOMC. The currency pair started the Asian trading session just under 118, dropped to a low of 115.57 in Europe before ending the North American trading session around 117. While the move was driven by the wild volatility in oil and the consequences of Russia’s rate hike, the dollar recovered strongly on the hopes that tomorrow the Fed will take another step towards policy normalization. However today’s volatility makes the central bank’s decision more difficult because an overly hawkish bias could send global equities tumbling further. So while we still expect the Fed to drop its considerable time language from the FOMC statement, Janet Yellen may attempt to downplay changes, which would minimize the positive impact on the dollar. We would not surprised if the greenback sold off as a result as the year end approaches and the lack of an unambiguously positive bias triggers additional profit taking on long USD/JPY positions. In order for USD/JPY to reach 120 in 2014, the Fed needs to be very hawkish and Yellen needs to say specifically when rates will rise. Anything short of that could actually be negative for the currency.
Taking a look at the daily chart of USD/JPY, if the 115.50 support level breaks, the next target for a decline should be the 100-day SMA right below 112. If 115.50 holds and USD/JPY breaks back above 118, the rally should extend as high as 120, which is not only a psychologically significant level but also the 61.8% Fibonacci retracement of 1998 to 2011 decline.
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