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team Graham Parlane

USD/JPY - this time it's different!

Posted by Graham Parlane on 16 September 2012

Good morning

A number of factors cropped up last week that have me thinking USD/JPY may have put in a medium term low.

For a very long time now the JPY has seemingly defied all predictions, continuing to strengthen in the face of some very serious underlying Japanese economic malaise. One of the factors, apart from supposed ‘safe haven’ JPY buying (to be fair I’ve never understood that particular concept with regard to the JPY) which may have caught the market out in the last year or so may have been the boost the Japanese economy received from activity surrounding the Tsunami clean up.

Anyway, things look a little different to me now in the wake of the FED decision of last week. The USD/JPY has long been highly correlated with movements in medium term U.S. interest rates. Last week they rose. It’s my belief that if forthcoming U.S economic data comes in ‘good to solid’ going forward then the market is going to fret that the FED may potentially overinflate the economy and thus will drive medium term rates higher. That’s a definite positive for USD/JPY.

Turning to technical factors a couple of charts support my case.

Fig 1 – Weekly USD/JPY. The base case. Remember my chart of the 5 year downtrend being broken earlier in the year?

USDJPY – Click here to view chart

Fig 2 – USD/JPY Weekly. A closer look. A potential reversal week in the form of a ‘doji’ where USD/JPY tried to fall but ended up being strongly repulsed from the lows. This indicates solid buying demand and a higher close to this week should confirm the case.

USDJPY a Closer Look – Click here to view chart

Fig 3 – Chart of Honda v USD/JPY (sourced from the Gartman Letter). This highly correlated overlay suggests that USD/JPY should be higher (or Honda lower of course!).

Honda and USDJPY – click here to view chart 

Lastly, market chatter on Friday had it that the BOJ was checking rates. Now this is a common enough occurrence and doesn’t mean that the BOJ will intervene but I can tell you that intervention doesn’t occur WITHOUT the BOJ first checking rates !

Regards G.

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