This article is written by Matthew Clark who is the owner of Global Forex Pros.
ABOUT THE AUTHOR: Matthew has been a trader for more than 20 years running FX desks at major banks and retail brokers. He recently started Global Forex Pros as a service for brokers to offer their clients, teaching them to trade in real-time as professional traders learn at banks and institutions, giving the retail trader the confidence to trade and increasing volumes for the broker.
The USD/JPY has been sold off repeatedly since the post-FOMC rally and yesterday we closed for the first time below the trendline break out that occurred on the US Non-Farm Payroll data. This morning, that slide has continued with the dollar hitting fresh one month lows against the yen. It appears to us that any attempt now to test the 124.14 highs from July 2006 and our initial target after the break up through the 120.50 has to be revised.
The last few days have seen some of the major investment banks reduce their Q1 GDP forecasts following the FOMC’s dovish release last week. Barclays lowered its estimate to 1.2% from a previous forecast of 1.3% following yesterday’s weak durable goods orders. Goldman Sachs downgraded its forecast again to 1.8% from 2.00%. This has been a contributing factor to not only the USD/JPY sell off, but the dollar across the board as it continues on its steepest weekly slide in over 3.5 years. This move has been exasperated and continues following the dovish comments from Chicago Fed President Evans who shocked markets yesterday by saying that the Fed could loosen policy further if needed.
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JPMorgan Chase & Co which last year said JPY would strengthen in the first half of last year has proven correct, now saying that the currency’s 2 1/2-year sell off is running out of fuel. They say that the JPY stability (we are trading as I write this around 1 % stronger than the start of the year ) highlights future appreciation following the 6 straight months of gains of Japanese exports. They say that the 30 per cent slide versus the dollar since Prime Minister Shinzo Abe’s rise to power in late 2012 has boosted the nation’s exports to such a degree that the currency is close to finding a floor. Looking at the price action over the last few days, we at Global Forex Pros would tend to agree at least over the short-term. Japan’s currency has advanced over 5 percent this year against its major peers, the strongest advance after the Swiss franc, Bloomberg Correlation-Weighted Indexes shown below.
“There is a high probability this year will mark the yen’s low for now,” said Tohru Sasaki, a former Bank of Japan official who is now JPMorgan’s head of Japan rates and currency research, in a recent Bloomberg interview. With Abe’s stimulus program starting to revive trade flows and the drop in oil prices cutting imports.
Although we cannot rule out another test of the 124-128 level later this year. In the short- term the break back down below the 120 level was fuelled by the safe haven appeal of the JPY. Support stands very close at 118.20 (on an Ichimoku cloud basis) and a break below this level on a daily close basis will signal another leg lower in this USD sell off. Expect some short-term support there, but look to sell any rallies in the USD/JPY for an eventual break to occur and a test of the February lows soo at 116.80. Looking at the RSI we can see divergence with the post-FOMC sell off so some retracement is expected soon and look to sell rallies up to the 38.2% at 119.74 or even as high (although not expected) 76.4% and top of the wave iv at 121.15.