On Thursday 21 September 2017, Japanese central bank, Bank of Japan (BOJ) will announce its latest monetary policy decision where the median consensus is expected to be status quo with no changes on its quantitative and qualitative monetary easing (QQE) and yield curve control programmes.
Economic activity in Japan has accelerated in the past month where it can lead to a potential strengthening of consumer prices in the coming months.
- Manufacturing PMI has continued its modest pace of expansion since the start of 2017 where it rose to 52.2 in August from 52.1 seen in July.
- The Producer Price Index (PPI) for consumer goods had increased by 2.9% y/y in August which was the highest annual gain seen since the sales tax hike implemented in 2014.
Despite such recent positive economic data, we do not think it will be sufficient enough to move the “needle” in order for BOJ to offer policy guidance on the start of normalising its ultra-lose monetary policy. The reasons are as follow;
- The latest core consumer prices (excluding energy & fresh foods) rose by 0.1% y/y in July 2017 which recorded an average gain of 0.4% in the first four months of the current fiscal year. In BOJ’s latest economic outlook report that was released in the July meeting, the central bank lowered its inflation forecast for the current fiscal year from 1.4% to 1.1%. Thus based on the current pace of price gains seen in consumer prices, it will need a remarkable turnaround to reach BOJ’s latest forecast numbers which seems highly unlikely at this juncture.
- According to a NHK media report, Japanese Prime Minister Abe may call for a snap general election in October 2017 where he will make a decision after talks with senior government officials and may announce the move as soon as 28th September when the parliament reopens. Thus, BOJ is unlikely to “rock the boat” by announcing changes to its current monetary policy ahead of a potential upcoming general election.
Thus, BOJ is likely to keep its monetary policy settings unchanged which is likely to support further potential up move in the USD/JPY.
However, do note that there are also external factors that can impact the movement of the USD/JPY in the next few days such as;
- The U.S. Federal Reserve monetary policy meeting on Wed, 20 September where it will also release its latest economic data projections as well as future projected movement (dot plot) of the Fed Funds interest rate. The consensus is no interest rate hike on 20 September and the Fed is expected to announce the steps for the start of a reduction in its US$4.4 trillion worth of Treasury and mortgage bonds on its balance sheet from its previous QE programmes. In addition, Fed chairwoman Yellen is expected to lay the groundwork in her press conference for an interest rate hike in the 13 December 2017 meeting where the latest data on the Fed Fund futures obtained from CME (as at 19 September 2017) has indicated a probability of 55.8% of a 25bps hike in the Fed Funds interest rate to 1.25%-1.5% in 13 December 2017, up from a probability of 41.3% seen one week ago. Thus, any further hawkish comment from Yellen during the press conference or a change in tonality on inflationary expectations as per highlighted in the accompanying monetary policy statement to reflect a more upbeat view after a series of lacklustre numbers seen in the past months are likely to add impetus for a further up move in the USD/JPY.
Now, let’s take a look at USD/JPY from a technical analysis perspective.
Medium-term technical outlook on USD/JPY
Key technical elements
- The USD/JPY has staged a bullish breakout from its former medium-term resistance from 04 August 2017 now turns into a pull-back support at 110.50 (see daily chart).
- In the longer-term, the USD/JPY is still evolving in a descending range configuration in place since 10 March 2017 high with its range resistance coming in at 113.85 (see daily chart).
- In the short to medium-term, it has started to evolve within a bullish ascending channel in place since 08 September 2017 low with its lower boundary (support) and upper boundary (resistance) at 111.25/111.00 and 112.40/80 respectively (see 4 hour chart).
- The upper boundary of the aforementioned ascending channel at 112.40/80 also confluences with the swing high areas of 17 July/20 July 2017 and a Fibonacci cluster (see 4 hour).
- Observations from momentum indicators have indicated that the medium-term upside momentum of price action remains intact. The daily RSI oscillator has continued to inch higher since its bullish break of a former corresponding resistance at the 54% level. In addition, it still has further room to manoeuvre to the upside before it reaches an extreme overbought level of 83%. The shorter-term 4 hour Stochastic oscillator has remained within its overbought zone without any bearish divergence signal (see daily & 4 hour charts).
Key levels (1 to 3 weeks)
Intermediate support: 111.25/111.00
Pivot (key support): 110.50
Resistances: 112.40/80 & 113.30/85
Next support: 108.55
Therefore, as long as the 110.50 key medium-term pivotal support holds, the USD/JPY is likely to shape another round of potential bullish impulsive upleg within its medium-term uptrend in place since 08 September 2017 low towards the next resistance at 112.40/80. A break above 112.80 may open up scope for a further acceleration towards the 113.30/85 zone (descending range resistance from 10 Mar 2017 high).
On the other hand, failure to hold above 110.50 should invalidate the medium-term uptrend for another round of choppy downward corrective movement towards the next support at 108.55 in the first step.
Charts are from eSignal
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