USDJPY may see a relief rebound as BOJ looms

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By :  ,  Financial Analyst

On Thursday 20 June 2017, Japanese central bank, BOJ will announce its latest monetary policy decision and publish its latest quarterly outlook report. The median consensus is expected to be status quo with no changes on its quantitative and qualitative monetary easing (QQE) with yield curve control programmes.

During the last monetary meeting held on 16 June 2017,  BOJ had left its key policy interest rate unchanged at -0.1%, maintained the 10- year JGB yield curve control programme at around 0%  and continued its purchase programme of  equities related exchange-traded funds and Japan real estate investment trusts. During the press conference, BOJ Governor Kuroda had been reluctant to give any guidance on BOJ’s exit plan from its on-going massive QQE and yield curve control programmes. In contrast, Eurozone (ECB), U.K (BOE) and even Canada (BOC) central bankers had signalled that “low interest rates” environment are coming to an end and their respective countries’ borrowing costs are set to rise.

Since the last monetary policy meeting outcome on June, inflationary pressures and catalysts to rekindle inflationary pressures had been lacklustre.

  • The core CPI excluding fresh food and energy for May remained unchanged from a year ago (no y/y growth) and only recorded a meagre m/m growth of 0.1%. In addition, the preliminary advance Tokyo core CPI excluding food & energy for June had declined by 0.4% y/y from -0.2% y/y recorded in May. Thus, the advance reading for the Tokyo CPI has shown that the downward trend in inflation probably continued into June.
  • Retail sales for May came in at 2% y/y which was below median consensus of 2.6% and the April reading of 3.2% y/y. When compared with the previous month of April, retail sales declined by 1.6%, the worst m/m decline since December 2016.
  • Consumer confidence had dropped to 43.3 in June from 43.6 in May due to deterioration in households’ perception regarding general livelihood. 

In the last quarterly outlook report released in April 20017, BOJ had upgraded its forecast of economic growth where it expected real GDP to grow by 1.6% in fiscal year 2017 from a 1.5% forecast made in January.  It downgraded its inflation growth forecast slightly where fiscal year 2017 is expected to see a rise of 1.4% versus an earlier forecast of 1.5% made in January.

Given the aforementioned recent set of lacklustre inflationary related economic data, BOJ may further downgrade its inflation estimates in its latest quarterly outlook report and state that the reflationary process may take longer than expected to achieve the 2% inflation target due to a cautionary stance that is being adopted by corporations on pricing on goods/services and wage setting.

For the yield curve control programme, BOJ had send a strong signal to the markets recently on 07 July where BOJ boosted its current bond purchases programme as it prepared to purchase an unlimited amount of 10-year fixed Japanese government bonds (JGBs) . It also increased its purchase on the three to five-year JGBs on 12 July to 330 billion yen from 300 billion yen at its previous purchase operations.  BOJ’s actions came as a result of a steady rise in JGB yields seen in the past month which was in line with higher overseas yields. Thus, BOJ had sent a message that it would not follow the steps of the U.S. Federal Reserve and other developed nations’ central banks to tighten liquidity soon.

Therefore, we expect BOJ to maintain its current set of monetary policies and yield curve control programme despite the lack of available JGBs to purchase in the secondary market. Coupled with a possible downgrade on its inflationary outlook, the recent decline seen in the USD/JPY in line with general USD weakness may see a short-term relief rebound.

 Now, let’s take a look at USD/JPY from a technical analysis perspective.

Short-term technical outlook on USD/JPY

Key technical elements

  • The recent decline from its 11 July 2017 high of 114.50 is now coming close to a graphical support of 111.60/50 which is defined by the former minor swing highs congestion areas of  02 June/21 June 2017 (see 4 hour chart).
  • The aforementioned 111.60/50 graphical support also confluences with a Fibonacci cluster (see 4 chart).
  • The recent 2.2% decline from the 114.50 high of 11 July has also started to exhibit bearish exhaustion signals where its price action since 14 July has formed a bullish “Descending Wedge” configuration with its upper boundary now at 112.40. In addition, the 4 hour RSI oscillator has flashed a bullish divergence signal at its oversold region. These observations suggest the recent downside momentum of price action has started to ease (see 4 hour chart).
  • The significant short-term resistances stand at 113.45 and 113.80 which are defined by the graphical minor swing high area of 14 July 2017 and close to the 61.8%/76.4% Fibonacci retracement of the on-going decline from 11 July 2017 high of 114.50 (see 4 hour chart).

Key levels (1 to 3 days)

Pivot (key support): 111.60/50

Resistances: 112.40, 112.90 & 113.45

Next support: 110.97/65


Therefore as long as the 111.60/50 short-term pivotal support holds and a break above the near-term resistance of 112.40 may see a potential relief rebound on the USD/JPY to target the next resistances at 112.90 follow by 113.45 next.

On the other hand, failure to hold above 111.50 is likely to invalidate the preferred relief rebound scenario for a deeper corrective decline towards the next support at 110.97/65 (61.8% Fibonacci retracement of the recent up move from 15 June 2017 low to 11 July 2017 high & the former minor swing high areas of 05 June/09 June 2017).

Charts are from eSignal


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