can boj stall the current weakness in usdjpy 1854212017

On Friday 16 June 2017, Japanese central bank, BOJ will announce its latest monetary policy decision where consensus is expected to be status quo with no change in its policy settings.

During the last monetary meeting held in April 2017, BOJ 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.

It also raised Japan economic growth forecast for fiscal 2017 to 1.6% from an earlier projection of 1.5% due to rising exports and an improving external environment. On the other hand, BOJ lowered slightly its core CPI forecast for fiscal 2017 to 1.4% from its previous estimate of 1.5% due to weak pricing in consumer durable goods and services and maintained that its 2% inflation goal target that will be achieved by around fiscal 2018.

In the past few weeks, there had been notable signs of an improving Japanese economy;

• The Consumer Confidence Index had increased slightly in May to 43.6 from 43.2 in April. It has been in an upward trajectory path for almost close to a year since its February 2016 reading of 40.3.
• In the January to March quarter of 2017, Japanese corporate profits rose by a robust pace of 26.6% y/y with manufacturers’ profits up by a stunning growth of 70.3% y/y. Thus, Japanese corporates had now recorded three consecutive quarters of improving y/y earnings growth since Q3 2016.
• Yamato Transport, a major logistic firm had planned to increase its base rate for individual customers from October 2017, its first hike in 27 years. If other Japanese firms start to follow a similar path to increase their cost of services, it can help to ease the decade long of deflationary pressure in Japan.
• Industrial production expanded by 4% m/m in April that reversed a contraction of 1.9% m/m recorded in March.

However, nominal wage growth in April 2017 only recorded a modest rise of 0.4% y/y despite a tight labour market condition where the unemployment rate remained unchanged at 2.8% in April 2017, the lowest since June 1994.

Therefore, we are still expecting BOJ to keep its monetary policies unchanged but with its JGB buying programme that it pledges to increase at an annual pace of 80 trillion yen is coming close to a limit where BOJ now owns around 42% of the JGB market. In addition, the BOJ’s purchases of JGB has started to slow down in the past two months where its purchases of 4.3 trillion yen in May were the lowest since it increased the pace of JGB buying programme in October 2014.

Thus, there is now a growing risk that BOJ is not able to maintain its current quantum of JGB buying due to a lack of availability and it may omit the explicit target of 80 trillion yen target in its monetary policy statement. If such scenario arises, market will view it as the start of a “stealth tapering process” which is likely to add further downside pressure in the USD/JPY in the short to medium-term.

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

Short-term technical outlook on USD/JPY

(Click to enlarge charts)

Key technical elements

• Yesterday, the USD/JPY had managed to survive its early carnage after an initial plunge before Fed FOMC to test the gap support of 109.11/28 seen after the outcome of the 1^st round of French presidential election on 24 April 2017 (see 1 hour chart)
• However, its short-term bearish trend in place since 11 May 2017 high of 114.37 remains intact as it continues to evolve within a descending channel with its upper boundary now acting as a resistance at 110.30 (see 1 hour chart).
• The aforementioned descending channel resistance of 110.30 (now key short-term resistance) also confluences with the former minor swing low area of 18 May 2017 and close to the 23.6% Fibonacci retracement of the on-going down move since 11 May 2017 high to yesterday’s low  (see 1 hour chart).
• The significant short-term support now rests at 108.18 which is defined by 17 April 2017  low, the lower boundary of a micro descending channel in place since 02 June 2017 high (depicted in dotted red) and the 1.00 Fibonacci projection of the decline from 02 June 2017 high to 07 June 2017 low projected from 09 June 2017 minor swing high of 110.81 (see 1 hour chart).
• Observations from momentum indicator as seen on the daily and hourly RSI oscillators have indicated that bearish momentum remains intact for both medium and short-term time horizons.

Key levels (1 to 3 days)

Intermediate resistance: 109.50

Pivot (key resistance): 110.30

Supports: 108.80 & 108.18

Next resistance: 110.70/120.00

Conclusion

Short-term bearish trend remains intact for USD/JPY. As long as the 110.30 pivotal resistance is now surpassed, the pair is likely to see another potential down leg to retest yesterday’s (14 June) U.S. session low of 108.80 before targeting 108.18 next.

However, a clearance above 110.30 may invalidate the preferred short-term bearish bias for a corrective rebound towards the 111.70/120.00 range top formed in 19 May/25 May 2017.

Charts are from eSignal

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