USDJPY is nearing our downside target of 120.11 — first charted back on early June [see: Sell in May, Go Away.]Recall that this is a critical Fib level — the 61.8% retracement of the drop from 147.65 to 75.56 that began in August 1998. As we’ve detailed countless times, the yen’s demise has been almost solely responsible for stocks’ rally since 2011.
The effects of the yen carry trade [EXPLAINED HERE] have been especially easy to see since this past December, when USDJPY first reached 120.11.
SPX (thin purple line) went into a holding pattern until mid-May, when USDJPY finally shot above 120.11 in a meaningful way. Since completing a Crab Pattern at 125.76, it’s been all downhill ever since.While USDJPY’s volatility has surprised some, it fits perfectly with the analog [WHAT’S THIS?] we first proposed in late March [see: A New Analog] and refined along the way. The post focused heavily on USDJPY’s SMA200:
…[the] tag back then …would equate to July 29, 2015. According to my calculations, USDJPY’s SMA200 — which is currently at 111.91 — should arrive in the vicinity of the critical yellow .618 at 120.11 around the end of July.
This analog has been extremely helpful in keeping our results above average in June [see: June Results] and over 5% thus far in July.
It’s pretty clear now that the SMA200 will arrive at 120.11 around that time. And, it’s pretty clear that Japan Inc. is taking it on the chin as USDJPY dips to meet it. This is all by design.
Our central thesis has been that the carry trade would ultimately be strengthened by an expansion of QQE, but that said expansion would only take place when the BOJ was sufficiently panicked by a market sell off.
The Nikkei 225 futures are off over 5% today, and down 7.5% since the Jun 24 highs. I’d say we’re pretty close to panic time.