Update on USDJPY: Sep 10, 2015

While I present updated USDJPY charts in every daily post, it’s been a while since we took a view from 30,000 feet.  Stripping away all the expectations associated with our analog, USDJPY has finally settled into some fairly straightforward patterns.

The big picture shows several very significant features.  First, the drop from 1998 followed a fairly well-formed channel that was interrupted in October 2011 by a massive QQE expansion.  The subsequent yen devaluation (USDJPY increase) sent the pair screaming higher where it barely reacted at the yellow .382 or the red .500 — not even dropping to the next lower Fib level.

Another QQE expansion sent it spiking out of the huge channel and up to the yellow .618 at 120.11 where it was quite overdue for a retracement.  However, since the pair is carefully managed by the BoJ, and any decline is instantly translated into falling equity prices (thanks to the yen carry trade), it was, again, not really permitted to react.2015-09-10 USDJPY big harmonic 0300It would occasionally drift lower, but as soon as equities started sagging it was immediately brought right back up to that key Fib level.  Finally, this past May, it broke out.  But, it ran into the rising purple channel that broke down back in 2008.

This backtest has proven problematic for USDJPY’s continued upside, as has the BoJ’s pause in announcing additional QQE.  USDJPY dropped back down and backtested the .618 (well, almost…stocks had a hissy fit) before zipping back up to retrace .886 of that particular drop on Aug 12.

That’s when the wheels almost came off the bus.  USDJPY had completed a large IH&S Pattern, and was surely headed higher.  But, it didn’t.  China and nearly all of SE Asia was in trouble, and all that hot money was flooding back into and strengthening the yen (weakening USDJPY.)2015-09-10 USDJPY CU 0300The next two weeks’ denouement was abrupt.  The impact it had on stocks was equally dramatic.  SPX, shown above in purple, fell 238 points (11.3%.)

However, the central bankers were able to stem the tide, holding USDJPY to a Bat Pattern, with the final thrust (D) only slightly exceeding the purple .886 Fib.  When all was said and done, USDJPY’s daily range on Aug 24 was 5.87 — the largest ever since the 2010 mini-crash.

2015-09-10 USDJPY daily Bat 0300Every Bat Pattern has the potential to morph into a Crab Pattern.  And, this one is no different.  But, the primary channel that has set up over the past 10 months doesn’t really support the idea.

It’s not a great channel.  It suffers from many abnormalities — not the least of which was the Aug 24 plunge that momentarily busted it.  But, it does an excellent job of demonstrating what TPTB wanted and needed: a gently sloping uptrend that keeps the yen carry trade alive without requiring additional yen devaluation.

2015-09-10 USDJPY daily chnl 0300Putting it all together, we get a picture of a tightly-controlled experiment that came very close to a very messy implosion.  In the 2-1/2 weeks since Aug 24, however, central bankers have done a pretty good job of glossing over the economic turmoil underlying global equity valuations.

But, they haven’t yet answered the most important questions:  will they further expand quantitative easing?  And, regardless of whether there’s additional easing, will they continue to devalue the yen?

I’ve analyzed this and speculated on the ultimate outcome ever since releasing our USDJPy analog on March 27.  In my opinion, they have no choice [see: An Offer Japan Can’t Refuse.]

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