It’s pretty interesting that today — one day before the expected cyclical low of our USDJPY-based analog — is the day that Abe’s close advisor Koichi Hamada chose to announce that the yen should increase in value to 105 to the dollar versus the current 120ish. For more on Hamada’s views, check out THIS VIDEO.
The USDJPY’s reaction was swift and unambiguous — though, just as quickly, the pair popped right back to the yellow .618 at 120.11. Is it just a backtest, or something more troubling for Abe and friends?
The futures reacted mildly, but what if carry-traders should get the idea that Abe intends to end the free ride? Would they meekly ride off into the sunset, or would they stand their ground?
At the end of the day, who really controls the USDJPY? This is a question the “market” will decide for us. And, given that all of the currency pairs we chart are at important inflection points, it will be a very interesting next couple of days.
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The dollar has reached the .886 retrace of its drop from 100.785.
CL has, interestingly, not picked up the slack from a plunging USDJPY. Though up from last Friday, it conspicuously did not make it past the purple midline.
Why? As we’ve discussed many times lately, a weakening euro can mute the yen’s impact on DX. What it loses from the rising yen, it can gain from a weakening euro. While reversing at the .886, DX isn’t exactly plunging at this point.
EURUSD has reached the .886 of its rise from 1.04. While a reversal seems likely, it would have to clear both falling red channel midlines it has dropped beneath.
Look for SPX to run into a brick wall at 2106.95 or so. From there, it should be downhill.
This is the chart we’ve been using the past few weeks, before CL’s rally and USDJPY retreat to 120.11 completely screwed up the falling white channel.
It was a solid chart, with a nice intersection (purple dot) between the red .618 and falling white channel midline or, alternatively, the red .886 at the TL off the Dec and Feb lows (yellow dot.)
The white channel corresponded nicely with the falling red channel for USDJPY.
They were both busted last week — SPX on Friday by USDJPY’s clinging to the 120.11 line long after it should have let go. Note that the “market” has sought refuge from the USDJPY 8 separate times on the daily chart since early December (much more frequently on the hourly chart.)
And, that brings us back to the question posed above” “who’s really in charge of the USDJPY?” If Abe really does want the yen back at 105, we’re talking about October 2014 lows — before the Oct 31 QE expansion.
USDJPY bottomed out at 105.19 on Oct 15, the same day SPX bottomed out at 1820. When Japan’s QQE was expanded two weeks later, it enabled SPX to establish new all-time highs.
USDJPY is the thin purple line on the SPX chart below. Would Abe really help precipitate a decline to the October lows? I seriously doubt it.
I suspect what’s really happening is a bit of sabre-rattling with respect to oil prices. Remember, our thesis is that a deal was made between various powers that be. There are a lot of moving pieces, but it involves a cheaper yen in exchange for lower oil prices (shown below as the thin purple line.)
If CL continues to creep back up as it has over the past month, it will take a toll on Japan’s oil-dependent economy. They can’t afford higher oil prices and a lower yen. So, something’s gotta give. Either lower oil prices, or we’ll let the yen normalize — and, unravel all the wonderful things that the yen carry trade has done for markets around the world.
It was communicated through Koichi Hamada because he’s here in the US, he’s articulate and well-respected (a Yale professor), he’s assumed to reflect Abe’s attitudes about things…but, he’s not Abe. Therefore, no blowback in case Wall Street and the FOMC don’t like what they hear.
Sure, I’m speculating. But, it’s the only theory that makes any sense at all to me. Keep an eye on USDJPY as it dips back below the SMA100 — now at 119.19. And, we’ll see if SPX can manage to break below that Oct 2014 trend line again.