In our December 1 update on DX [Is DX Really Breaking Out?] I (somewhat cynically) suggested that DX’s rise above a key Fib level was just another scheme to convince investors that the markets were doing just fine.

TPTB have done their best to convince the investment world that higher rates are just around the corner — even as signs of a faltering global economy continue to stack up.  Ramping the dollar up past a natural reversal point is just one more way to support that meme.

As the FOMC dates approach, keep an eye on DX.  A sudden plunge below the .886 would be an excellent way of detecting that investors aren’t buying the story.

Since Dec 1 (the yellow arrow, below) DX has plummeted, forcing USDJPY and stocks lower as “investors” abandoned the yen carry trade.  It got a momentary reprieve (the white arrow) when the FOMC raised rates on Dec 16.  But, since then, it’s been all downhill until today — where it has nearly reached our next downside target.Clearly, the dollar’s performance is critical to stocks.  What next, then, from the world’s reserve currency?

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To continue yesterday’s theme, we focus this morning on the Nikkei futures, which are testing a critical TL – again.  NKD is the first derivative of the BoJ’s manipulation of stocks via yen devaluation and, at times, leads “markets” in carry trade-oriented algorithms.

This support, therefore, is critical not only to NKD, but to SPX and the entire yen carry trade complex. [see: Update on NKD: Feb 9, 2016.]

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In our last update on NKD, we noted the arrival at an important junction of the 50 and 100-day moving averages.  We noted at that time that a drop through those levels would be quite bearish for both NKD and SPX.  NKD did drop through, managed a feeble recovery for two weeks, then really plunged.

This was somewhat surprising, given that the NKD is one of the most heavily manipulated of the major “markets.”  What wasn’t surprising is where it finally found support on Jan 21.  Fun fact?  After a 13.4% bounce that climaxed in a disappointing BoJ QQE experiment, NKD is right back to that bounce spot.  It’s a very important spot.

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One simple chart illustrates the importance of holding 15,820.  Abe, Kuroda et al have a lot riding on this trend line.  They should step in and aggressively buy, today. 

I’ve been beating the yen carry trade drum so long, I can’t remember when it didn’t matter.  Today, as on Jan 20, USDJPY has dropped below the bottom of the red channel.  And, stocks are not amused.  S&P futures were off over 31 points overnight before attempting the latest bounce.ES has dropped 100 points since USDJPY reversed at our upside target on Jan 29 following the BoJ’s ill-fated attempt to turn things around [see: BoJ Underwhelms.]  Now, as USDJPY drops through the channel bottom again, the “market’s” fate rests on whether or not the central planners will elevate the USDJPY yet again.

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QQE didn’t work.  Jawboning didn’t work.  Not even NIRP worked.  When all else fails, the only course left to central planners is direct intervention.  Welcome to direct intervention.

Yesterday, USDJPY tagged the bottom of a channel dating back to Nov 2014  for the second time in two weeks.  Remember, on Jan 20 it actually dipped below the bottom, resulting in SPX briefly dropping below the neckline of a large H&S Pattern targeting 1530.As we’ve discussed many times, this channel can’t fail without the yen carry trade suffering a huge setback and stocks plummeting much lower.

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Yesterday’s meltdown made perfect sense — up to a point.  As USDJPY broke down through support level after support level, it was finally clear it was heading for 116.50 — the bottom of the red channel dating back to Nov 2014.

We’ve written about this channel extensively, as it represents the line in the sand for USDJPY and, more importantly, for global equities [see: The Only Charts That Matter.] Quite simply, a drop through 116.50 means no more upside for stocks.  From Jan 19:Everything was progressing according to plan when TPTB panicked and booted CL out of its thrice-failed trajectory into the stratosphere.  The impact on stocks is perfectly illustrated by NKD, which was only 10 points away from its obvious .618 target when the excitement began.  See if you can spot the moment.CL continues ramping this morning.  How high will they push it?  As high as they need to in order to distract carry trade investors from the USDJPY debacle going on.

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I was a bit chagrined when, after posting BoJ Underwhelms last Friday, a 47-pt meltup followed the initial ho-hum reaction.  My point then was that the BoJ had:

1.  managed to ramp USDJPY directly to overhead resistance; and,
2.  it wouldn’t matter unless yen carry trade investors believed it would continue higher.

I’m chagrined no more.  Not only did the pair reverse at that resistance (a major channel midline and the SMA 200), but the subsequent reversal plunged right through the biggest, most important line of support in the most important instrument that affects the “market” — the USDJPY’s 61.8% Fib at 120.11.  It erased over 80% of USDJPY’s post-Kuroda gains, and 88.6% of SPX’s gains.

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If yesterday was your idea of fun, you’ll probably love today.  When USDJPY tested the red channel midline and SMA200 after the BoJ’s underwhelming NIRP action, we forecast the next move would be lower.  And, it has been.  Last night, it dropped back below the SMA100, too.

There are numerous fundamental reasons why this might be the case.  But, since the USDJPY usually trades where the BoJ wants it to, the real reason is because they want to backtest the critical Fib at 120.11 (dashed, yellow line.)  Any potential decline should be defended there.  And, any further advance should be launched by one last backtest.The key, for the bulls, is accomplishing the 1.57 decline without too much disruption to the equity markets. Yesterday, it meant an inexplicable rally after the initial sell-off in the opening hour.  Will they permit the rest of the decline today?

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Friday’s runaway meltup was seemingly driven entirely by USDJPY.  On the daily chart, the 47-pt gain seems clearly correlated to the USDJPY rebound (that we had forecast several weeks ago.)

In reality, the initial USDJPY spike was responsible for only the first 20-25 points.  After that, it was all CL, which moved in tandem with USDJPY as it tried to regain its overnight highs.

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Ten days ago, we outlined the predicament the market masters were in as a result of the yen’s strength [see: The Only Charts That Matter.]  We maintained, then, that the BoJ needed to get USDJPY back above the bottom of the red channel bottom dating back to 2014 in order to save stocks.

Last night’s venture into NIRP for a very small portion of Japan’s debt burden managed to get USDJPY up off the channel bottom.  But, gauging from the futures’ lethargic reaction, investors are underwhelmed.Note that the last time Kuroda et al levitated USDJPY, ES rebounded by 161 points, 117 of it in the first 24 hours.  This time — an unimpressive 52 points.

Yes, USDJPY is back above the critical .618 Fib at 120.11.  But, note that it stopped at the red channel midline, right where we can expect it to reverse.  While TPTB are certain to pile into stocks today to endorse Kuroda’s brilliance, the reality is that we’ve seen this movie before.  And, we didn’t like the ending.

The reality it that the yen carry trade [what’s this?] is fueled by the prospect of a continually cheapening yen — not one that flip flops about 120.11 for years on end.

If yen carry trade investors aren’t convinced that the USDJPY is ultimately headed higher, they won’t pile back into stocks.  They’ll play the bounce, for sure.

But, a sustained rally isn’t in the cards unless Kuroda & Co. do something more dramatic than follow the ECB down the path of failed central planning policies.

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