USDJPY reached our Nov 20 target [see: Catawampus] of 120.05 early this morning — the intersection of the .618 Fib and the gray channel top. Seen here on the 60-min chart vs ES…
And, the daily chart vs SPX…
Remember, this is the .618 of the 50% drop (from 147 to 75) that began in 1998 (i.e. the big one) and the first of the 5 key targets outlined yesterday in our year-end forecast [see: Update on Currencies.]
The USDJPY should reverse here. The implications for equities?
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The eminis shed 10 points USDJPY backed off from 120.16 to 119.66. So, it’s not so much how far USDJPY fell, but the suggestion of more pronounced reversal [see yesterday’s discussion of the yen carry trade.]
USDJPY has hit several potentially important reversal levels before. Most recently, the reversal at the purple .886 ushered in a mild 15-pt reversal in ES. The prior .786 reversal at 113.73 translated into a 20-pt drop.
We have to go back to the purple .707 in late September, when USDJPY dropped from 110.07 to 105.19 (4%), to see a meaningful reaction in stocks. It precipitated the 100-pt (9.8%) drop in SPX.
The bulls turned it into a springboard for the fastest, strongest recovery in recent memory, as USDJPY essentially backtested the purple .618 and the broken channel top (yellow) before rocketing higher.
As discussed yesterday, I believe Abe and Kuroda are all-in on trashing the yen. While traders might make some hay over this Fib level, I don’t see it dropping out of the white acceleration channel — the bottom of which is currently 118.59 (aka the purple .886.)
Having said that, there have been countless examples of a USDJPY channel being broken, only to be regained an hour later when TPTB realized how detrimental it was to stocks. So, the key to prices over the next few weeks will be whether or not the white channel and purple .886 are defended.
As we discussed yesterday, SPX has 18 sessions to gain roughly 70 points to our 2138-2141 year-end target — less than 4 points/day. So a drop of 1% in USDJPY that produced a 2% drop in SPX would be entirely in keeping with the chop I expect. Remember, the most common time of day — as occurred this morning — for declines in USDJPY is overnight (so the average US-based investor will be challenged to make any money by shorting.)
UPDATE: 10:15AM
While I was typing, USDJPY just provided a great example of not only its sway over stocks, but the willingness of those in charge to use that sway in order to arrest any meaningful declines. How else to explain a new high — however brief — after reversing at the .618 Fib retracement of a 16-year pattern?
For those who missed the opportunity to short overnight, here’s another chance.
GLTA.