The BoJ tapered its bond purchases just a bit yesterday, sending the USDJPY marginally lower on the news.  The fact that it would taper at all was a bit surprising, but it appears the falling white channel will remain intact long enough for our next downside target to be tagged.The big question: will the trend continue or are they just buying a little time for EURUSD to backtest?

continued for members…Note the DXY has gotten a bounce up through the SMA10, meaning the short should be suspended…for now.But, as mentioned above, EURUSD is correcting today.  If it’s just a backtest, the dollar will continue weakening (EURUSD rising) and USDJPY has potential to drop through its SMA200.If EURUSD should drop back into the falling white channel and tag its own SMA200, then the resulting dollar strength should put any further drops by USDJPY on hold.

I have to admit, I’m a little surprised USDJPY hasn’t taken the lead in the equity rally.  I chalk it up to the oil and gas complex going gangbusters — which has also been a bit surprising.  I can only surmise that rather than trying to keep CPI as low as possible, the FOMC has shifted focus to creating cover for their planned rate hikes.

If inflation continues to run north of 2%, it gives them plenty of cover.  If it fall back below 2%, then they’ll be tough to justify.  And, they do seem intent on getting all three hikes done in 2018.

This raises the question, of course, of why the dollar continues to falter.  US nominal rates are much higher than Japan and the eurozone.  So, why the continuing USD weakness?  A lower dollar increases import costs, which again contribute to higher CPI and provide rate hike cover.

But, my basic premise is that rate hikes are fine until they result in higher long rates — where most of the US debt resides.  As long as the curve is flat and the long end depressed, there’s no problem. Once the 10-yr rallies convincingly through 3%, things start to get a little dicey.

At least, that’s my but feeling at this moment.  I’ve spent a lot of time noodling over this and the oil and gas situation, and will no doubt spend a lot more time on it.  The charts are unconvincing at best, and probably downright misleading.

More on this in the coming days.