I update the USDJPY charts every day, but it’s been a while since we last took a look at the pair from 30,000 feet.  In our May 17 Update, we noted it had rejoined its well-formed falling white channel and was headed for a tag of the rising white channel bottom — though there were important interim Fib levels with which to contend.

Otherwise, the downside targets originally contemplated are all in play: the red .618 at 107.86, the purple .618 at 106.50 and the red .786 at 104.92.

It turned out that breaking out of the falling white channel was a pretty healthy development for stocks — so much so that it did so again, and again, and again.  Not that there is such a thing, but it probably set a record for backtesting a channel.

The net effect was that the rising white channel tag was delayed, coming in at a much higher price than if the falling channel were allowed to play out. The original intersection of the two was mid-late July.Thus, even though USDJPY registered new lows, stocks were supported in setting new all-time highs.

USDJPY came within 0.81 of our 106.50 target last week, and has since rebounded sharply.  Is the worst behind us, or is there more downside ahead?

continued for members…

As we discussed yesterday, tomorrow’s CPI data could easily prompt additional USD weakness.  There is much speculation, lately, about the possibility of another rate hike in 2017.  I believe we’ll see another weak print, since the spike in gasoline prices came too late in the month of August to make much difference (an 8% increase YoY.)

RB’s 60-min chart should provide a pretty clear indication of whether it’ll be USDJPY or RB/CL that is responsible for the next leg up in stocks.Looking at CL, it’s clearly due for a breakdown or breakout.

I’ve put my chips on a breakdown, as I don’t believe the Fed can abide another spike in inflation.  This means that USDJPY must rally if stocks are to maintain their momentum.  But, is it ready?

USDJPY likes to make dramatic bottoms, with big, sharp spikes down to support and a spectacular reversal such as occurred on election night last November.

The latest doesn’t really qualify.  And, in fact, USDJPY has yet to surpass the most recent high — though it’s getting pretty darned close.And, as we’ve discussed, DXY still has plenty of downside potential if it can’t hold its recent lows — which would likely be the case if CPI is modest and the Fed sounds dovish next week (FOMC mtg and press conference Sep 19-20.)There are three “movements” to the USDJPY.  The first was the dramatic drop from 147 to 75.  It wasn’t all downhill for equities, as occasionally the USDJPY would pretend to break out, which was useful in 2007 when SPX made new highs.It became clear in late 2007/early 2008 that yen strengthening (USDJPY weakening) was bearish — especially when major trend lines were crossed.

If we were to connect the bottoms, we’d see a false breakout in 2007 that corresponded perfectly with the Oct 2007 new all-time highs.The second movement followed Fukushima and BoJ’s QQE, when USDJPY became very closely associated with stocks rising — the advent of the yen carry trade we talk about all the time.

When SPX reached the 1.618 Fib and USDJPY reached the white .618 Fib, stocks ran into trouble.  We saw two backtests of the 1.272 Fib which were facilitated by a drop by USDJPY below 120.11.

Eventually, 120.11 failed and the rising purple channel fell apart, leaving USDJPY to backtest an internal TL and horizontal support (the shaded area — when CL propped up algos with a rally from 26-51) It might have dropped lower, but Trump was elected and TPTB needed a dramatic move higher in order to rescue stocks.

This bottom in late 2016 left us with a rising white channel which has, so far, held up.  And, that’s where we are today.  We’ve had one strong plunge from 125 to 99.  If 105.60 doesn’t hold, we’ll get another leg lower.  But, it’s hard to imagine, as it would almost certainly require CL to break out and inflation to spike higher.

I suspect it’ll hold, though there is room for one last, dramatic plunge to the purple .618 at 106.50 and, if DXY hasn’t reached 88.68, maybe even 103.20.  Witih CPI coming out tomorrow and an FOMC meeting next week, we shouldn’t have long to wait.

I have to duck out for a meeting, but should have a chance to post more later this afternoon.

GLTA.