USDJPY Reaches Critical Resistance

As we discussed yesterday, USDJPY has reached a critical line in the sand.  As one of the primary drivers of equity algos [see: Yen Carry Trade] this creates a potential headwind for stocks.

Over the years, oil and the USDJPY have mostly offset each other – with one bolstering stocks while the other resets (or, moving in tandem if the situation is dire enough.)  The most significant such event was in July 2014, when WTI’s crash began on the very same day that the USDJPY broke out to new highs.

This enabled Japan, which had recently seen inflation near 4% as a result of soaring oil prices, to withstand even further yen depreciation.  It also enabled SPX to remain above the critical resistance (1823) through which it had recently pushed.

As oil crashed, Japan’s inflation rate settled back down to the level at which the BoJ could justify continuing an insane amount of QQE (which continues to this day.)  And, SPX went merrily on its way to its next technical resistance at 2138, backtesting 1823 another 4-5 times (in case there were any unconvinced bears left standing.)Why the history lesson?  The huge white channel that has carried USDJPY higher since 2010 broke down on January 24, two sessions before SPX topped out and began a 340 point (11.8%) correction.

When SPX finally bottomed out at its 200-day moving average on Feb 9, it was because USDJPY was making noises about rejoining the broken white channel and because oil took the opportunity to bottom out and begin a 29% rally (yep, the same day.)

While CL did the heavy lifting, USDJPY reset for the next six weeks.  It bottomed on Mar 23, the very same day that SPX tagged its SMA200 for the second time.  USJDPY has since supported SPX’s slow, tortuous climb back above a key Fib at 2703 ever since.

But, yesterday, it reached a critical line of resistance — a backtest of the huge white channel from which it originally broke down and instigated the Jan-Feb correction.Normally, backtests mark reversals. So, when we talk about reaching “critical resistance” we’re not just talking about the currency pair.  If USDJPY doesn’t push through resistance, stocks will not be amused.

We’ll take a look at the various scenarios and the likely outcome of each.

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