I’m taking a stab at USDJPY’s likely course tonight, given what I expect to be disappointment over the BoJ’s QQE actions (or, lack thereof.)

We left off earlier this afternoon with this chart.  It seemed a little silly at the time, given that the pair spiked into the US equity close.  But, of course, that close was all about ensuring a positive day for SPX, courtesy of the (still occasionally effective) yen carry trade.And, you could see it coming from a mile away.  SPX was sliding, after having bounced up to backtest the SMA5 200 and a channel top……when suddenly — and I’m sure quite by coincidence — USDJPY started spiking.  The pair not only broke a trend line connecting yesterday’s phoney-baloney spike, but soared out of the falling white channel for good measure.If that weren’t enough, VIX picked that exact moment to take a dive.And, wouldn’t you know it, CL decided it was a great time to pop up out of the falling white channel it’s been locked in (except for yesterday’s clumsy, but effective, ramp job) for over a week. Instead of continuing lower, SPX spiked up through the channel top and its only remaining moving averages.  Mission accomplished — for the eleventy billionth time this year.Given that stocks are still susceptible to USDJPY’s gyrations over a year since USDJPY topped out, and given that the BoJ has painted themselves into a corner so tight that not even Picasso could find a way out, what does the path ahead look like?

continued for members…

Recall that USDJPY recently tagged the bottom of a falling channel after having backtested the broken rising purple channel in May [see: May 25 update.]  It’s not a great-looking falling white channel, but it’s convenient.  That is, it fits with USDJPY’s need to rebound following the Brexit plunge.

Looking at a close up, the falling red channel is the only one that has fit very well since the last time USDJPY dropped through the key .618 Fib level at 120.11 in February.

Note that its drop through 120.11 corresponded with SPX’s decoupling from USDJPY.  Technically, this was the beginning of the end for the yen carry trade.On Feb 11, CL came to the rescue — putting in a bottom at 26.05 and doubling over the next 4 months.  It became the algo gooser-in-chief.

Of course, CL topped out on June 8 and has been tumbling ever since.  It recently broke down through its Feb-Jun channel but — and, this is critical — is testing its SMA200 and an important TL as I write this.

The yellow TL running through the SMA200 in this 5-min chart……is actually the bottom of the long-term yellow channel seen on this weekly chart (please ignore the mess — too much work to clean it out for these purposes.)  It was CL’s drop through the yellow channel bottom in Dec 2015 (yellow arrow) that led to new lows for SPX in Feb.  Those lows, of course, necessitated that massive rebound in CL that began on Feb 11. Bottom line, it’s back above the yellow channel bottom and is backtesting it.  Will they let it drop back through?  Given all the trouble it caused last time, I seriously doubt it.  In fact, CL is almost certain to bounce big at 40-41 if USDJPY plummets.

I expect it to bounce like crazy here at the channel bottom and SMA200.  And, if it seems like I’m way off course in an update on USDJPY, consider what higher oil prices would do to the Japanese economy — which imports all its oil.  Oil, by the way, which is priced in USD.

Don’t you imagine it would help a little if the yen appreciated in value rather than depreciating even further?

If your eyes haven’t glazed over yet, you now understand why I believe the BoJ will disappoint investors and let the yen continue to appreciate (USDJPY decline.) Sure, it will suck for Sony, Mitsubishi and Toyota — which rely on a cheaper yen to boost their exports.  But, what choice does the BoJ have?

Ah, I’m glad you asked.  They could force the yen lower (with or without additional QQE, it’s not necessary to currency manipulation.)  But, then they’d start to see some serious inflation unless the rest of the world was okay with oil prices crashing again.

Do financial institutions and big oil have more political clout than Japan?  I don’t know.  But, TPTB-Japan would have to make that choice.  If it seems necessary in order to prop up stocks — the only data the Fed really depends on — then it will happen.  Otherwise, I think Japan will have to lump it.

It’s the dilemma I’ve been expecting for over a year and have written about countless times — here at last.  For now, I’ll stick with the targets printed earlier this afternoon.

Stay tuned.