USDJPY Marches On, We Stay Long

The financial markets are closed today in Japan for Culture Day but USDJPY is still
managing to drive higher to an intra-day high of 113.70 (as of writing) with little to deter the market after Friday’s surprise monetary easing.

What will quickly become clear over the coming days is that the action of the BOJ will shift the focus back onto the Abe administration and the “3rd Arrow of Abenomics”. Economy Minister Amari has stated that if Q3 GDP data indicated that the economy remained weak, then further stimulus would be required. Some media reports have suggested that the government is considering a stimulus injection of about JPY 2-3trn for this fiscal year, which could be added to next fiscal year if the sales tax increase goes ahead.

But progress on other aspects of reform from labour market reform, corporate tax
and governance reform and immigration reform will be important to reinforce the
action taken by the BOJ last week.

There can be no doubt over the sharp contrast in the monetary stance of Japan
versus the US and the Eurozone. The balance sheet expansion with the monetary
base heading to somewhere between JPY 350-400trn will equate to about 70-75% of
GDP in contrast to around 20% in the US and even less in the Eurozone.

The JGB holdings target was lowered considerably from 60% to 35%, but the caveat is the wide +/-10% band around within will be acceptable levels of holdings. There have already been newswires reports that the JGB allocation in Q3 fell below the 50% level, which would imply not a huge further shift to get within the acceptable allocation range.

The fundamental backdrop is well supported by the technical picture. USDJPY is firmly on course for a second consecutive monthly close above the trend line from the highs since of ’98. Monthly indicators are turning bullish. The eventual target from the declining wedge that developed off the ‘07 peak is up at 124.00 which is also the topside of the current channel. We doubt this will be all one-way traffic but the current price action is impulsive and we will likely only witness shallow pull backs.

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As of Tuesday last week net short JPY position was $7.8bn, having narrowed for four consecutive weeks in a reflection of lingering concerns related to the events from mid-October. The changes in sentiment underscore the extent to which the subsequent BOJ policy announcement was unanticipated by market participants. With many participants miss positioned there is plenty of scope to the upside.

JPY selling on October 31st was the sixth-largest daily flow on record. Friday’s volumes stood out in many ways: the biggest single-day gross volume since April 2013 and the 11th largest on record; net single-day purchases were the largest since June 2006 and the fifth largest on record.

All of the price action in recent months has been characteristic of a textbook bullish sequence, the last upside thrust has been sharp and impulsive, breaking through the 110 pivot resistance, which should now act as support. All of this suggests that the chances of this up trend sustaining have a high probability.

We remain long in both spec and core positions. With On Balance Volume, Psychology and Order Book Regression Indicators supporting further upside momentum. We will start tightening trailing stops to trail below the low of each session to protect already sizeable profits.

The next key technical phase will be the potential retest of the 110 pivot level from above. If the market is supported a the level this will set up the next phase of significant upside potential in the pair. We will monitor price action closely to look to re-establish longs at that juncture.

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